PNC Financial’s CEO, who has made a routine of riding out storms, sees the mortgage crisis as just one more to take in stride -- so far.

James Rohr, the chairman and CEO of PNC Financial Services Group, can be a bullheaded fellow. And his stubbornness hasn’t always sat well with the bank’s regulators — or shareholders.

Rohr was barely two years on the job in 2002 when the Securities and Exchange Commission, flexing its muscles after the Enron Corp. accounting scandal, accused the bank of improperly moving troubled assets into off-balance-sheet entities. The maneuver had boosted reported 2001 income per share by 52 percent, said the SEC, which demanded a restatement of the earnings. Rohr took umbrage, and, relying on opinions from his lawyers and accountants, fought back, even as some investors called for him to resign or sell the bank. After six months he finally consented to an administrative order on July 18, 2002, in which PNC acknowledged its overstatement of income and paid a $120 million fine. Its shares closed that day at $39.69, down from $56.20 at the end of 2001.

Today, Rohr admits he made a mistake resisting the SEC, and he and PNC are still suffering from the showdown. Robert Hughes, a banking analyst with Keefe, Bruyette & Woods and a longtime booster of PNC, notes, “There are a lot of equity investors who say, ‘I won’t own that bank as long as Jim Rohr is running it.’”

Those investors might want to have another think. During his tenure, Rohr, 59, has guided $139 billion-in-assets PNC down a narrow, cautious path, resisting the lure of high-octane investment strategies even when the market clamored for greater risk-taking to pump up results. He has kept PNC tightly focused on a handful of core businesses — retail and corporate banking, asset management and securities servicing — while stressing revenues from transaction and management fees rather than loan interest. The result has been a bank that is predictable, even boring, but has managed to sidestep most market blowups, including the worst of the subprime crisis. “We are not a player in the subprime space,” says Rohr. “We maintain a moderate risk profile, and we are performing better than our peers.”

To be sure, PNC did take a hit to fourth-quarter earnings — including a $26 million charge from a marked-down $1.5 billion portfolio of commercial-mortgage-backed securities — but that was a trifle compared with the multibillion-dollar write-downs at other banks. Nonetheless, PNC shares swooned, says Richard Bove, a financial services analyst with Punk Ziegel & Co., a specialty investment bank in Lutz, Florida, because “people bought this stock on the thesis that PNC was a safe haven in the space. Everybody was shocked; it really hurt their credibility.”

Still, PNC compares favorably with the nation’s most highly regarded banks. During 2007 its shares slid 11.3 percent, compared with the 32.5 percent decline of the Standard & Poor’s banking index. Recently, its shares were trading at a multiple of 15 times projected 2008 earnings. That’s on a par with market darlings JPMorgan Chase & Co. and Wells Fargo & Co. and easily bests the ratios of about 10 posted by Bank of America Corp. and Wachovia Corp. KBW’s Hughes gave PNC an “outperform” rating — his only one among large-cap banks — until mid-March, when he downgraded it to “market perform” because of general credit market deterioration. He still considers PNC “the best house in a bad neighborhood” and calls the criticisms of Rohr “not really fair, because if you look at his numbers relative to his peers’, he has done a stellar job.”

One reason was PNC’s 1995 acquisition of standout money manager BlackRock, the rare financial services firm whose shares have risen during the credit crisis. Navigating adeptly, the fixed-income and risk management specialist has won high-profile advisory assignments, including mandates last month from the Federal Reserve Board to manage a troubled $30 billion mortgage-backed-securities portfolio as part of the Bear Stearns Cos. bailout, and late last year from Florida’s $27 billion Local Government Investment Pool to stem losses from subprime investments. PNC spun off a chunk of BlackRock to the public in 1999 at $14 a share. In 2006, BlackRock bought Merrill Lynch Investment Managers, cutting PNC’s stake in half, to 34 percent; Merrill now owns 49.8 percent. With BlackRock shares trading recently at about $200, up from $165 in September, PNC’s stake is worth just under $10 billion, equivalent to about 43 percent of its overall market capitalization of $23 billion. Results for the $1.36 trillion-in-assets manager, which tripled its net income last year, to $995 million, are no longer consolidated with PNC’s. The banking company’s overall 2007 earnings, including a proportional $253 million from BlackRock’s bottom line, improved to $1.7 billion from $1.5 billion a year earlier, the latter figure not including $1.3 billion in gains on the BlackRock stake. PNC’s adjusted 1.38 percent return on assets and 12.21 percent return on average shareholders’ equity declined from 1.59 percent and 16.31 percent, respectively, in 2006, but the ratios were still well above the aggregate 0.92 percent ROA and 9.22 percent ROE for U.S. banks with at least $10 billion in assets, according to the Federal Deposit Insurance Corp.

That all added up to “a good year, given the operating environment,” says Rohr. Following the write-down, “there is no bigger nightmare out there waiting for us,” he notes. In December, William Demchak, vice chairman and head of corporate and institutional banking, said: “We’ve taken our pain. We’re fully marked to market, and we’ll make money going forward.”

Analysts nonetheless anticipate that PNC, like most banks, will take further charges in its first-quarter earnings report, and perhaps beyond, but they tend to be bullish on longer-term prospects. Morgan Stanley analyst Betsy Graseck issued a cautious outlook on large-cap U.S. banks in early March but kept PNC at “overweight,” with a $68 price target. The stock closed on March 31 at $65.57.

PNC’s business approach is a model of simplicity. The 18th-biggest bank in the U.S. by assets, PNC has just four business lines. (Wells Fargo, the nation’s fifth-biggest bank, with $575 billion in assets and a similar retail orientation, has 19.) PNC’s lines comprise a 1,109-branch retail bank serving an eight-state corridor from Indiana to the Atlantic coast; Demchak’s corporate and institutional bank, which is strong in treasury management, asset-based lending and, through its Harris Williams & Co. unit, middle-market merger advisory; asset management, which in addition to BlackRock consists of a $73 billion wealth management business; and securities transfer agent and fund administrator PFPC.

Fully 57 percent of PNC’s $6.7 billion in total revenues last year came from fees, which provided some insulation from cyclical credit concerns. Retail and commercial banking operations derive half of their revenues from such fee-based services as treasury management and loan servicing, far above the 30 percent typical of a large bank. The timing of the pursuit of fees, says Punk Ziegel’s Bove, helped prevent PNC from “making the mistakes its peers made” in risky loans or derivatives strategies. Rohr touts the results as “high returns without outsize bets in the credit space or [on the] yield curve.”

With a conservative loan-to-deposit ratio of 83 percent — the industry average is about 100 percent — PNC has been a cautious lender that sells much of its credit risk into the secondary market while retaining loan-servicing rights. The current lack of liquidity in secondary markets makes PNC vulnerable to more write-downs like the one on commercial mortgage credits in the fourth quarter, when the bank listed as “held for sale” $2.3 billion in commercial mortgages.

At year-end the total loan portfolio was $68.3 billion, up $18.2 billion, or 36 percent, from a year earlier, owing chiefly to acquisitions like that of the $17 billion-in-assets Mercantile Bankshares Corp. of Baltimore in March 2007. The bulk of the loan book consists of $28.6 billion in commercial loans, $8.9 billion in commercial real estate, $9.6 billion in residential mortgages and $18.3 billion in consumer. The consumer total includes $14.4 billion of home equity loans, up 5 percent, from $13.7 billion, a year earlier.

The Mercantile acquisition is one of five since 2004 that have significantly expanded PNC’s regional banking footprint along with its balance sheet. The others are $3.1 billion-in-assets United National Bancorp of Bridgewater, New Jersey; $6 billion-in-assets Riggs National Corp. of Washington, D.C.; Hamilton, New Jersey’s $2.7 billion-in-assets Yardville National Bancorp; and, in a deal that closed April 4, $3.2 billion-in-assets Sterling Financial Corp. of Lancaster, Pennsylvania.

Although nonperforming assets increased from 0.43 percent on September 30 to 0.70 percent on December 31, that was still well below the 0.94 percent average for all FDIC-insured institutions. In December the bank stopped buying home equity loans originated by third parties, citing credit concerns, and officials say the vast majority of outstanding loans have been made to high-quality borrowers in PNC’s core Midwest and Mid-Atlantic retail markets.

Rohr stresses “operating leverage,” or the ability to boost revenue while holding expense growth in check. Between 2004 and 2006, for example, compound annual growth rates of 9 percent in revenue and 7 percent in expenses yielded 12 percent growth in net income. In 2007, after adjusting for such nonrecurring factors as the BlackRock transaction, total revenue rose 18 percent against a 15 percent increase in noninterest expenses; adjusted net income was $1.7 billion, up 12 percent.

PNC has shrewdly controlled its cost of funds by bringing in non-interest-bearing deposits, mainly checking accounts, which sell well to consumers and businesses alike in the Mid-Atlantic region in tandem with the bank’s promotion of high-quality customer service. These cheap deposits grew 23 percent last year, spurred by the acquisitions, while the industry overall was flat. At 18 percent, says a pleased Rohr, “we have one of the highest ratios of average non-interest-bearing deposits to average earning assets.”

PNC’s performance hasn’t won over everyone. Activist shareholders may pressure Rohr to boost the value of their holdings. One possibility: disposing of PNC’s nonbank holdings — BlackRock and PFPC — to unlock the value of a banking business that is showing great promise after recent restructurings and acquisitions in attractive markets such as Washington-Baltimore and central New Jersey.

Together, PFPC and the BlackRock stake, which would likely attract plenty of interest, are worth upwards of $13 billion, the equivalent of 57 percent of PNC’s market capitalization. Stripped of those affiliates, a streamlined banking operation, according to KBW’s Hughes, would be trading at a “cheap” ten times 2009 earnings estimates.

“The banking franchise is strong, but it’s trading at a huge discount to peers,” says one investor pushing this scenario, who requests anonymity, adding that a spin-off would provide a tidy sum to shareholders while forcing the market to adjust the bank’s valuation upward. As an added benefit, PNC would free up capital it can’t now touch, and it would no longer have to take a regular accounting hit related to BlackRock options. (A mark-to-market adjustment on a BlackRock long-term incentive plan obligation cost PNC $83 million in 2007.)

PNC officials won’t comment directly on any potential sell-off, but vice chairman Demchak, who along with Rohr sits on BlackRock’s board, allows that the money manager is “an asset that gives us a massive amount of strategic flexibility. If we wanted to, it could be liquidated.”

Rohr notes that BlackRock “is on the books for $4 billion, but it’s worth almost $10 billion. We’d be paying off the [federal] deficit” in capital gains taxes on a sale — unless it could be structured as a tax-free spin-off. “If you asked anyone, ‘Would you want to own a third of BlackRock?,’ no one would say no,” says Rohr.

PNC’s December acquisition of Albridge Solutions, a Lawrenceville, New Jersey–based provider of wealth management and portfolio accounting software for brokers, makes PFPC more attractive to a potential buyer. The terms were not disclosed, but Albridge moved PFPC “up the value chain, from the processing game to the information game,” says PNC chief financial officer Richard Johnson.

PNC further bolstered PFPC with another December purchase, broker-performance systems company Coates Analytics Group of Chadds Ford, Pennsylvania, that sharpens its technology edge. But Punk Ziegel analyst Bove points out that processing subsidiaries don’t bring banking companies that own them — others include Bank of New York Mellon Corp. and Chicago’s Northern Trust Corp. — the premiums that they once did. As a result, Bove says, PNC isn’t getting as much bang for its buck as it might if its PFPC capital were invested in the core bank. Rohr believes otherwise: “I really can’t think of anything better to do with the capital” than to keep PFPC as part of the diversified revenue stream.

The fourth of five children, Rohr grew up in the Cleveland suburb of University Heights. He was ten years old when his father, the owner of Rohr’s Restaurant, a local fish house, died, but the family pulled together and his mother kept the establishment going until it closed in the 1960s.

At Saint Ignatius High School, a Jesuit school in downtown Cleveland, Rohr was a good student who dabbled in several sports before eventually making his way onto the golf team. (Today he has a 14 handicap; in a 2006 pro-am tournament, he scored a hole-in-one on Pebble Beach’s 187-yard fifth hole.) He followed in his father’s footsteps to the University of Notre Dame, graduating in 1970 with an economics degree with an emphasis on statistics. He entered the MBA program at Ohio State University, working as a teaching assistant. “I had no money and a wife,” he said, referring to Sharon Rohr, whom he had met on a blind date, “and they agreed to pay me $300 a month plus tuition to teach statistics,” Rohr recalls. “That was huge at the time.” On graduating in 1972, he got job offers from a tire company, an ad agency and two banks. He chose PNC predecessor Pittsburgh National Bank, he says, “because I liked the people.”

As a management trainee, Rohr worked in various departments — treasury management, operations, trust — before landing in corporate banking. He spent a couple of years in New York as a relationship manager going after large clients. It was invaluable experience, he says, because “you have to understand all of your own products and their risks, and those of your competitors, to be effective. It really rounds you out as a banker.”

In the 1980s he did stints running both the corporate business and the flagship Pittsburgh bank. He says he realized from the start that any leader’s success is contingent on getting the team to perform. “Some people never figure that out, and their careers stall out.”

In 1992, at 43, Rohr was named president and heir apparent to longtime CEO Thomas O’Brien. “From the time I began working with him in the late ’80s, everybody felt Jim was the guy who, unless he screwed up, would be the next CEO,” says Joseph Guyaux, PNC’s president and head of retail banking and, like Rohr, a company lifer.

In-house, Rohr is regarded as a taskmaster who leavens his serious side with jokes and stories. Loyalists at PNC, which employs 28,000, give the CEO credit for his strategic vision, for the strong management team he has assembled and for motivating the troops. “Jim’s leadership style is to say, ‘We’re doing well; how can we do even better?’” says Guyaux. “It’s about continuous improvement, and he has been very clear about what we need to do.”

He can be unpretentious and direct. Vice chairman Demchak recalls being with Rohr and other colleagues on a trip to Washington for a regulatory review when a bright-red minivan arrived to shuttle them to the airport. “On Wall Street no one would have gotten into that car,” says Demchak, who notes that when the seat back failed to fold down, Rohr simply “slid open the door and belly-rolled over the middle seat into the backseat.”

Rohr’s folksy manner can mislead people. “Jim comes across as a good ol’ boy,” acknowledges Demchak. “The rap is, you wonder if there’s anything to him.”

Jared Cohon, president of Carnegie Mellon University, concurs. “It’s easy to underestimate him,” he says. He recalls a meeting that Rohr, a member of the school’s board of trustees, had with two professors doing cutting-edge work in the field of neuroeconomics. The academics came in thinking the scheduled one-hour discussion would be over Rohr’s head. “They came away two and a half hours later blown away by Jim’s insights and engagement on the topic,” Cohon says. “This is a very smart guy, a true leader.”

Rohr got his baptism of fire as CEO when he took PNC’s helm in May 2000, just as the Internet bubble was bursting. A slowdown in revenues forced the bank to slash costs and restructure. By October, PNC had agreed to sell its PNC Mortgage Corp. subsidiary to Washington Mutual of Seattle for $605 million in cash. The transaction was lucrative at a 54 percent premium to fair-market value. It was also strategically important, as a step toward creating Rohr’s more streamlined portfolio of businesses. “We had to focus on businesses where we thought we had the technology and scale to compete, and that had the kind of returns where we thought we could win,” says the CEO.

Then, in 2002, came the confrontation with the SEC over off-balance-sheet entities established for PNC by insurer American International Group. PNC’s auditors at Ernst & Young had suggested the gambit, attorneys at Arnold & Porter had signed off on it, and Rohr had believed that by transferring $762 million of assets into those special-purpose entities in 2001, he was clearing the decks of “volatile, troubled or underperforming loans and venture capital investments,” as the SEC described them in its formal cease-and-desist order. The SEC leveled harsh accusations, charging PNC with violations of generally accepted accounting principles and with making false and misleading disclosures. As part of its penalty, which PNC accepted without admitting to or denying the agency’s findings, the bank submitted to close supervision by bank regulatory agencies, which continued until September 2003, when they concluded that adequate financial controls and other remedial measures were in place. Today, Rohr chalks the incident up as a misunderstanding. “The treatment of off-balance-sheet transactions had changed,” says Rohr. “We could have easily redone it, but instead we argued with the regulators. That was a mistake.” He is philosophical about the continuing criticism: “When you’re CEO, no one ever comes to you with good news. You always get the bad stuff.” PNC’s image and morale took a hit in the wake of its regulatory problems. “It wasn’t easy for people to stay,” Guyaux recalls. “All of a sudden they were in the middle of a company with all these problems.”

But Rohr hunkered down and made some changes, replacing Ernst & Young with Deloitte & Touche as principal accountant and recruiting senior talent such as Demchak, a former global head of structured finance and credit portfolio at JPMorgan Chase, and CFO Johnson, a former CEO of the JPMorgan Services data processing arm. Once Rohr’s team realized the gravity of the regulatory situation, they bent over backward to make amends and “used the situation as an opportunity to strengthen the entire organization,” says Eugene Ludwig, a former comptroller of the currency and now CEO of Washington, D.C.–based Promontory Financial Group, a consulting firm that Rohr hired to help navigate the bank through the troubles.

The experience of grappling with that scandal gave PNC the gumption to take action in 2005, when regulators fined Riggs National $25 million for conducting suspicious transactions on behalf of former Chilean dictator Augusto Pinochet and the rulers of Equatorial Guinea. The Washington bank also pleaded guilty to federal money-laundering charges, for which it had to pay an additional $41 million in fines. On the selling block since mid-2004, Riggs had found few potential buyers willing to take on its reputational baggage. PNC snapped up Riggs and its 50 branches for a bargain $643 million. Thanks to what PNC had learned from its own regulatory problems, says Guyaux, “we were very confident we could get it done.”

At about the same time, Rohr launched an internal reorganization, dubbed One PNC, to overcome the system incompatibilities that had resulted from years of acquisitions and decentralized management. This “siloing” of business units made it difficult to refer and cross-sell to customers and was an obstacle to improved operating leverage. Spearheaded by Rohr, the initiative included soliciting cost-cutting and revenue-enhancing ideas from employees. Out of 6,000 suggestions, 2,400 were selected for action. The company Web-enabled its branches and began making better use of customer data to find sales leads. It also appointed sales coaches, each tutoring employees in ten to 12 branches. “We had a reputation for having the nicest people in the world, but they would never ask people to buy anything,” Guyaux says. PNC has identified $300 million in cost savings and $100 million in new revenues through One PNC.

Rohr then embarked on a series of opportunistic deals to grow the retail business and improve the company’s focus. He pledged to give some of the proceeds from the 2006 BlackRock-MLIM transaction back to shareholders — PNC has boosted its quarterly dividend 26 percent, to 63 cents per share, since early 2006, and repurchased some $800 million of its shares in 2007 — and to use much of the rest for acquisitions. KBW’s Hughes is expecting a 10 percent dividend hike this year; PNC went half the distance this month, announcing a 3 cent increase.

In July 2007, PNC agreed to pay $565 million for Sterling Financial, which became open to a buyout when a leasing subsidiary’s portfolio ran into trouble. A similar, opportunistic $405 million purchase of Yardville National was completed in October. Yardville had been operating under the supervision of the Office of the Comptroller of the Currency, the national bank regulator, since 2005 and ranked No. 1 in deposit market share in affluent Hunterdon, Mercer and Somerset counties.

PNC’s biggest deal by far was the $6 billion purchase of Mercantile Bankshares, the leading local independent bank in Maryland, with 240 branches. At about 2.6 times book value, the deal was pricey, but the bank has been combined with Riggs into what KBW’s Hughes calls “a Mid-Atlantic powerhouse in banking.”

Rohr also decided to divest J.J.B. Hilliard, W.L. Lyons, a Louisville, Kentucky–based brokerage firm whose national footprint he deemed not in keeping with PNC’s regional focus. The buyer is employee-owned Houchens Industries of Bowling Green, Kentucky. When PNC announced the deal in November — it was completed March 31 — it projected a $50 million aftertax gain.

Rohr says not to expect any big deals or share repurchases in 2008; he has denied any interest in seeking a merger with $150 billion-in-assets National City Corp., a Cleveland-based banking company with businesses concentrated in markets that are slower-growing than PNC’s.

Instead, Rohr wants to channel capital into product and system enhancements in newly entered banking markets, and into shoring up liquidity in a difficult economy. “We have the opportunity to take a break and put our technology and products to work,” he says.

Or do they? At least one healthy megabank — JPMorgan, with its $150 billion market cap — is likely to be on the prowl for acquisitions. Its chairman and CEO, Jamie Dimon, said as much in his January 16 earnings call. Before Dimon joined forces in March with the Federal Reserve Board in the Bear Stearns bailout, which may preoccupy him for a while, speculation centered on a JPMorgan–Washington Mutual tie-up. But PNC’s retail banking geography, fee-generating corporate businesses, BlackRock stake and PFPC would all be attractive fits for the New York banking giant. Dimon, of course, would have to deal first with Rohr, who obstinately says, “I don’t see us as a takeover target.”