PNC Financial Services Group Inc. (PNC.N: Quote, Profile , Research) said on Thursday it would pay $403 million to acquire Yardville National Bancorp. (YANB.O: Quote, Profile , Research) a central New Jersey bank that has struggled with regulatory problems and complaints from its largest shareholder.

Pittsburgh-based PNC said the acquisition will help it rank first in deposit share in three wealthy New Jersey counties: Hunterdon, Mercer and Somerset. The purchase comes three months after PNC paid $6 billion for Baltimore's Mercantile Bankshares Corp., becoming the 10th-largest U.S. bank.

Yardville ended March with $2.68 billion of assets, $2.06 billion of deposits and $2 billion of loans. It operates 33 branches in six New Jersey counties and Bucks County, Pennsylvania and has 440 employees. Like many commercial lenders, it has struggled with a tough interest rate environment.

"The inverted yield curve and an activist dissident shareholder who brought legal and other expenses to the table, compounded by the lack of quality asset growth opportunities, made our jobs all the more challenging," Yardville Chief Executive Patrick Ryan said in an interview.

Lawrence Seidman, who has said he owns 9.3 percent of Yardville shares, has long pushed the Hamilton, New Jersey-based bank to overhaul management or consider a sale. He did not immediately return calls seeking comment.

Yardville in March slashed reported 2006 profit by 24 percent to $5.27 million because of financial controls issues. It has been under special oversight by the U.S. Comptroller of the Currency since 2005, related to capital sufficiency and credit risk.

Shareholders would receive 0.2923 of a PNC share and $14 in cash for each share, or a total of 3.27 million PNC shares and $156 million in cash. The terms value Yardville at $35 per share, a 2 percent discount to the stock's Wednesday closing price of $35.77 -- "a fair price," Ryan said.

"We thought the franchise was worth $40 to $41 per share based on metrics we've seen in New Jersey bank acquisitions, but the question was how much of a discount you apply because of regulatory and credit issues," said Joseph Fenech, a Sandler O'Neill & Partners LP analyst. "It's not necessarily surprising to see what is essentially an at-market deal."

In afternoon trading, Yardville shares fell $1.60 to $34.17. PNC shares fell 49 cents to $71.35.

UNHAPPY SHAREHOLDER

PNC expects the acquisition to close early in the fourth quarter, pending shareholder and regulatory approvals, and add to 2008 earnings per share, with a 15 percent internal rate of return. It expects a $27 million fourth-quarter charge.

Ryan, 62, plans to consult PNC for a year. Yardville Chief Operating Officer Kevin Tylus expects some job cuts and branch closures.

Seidman had contended in a March regulatory filing that Yardville may have rejected a $41-per-share takeover bid late last year. Ryan said an outside law firm found "no basis" for Seidman's claim.

Tylus and PNC spokesman Fred Solomon said they do not expect Seidman to file a lawsuit that might delay the shareholder vote.

Fenech said Seidman is "in the stock in the mid-20s (per share), so he may be pleased with the price."

PNC has experience with integrating banks with regulatory problems. It paid about $652 million in 2005 for Washington, D.C.'s Riggs National Corp. after that bank pleaded guilty to violating a U.S. law against money laundering.

Hovde Financial and the law firm Pepper Hamilton LLP advised Yardville. Citigroup and the law firm Wachtell Lipton Rosen & Katz advised PNC.

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