Embattled Yardville Finds Buyer

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After years of fending off a growing list of dissident shareholders, Yardville National Bancorp of Hamilton, N.J., said Thursday it would sell to PNC Financial Services Group Inc. for $403 million.

The offer of $35 a share is below market value; in fact, just once in the last six months has Yardville’s stock closed below that price. However, the $3 billion-asset Yardville has struggled with an inverted yield curve, declining credit quality, and unhappy regulators.

F. Kevin Tylus, Yardville’s president, in an interview defended the offer, and said Yardville’s board got two fairness opinions. “A lot of factors go into that, not just the price,” he said, noting that PNC’s shares have performed better than Yardville’s in the last two years and offer a higher dividend yield.

“We’re in a valuable market, and if perhaps times were different, a bank like ours could continue on for however many years more,” Mr. Tylus said.

PNC executives would not discuss the deal. Also noticeably quiet Thursday was Lawrence B. Seidman, who owns a 8.6% stake in Yardville and has been pressuring the company to improve for the last several years. Calls to his office were not returned.

In the past year Mr. Seidman has brought proxy battles and filed several lawsuits as part of his campaign to force Yardville to remove Patrick M. Ryan as its chief executive or find a buyer. One of those suits is still pending.

Mr. Ryan said in an interview that pressure from Mr. Seidman was a consideration in the decision to sell.

“When you look at the size of our bank and have these major expenses coming at you, it does certainly impact the profit-and-loss statement,” Mr. Ryan said. “It’s not just the cost, but also the time it consumes in your workday when you’re not able to be out doing business, if you will, because you’re taking care of this particular issue.”

Because of the pending litigation, Yardville cannot contact Mr. Seidman and has not talked to him about the deal, Mr. Ryan said.

Mr. Seidman has accused Yardville of disclosing nonpublic information to investors. It hired a law firm to conduct an internal audit and concluded May 7 that no information had been leaked. He also has said the company declined an offer of $41 from an unnamed bidder last year. Yardville has never confirmed such a bid.

Its second-largest stakeholder is another activist investor, the Connecticut hedge fund Tontine Management LLC, which owned a 6.7% stake as of March 31. Jeffrey L. Gendell, the head of Tontine, did not return a call for comment.

Shares of Yardville dropped 4.5% Thursday, and PNC fell 0.7%.

The cash-and-stock deal is expected to close in the fourth quarter. PNC, which would book $27 million of fourth-quarter charges related to the deal, said it expects an internal rate of return of 15% and for the deal to be accretive next year.

Yardville’s first-quarter earnings fell slightly from a year earlier, to $5.1 million. A balance-sheet restructuring led to a $8.7 million loss for the fourth quarter.

Jennifer A. Thompson, an Oppenheimer & Co. analyst who covers both Yardville and PNC, said in an interview that the price was “not surprising,” given Yardville’s recent disappointing financial performance and regulatory troubles, which include orders from the Federal Reserve Board and the Office of Comptroller of the Currency to improve its capital structure and clean up its credit administration.

Analysts applauded the Yardville deal from PNC’s perspective; at least four called the price “attractive.”

Matthew Schultheis, an analyst with Ferris, Baker Watts Inc., wrote in a research note, “We view this as little more than PNC buying 33 branches in New Jersey markets with favorable population growth trends compared to the PNC franchise as a whole and median household income figures well above the national median.”

After the acquisition, PNC would rank No. 1 in deposit share in Mercer, Hunterdon, and Somerset counties, whose median household incomes are between $70,000 and $100,000.

PNC also bought its way into good demographics with its March 2 purchase of Mercantile Bankshares Corp. of Baltimore.

Speaking Thursday on a previously scheduled investor call with Gary B. Townsend, an analyst of Friedman, Billings, Ramsey & Co. Inc., PNC’s chief financial officer, Richard J. Johnson, said that Mercantile’s systems would be converted in September, and that Yardville’s conversion would likely take place early next year.

(He fielded just two questions on the Yardville deal, and his answers were nearly verbatim from PNC’s press release. He did say future deals could fill in “gaps” in central Pennsylvania and northern Virginia.)

As it did with the Mercantile deal, PNC said one of the largest opportunities with Yardville would be offering wealth management to its wealthy customers.

Ms. Thompson said, “It’s a small deal for PNC, but it gets them into some attractive growth markets in New Jersey, and I think they’ll be able to run that franchise with better potential to penetrate the wealthier client base.”

That franchise would get a bit smaller after the purchase closes. During the call, Mr. Johnson said that there was some overlap in the branch networks of PNC and Yardville, and that seven of Yardville’s 33 branches would be closed or consolidated.

PNC said it expects to proceed with its planned $800 million of share repurchases this year.

Mr. Townsend wrote in a research note Thursday that PNC is well suited to take on Yardville’s regulatory problems. PNC had its own problems in 2003 and inherited some more when it bought Riggs National Corp. of Washington in May 2005.

Ms. Thompson said one risk to PNC would be the quality of Yardville’s commercial real estate loan portfolio, which has had a high level of losses recently compared to competitors.

However, Mr. Johnson said on the conference call that the $27 million of charges PNC expects to take would cover, among other things, raising the loss reserves against Yardville’s commercial real estate portfolio.

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