PNC Bank Corp. said it will buy 84 southern and central New Jersey branches of Chemical Banking Corp. for $504 million.
The purchase of the $3.4 billion-asset banking unit for two times tangible book value moves Pittsburgh-based PNC into the New Jersey retail market for the first time.
The definitive agreement for Chemical Bank New Jersey caught some analysts and bankers by surprise, because PNC is in the midst of shedding as much as 30% of its own branch system.
But PNC officials pointed to opportunities in the wealthy southern New Jersey market and to the cost efficiencies the bank could gain by merging the new branches with its nearby Philadelphia operations.
They also said the purchase will increase PNC's market share in the Philadelphia metropolitan area to 8.8% from 7.1%. The bank will remain the fourth largest in the market.
"It has long been a strategic objective of PNC Bank to leverage our strong eastern Pennsylvania and Delaware presence by entering the attractive New Jersey market," Thomas H. O'Brien, PNC chairman and chief executive, said at a news conference.
"This acquisition provides direct access to the appealing demographics of the New Jersey consumer market and to a large and diverse business community," he said.
Mr. O'Brien also stressed PNC's need for more wholesale funding in the wake of the branch sales it announced last year.
He emphasized that PNC would probably continue to expand in New Jersey. "New Jersey is a place we'd like to be larger," he said.
For Chemical, the sale represented the final chapter of an ill-fated expansion into southern New Jersey.
Chemical paid $650 million for Horizon Bancorp in 1986, but never achieved the economies of scale that would have been necessary to make the deal pay.
Chemical will keep its northern New Jersey operations and likely fold them into its New York headquarters after interstate banking becomes law later this year.
The money-center will also keep all but one branch of the highly profitable Princeton Bank and Trust, a private banking company.
The branch PNC receives has $750 million under management.
The acquisition will bring PNC $2.9 billion of deposits, $1.8 billion in consumer loans, and $500 million in middle-market commercial loans, spread over 14 New Jersey counties.
PNC predicted it will reduce Chemical New Jersey by 25% through some branch consolidation with nearby Pennsylvania branches, and by folding Chemical's New Jersey charter into PNC's Pennsylvania bank.
"It is an excellent strategic fit," said Frank DeSantis of Donaldson, Lufkin & Jenrette. "And they have structured the deal in a way so it will be reasonably good for shareholders."
PNC will pay Chemical up to $300 million in perpetual preferred stock, and the remainder in cash.
PNC is hamstrung by a 12-million-share repurchase program and by goodwill from past purchases, which reduce the bank's capital ratios.
The use of preferred stock, while more costly than straight cash, will limit the goodwill impact on PNC's balance sheet, said Mr. O'Brien.
PNC did not retain an investment adviser, and used Merrill Lynch & Co. to write a fairness opinion.
Chemical used Chemical Securities Inc., the money-center's securities unit, for the sale.
