PNC Mows Down Yardville

Shares in the New Jersey bank tumble on a take-under.
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Yardville National Bank

(YANB)

got trimmed on Thursday after

PNC Financial Services

(PNC) - Get Report

agreed to buy the New Jersey bank for $403 million.

PNC said it would acquire the $3 billion-asset company in a cash and stock deal worth $35 a share -- a 2.2% discount to Yardville's closing price on Wednesday.

Shares of Yardville slumped $1.61, or 4.5%, to $34.16. The stock has been in a steady decline since it hit a 52-week high in November. Shares of PNC fell 56 cents to $71.28.

Yardville's largest shareholder, Lawrence Seidman, has been calling on the company to overhaul management or consider a sale.

In a letter dated May 4, which was disclosed in a

Securities and Exchange Commission

filing, Seidman criticized Yardville CEO Patrick Ryan's "definition of success" for its retail operations.

"I do not believe the mark of success is slow growth in quality assets, combined with a bloated expense structure, a high level of problem credits, and most importantly, reduced earnings," Seidman said in the letter. "The success you claim to have achieved is actually eroding shareholder value, not maximizing that value."

The company disclosed in March that it had to restate its 2006 earnings after it identified "a material weakness in its internal controls over financial reporting" of loan losses. Yardville said the errors were related to "the risk rating process and resultant determination of the allowance for loan losses and the provision for loan losses."

This past spring, Pittsburgh-based PNC completed its acquisition of Mercantile Bankshares of Baltimore.

"Yardville has an underperforming retail network which gives PNC an opportunity for turnaround and upside for improvement," writes Jennifer Thompson, an analyst at Oppenheimer. She has a neutral rating on PNC.

"The biggest risk we feel is potential asset quality issues," Thompson writes. "Yardville's asset quality history has been choppy in recent years and its exposure to commercial real estate (54% of loans) is larger than average. Underwriting has been a concern to us at Yardville, given the number of credit quality 'blips' we have seen through a very strong economic environment."