Pennsylvania's largest bank, the Pittsburgh-based PNC Financial said it will acquire Ohio's largest troubled bank and rival, sub-prime lender National City Corp at a 19-per cent discount to its yesterday's closing price, at $2.23 a share valuing the transaction at $5.6 billion, in a federally-assisted stock and cash deal.

The merged entity will emerge the fifth largest US bank by deposits with a combined deposit base of $180 billion, with National City's 158 branches in the Pittsburgh metropolitan area expanding substantially PNC's 98. Despite fewer branches PNC has a 37-per cent market share with $26 billion in deposits, compared to National City's 15.49 per cent share an almost $11 billion in deposits.

The acquisition, which has not surprised many and has been the subject of speculation for some time, comes after National City's shares fell dramatically due to its exposure to the subprime mortgage market.

Earlier this week, National City announced large third-quarter net losses of $729 million and said it would cut about 4,000 jobs. (See: Job cuts sweep the US)  The bank's stock had declined 83 per cent in New York Stock Exchange composite trading this year and has posted more than $2 billion in losses during the past two quarters.

National City shareholders will receive $5.2 billion in PNC stock, or 0.04 PNC shares for each share they own. Certain warrant holders of the bank will receive $384 million in cash.

PNC will issue $7.7 billion of preferred stock and warrants to the US Treasury under the $700-billion financial assistance plan approved by the US Congress, allowing PNC to improve its capital position. The new capital allows PNC to acquire a weaker bank using cheap funding from the government to help absorb the potential losses, said analysts.

According to the deal, National City CEO Peter Raskind will become a vice chairman at PNC.

The acquisition of National City will increase PNC's core deposit base to $180 billion, making PNC the fifth-largest US bank by deposits.

James E Rohr, chairman and chief executive officer of PNC, said, "The acquisition of National City will increase our core deposit base to $180 billion, making PNC the fifth-largest US bank by deposits. At a time when core funding is key, we see our deposit strength as an important success factor."

National City had stretched itself too far with its acquisition of two banks in Florida in 2006 and early 2007 and as with many other banks it had also been hammered by home loans, which it held on to after selling its subprime mortgage business to Merrill Lynch in 2006.

In a bid to save itself from the financial mess, it raised $7 billion capital from private equity firm Corsair Capital and other investors in April, but was not able to redeem itself and since then regulators have been pressuring the bank to sell itself.

After closing the deal, PNC intends to merge National City's banking affiliates into PNC Bank and they will assume the PNC bank name. The merged entity will be headquartered in Pittsburgh.

PNC said it expects to incur a cost of $2.3 billion on merger and integration and the transaction is expected to close by the end of the year, subject to shareholder and regulatory approvals.

The capital injection is the first in phase two of the $250 billion program for financial companies, the Troubled Asset Relief Program (TARP). An initial $125 billion was allocated to nine of the largest US banks.

Last week the Treasury set a 14 November deadline for banks to apply for a massive financial rescue from the $250 billion available in exchange for equity stakes to help restore credit flows.

Nine large banks including Citigroup, JPMorgan Chase and Goldman Sachs earlier this month agreed to give the government equity stakes in exchange for new capital in the program, the first of its kind since the 1930s Great Depression.

With this deal, National City joins Washington Mutual Inc. and Wachovia Corp. in submitting to takeovers after losses tied to failed home loans. Cleveland-based National City lost more than $3 billion during the past five quarters, and its stock plunged 88 percent this year. PNC is still profitable. (See: Wells Fargo's buyout of Wachovia cleared and  Federal Reserve seizes WaMu; auctions it to JPMorgan for $1.9 billion )

James Rohr, PNC chairman and chief executive, welcomed his bank's selection for the Treasury's capital purchase program of bank shares under the TARP program, saying it paved the way for the acquisition.

"We are also gratified that we have been selected to participate in Treasury's Capital Purchase Program, which has helped to put this transaction on a very solid footing," he said in the statement.