Mercantile Bankshares Inc. of Baltimore announced Tuesday that it is buying Community Bank of Northern Virginia in Sterling for $212 million in cash and stock.
The deal, an effort to accelerate Mercantile's push into metropolitan Washington, would add 13 offices and $880 million of assets in one of the nation's most attractive retail markets.
It also signals a change in strategy for the $14 billion-asset multibank holding company, which had been looking to build in northern Virginia. With the purchase, Mercantile would leapfrog many other out-of-state companies vying for a toehold there.
In a conference call Tuesday, Mercantile chairman and chief executive Edward J. Kelly 3d said that hiring expenses and the challenge of finding attractive branch sites prompted the change of course.
"This puts us at least three years ahead of plan, and the economics are far more attractive than de novo entry in achieving this kind of scale," Mr. Kelly said.
That is not to say that Community Bank came cheap. The deal, which is expected to close in the third quarter, is valued at 3.41 times Community's book value, well above the going price for banks its size. In 2004, sellers with assets of $250 million to $1 billion fetched an average 2.35 times book, according to Highline Banking Data Services.
Analysts said Mercantile is paying top dollar for Community Bank because all its branches are in Fairfax and Loudon counties, which have an average household income of $87,000. Fairfax is the wealthier of the two (its per-capita income ranks among the nation's highest), but Loudon is the country's fastest-growing municipality, according to 2003 Census Bureau data. (Community Bank also has a branch under construction in neighboring Prince William County.)
"What they really bought here is a very good branch network," said Matthew Schultheis, an analyst with Ferris, Baker, Watts Inc. in Baltimore. "And I just don't mean the counties that they are in, but right down to the pad site - the right side of the street, and in shopping centers with the right anchor store."
Collyn Bement Gilbert, an analyst with BankAtlantic Bancorp's Ryan Beck & Co. Inc. in Livingston, N.J., said the high price - equal to about $20.375 a share - is necessary because there are so few acquisition opportunities in northern Virginia and so many interested buyers. (Only six banks there have more than $500 million of assets.)
"Everybody wants to get into that market, so to buy something you are going to have to pay up because of the limited supply," Ms. Gilbert said.
Dozens of out-of-area banks have been scouting the vicinity, but most have opted to build.
First Horizon National Corp. of Memphis entered the northern Virginia market last year by opening four full-service branches. And Commerce Bancorp of Cherry Hill, N.J., which has its sights set on the D.C. metro area, plans to open its first of many branches there this year.
Mercantile has 17 branches in the Washington area (five of them in the Virginia suburbs) under the $1 billion-asset Mercantile Potomac Bank. Community Bank would become part of that subsidiary, and three overlapping branches are expected to be closed.
Aside from nearly doubling Mercantile's assets in the Washington area, the deal could offer significant cross-selling opportunities for its investment and wealth management business, Mr. Kelly said.
"These are some of the best markets in the United States, and they are ripe for our style of community banking," he said.
Community Bank's balance sheet is unlike Mercantile's in that it relies heavily on certificates of deposit for funding. About 70% of its deposits are in CDs, compared with 30% at Mercantile.
The seller is also an active indirect auto lender. Mr. Kelly said that business would probably be phased out, as Mercantile did after acquiring a similar portfolio in its August 2003 purchase of F&M Bancorp in Frederick, Md.
The company also announced Tuesday that it planned to merge Mercantile Potomac with its largest subsidiary, the $4.7 billion-asset Mercantile-Safe Deposit and Trust Co. in Baltimore, though Mercantile Potomac branches - and the Community Bank ones - would keep that name.
Combining the units would let Mercantile use Mercantile-Safe Deposit's excess capital to grow in the Washington market, where the company will focus on further expansion, Mr. Kelly said. At the end of the third quarter its core capital ratio was 9.23%; Mercantile Potomac's was 8%.
"What this deal does for us is gives us a considerably larger platform … to go at that market and give it the attention it deserves," he said.
Community's stock closed Tuesday at $19.97, up 16% from Monday's close. Mercantile's closed at $49.98, down 0.85%.
