Mercantile Bankshares Corp., which bought Community Bank of Northern Virginia in May of last year for $215.4 million, has another deal in northern Virginia.
The Baltimore company said it will pay $142.9 million for James Monroe Bancorp Inc. of Arlington.
Edward "Ned" J. Kelly 3d, Mercantile's chairman, president, and chief executive, has been vocal recently about wanting to expand in the northern Virginia area.
In an interview Monday, when the James Monroe deal was announced, he said: "This is clearly the fastest-growing part of our franchise. If you take even the small position we had there before we bought Community Bank of Northern Virginia, that part of our franchise has been growing in excess of 20% from an asset and earning standpoint."
The $16 billion-asset Mercantile has 240 branches in Maryland, Virginia, Washington, Delaware, and Pennsylvania. Buying the 8-year-old James Monroe, which has assets of $530 million, would expand commercial real estate lending capabilities for Mercantile, which would also gain six branches, $378 million of loans, and $471 million in deposits.
"One of the reasons that James Monroe made so much sense for us is it's a very high-quality franchise which is right within the footprint that we acquired when we did the community bank and we acquired very good people and a number of them."
In the past Mr. Kelly has said the "perfect deal" in that region would be for a company with about $1 billion of assets. But he has acknowledged that there are few large banks available in northern Virginia and that his company would more likely end up acquiring companies with assets of $300 million to $500 million.
Several analysts said Mr. Kelly is paying up for James Monroe. Mercantile has agreed to pay $23.50 a share in cash and the rest in stock. In a press release announcing the deal, which is expected to close in the third quarter, Mercantile said the acquisition would be accretive within the first 12 months. The one analyst who covers James Monroe expects it to earn 94 cents a share this year.
However, the purchase price represents 333.7% of tangible book value, and is 25 times James Monroe's 2006 earnings estimates.
Todd Hagerman, an analyst at Swiss Reinsurance's Fox-Pitt, Kelton Inc., said the deal does not make much sense for the company, other than giving it modest expansion in Virginia.
"It's a pretty small transaction," Mr. Hagerman said. "It doesn't really get them that much closer to establishing a meaningful northern Virginia presence."
Mercantile needs to be "more aggressive with their capital and look for something a little more out of the box," Mr. Hagerman said. "Growth in that market has been a challenge for them." Mr. Kelly "has to do something more sizable to really energize the growth rate of the company," either north or south of the company's existing presence.
Jared Shaw at Keefe, Bruyette & Woods Inc. said he was less concerned about the amount Mercantile is spending for James Monroe.
"The pricing seems a little bit high, but a function of the scarcity value," he said. "There is not a whole lot down there. If you want to buy something you have to pay the price."
Mr. Kelly conceded that the price was high.
"I wouldn't dispute that," he said. "I think it is a high-quality franchise in a footprint that is strategic for us where we increase our incremental growth rate and get an awful lot of people and where we can still be accretive in the first full year. So from our standpoint it was a compelling opportunity."
Christopher Mutascio of Credit Suisse was broader in his criticism of Mercantile's strategy. He said its Baltimore franchise "is dragging the growth rate of the entire company" and that buying James Monroe will "continue the path of making the Potomac bank a bigger piece of the overall pie."
He continued: "The deal brings more brick- and-mortar offices and more customer accounts to Mercantile," and also makes it more attractive as a takeover candidate if it ever decides to sell.
Sandler O'Neill & Partners LP was Mercantile's financial adviser and Davis Polk & Wardwell and Venable LLP was its legal counsel. James Monroe's financial adviser was Scott & Stringfellow Inc. Its legal counsel was Kennedy & Baris LLP.
