Mercantile Bankshares Corp., Maryland's largest independently owned bank, has agreed to buy Community Bank of Northern Virginia for $212 million in a bid to increase its presence in the fast-growing Washington suburbs and build a more wealthy clientele base.
Baltimore-based Mercantile said yesterday that it will pay a market premium of nearly 20 percent for Community Bank stock, based on Monday's closing price of $17.20. With the deal, Mercantile will acquire 13 branches in the Virginia counties of Loudoun and Fairfax and bring its total number of branches in the northern part of the state to 15.
Mercantile also reported that its net income in the fourth quarter of 2004 increased 19.7 percent to $60.6 million from $50.6 million during the fourth quarter of 2003. For the year, net income was $229 million, a 16.6 percent increase over $197 million in 2003.
The bank had 76 cents of diluted earnings per share in the fourth quarter, matching Wall Street estimates compiled by Thomson Financial. That compared with 63 cents per share in the year-earlier quarter. Diluted net income per share for 2004 was $2.87, a 7.1 percent increase from $2.68 for 2003.
Mercantile stock fell 43 cents, or less than 1 percent, to $49.98 in yesterday's trading. Community Bank shares shot up $2.77, or 16 percent, to $19.97 - the seventh-largest percentage gainer on the Nasdaq stock market yesterday.
The proposed Community Bank acquisition puts Mercantile among a number of banks, including PNC Financial Services Group Inc. of Pittsburgh, Provident Bankshares Corp. of Baltimore and Commerce Bancorp Inc. of Cherry Hill, N.J., that have been looking to build or acquire branches in the counties around the nation's capital. They are drawn by population growth and household incomes that outpace the country as a whole, and by booming defense and homeland security industries.
"From my standpoint, Virginia is an extraordinarily attractive market," said Edward J. "Ned" Kelly III, Mercantile's chairman, president and chief executive.
The median household income in Community Bank's region is about $86,900, about 57 percent higher than the $55,460 median income in Mercantile's market.
"The area has such strong demographics that even if Mercantile doesn't gain a tremendous amount of market share, it should be a strong source of growth for their balance sheet," said Matt Schultheis, an analyst with Ferris Baker Watts Inc. who doesn't hold stock in the bank.
Community Bank, which started as a one-branch operation in 1992, has about $650 million in deposits. The largest part of its business is in commercial real estate lending, said Dave Summers, president and chief executive.
To leverage the Community Bank acquisition, Mercantile Potomac Bank, an affiliate, will merge with Mercantile-Safe Deposit and Trust Co., the lead bank in Baltimore. The merged entity will then buy Community Bank, though Mercantile Potomac will retain its local management.
That appealed to Summers, who will remain with the combined company as an executive vice president. He said he has fielded "numerous" phone calls from potential buyers in recent years.
"We liked the Mercantile story. It's a multibank environment, and they have maintained a sensitivity to local markets," Summers said. "We've had a very good run, but we're in a great market and we have gotten a lot of interest from people wanting to come into the Northern Virginia market."
The acquisition is subject to approval by shareholders. Kelly said he expects the purchase to be completed in the second quarter. Community Bank shareholders can elect to receive either $20.37 for each of their shares or 0.4 share of Mercantile stock.
Mercantile had set its sights on buying the troubled Riggs National Corp. as a way to expand in the Washington area and spent about $1 million exploring the idea. But the deal didn't happen. PNC Financial agreed in July to buy Washington-based Riggs, which has been rocked by scandals over alleged money laundering and ties to the former Chilean dictator, Augusto Pinochet.
Kelly said the Community Bank acquisition gives his bank a "first mover" advantage over competitors seeking to position themselves in the area "with a lot less risk than a deal like Riggs."
Community Bank has had its own legal troubles and last year settled a class action lawsuit alleging predatory lending. GMAC Residential Funding Corp., Guaranty National Bank of Tallahassee, Fla., and Community Bank agreed to pay a total of $41.1 million. Kelly said the case has been appealed and that two related lawsuits are pending, though he said any liability is likely to be small and that Community Bank has set aside $3 million to cover future costs.
On the legal front for Mercantile, the bank spent more than $2 million on litigation expenses in the past six months, including costs related to a lawsuit against John J. Pileggi, a senior executive who was fired last year amid allegations that he breached his fiduciary duty. Mercantile sued Pileggi for more than $8 million in Baltimore Circuit Court after Pileggi sued the bank for $240 million over his dismissal.
Pileggi said he stood to lose millions of dollars because of his dismissal. He contended the bank was shopping itself to interested buyers, which would have resulted in a large payout to him and others. The bank has said it is not for sale.