- The Washington Times - Monday, July 17, 2006

Mercantile Bankshares is acquiring James Monroe Bank in a $143 million cash and stock deal that once again is reshuffling the competitive Northern Virginia banking market.

Mercantile Bankshares is paying more than three times the book value of Arlington-based James Monroe, which is unusually high even considering the fast pace of bank consolidations in recent years.

Nevertheless, shareholders approved the deal, which is scheduled to close this week. State and federal regulators also have given approval.

Last year, Baltimore-based Mercantile Bankshares acquired Community Bank of Northern Virginia for $212 million.

“As evidenced by last year’s merger with Community Bank of Northern Virginia and most recently, with James Monroe Bank, we are excited about the prospects for growth in the Northern Virginia market,” said Alexander T. Mason, Mercantile Bankshares’ chief operating officer. “We also are keeping an eye out for ways to bring our brand … to new markets, particularly those south of our current footprint.”

James Monroe will be merged into Mercantile Potomac Bank, a division of Mercantile Bankshares’ largest affiliate.

Mercantile Bankshares earned net income of $70.8 million, or 57 cents per diluted share, on revenue of $288.5 million in the first quarter of 2006, compared with net income of $62.6 million, or 52 cents per diluted share, on revenue of $237.1 million in the first quarter of 2005.

Mercantile Bankshares Corporation, MRBK on the Nasdaq Stock Exchange, closed yesterday at $34.72 per share, up 29 cents or 1 percent from Friday’s close.

The bank claims it can withstand the tough competition that James Monroe Bank said in regulatory filings influenced its decision to seek a merger.

Mercantile Bankshares operates with a family of 11 community banks and one mortgage banking company linked into a single regional network with 3,658 employees in Maryland, the District, Virginia, Delaware and Pennsylvania.

Their combined assets are valued at more than $16 billion, giving each of the community banks significantly greater resources than a single bank such as James Monroe, which operates with seven offices and about $550 million in assets.

“This permits us to provide everyday banking services, as well as more sophisticated lending, cash management, investment and wealth management services to local businesses and individuals,” Mr. Mason said.

Nevertheless, he acknowledges that banking in the Washington area, which he describes as “one of the country’s fastest-growing, most attractive markets,” has its risks.

“On the flip side, it is also one of the most competitive markets,” Mr. Mason said.

Industry analysts said the price Mercantile Bankshares is paying for James Monroe might hurt its earnings in the short term but could be made up through cost savings later.

“The deal would seem to destroy roughly $10 million in shareholder value,” said Robert C. Rutschow, research analyst for financial firm Prudential Equity Group, which makes a market in shares of Mercantile Bankshares. “However, we believe value destruction is mostly offset by, what is now, a more attractive franchise, which could command more of a premium in the event of a sale.”

Consolidating operations with James Monroe would “generate cost savings of $3 million per year,” Mr. Rutschow said.

Adam Barkstrom, managing director for Richmond financial firm Stifel Nicolaus, which makes a market in Mercantile Bankshares stock, said the James Monroe acquisition merely continues a long-term strategy of expansion in the Washington area by Mercantile Bankshares.

“Given their size, it would be tough to be worried about a lot of acquisition risk there,” Mr. Barkstrom said. “Over the years, they’ve been known as a pretty conservative, well-run organization. They certainly maintain high levels of capital.”

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