Virginia Commerce Scores Big M&A Premium After Turnaround

Executives at Virginia Commerce (VCBI) believed they held a valuable gem that needed just a little polishing.

Their conviction was affirmed Wednesday when the Arlington company announced it would sell itself to United Bankshares (UBSI) for $491 million in stock, or 182% of its tangible book value.

That premium justifies the sale, said analysts who had thought the company might stay independent longer.

"I didn't think they'd sell," says Paul Miller, an analyst with FBR Capital Markets. "But this is a good price for them. …It is proof that deals are getting done and some sellers are getting good prices. We've heard that the bid/ask spread is too large, but at 1.8 of tangible book, this is favorable to the sellers."

Virginia Commerce, with assets of $2.8 billion, said this month it had hired Sandler O'Neill to explore strategic options after it spent last year resolving its problems and repaying the Treasury Department.

Analysts had pegged the likely sale price at about 160% of tangible book value. Mark Merrill, Virginia Commerce's chief financial officer, declined to say if the deal was negotiated or was the result of a bid process, but he hinted that it has had numerous suitors over the years.

"Northern Virginia has been coveted by in-state and out-of-state institutions for years," Merrill says. "They are interested in diversifying from their slow- to mid-growth markets into one that offers strong growth."

But Virginia Commerce has spent the last few years dealing with credit issues, particularly those tied to its construction portfolio. Though there was interest from buyers, Virginia Commerce, which has a high level of insider ownership, was not interested in selling from a position of weakness, Merrill says.

Instead, it raised capital several times. In September 2008 the company's directors and officers bought $25 million of trust-preferred securities; it accepted $71 million from the Troubled Asset Relief Program also in 2008; in 2010 it raised $10 million in common equity from institutional investors, with an additional $6.5 million in exercised warrants; and in 2011 it raised $2.5 million in common stock from a director, along with exercised warrants that brought in an additional $4.8 million.

The insider raises "sent a bold statement that we believe in this bank and we are going to make it through this cycle," Merrill says.

The appetite of potential buyers intensified as the company's health improved.

"This deal is not the result of one specific meeting," Merrill says. "In our world management teams meet from time to time. We talk at conference and develop these relationships. Interest became stronger as positive things were happening for us."

United Bankshares did not return calls for comment. The $8.3 billion-asset company — which has dual headquarters in Washington and Charleston, W. Va. — has long been interested in increasing its presence in Washington and its suburbs.

The deal would double the assets the company has in that market. It currently has 42% of its assets in Maryland, Virginia and the District of Columbia. Following the deal, that share would grow to 56% of an $11.2 billion-asset balance sheet.

Analysts were divided on whether United overpaid.

Matthew Schultheis, an analyst with Boenning & Scattergood, said the pricing matched historic pricing levels of mid-Atlantic bank M&A, but that he would have preferred the payment to be a mix of cash and stock "to take out some of the dilution to tangible book value."

United expects to earn back the dilution over three to four years, its investor presentation said. Schultheis said in a note that United's tangible book value would fall 77 cents to $11.29 per share.

"I don't get the sense they are overpaying," Schultheis said in an interview. "They've long telegraphed that they wanted more of a presence in Washington. …This is what they've been building toward."

However, David Darst, an analyst with Guggenheim Partners, described the premium as a little rich, given Virginia Commerce's loan quality. Nonperforming assets made up 1.98% of total assets at the end of 2012.

United plans to take an $87 million markdown, or 4%, on the loan portfolio. That would make the deal value closer to 2.2 times tangible book, Darst says.

"I'm surprised by the price," Darst says. "We've seen valuations between 1.5 to two times tangible book value. However, those were for banks with very clean asset quality."