Provident Bankshares Corp., the parent company of Provident Bank, has agreed to purchase Southern Financial Bancorp Inc., significantly expanding the reach into Washington's Virginia suburbs of the second-largest independent commercial bank with headquarters in Maryland.
The $330 million deal, which was announced yesterday, is expected to become final in April. It would add an additional $1.5 billion in assets and 33 offices to Provident's 116 offices, which stretch from Baltimore into Frederick, Montgomery and Prince George's counties of Maryland, as well as into Northern Virginia and southern Pennsylvania.
Warrenton, Va-based Southern Financial is expected to have acquired Norfolk, Va.-based Essex Bancorp Inc. and to have added Essex's seven savings bank locations to its roster by the first quarter of next year.
"This is sort of like home run time," said Gary N. Geisel, Provident Bankshares Corp. chairman and chief executive. "There would be very few banks that would fit all four of our core strategies as well as Southern does."
Provident, a historically strong consumer bank, counts among its key strategies expanding its commercial banking component, building its market share, expanding its branch network into metropolitan Washington and expanding core banking business and to improve its finances.
"It looks to be a very good strategic fit with regards to what Provident wanted to do," said Jeff K. Davis, an analyst and managing director of FTN Midwest Research, in Nashville, Tenn., a subsidiary of First Tennessee National. "Provident management still has to execute. But, they've done a very good job of transforming what was once a very sleepy institution with a thrift heritage into a big up-and-comer in the mid-Atlantic region."
Provident has not been overly aggressive in its deals, he noted.
"It's good news for the banking community in Baltimore," he said. "One of your hometown banks is stepping up a rung on the ladder with regards to size and presence, and Wall Street notices those things."
Although the deal will tax the capital ratio in the near term, Davis said he did not see that as a problem.
"They are going to have to raise some debt to fund the cash component of the purchase price," he said. "They could shrink the balance sheet some to improve capital ratios if they felt that was needed. But at the end of the day, they are going to be absolutely fine."
Such deals always entail risk, Geisel said, but he is optimistic that this one will go smoothly. The team that handled the 1997 merger with First Citizens Financial Corp. is still at Provident, he said. That involved 188 employees and 56,400 accounts, compared with Southern's 216 employees and 47,400 total accounts, he said.
"We feel very poised and very able to handle the execution of the integration of Southern Financial, based on our experience at Citizens," he said.
Southern and Provident will also mesh very well culturally, he said.
"The two organizations are very focused on the customers and are employee-centric," Geisel said.
The deal values Southern Financial at $44.89 a share, a 20.5 percent premium over Friday's closing price. Southern Financial shareholders are to receive 1.0875 shares of Provident stock and $11.125 in cash for each Southern Financial share held. Provident said it represents 272 percent of book value.
"I think it's a very good long-term acquisition," said Matthew C. Peake, an analyst at Davenport & Co. in Richmond, Va., a firm that deals with both Provident and Southern Financial. "There is concern about the premium being paid. But anybody that wants to acquire Southern Financial is not going to get it cheap."
Adding Southern Financial's strong business banking to Provident's distribution channels makes a lot of sense, Peake said.
"I think at the end of the day, you end up with a stronger, more attractive company than Provident standing alone," he said.
Davis, the analyst, noted that even once the Southern deal is completed, Provident still has a hole in its franchise in Howard County.
"This is a large and important merger for us," Geisel said. "Our focus is on integration and retention of customers. We have pieces of our footprint that continue to be underbranched and under the market share numbers that we'd prefer."
Provident probably would continue to grow under what has been a successful tradition of opening branches, Geisel said, noting that the bank has doubled the number of branches in metropolitan Washington in the past five years. In 1999, the bank had 24 branches in that region; today, it has 48.
Provident shares closed at $30.13 yesterday, down 92 cents. Southern Financial closed at $43.14 a share, up $5.87.