Eight months ago, ESSA Bancorp in Stroudsburg, Pa., had the look of a seller. Indeed, investment bank Stern Agee included the $1.6 billion-asset company on a list of 76 potential merger-and-acquisition targets.
But ESSA sent an unmistakable signal late Wednesday that it has no intentions of quitting the business it agreed to pay $24.7 million in cash for the $175.7 million-asset Eagle National Bancorp in Upper Darby, Pa.
"Our board of directors gives us guidance. The strategic plan they approved calls for continued growth and independence, so that's what we'd like to do," said Gary S. Olson, the president and chief executive of ESSA, in an interview.
The deal, which is expected to close in the fourth quarter, would give 99-year-old ESSA its first-ever presence in the metropolitan Philadelphia marketplace. That is part of its appeal, since Philadelphia is a more attractive market than the central-Pennsylvania communities where ESSA currently does business.
"East central Pennsylvania is a slow-growth area," said Ted Peters, CEO of the Bluestone Financial Institutions Fund and former chairman and CEO of Bryn Mawr Bancorp in Bryn Mawr, Pa. "This is not a huge deal, but they are getting into a faster-growing market where they can build critical mass."
Eagle National Bank operates five branches in Montgomery, Chester, and Delaware counties spanning the western suburbs of Philadelphia. According to ESSA, per capita income in each of the five counties where it currently operates is lower than the statewide average of $29,727. Per capita income in Eagle National's suburban Philadelphia footprint is significantly higher, by contrast.
The downside of entering a market as prominent as Philadelphia is competition. According to the Federal Deposit Insurance Corp.'s most recent Deposit Market Share Report, more than 130 banks maintain a presence in metropolitan Philadelphia, holding more than $496 billion in deposits.
Olson said ESSA would have no trouble grabbing its share of business. "We've moved into two new markets in the past three years, "he said. "We do fine once individuals and companies begin to learn what ESSA is all about. I'm convinced our brand will play well in any marketplace."
Eagle, which reported a profit of $255,000 for the quarter ending June 30, has struggled with asset quality issues in recent years. At the end of 2013, its ratio of noncurrent loans to total loans was 4.56% according to FDIC statistics. The number had declined to a more manageable 2.99% as of March 31, but it was still higher than the industry average.
ESSA, which reported a second-quarter profit of $2.5 million and 23 cents per share on Wednesday, said its nonperforming assets totaled $23.4 million or 1.46% of total assets.
ESSA believes it can achieve cost saves totaling $2.4 million within a year of the deal's closing date. Once it hits that mark, earnings-per-share accretion should total 19%.
Eagle National marks the third whole-bank acquisition ESSA has announced since completing its $159 million initial public offering in April 2007. The company, which had approximately $725 million of assets at the time of its stock sale, acquired the $219.5 million-asset Franklin Security Bancorp in Wilkes-Barre, Pa., in April 2014 and the $427.6 million-asset First Star Bancorp in Bethlehem, Pa., in July 2012.
Following the IPO, ESSA's ratio of average capital to assets was north of 21%. The Eagle National deal should reduce the ratio to approximately 9%. "That's where we were before the IPO, so it's a comfortable level for us."
Raising additional capital is a "possibility" for ESSA, Olson said. There are still a number of community banks in the state interested in selling, and ESSA certainly seems open to doing additional deals once it completes its acquisition of Eagle National. "We've got to figure out a way to do it without significantly diluting our shareholders," Olson said.