Conventional wisdom in banking says it is cheaper to build than buy, but Interchange Financial Services Corp. of Saddle Brook, N.J., is turning that axiom on its head.
Not only is the $1.5 billion-asset company buying its way into neighboring Essex County, but president and chief executive officer Anthony S. Abbate says it is saving money in the process.
Interchange said Friday that it is acquiring the $81 million-asset Franklin Bank in Nutley for $24.8 million. In an interview Monday, Mr. Abbate said his company had been looking to build branches in Essex County but balked because of skyrocketing real estate costs.
"One of the reasons we're buying [Franklin] is that every other location we looked at in Nutley is overpriced," he said. "Everybody is bidding up prices because of the branching mania that's going on."
Indeed, few banking markets are as desirable as northern New Jersey, and competition for prime real estate is driving up land costs. Franklin's president and CEO, Tom Lupo, said the chief reason it decided to sell is that the most attractive parcels of land in Essex County can cost $2 million to $3 million to buy and develop.
"We had reached a point in out maturity process where we had to add branches to be a competitive force, and that would have had too negative an impact on earnings," Mr. Lupo said.
Interchange, founded in 1969, has 30 branches, all in Bergen County. Mr. Abbate said buying Franklin would serve as a springboard for further expansion in Essex, which has a population of about 800,000, according to the U.S. Census Bureau.
Though Interchange would prefer to buy in Essex, Mr. Abbate said that building new branches there might be its only option because additional acquisition targets are scarce.
On the bright side, Interchange is not paying a lot for Franklin. The price works out to 16 times Franklin's trailing 12-month earnings, well below the average of 26.34 times earnings for bank deals announced so far this year, according to Highline Banking Data Services. Mr. Abbate said he likes Essex County because, like Bergen, it is home to some of the most affluent communities in the Northeast.
Interchange is not adding any Franklin directors to its board but did appoint four of them - chairman Salvatore Cocco Jr., James Piro, Daniel Geltrude, and Frank Pomaco - to a board set up to advise Interchange on strategic moves in Essex County.
"We've formalized the advisory board so that it will be meaningful to them and to us," Mr. Abbate said. He would not say what the four members would be paid.
Franklin's decision continues a trend among young community banks. Nearly 40% of the bank deals announced since May 1 have involved a seller founded in 1997 or later.
The privately held Franklin reported its first profit, of $559,000, in 2003. Net earnings topped $1.1 million in 2004, and the company reported a profit of $415,000 for the quarter that ended March 31.
Franklin investors are to receive 1.23 shares of Interchange stock for each of their Franklin shares. Interchange expects to close the deal by yearend and said the acquisition would be accretive to earnings in 2006. Its strategic assumptions include a 35% reduction in Franklin's operating expenses, but Mr. Abbate said that would be achieved without staffing cuts.
Franklin would be Interchange's third acquisition. Both the banks it bought were in Bergen County, where Interchange holds a 3.7% share of the $32 billion deposit market, according to the latest statistics compiled by Federal Deposit Insurance Corp. Franklin held less than 1% of Essex County's $14.7 billion of deposits.
