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Execs tout Westfield's deal in Massachusetts, but stock bruised amid earnback concerns

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Execs tout Westfield's deal in Massachusetts, but stock bruised amid earnback concerns

Westfield FinancialInc.and ChicopeeBancorp Inc. heralded their $110million all-stock dealto join forces in the Springfield area ofMassachusetts, a market they say is ripening with commercial growth and inneed of a larger community bank to meet local businesses credit needs.

Westfield executives said the acquisition of Chicopee, slatedto close in the fourth quarter, would unite two complementary branch networks andelevate lending limits for the combined operation, giving it heft and new leewayto pursue more commercial clients as Greater Springfield's economy recovers froma downturn. Westfield would move from No. 8 to No. 4 in deposit market share inthe Springfield metropolitan area.

In aninterview, Westfield President and CEO James Hagan said several major constructionand commercial expansion projects are underway in the market, driving robust developmentactivity and bringing new jobs. Existing local businesses expect to feed off ofthe activity, giving them reason to tap credit lines to invest in growth of theirown. Hagan said the prospects for commercial real estate and especially commercial-and-industrialloan growth appear bright.

"The C&I opportunities are enormous here," he said.

From his perspective, Chicopee Chairman, President and CEO William Wagner put it this way duringa joint call to discuss the deal with investors and analysts: "We'll be ableto swim in a much deeper pond."

Analystswelcomed the complements and potential growth the deal affords, but also homed inon shareholder dilution and a lengthy projected earnback period, raising questionsabout the deal's merits. Westfield's stock sank about9% in morning trading April 5. The acquisition was announced after markets closeda day earlier. Shares of Chicopee were up about 1% at midday.

On aper-share basis, SNL Financial calculated the deal value to be 119.7% of tangiblebook, below the average of 135.09% for bank and thrift targets in the Northeastbetween April 4, 2015, and the same date this year.

Westfield estimated TBV dilution of 6% with an earnback period of 4.7 years. Investors in recent years have welcomed deals with earnbacksof less than five years and favored those with periods shorter than four years,analysts say. FIG Partners analyst David Bishop said in an interview that the deal priceappeared fair but the earnback would test "the market's comfort level."

Compass Point Research & Trading LLC analyst Laurie Havener Hunsicker went further, writingin an April 5 note to clients that she estimated 8.5% dilution, and she added that Westfield'sprojected earnback falls well short of her estimate of more than 10 years.She said Westfield used the "crossover" method, under which the impact on tangible book does not reflect all restructuringcharges, to calculate the earnback. Sheinstead used the "EPS accretion" method, which includes all one-time chargesamong other differences.

While she agrees the deal "provides a nice geographic expansion,"Hunsicker said the dilution "istoo high, and the earnback is too lengthy." Compass Point downgradedWestfield's stock to "neutral"from "buy" after the deal was announced.

Hagan,the Westfield chief executive, acknowledged that there are different ways to calculateprojections in a deal. But he said the company is very confident that its numbersand estimates are accurate and achievable.

Hagansaid the combined Westfield/Chicopee — which willbe renamed at the holding company level Western New England Bancorp and as a bankwill do business as WestfieldBank — will grow substantially, providingit scale needed to compete with larger players and heft to better absorb regulatorycosts that have soared in recent years for all banks.

It will have $2.1 billion in total assets, roughly $1.4 billionin deposits and a similar amount in loans, according to a presentation. The pro forma operation is projected to bethe largest locally managed bank in Hampden County, Mass., and the second-largestbank by deposit market share behind Toronto-Dominion Bank. It would rank fourth in the Springfieldmetro behind, Bank of America Corp.,TD and PeoplesBancorp MHC.

Hagan said the merged operation would have 21 branch locations.Westfield plans tokeep all of them because there is no meaningful overlap between the two banks' existingfootprints. Rather, he said, each boasts a prominent footprint on mostly oppositesides of a river that divides the market. The combined institution would straddlethe river and span the metro area. Still, Westfield estimated cost savings of $7million, or 15% of the combined banks' 2015 expense base. Savings will come in largepart from a reduction in overlapping vendors and consolidation of certain backroomfunctions, Hagan said.

The combined bank, Hagan said, would see its commercial loan limit rise substantially,from $21 million to $35 million, enabling it to compete for more credits and workwith larger commercial customers. "That makes a big difference," he said.

GreaterSpringfield suffered economically in recent years, the result both of the last nationalrecession and a decline in its manufacturing base. But it has begun to rebound andappears poised to continue to do so in coming years, Hagan said. He cited severalmajor developments in the market as evidence:

* ChinaRailway Rolling Stock Corp's new manufacturing plant will assemble 285 new carsfor Boston's subway system under a $566 million contract, and China Railway alsorecently won a $1.3 billion bid to build rail cars for the Chicago Transit Authority.

* Workon a $950 million MGM casino is under way in downtown Springfield.

* SpringfieldUnion Station, an $88 million project billed as a chief transportation center inthe region, will support Amtrak in addition to regional and state-supported trains.

Hagansaid a variety of small businesses and middle-market companies provide servicesto such projects or stand to benefit when they are completed because they will employmore people and drive economic activity in the market. He said the combined Westfield/Chicopee aims to win more of that commercial clientele.

FIG Partners' Bishop saidthere does indeed appear to be upside in the Springfield area, adding appeal tothis deal.

"It'sa pretty good commercial-and-industrial market," he said. "It's competitive,but from a small-business and middle-market commercial perspective, it's prettyattractive."