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Deal would send Berkshire Hills further into New England under new CEO

Berkshire Hills Bancorp Inc. is not shying away from deal activity under newly installed President and CEO Richard Marotta.

Two weeks after Marotta was suddenly named chief executive in place of Michael Daly, the Boston-based bank struck a $182.2 million bid to acquire SI Financial Group Inc. The negotiated transaction, expected to close in the second quarter of 2019, will expand Berkshire Hills' existing presence in the New England region.

"Strategically, this is a contiguous market transaction, which is a natural fit for us," Marotta said Dec. 12 during a deal call.

Yet the deal caught some analysts off guard, as the announcement came about two months after Daly, then Berkshire Hills CEO, said the bank was focused on growing its profitability through organic means and not through a deal.

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"This is sort of a different path than [the bank has] been guiding throughout most of the year," Compass Point Research & Trading analyst Laurie Hunsicker said during the Dec. 12 call.

When asked about Daly's comments, Marotta said that no "fundamental difference" in strategy had occurred since then. Instead, the bank's current chief executive said he plans to focus on opportunities that would allow Berkshire Hills to bolster its returns through both deploying capital and liquidity. The merger discussions between Berkshire Hills and SI Financial had been "in the works for a while," said Marotta, who previously was president of Berkshire Bank.

Whether Berkshire Hills will look to bolster returns through expansions in its hometown of Boston or in more rural areas remains to be seen.

"We're going to take a disciplined approach to where we're going to get the best bang for our capital and our liquidity," Marotta said. "I will put it simplistically — it's going to be on a deal-by-deal basis."

The deal for SI Financial does fit into Berkshire Hills' prior acquisition strategy, though, which has revolved around acquiring "moderately weaker performing banks" in bordering states, Keefe Bruyette & Woods analyst Collyn Gilbert wrote in a Dec. 11 research report.

Under the terms of the deal, each outstanding SI Financial common share will be swapped for 0.48 common share of Berkshire Hills stock. The deal is expected to swell Berkshire Hills' total assets to $13.6 billion.

SI Financial's 18 branches in Connecticut will build on Berkshire Hill's existing nine-branch network in the state, which was established through its 2011 acquisition of Connecticut Bank and Trust Co. Once the deal closes, Berkshire Hills will also enter the Rhode Island market, where SI Financial has five branches.

The pending transaction makes financial sense as well, according to Compass Point's Hunsicker.

Expected to create earnings-per-share accretion of 5% once integrated, the deal will provide Berkshire Hills with a franchise network that carries lower-cost core deposits, Hunsicker wrote in a Dec. 12 research report. In the most recent quarter, Berkshire Hills' cost of deposits was 97 basis points versus SI Financial's 82 basis points, according to an investor presentation. The bank expects its cost of deposits to fall to 95 basis points once SI Financial comes under its corporate umbrella.

Berkshire Hills expects that the deal, which is its second-largest in the past decade, will carry 2.4% dilution to tangible book value. The bank said it plans to earn that back in less than three years through the crossover method.

Still, it was SI Financial's deposit profile that piqued Berkshire Hills' interest in the bank, said Marotta, who called the target bank a "really good deposit franchise." The deal will provide Berkshire Hills with a business that reported $1.3 billion in loans and $1.3 billion in deposits, as of Sept. 30.

"[SI Financial] has built a strong long-standing deposit franchise in their markets, and half of their deposits are in towns where they have the top market share," he said.

Berkshire Hills shares plunged the trading day following the deal announcement, falling 6.14% to $29.37 by market close. SI Financial shares rose 5.53% to $13.75 that same day.

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