Webster Financial Corp., which in recent years has been trying to position itself as a commercial bank, went back to its thrift roots Thursday, announcing a deal to buy Mech Financial Inc. for $210 million in stock.
The Waterbury, Conn.-based company would pay 16.9 times earnings, or 2.2 times book, for Hartford, Conn.-based Mech Financial, the parent of $1.1 billion-asset Mechanics Savings Bank. Webster, which has $10 billion of assets, expects to close the deal during the second quarter.
The deal - announced the same week that Webster completed its acquisition of Windsor, Conn.-based New England Community Bancorp - would solidify Webster's position in the Hartford market, where it is already the second-largest banking company, behind FleetBoston Financial Corp.
When the merger is completed, Webster would operate 63 branches in the market, triple what third-place Sovereign Bancorp, of Wyomissing, Pa., would have when it completes its purchase of divested FleetBoston branches.
"This merger is a very attractive opportunity to significantly strengthen our Hartford franchise," said James C. Smith, Webster's chairman and chief executive officer, in a conference call Thursday. "We look at this as a low-risk, in-market transaction which gives us a good opportunity to cross-sell products and add value."
The company expects sales of insurance and trust services to Mechanics Savings customers to contribute to earnings the first year after the acquisition closes.
Analysts said the deal is also significant because it keeps Mechanics Savings - considered by many industry-watchers a prime takeover target - out of the hands of a competitor. It is a strategy Webster could repeat in the near future.
"There is not a lot left to buy in the state of Connecticut, and I think Webster is eager to lock-up as many of the remaining institutions as it can," said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners in New York.
Still, this acquisition would seem to be in contrast to what Webster said it was trying to accomplish in July, when it announced its $220 million deal for New England Community, a commercial bank holding company. At the time, Webster said it was trying to add more commercial loans to its traditional thrift balance sheet.
Five years ago, home mortgages accounted for more than 90% of Webster's outstanding loans. That proportion was down to 70% at the beginning of this year, and dropped to 65.4% of total loans after the company completed its deal for New England Community this week.
Mr. Smith said during the conference call that the acquisition does not mean Webster is abandoning its mission of becoming more bank-like. Mech's management, he said, has done a good job attracting commercial customers.
"This transaction leaves us exactly where we are right now," he said. "It does not take us back."
Webster's ratio of residential mortgages to total loans would actually drop slightly, to 65.1%, when the deal is closed, he said.
"Mech Financial has a decent commercial business and good deposit structure," said Kevin T. Timmons, analyst with First Albany (N.Y.) Corp. "There are some fee-income streams where they can probably even teach Webster a thing or two."