Webster Financial Corp., the holding company for Waterbury-based Webster Bank – whose headquarters are above – is acquiring FirstFed America Bancorp for about $465 million.

In the latest of several moves, a leading in-state financial institution has spilled out over the border into Massachusetts and Rhode Island with the acquisition of another bank.

Webster Financial Corp., the holding company for Waterbury-based Webster Bank, announced early Tuesday morning that it has reached a definitive agreement to acquire Swansea, Mass.-based FirstFed America Bancorp, the holding company for First Federal Savings Bank of America, for about $465 million.

The combined bank would rank as the 46th largest in the United States, with $16 billion in assets, market capitalization of $2.2 billion and a 141-branch retail footprint in Connecticut, Massachusetts and Rhode Island.

“Our partnership with FirstFed is a union with people we know well and trust, and whose strategic goals are highly compatible with our own,” said James C. Smith, Webster chairman and chief executive officer. “Together, Webster and FirstFed create a powerful franchise stretching across Southern New England from Lower Fairfield County through Connecticut and Rhode Island to Southeastern Massachusetts. The merger opens new opportunities and establishes a platform for future growth in the region.”

FirstFed America Bancorp is a federally chartered savings-and-loan holding company with $2.7 billion in assets as of June 30, 2003, and 26 branches, 19 in Massachusetts and seven in Rhode Island.

FirstFed and Webster will merge operations, and existing FirstFed branches will be renamed Webster Bank. Both companies have similar structures with extensive consumer, mortgage and commercial banking operations, and both also have insurance agencies and trust companies. Webster intends to retain the existing FirstFed branch locations and all customer service personnel.

“When banks get over the $1 billion mark, they become very attractive candidates for acquisition by larger banks, and FirstFed had become an attractive franchise to particularly someone who wasn’t servicing that market area,” said Stan Ragalevsky, banking attorney with Kirkpatrick & Lockhart in Boston.

“The other thing to think about is that the life expectancy of a bank following a conversion is five to seven years, and I believe that FirstFed converted within that time frame,” he said. “The only way for the larger bank investors to realize a significant return on their investment is to encourage the sale of their institution.”

‘Breakout Deal’

Ragalevsky noted that Webster’s plans could include being acquired itself, or perhaps merging with a similar bank, in the future.

“I would think that would be natural. After this acquisition, Webster will have [$16 billion] in assets, and if you take a look at their franchise, and a merger with [Portland, Maine-based] Banknorth, for example, you could have a regional franchise that would be quite powerful,” he said. “Also a bank that has a franchise that extends into several states may be attractive to one of the nationally operating banks like Wachovia or Bank of America, which have been rumored to be coming into the New England area but have yet to surface.”

Ragalevsky added that the overall endgame of Webster is quite possibly to be acquired.

However, banks of similar size and strategy have done just the opposite, and thrived with their multi-state operation. Philadelphia-based Sovereign Bank, for example, was questioned for being an out-of-state thrift trying to break into a tight Massachusetts market.

“Everyone thought there must be something wrong with them, but they were able to turn [the acquisition of U.S. Trust] into a very successful business opportunity. Now Sovereign is a significant competitor in the New England regional banking market,” he said.

Robert F. Stoico, FirstFed chairman, president and chief executive officer, will be Webster’s chairman and chief executive officer for the Massachusetts and Rhode Island region, and he will join the board of directors of Webster Financial Corp. and Webster Bank. FirstFed Executive Vice President, Chief Operating Officer and Chief Financial Officer Edward A. Hjerpe III will serve as president and chief operating officer of the Massachusetts and Rhode Island region.

Stoico said, “In considering strategic alternatives, our board of directors placed great value on the compatibility of Webster’s strategy and culture and on leadership that will enable us to compete effectively as a regional financial services company. This partnership is excellent news for our shareholders, customers and the communities FirstFed serves.”

In connection with the merger, Webster plans to de-leverage its balance sheet by up to $1.5 billion through a combination of investment portfolio reduction, loan sales or securitization. The de-leveraging will improve the combined company’s funding mix and accelerate Webster’s transition to a commercial bank.

The agreement is a combination cash and stock transaction valued at approximately $465 million, or $24.50 per common share of FirstFed stock, payable 60 percent in Webster stock and 40 percent in cash.

The purchase price is 2.08 times FirstFed’s book value and represents a premium of 22.4 per cent to deposits, excluding jumbo certificates of deposit. The acquisition is expected to contribute positively to Webster’s earnings per share immediately, excluding one-time merger-related costs in 2004.

Webster’s acquisition of FirstFed coincides with its conversion to a national charter. The new charter will allow the bank to operate in several states with ease.

“Converting to a national charter generally would have certain advantages in terms of being able to offer products and services across multiple states with one set of operating rules,” said Ragalevsky. “To operate under a uniform set of rules by the [Office of the Comptroller of Currency] would be attractive in that they are operating in four different states, but there’s no significant reason to do it until you get into the third state. Most of these states have fairly similar banking laws, but New York is a very tough state and has laws that are not like Massachusetts, Connecticut and Rhode Island.”

Ragalevsky noted that the national charter is more expensive than an in-state charter because of associated examination fees charged by the OCC. His comments about multiple states reflect the fact that other recent acquisitions have pushed Webster into Westchester County in New York, as well as Fairfield County.

“I think moving north into Massachusetts is something we’ve always looked at,” said Clark Finley, spokesman for the bank. “We consider this move an opportunity to bolster ourselves as a leading regional financial service provider. The benefit of this deal is that we accomplish our goal with an institution that we consider to be a like-minded institution.”

Finley said that talks have been going on for a few weeks before the announcement, and that the bank had been looking throughout Massachusetts, Rhode Island and New York for potential acquisitions.

As far as what happens to employees of FirstFed, Finley said that there will be some layoffs because of the “inevitable duplicity of jobs.” However, those who work at the customer service level and branch personnel will remain in place, and those with back-office jobs may be offered jobs at Webster.

“We have a very good track record of finding them something within our shop,” said Finley. “This is a breakout deal for us. It’s a very exciting day.”

Upon the completion of the acquisition, FirstFed shareholders will be entitled to receive either 0.59 shares of Webster common stock or $24.50 in cash for each share of FirstFed common stock, subject to proration.

The definitive agreement, which was unanimously approved by FirstFed’s board of directors, is subject to approval by regulatory authorities and FirstFed’s shareholders. Webster expects the transaction to close in the first quarter of 2004.

Lehman Bros. served as financial advisor to Webster. Keefe, Bruyette & Woods and Sandler O’Neill & Partners served as financial advisors to FirstFed.

Webster Financial Corp. is the holding company for Webster Insurance in addition to Webster Bank. With $14 billion in assets, Webster Bank provides business and consumer banking, mortgage, insurance, trust and investment services through 110 banking offices, 220 ATMs, a Connecticut-based call center and the Internet.