Waterbury-based Webster Bank is purchasing Eastern Wisconsin Bancshares, which specializes in health savings accounts, for $26 million.

Mergers and acquisitions are all the rage now, but one Connecticut bank is taking growth in a new direction. Waterbury-based Webster Bank announced Tuesday that it has acquired a Wisconsin-based company that specializes in health savings accounts.

Webster bought Eastern Wisconsin Bancshares, the holding company for State Bank of Howards Grove, which also runs HSA Bank, a large provider of tax-exempt health and medical savings accounts. Webster paid $26 million in cash and expects the deal to close early in 2005, according to a press release from the bank.

Health or medical savings accounts allow individuals or employers to contribute money to an account, tax-free, to save for medical expenses, according to HSA Bank’s Web site.

“The account allows you to enjoy tax reductions while having affordable premiums and decreasing your out-of-pocket expenses without risking your insurance protection,” according to the site.

The accounts are used in conjunction with a “qualified high-deductible plan,” which is defined as a health plan with a minimum deductible of $1,000 and a maximum deductible of $5,000 for an individual, and a minimum deductible of $2,000 and a maximum deductible of $10,000 for a family, according to HSA Bank’s Web site. Then, the individual or employer contributes a certain amount of money every year tax-free, depending on the size of the deductible. The money can be used to pay medical expenses up to the cost of the deductible, after which the health insurance kicks in.

‘Very Creative’

Medical savings accounts – which are for individuals who contribute to the accounts themselves or whose employers contribute, but not a combination of both – have been around since 1996. HSA Bank began offering such accounts the following year. But last year, Congress approved health savings accounts as a part of the Medicare Prescription Drug, Improvement & Modernization Act, according to information released by Webster.

The accounts are attractive to companies that want to give employees more control over their money, said Nat Brinn, executive vice president of corporate development at Webster. Before Congress approved the health savings accounts, medical savings accounts were not as popular because many people did not want to take on the risk of a high deductible, Brinn said. But when pairing the high-deductible plans with the tax-exempt accounts, he added, the option becomes more realistic.

If an individual does not use all the money in their accounts for medical purposes, it can be withdrawn with a penalty at any time or used, without penalty, if the individual is disabled or when they reach age 65, according to HSA Bank’s site.

“The difference is … it’s the employee’s money and if they don’t use it, it’s theirs to keep,” Brinn said.

Webster’s acquisition is the latest in the bank’s record of branching out in creative ways, said John Carusone, president of the Bank Analysis Center in Hartford.

“Webster has a track record of very selectively identifying niche business opportunities that complement their interests and resources,” he said.

The bank began to consider a foray into health savings accounts last year when Congress passed the law to allow the accounts, Brinn said.

“We assessed this with a logical process,” he said. “We assessed the potential as very large.”

After deciding the market was one the bank would like to enter, Webster began to decide how, Brinn said.

“It was buy vs. build,” he said.

But the bank’s executives decided it would be better to enter the market quickly, so they searched for an existing company to acquire. While they were trying to grow, State Bank of Howards Grove and HSA Bank were struggling with a market that was growing too fast for them. So, the $163 million-in-assets bank was sold to Webster.

“They were, fortuitously, trying to deal with the problem on the other side,” Brinn said.

The acquisition appears to be taking place at a good time, according to Carusone.

“It looks like a win-win for both the seller and the buyer,” he said.

The addition of the new services will diversify Webster while its deposits grow because of the escalating costs of health care, he noted.

“[It’s a] very creative acquisition,” Carusone said. “The pricing seems a bit rich, but doubtlessly is a factor of the profitability.”

The new venture will allow Webster to generate deposits on a national scale and the acquisition of HSA Bank, which was an early entrant into the market, will give Webster a commanding presence in the health savings account industry, Brinn said.

“They had a good reputation with the carriers’ administrators,” he said.

The bank’s top executive agreed.

“Webster is now well positioned as an early entrant in the rapidly growing national HSA deposit market,” said James C. Smith, Webster’s chairman and chief executive officer, in a prepared statement. “We gain competitive advantage by acquiring an established national competitor. As companies and organizations across the country intensify their search for health care plans offering optimal benefits to their employees at affordable costs, they increasingly find advantages in tax-free HSAs. By giving employees greater flexibility in deciding how they want to protect their families through individual health plans, HSAs offer a compelling new benefits solution.”

State Bank of Howards Grove also operates two retail branches in Wisconsin, which Webster expects to divest, along with its related loans and deposits. Webster expects to retain all the staff from HSA Bank, according to a press release. The senior vice president of the HSA operation, Kirk Howeisch, will become president of HSA Bank when it debuts as a division of Webster.

“Our acquisition of HSA Bank affords a unique opportunity for Webster to advance its strategic plan by capitalizing on this new, rapidly growing initiative to gather core deposits and increase income from fee-based services,” said William T. Bromage, Webster’s president and chief operating officer, in a prepared statement. “We expect that HSA deposits will become a significant portion of our total deposits and will generate attractive returns on invested capital. In addition, we believe that our presence in the Connecticut market will prove to be a strategic benefit to building HSA relationships, given the many insurance and third-party providers active in this region.”