Webster Financial Corp. said Tuesday it expects its plan to buy Eastern Wisconsin Bancshares for $26 million to make it a major player in the nascent heath savings account market as well as to further its overall strategy of increasing core deposits.
"We think that the high-deductible health plans which are coupled with HSAs will create a revolution in the way that health care benefits are purchased and delivered," said James C. Smith, the chairman and chief executive officer of $17 billion-asset Webster. "In this case we have an opportunity with this modest investment of capital to be an early entrant into a business that we think is going to grow exponentially."
The Waterbury, Conn., banking company said its deal for Eastern Wisconsin, the holding company for State Bank of Howards Grove, would also give it the trade name operation, HSA Bank. Eastern Wisconsin has $163 million of assets and $144 million of deposits, including $100 million of HSA deposits.
Mr. Smith said that the cash deal, which is expected to close in the first quarter, would give Webster an established platform on which to build an HSA custody and administration business.
Eastern Wisconsin has 30 employees in this business and clients in all 50 states, Mr. Smith said, and its fully formed platform includes seamless enrollment and management of the accounts as well as customer support for employers, employees, insurers, and third-party administrators involved in the plans.
Nathaniel Brinn, a Webster executive vice president, corporate development, said that despite its small size Eastern Wisconsin already works with an extensive list of health insurers and third-party administrators. It got its start as a custodian for the Archer medical savings accounts that have been available since 1996, he said, and thus has a reputation in the marketplace.
With the 2005 enrollment season starting this fall, Mr. Smith said, now is a good time for Webster to enter the business. Awareness of this product is just starting to take off, he said, and he anticipates that interest will grow even further by the 2006 enrollment season.
HSAs were created in December as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Under these plans, eligible people may establish health savings accounts to receive tax-favored contributions that can be used to pay health-care costs. Workers and their employers can contribute as much as $2,600 a year for an individual or $5,150 for a family.
One obstacle to large-scale adoption, however, has been concerns about regulatory compliance. The Treasury Department has issued some guidance on compliance issues in recent months.
Mr. Brinn acknowledged that "there's a tremendous amount of compliance review that banks need to consider when entering this market." But he said, "We've done that and feel very comfortable."
Mr. Smith also noted that the need for extensive regulatory compliance will probably make most banks reluctant "to dabble in this business," leaving a clear advantage to the banks, like his, that make a commitment early.
Paul Fronstin, a senior research associate at the Employee Benefit Research Institute in Washington, said that deposits in these kinds of accounts are probably quite small to this point and will only grow as people add to their accounts and as more accounts are opened.
He said interested employers will also need to take time to educate their workers about this kind of plan. This, too, will mean a slower growth curve, he said.
Banks getting into the business now are facing "a balancing act" because of the potentially high cost of managing many low-balance accounts, perhaps with only a few hundred dollars in each, Mr. Fronstin said. Low balances mean limited investment options for account holders and the possibility of management fees, he noted. Banks need to educate customers about these details, balancing the interest in expanding the business with the need to make it profitable, he said.
In addition to its HSA operation, Eastern Wisconsin owns two retail branches in Wisconsin, but Mr. Smith said Webster plans to divest them and their related loans and deposits. All employees of the HSA operation will be retained, Mr. Smith said, and Webster plans to expand the business at its current site.
Once the deal closes, Kirk Hoewisch, a senior vice president in State Bank's HSA operation, is to become president of HSA Bank, a division of Webster Bank.
By joining Webster, Eastern Wisconsin gains "capital and credibility," Mr. Smith said. "They believe that they are going to grow so rapidly that they won't be able to attract the capital to support that growth and attractive returns to the existing shareholder base."
Webster will be able to provide the capital required for growth by HSA Bank that some estimate could be dramatic in this decade.
Forrester Research Group has projected premiums for consumer-directed health plans will grow to $413 billion by 2010 and make up 24% of the health benefits market.
Mr. Smith also said, "The acquisition enables us to increase our core deposits, which is the overall strategy."
In addition, he said, Webster has a history of making small deals with big growth potential. "We rate this opportunity among the best that we have seen," he said.
