Region key to Webster expansion

Webster is bolstering its presence in Rhode Island, Massachusetts and Connecticut
with one overriding goal: to break into lucrative “bedroom” communities along
the eastern corridor.

Webster, a $17 billion regional powerhouse based in Waterbury, Conn., is building
on its recent acquisition of FirstFed Financial in Swansea, Mass., by expanding
the breadth and scope of its non-banking, fee-based services to area customers.
Specifically, the bank is beefing up its wealth management consulting, a growth
niche.

At the same time, Webster is bridging the geographical gap between Waterbury
and Swansea by targeting small-business customers and commercial projects. Webster’s
local task is made easier by the market leverage of FirstFed’s seven Rhode Island
branch offices in Cranston, East Greenwich, Middletown, Pawtucket, downtown
Providence, Riverside and Warwick.

Webster acquired FirstFed this year for $465 million in cash and stock. FirstFed
has $2.7 billion in assets and 26 branches, 19 in Massachusetts and the rest
in Rhode Island. The transaction, finalized in May, made Webster the largest
independent bank based in southern New England, with 145 retail branches throughout
Connecticut, Massachusetts and Rhode Island.

For Rhode Island customers, the consequences of the Webster-FirstFed marriage
appear sanguine. The worst fear of local retail customers, that banking fees
would rise after the merger, hasn’t materialized.

However, industry observers say Webster isn’t content with simply acquiring
new retail customers in the Ocean State. They contend that Webster is using
FirstFed as a stepping stone for an inexorable march into the fertile banking
territories of Boston, New York and maybe even New Jersey. Customers in these
affluent areas increasingly demand the personalized “community bank” approach
that is Webster’s forte.

FirstFed gives Webster a presence in areas of southern New England that are
served by big Boston banks, explained Tom Doheny, an analyst with Sandler O’Neill
investment bankers in New York.

“FirstFed’s managers have experience with communities closer to Boston,” Doheny
said. “Also, the regulatory and administrative hurdles to expansion are diminished,
because an alliance with FirstFed means they’re not complete outsiders.” He
said small-business banking in the Boston area is a profitable plum now targeted
by the Connecticut-based bank.

“Webster is on the march,” said William McCrystal, managing director, McConnell,
Budd & Romano, a banking industry research firm in Morristown, N.J. “The
merger with FirstFed made sense for Webster because it gave them new markets,
such as Providence, which in turn will give them entry into the Boston market.
Their expansion goal is to create concentric circles around their current locations.”

Officials with the newly merged entity of Webster and FirstFed confirm as
much. “Webster’s plan is to reach from the suburbs of New York to the suburbs
of Boston,” said Brenda Farrell, spokesperson in FirstFed’s Swansea headquarters.
Farrell said the company hasn’t opened any new branches yet in New England,
but acknowledged the bank has been busily opening new branches in Fairfield
and Westchester counties in New York.

Farrell says Webster’s first move after the merger was to reap economies of
scale by streamlining back-room operations at FirstFed, the sort of consolidation
that typically follows any large corporate merger. “We eliminated duplicative
support and administrative staff, particularly on the mortgage lending side,”
she said. “It created efficiencies without affecting service.”

The streamlining led to 55 layoffs. The company expects more job cuts in the
second quarter of 2005, said Farrell.

Now, with its local house in order, Webster is invading the suburbs of New
York.

“It’s a completely new foray for Webster,” McCrystal said. “Westchester has
great demographics. It’s one of wealthiest counties in the country. More to
the point, the Boston and New York markets are contiguous. It’s logical that
Webster will go north, up the coast, toward Boston, as well as south toward
Westchester, and even into northern New Jersey.”

McCrystal, who closely follows New England banking and FirstFed in particular,
said Webster’s purchase of FirstFed makes strategic sense for both operations.

“FirstFed and Webster have always had similar product lines,” he said. “They
are a good fit for each other. They both offer non-banking services, such as
insurance, trust and wealth management. With Webster’s greater financial wherewithal,
FirstFed is able to expand those non-banking services.”

When the merger was announced in late 2003, FirstFed was enjoying one of its
most profitable years, largely because low interest rates were fueling a boom
in home mortgage refinancing.

“FirstFed was smart to hook up with Webster,” McCrystal said. “FirstFed couldn’t
replicate that great financial performance on its own, because rates are expected
to rise. FirstFed sold at the top of the market and they got a good price. They
took their business to the next level.”

Webster this year opened new branches in Scarsdale, Yonkers and White Plains,
the first of about 15 new branches the bank plans to unveil in New York state
over the next three years. These areas are located in the Manhattan-commuter
suburbs of Fairfield and Westchester counties – coveted high-income havens that
bankers often refer to as the “Gold Coast.”

“We see from these branch openings that Webster’s goal is similar to those
of other banks that have acquired smaller banks,” said Jared Shaw, an analyst
in the Hartford office of Keefe Bruyette Woods, N.Y.-based investment bankers.
“Webster is using a smaller bank like FirstFed as a toehold to develop new markets.”

Shaw said the FirstFed deal was a watershed for Webster, because it was the
bank’s first acquisition in more than five years.

“Webster was stuck in Connecticut because it was focused on growing other
business lines, such as insurance,” he said. “But it saw other banks all around
it merging, and it knew it needed to get back into the game.”

The New England banking market is notoriously provincial and tough to crack,
especially in the neighborhood-oriented enclaves of Rhode Island.

“FirstFed always provided good neighborhood service and that has continued,”
Shaw said. “FirstFed is primarily a real estate lender, while Webster has the
capital to offer more sophisticated products for local business expansion.”

A key local competitor in this regard is Westerly-based Washington Trust,
which has been catering to the mercantile class here for more than 150 years.

“In New England, customers prize the longtime relationship and loyalty of
a local bank,” Shaw said. “The high concentration of local banks in this region
bears that out. At the same time, it’s tough for a local bank to remain independent,
considering the high costs of regulations, keeping up with technology, and today’s
low interest rate environment.”