Expanding in New England, Nary a Bank Deal in Sight

One of the nation's oldest community banks is making waves across New England.

Washington Trust in Westerly, R.I., has been steadily expanding, gaining ground on a number of larger regional competitors. The 215-year-old bank's share of Rhode Island's $27 billion deposit market rose by nearly 40% from 2009 to 2014, based on data from the Federal Deposit Insurance Corp. Over that period, the company went from being the state's fifth-largest deposit holder to third place.

The company also has a stranglehold along the state's southern coast, where its executives assert that it controls more than 70% of local deposits. Management, however, is eager to find ways to target more customers in other parts of the state, while also looking beyond Rhode Island's borders. (Washington Trust has two branches in nearby Connecticut.)

Like many community banks, the $3.6 billion-asset company is keeping its eyes open for acquisitions as it charts future growth. But it has found a dearth of potential sellers who are willing to come down on their price expectations.

So management has shifted its focus, for now, on steadily investing in its own operations, including opening branches around Providence; expanding its wealth management unit in neighboring markets, such as Boston and New Haven, Conn.; and establishing a growing base of commercial clients.

In a wide-ranging interview last week, Joseph MarcAurele, Washington Trust's chairman and chief executive, and Edward Handy, the company's chief operating officer, discussed their growth strategy. Here is an edited transcript. 

Washington Trust hasn't announced a bank acquisition since 2002. Are there any discussions today in terms of M&A?
JOSEPH MARCAURELE: I think there's a lot of activity, and certainly a lot of discussions. There are quite a few smaller banks under $1 billion in New England that are in a position where it would make sense for them to combine with other people. A lot of these decisions have everything to do with price. Quite frankly, if you buy something like this, can you really grow it in the markets that you purchased into. So for us, those are the beginning factors for our initial decision making. 

During your recent earnings call, you said there's an "absence of activist investors who are pushing boards and banks." Talk to me about that.
MARCAURELE: I think on balance, there has to be some kind of motivation for smaller, somewhat underperforming, banks to think more closely and clearly on what they have to do. To some extent, that's one of the catalysts. Either the board understands that they're a little bit stuck and need to find a better way or maybe a combination that makes sense for them, or they have an investor that pushes them along in that direction.

It's hard to say whether there's too much, or not enough, of it. But quite frankly it's the natural order of things, and you should have that expectation. If you're running any company, not just a bank, you really have to put your investors first, and to the extent that you can justify good returns for your investors, then I think you can remain on the winning side of acquisitions. Or, you have to make other decisions as to where you're going to go.

Washington Trust recently bought a wealth management firm in Connecticut. It was your third nonbank deal since 2000. Is this your acquisition strategy going forward?
MARCAURELE: We really feel that wealth management is an expertise that we have. We've had trust powers for almost 100 years. We have a very solid investment management business in Rhode Island. We also have an operation just outside of Boston — Weston Financial — that we bought just 10 years ago. We really feel as though going into Connecticut, and the New Haven market, where we do a lot of commercial banking today is a natural extension of our expertise in wealth management.

EDWARD HANDY: We also feel that we benefit greatly from the diversified revenue stream that we have. So to prioritize capital to fee-based businesses certainly helped us in this period of compressed margins. That's certainly part of our strategy, to keep growing those businesses.

Let's talk about your plan to attract high-net-worth clients.
MARCAURELE: The bulk of all of our wealth management business is high-net-worth individuals. We do have some relationships with foundations and nonprofit organizations. Our major focus is high-net-worth individuals, though, and we really serve two niches. We're very happy to have relationships between $5 and $15 million, which some of the really big players tend to not pay as much attention to.

It tends to be really sticky business. While our customers want good returns, they're not entirely focused on good returns. A lot of them are focused on trust services, fiduciary services, us helping them with other things like paying bills. So we do more for our clients than just invest their money. 

When you look at this kind of business across the whole country, it can tend to be a little bit of a leaky bucket — you get customers, you lose customers. Our business is not like that. We have tremendous retention rates, we're very service oriented. So even if we have a slightly down year in investment performance, we don't lose customers. That's not saying they're not sensitive to that — everyone wants their return. But it's nice to be in a position where that's not all they're focused on. 

You've grown deposits steadily in Rhode Island. Where do you want your market share to be in five years?
HANDY: We'd love it to be a lot bigger. But every percentage of market gain is $270 million. And that to us is very significant. We think that the branches we're developing now have a $40 million breakeven point. So $270 million in deposits supports a two-branch-per-year strategy for a couple of years. That's a 1% market gain. We'd love to get more than that. We won't stop at 1% when we get there.