Jack Treanor, the president and chief operating officer of Washington Trust Bancorp Inc., said he believes in making bold changes.
So when his 208-year-old Westerly, R.I., company set out to diversify its revenue almost a decade ago, it developed an aggressive plan to expand its wealth management services.
That decision continues to pay off. Washington Trust’s assets under management have grown ninefold since then, to $4.5 billion, exceeding its bank assets of $2.4 billion. Wealth management contributed 25% of its profit for the first three quarters of 2007, and fees, mostly from wealth management, accounted for 44% of its revenue.
“I believe your big moves are all strategic,” Mr. Treanor said. “If you’re going to reduce expenses, the best way to do it is through major changes in business, and we realized if we were going to increase our fee income, we weren’t going to do it by increasing deposit service charges. We really had to do something different.”
And Washington Trust is not done yet. Mr. Treanor said it aims to have $10 billion of assets under management within three to five years. It hopes to supplement organic growth in wealth management with acquisitions, possibly even expanding beyond New England into New York or New Jersey.
Analysts say focusing on wealth management has helped Washington Trust weather the downturn in the credit markets better than most banks its size and positioned it well for the future. Sandler O’Neill & Partners LP lists Washington Trust as one of its top stock picks for 2008.
Washington Trust had offered wealth management for a long time, but it had only $500 million of assets under management in 1999, when it embarked on the growth strategy, Mr. Treanor said.
It now offers wealth management services through three units headed by executive vice president Galan Daukas: 1800 Asset Management in Westerly, named for the year the company was founded; Washington Trust Investors in Providence; and Weston Financial Group in Wellesley, Mass. All three are supported by a trust department with fiduciary powers for wills and estates.
“Each one of the groups is slightly different than the other,” Mr. Treanor said. “So we attract three different types of investors.”
Acquisitions helped the company grow. In 2000 it bought Phoenix Investment Management in Providence, which had about $750 million of assets under management, and in 2005 it bought Weston, which had $1.2 billion. (Phoenix is now part of Washington Trust Investors.)
The units cross-sell their offerings, and Mr. Treanor said Weston products are in about a quarter of the portfolios at Washington Trust Investors.
“Before the Weston acquisition, we may not have had all of our clients’ money, but now we’re in a better position to manage all of their money, because we have a much broader portfolio of products to offer,” he said.
Weston operates on an open architecture platform, and the other units should be using it by the end of the year, he said. (Open architecture gives clients access to nonproprietary products, so they have more freedom in choosing their investments.)
Other projects are also in the works. This year Washington Trust plans to introduce a Unified Managed Account, conduct extensive cutomer research, and implement a customer relationship management system to allow more sophisticated and focused marketing.
The CRM system would enable Washington Trust to track customer contacts across its business lines and the three states where it operates, Mr. Treanor said. “We don’t want commercial lenders tripping over wealth management prospects,” he said. “We need a tool to manage our existing client base and our potential client base. It will allow us to tie in our commercial clients, who may be selling a business and need advice. That makes us so much more efficient, and it also makes us look good in front of our clients.”
Mr. Treanor said the company is pleased with the organic growth in wealth management; in the third quarter revenue from that group grew 11% from a year earlier because of new business wins and market appreciation.
But it is also on the lookout for more wealth management firms to buy and is considering expansion into New York or New Jersey.
Boston and Hartford appeal to the company as well. Massachusetts has about six times as many people as Rhode Island, so the growth opportunity is larger there, Mr. Treanor said. “Plus it has a good set of demographics for that type of business.”
Frank Schiraldi, an analyst at Sandler O’Neill, has a “buy” rating on Washington Trust’s stock, which he calls “a safe play.” On Monday, Sandler named the company one of its “best investment ideas for 2008,” citing its relatively large fee income.
Mr. Schiraldi said Washington Trust does not get enough credit for the wealth management business. Its shares were trading at $23.98 Thursday afternoon, about 11.6 times its projected 2008 earnings per share.
“I think they should be higher,” Mr. Schiraldi said.
Publicly traded banking companies with assets of $1 billion to $15 billion were trading at a median of 11.4 times their estimated 2008 earnings per share earlier this week, while trust and processing banks were trading at 15.8 times, according to data from Sandler O’Neill.
Mr. Schiraldi said he thinks Washington Trust should be somewhere closer to the trust and processing banks.
He said few community banks match Washington Trust’s success in wealth management, because “it is a scale business.”
Other factors in its favor are solid earnings and asset quality, he said.
The company expects to report fourth-quarter earnings Jan. 22. But it posted a third-quarter profit of $6.6 million, roughly the same as a year earlier, standing out from many other banking companies that had shrinking profits. Its 48 cents a share beat analysts’ average estimate by a penny.
Its nonperforming assets were only 0.11% of assets overall, Mr. Schiraldi said. “Credit quality continues to be best-in-class.”
Washington Trust also has been building the retail bank in recent years by opening one branch every other year. It now has 16 branches and plans to open one more late this year or early next year.
Mr. Treanor said the company likes to have large branches with space for commercial lenders and wealth management services. “We don’t do any strip-mall branches. They’re all big,” he said. “We treat the branch as its own little bank.”
He concedes that building a 5,000-square-foot branch is a “contrarian” strategy when other companies are shrinking branches to improve efficiency. But Mr. Treanor said he believes large branches are better at generating deposits, and “I think when you drive by it says something about Washington Trust.”
He said the average Washington Trust branch has deposits of $100 million, and one branch, in “a great location,” attracted $130 million within three years of opening. “Now that’s unusual, but that’s what we try to achieve.”
Washington Trust, which had stayed in Westerly for its first two centuries, also bought two banking companies in the past decade, which helped it stretch into the more populous Providence. “If you’re going to go fishing, you have to go where the fish are,” Mr. Treanor said.
He said the company does well with selling banking products to wealth management customers, who can contact the same financial adviser for any service they might want. “What they really want is one person to call,” he said. Calls from wealth management get preferential treatment from commercial lenders and the retail bank.
But it takes patience to win over any acquired wealth management firm, Mr. Treanor said. “If you’re in Massachusetts and you’re going to recommend Washington Trust to one of your best clients, you have to have a high degree of confidence in us. It takes a little bit of time for that trust to develop,” he said. “With both of our acquisitions, that has not been an issue. It worked out tremendously. But it doesn’t happen overnight.”
