A New Banking Model Washington Mutual is using a creative retail approach to turn the banking world upside down.
By Kimberly L. Allers

(FORTUNE Magazine) – On a blustery afternoon in late February, a thirtysomething woman rushes through the door of a Washington Mutual branch in the heart of midtown Manhattan, stops, and stares. Tucking her hair behind her ears, she surveys the bustling scene. There are no bulletproof-glass partitions visible, no roped-off lines. But what is there is curious enough: In one window display are mannequins, clad in polo shirts, that look as if they belong in a Gap store, and children are playing quietly in a corner. When a smiling "concierge" approaches to greet her, a perplexed look crosses the woman's face. "Um, is this the bank?" she asks.

You can't blame her for being confused. Washington Mutual specializes in turning the accepted banking model upside down. Led by ambitious CEO Kerry Killinger, this Seattle thrift bank has grown from a relative unknown into a $268 billion banking powerhouse in just under a decade. It has vaulted ahead of the competition as the nation's largest thrift and sixth-largest bank overall. And it has done so in part by aggressively snapping up rivals in a calculated buying spree. But what is really turning heads, it seems, is the company's unorthodox retail approach. Washington Mutual has been not only dogged in its pursuit of customers but creative as well.

While banking behemoths like Citigroup and Chase were investing millions to steer customers out of their branches and to faceless ATMs and the Internet during the past several years, Washington Mutual courted customers in underserved urban markets by offering free checking and other wallet-targeted incentives. With its customer-oriented appeal to the mass market and its own version of everyday low pricing, the bank known as WaMu (pronounced "WAH-moo") has earned comparisons to retail giant Wal-Mart.

The plus-sized thrift certainly has grand ambitions. WaMu is one of a group of "super-regional" banks that have been buoyed by the mortgage-lending boom and a flight of cash from stocks to deposit accounts. These midsized banks have outpaced their bigger counterparts, with an annual profit increase of 11.8%, vs. 8.5%, over the past five years. But even in this fast-growing class Washington Mutual stands head and shoulders above the competition. The thrift's deposits have grown an average of 38% annually for the past ten years, compared with 14% for other banks in its peer group. Last year it raked in $19 billion in revenues and posted $3.8 billion in profits. Thanks to its acquisitions, WaMu is now the biggest player in the nation for mortgage servicing and No. 2 in originations, surpassing Citigroup and Bank of America. If you have a mortgage, there's now a one-in-eight chance you send your payments to WaMu. And Killinger, 53, has no plans to stop expanding anytime soon.

But WaMu is entering a critical new phase in its evolution. The Citigroups of the world, which deemphasized the retail-banking business in the mid-1990s in favor of what they saw as higher-profit-margin businesses like underwriting and wealth management, are now beginning to turn their attention back to the working-class customers Washington Mutual thrives on. "The competition for the so-called unbanked market is more fierce in 2003 than ever before," says Steve Bartlett, president and CEO of banking industry trade group Financial Services Roundtable.

Indeed, for all of WaMu's success and tremendous growth, Wall Street has plenty of questions about its future. Though the thrift's stock has defied market gravity during the downturn--shares of WaMu rose 6% last year and have more than doubled since the market peaked in March 2000--the price has not kept up with its earnings growth. Shares of WaMu trade at a price/earnings ratio of just seven times estimates for 2003 earnings, lagging its peer group's multiple of ten and the S&P 500's P/E of 16. "Washington Mutual still has something to prove," says Bruce Harting, an analyst at Lehman Brothers--namely, whether Killinger can turn this patched-together collection of thrifts into a national bank and keep it growing organically.

Sitting in his panoramic office with its unobstructed view of Elliott Bay and the Olympic Mountains in the distance, Killinger is talking about empire building in increments. "You have to reinvent your company and become completely different every five years," he says. The current phase, which Killinger began in 2000, was calculated to transform WaMu from a West Coast power into a national network, with branches in all the major metropolitan areas. And he's not backing down. The bank intends to open 240 branches this year alone. In two years Killinger will embark on a new plan that includes the addition of financial services like home-equity loans and increased lending to apartment developers to help balance the consumer mortgage business.

It's hard to believe that a mere ten years ago Washington Mutual was a puny local thrift with just $9 billion in assets and about 2,800 employees. The bank's origins date to 1889, when it was created to make reconstruction loans to Seattle residents after a burning glue pot touched off a fire that destroyed 25 city blocks.

Things didn't really get exciting again until Killinger found his way into the business. The son of an Iowa music teacher--he still relaxes by playing the trumpet--Killinger earned money as a graduate student at the University of Iowa by buying homes and fixing them up to rent or sell. With his savings, he helped start a broker-dealer firm in Spokane. He was later instrumental in engineering the firm's acquisition by WaMu in 1982, where he began to climb the corporate ladder.

After taking the CEO reins in 1990, Killinger made two defining decisions. First, that the retail bank would remain, well, a bank. Rather than offer financial products like insurance or mutual funds, he farmed that business out to partners--and that, in turn, kept WaMu's overhead low. Second, he decided he would grow the bank through acquisitions.

After completing a series of small deals, Killinger set his sights on California. And in 1997 a takeover battle between two large thrifts provided him with a big opening. Great Western Financial Corp., at the time the nation's second-largest thrift, was trying to fend off a hostile bid from its longtime rival H.F. Ahmanson & Co. Within a year and a half Killinger managed to acquire both banks, suddenly giving WaMu a 17% deposit share in California.

Firmly established on the West Coast, Killinger moved east, buying Houston thrift Bank United Corp. and its $18 billion in assets in August 2000, and mortgage units of PNC Financial Services and FleetBoston Financial two months later. Suddenly WaMu's mortgage originations jumped 200%. Last year Killinger grabbed HomeSide Lending of Florida, pushing WaMu's loan-servicing portfolio up to $723 billion. Then he bought New York's 356-branch Dime Savings Bank, entering the home of big commercial banks.

Part of what has held Washington Mutual together through its rapid period of expansion is its zealous corporate culture. In addition to its devotion to the retail customer, another similarity the bank shares with Wal-Mart is that some people feel that WaMu's culture lingers on the edge of cultism. There are frequent brand "rallies" and a catchy jingle complete with accompanying hand motions. Employees casually refer to themselves as "WaMulians"--as in, "This is Bob, a WaMulian from marketing."

And that corporate passion starts at the top. Killinger excels in his self-proclaimed role as "chief brand ambassador." At February's "State of the Group" meeting, an annual confab of 3,500 senior executives at the Washington State Convention Center, music blared as a bespectacled Killinger took the stage doing a rhythmically challenged two-step. The crowd cheered, clapped, and pumped fists, and he proceeded to sell this year's theme, "Circle of Value," with Sunday-morning-pulpit intensity.

Washington Mutual transfers the same fervor to each acquisition. In an era in which banking mergers have often turned quickly into costly write-downs, Killinger and his top takeover specialist, Craig Tall, have earned respect on the Street for their discipline. They get high marks for not overpaying and for quickly integrating technologies. The strategy also has certain rules at its core: Pick acquisition targets that will make them a market leader and open branches in dense urban areas with high customer-dissatisfaction rates. Use technology to automate the mortgage-underwriting process and promise faster closing times--a big lure for homebuyers.

Once the deals are done, WaMu's goal at the newly integrated branches is simple: Get retail customers in the door. The bank does it with its hard-to-resist free checking and free ATM offers. But it also appeals to customers in less quantifiable ways. In store design, for example, WaMu takes its cue more from vibrant retail stores than from stodgy bank cliches. Most branches include a WaMu "store" that sells Barbie-esque teller dolls for kids and personal-finance books for adults. The tellers themselves are moved out from behind the windows and trained to be approachable. And Killinger likes to enter new markets with all the subtlety of a used-car dealer, drawing customers with outdoor barbecues and the bank's "WaMoola" machine for cash giveaways. All this tends to attract younger and lower-income customers, whom Killinger hopes to keep as their earnings increase.

WaMu's success--to say nothing of the languishing stock market--has the big banks taking a second look at WaMu's target: the working class, people of color, and immigrant communities that make up the country's fastest-growing demographic groups.

But Killinger says he's way ahead of the game. WaMu is increasing its number of customer households by 12% annually, compared with the overall population's 1% growth. And Killinger is looking to build on his foundation in the African-American and Latino communities. He recently enlisted Earvin "Magic" Johnson's consulting business to give advice on how to sell mortgages in urban neighborhoods in an effort to boost the bank's lending to low-and moderate-income households. Killinger also believes the bigger banks simply can't match WaMu's focus on customers.

Given all its success, why is WaMu's stock multiple lower than those of its peers? Interest rate uncertainty, for one thing. If rates reverse course in the near future and rise (as most pundits expect), it would squeeze WaMu's net interest income, which makes up about 60% of total income. On the other hand, if mortgage rates should nudge even lower, another wave of refinancing could decrease future earnings from fees for servicing mortgages. Then there are fears of a housing bubble. If housing prices fall dramatically, the collateral behind WaMu's hefty mortgage portfolio will take a serious hit. Lehman Brothers' Harting, though, says those concerns are overblown. "Investors are still hung up on the mortgage portion of the business and not focusing on the growth in consumer banking and deposit share."

WaMu has taken on some complex hedging strategies in order to mitigate its sensitivity to interest rates. But that makes its balance sheet only more complicated when investors really like thrifts for their simplicity. The fact is, despite its stellar growth, Washington Mutual also suffers from its identity as a thrift, a group that has been historically undervalued. "There's a memory overhang of what thrifts used to be like," says top value manager Bill Nygren of the Oakmark fund, which has WaMu as its largest holding. "But WaMu is more characteristic of a growth retailer. It's just substantially undervalued."

Killinger is determined to keep that growth going, despite concern from analysts that the money could be better spent elsewhere, like for boosting reserves. WaMu's 240 new stores this year translate into 15% growth, while other banks are expanding their networks by 1% to 2%. Next he plans to conquer Chicago. But Killinger has set his sights on Atlanta, Denver, and every other urban area in the country. If all goes according to plan, WaMu will soon be confusing new customers all over the country.

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