In the early 1980s, a financial analyst named Kerry Killinger crossed the mountains that divide eastern and western Washington to discuss selling the Spokane brokerage he partly owned.
He ended up with a deal, a new job, and a path to leadership - all at Washington Mutual Inc.
"He was a very capable guy, and obviously bright - it didn't take any great magic to decide I wanted to employ him," said former Washington Mutual chairman Louis Pepper.
Nineteen years later, surrounded by many of the executives who joined Wamu under Mr. Pepper, that young analyst has become, at 52, the thrift giant's chairman, president, and chief executive. Mr Killinger now oversees a company with assets of $223.6 billion, about 40,000 employees, offices from coast to coast, and a large and growing influence in two bread-and-butter bank products: home loans and deposits, particularly low-cost checking accounts. Its free checking account product, which has contributed to a 14% gain in nonacquired accounts in the last year alone, has pressured large commercial banks to revisit their checking account structures.
After an acquisition drive that started in earnest with the 1993 purchase of a local competitor, Wamu is the nation's largest mortgage servicer, and the completion of its deal to buy Dime Bancorp of New York, set for early next year, would make it the No. 1 originator. It is also one of the most active buyers of thrifts, having bought six savings institutions since the beginning of 1996. There's no doubt that in many of these deals Wamu was in the right place at the right time. Several of its well-timed - some say lucky - deals doubled its size.
Mr. Killinger became chief executive in 1990 and chairman a year later. He has presided over its transition from a locally minded thrift to a more streamlined national institution.
Washington Mutual hired Mr. Killinger after buying the Spokane brokerage firm, Murphy Favre Inc., where he had been an executive vice president. He spent his first years at Wamu working on, among other projects, ideas to boost nonbank revenues by forming entities including a real estate syndication company, a life insurance company, and even a travel agency.
"I felt the banking industry needed to go through a significant cultural change - it was moving from being highly regulated to deregulated - and that the culture of the securities industry would be helpful, moving it toward performance-based compensation," he said. "On the other side, I thought what the banking industry brought was a large and loyal customer base and financial leverage."
But by the time he became president, in 1988, Wamu had amassed enough evidence that the one-stop-shop model it had developed was not working. Processes and communication that were still paper-intensive made it difficult to offer a gamut of financial services to customers, executives with the company say. And the new president realized that by spreading the resources too thinly, some projects suffered in the execution.
Vice chairman and chief financial officer William Longbrake, who joined Wamu the same year as Mr. Killinger, said a lesson was learned: that "just having it doesn't bring customers in the door."
Having shifted its focus to fewer consumer business lines, the company started to divest some businesses and hunt for banking deals.
The first big one came in 1993, when Wamu bought Seattle's Pacific First Bank from the ailing Royal Trustco Ltd. of Canada. Under a "good bank/bad bank structure" devised by Craig Tall, who is now vice chairman for corporate development and specialty finance at Wamu, it left many of the acquired bank's distressed assets with Royal Trustco.
This intricate deal was an important one for the company, because in addition to doubling Wamu's asset size it showed management that Wamu could export its model to another market, in this case Oregon, said R. Jay Tejera, an analyst at Ragen MacKenzie in Seattle. And it proved to management that "market share matters - you have to get beyond the 10% threshold for advertising," and marketing other products like its fee-free checking accounts to work.
But the watershed deal came three years later, when Wamu again nearly doubled its asset size, to $42 billion, by gobbling up American Savings Bank, of Irvine, Calif., and its parent, Keystone Holdings Inc. This time Mr. Killinger's mettle as a chief executive was put to the test.
Wamu executives had to persuade Keystone's owners, an investment partnership led by the billionaire Texas investor Robert M. Bass and run by several tough negotiators, that exchanging their holdings for a stake in Wamu made sense.
It wasn't easy.
About a year before they started serious negotiations, Mr. Killinger and his crew started talking with the Bass group about a sale of American Savings. At the time, Wamu's stock price was low, so the talks went nowhere. But they resumed when it rose.
"We thought there was a great opportunity to take what we had done in the Northwest and expand it to California," Mr. Killinger said.
Philip Erlanger, a managing director at Lehman Brothers who has advised Wamu on many of its acquisitions, recalled that management had to "demonstrate their ability to compete effectively with large established commercial banks," and make the Keystone people comfortable with a minority - but significant - stake in Wamu.
To make it work, Mr. Killinger drew on a skill that would come in handy in seeing larger deals through - telling Wamu's story to investors and selling them on its fast-growth future. Another challenge: the group was originally interested in selling to a commercial bank, Wamu executives say.
(Mr. Bass did not return phone calls seeking comment for this article.)
In the end, Mr. Killinger and his team landed a $1.2 billion deal that would be immediately accretive to earnings and give a 22% stake to the investment group that owned American Savings. That was smaller than the group had originally wanted, and meant they were relying on the long-term appreciation of Wamu's shares, according to interviews at the time.
On July 22, 1996, the day the deal was announced, the Bass group and other investors got a taste of what was in store: Wamu's stock rose 16%.
Mr. Tall, who has worked alongside Mr. Killinger on acquisitions and new ventures since he joined the company in 1985, said his boss' gift for gab is also on display when deals are unveiled. "He's very good at articulating the story to investors and employees."
Mr. Killinger put Wall Street's growing confidence in Wamu to the test less than two months after the American Savings bank deal closed.
In February 1997 Wamu management found out that H.F. Ahmanson & Co., of Irwindale, Calif., had initiated a hostile takeover of Great Western Financial Corp., in Chatsworth. That company - the nation's second-largest thrift - told Mr. Killinger it would consider a white- knight offer.
Though tempted by the Great Western franchise, with its 416 bank offices, large mortgage operation, and Aristar consumer finance business, Wamu knew it was risky, coming so soon after its American Savings purchase.
"The question was, could we take on so much without blowing the company apart?" said Mr. Longbrake, who returned to Wamu in 1996 after an 18-month stint at the Federal Deposit Insurance Corp.
So in the course of three weeks, management crunched through the numbers and debated the pros and cons. Eventually Mr. Killinger green- lighted a $6.6 billion bid.
"When an opportunity presents itself, he doesn't react emotionally," Mr. Longbrake said. "He reacts strategically - he wants as much financial information on the table as possible." But "he does have an intuitive capability."
Said Mr. Tejera: "He's not a banker, so he's not emotionally attached to any one business. He's able to view his business as a portfolio."
That isn't to say Mr. Killinger is bland. When he decided to proceed with a Great Western offer, he rallied his staff; more than 100 employees came to the Los Angeles area for a speedy but thorough due diligence and negotiation. Mr. Killinger remembers discussing the game plan with his charges in an unused portion of Great Western's campus, where most of the available furniture was in the form of cardboard boxes.
As with the American Savings deal, winning the hotly-contested bid came down to convincing investors that Wamu could buy and convert the $43 billion-asset thrift - yet again doubling its size.
The three months from the time Wamu expressed its intentions to buy Great Western to Ahmanson's decision on June 4, 1998, to withdraw its unsolicited takeover plans, were grueling. Mr. Killinger and his team spent most of that time on the road, crisscrossing the country more than once, and even traveling to Europe. They attended close to 200 meetings with investors. On the day Ahmanson announced it had capitulated, Mr. Killinger was running on fumes, and his fatigue was evident in a television interview.
"He's one of the more driven people I know," Lehman Brothers' Mr. Erlanger said. That attribute would move some staffers to present him with an oversize Energizer bunny.
"He really wants to be a winner in the industry - but he doesn't come across as a grab-you-by-the-throat or arrogant kind of guy," Mr. Erlanger said.
The Great Western fight was doubly rewarding. Just over a year after Ahmanson made its offer for Great Western, Ahmanson approached Wamu about a sale. The three back-to-back deals made Wamu one of the 10 largest bank or thrift companies in the nation, with assets of about $150 billion.
Besides a 17% stake in California deposits, buying Ahmanson and then Great Western also brought Wamu into new markets in Florida and Texas.
"We found our approach worked well in every market," Mr. Killinger said. "The California acquisitions gave us the confidence to revise our strategy to creating the nation's leading consumer banking franchise."
Ever since its California buying spree, Wamu's expansion has stuck to three main paths: buying mortgage operations divested by large commercial banks that have exited the business; expanding its consumer banking franchise in fast-growing metropolitan markets by buying savings institutions; and building the retail customer base with low fees.
Though Wall Street applauded these acquisitions, it was not all smooth sailing for Wamu in 1998. In the second half of the year Wamu's deal-making hit a snag.
Some analysts, worried that the cost of integrating the three acquisitions would slow down earnings and that the Fed's interest rate cuts after the Russia debt crisis would start to cut into earnings, began to lower their estimates on Wamu in the fourth quarter of 1998.
And as the low interest rates drained its California mortgage portfolio of adjustable-rate loans, the pooling-of-interest accounting structure it had used for the California purchases prevented it from deploying its capital through alternatives such as stock buybacks.
"That time, when we didn't have as much flexibility and had to work on substantial integrations," was "particularly challenging," Mr. Killinger recalled.
Mr. Longbrake said, "Kerry has a long-run view - his sense was that he was building a company that would have significant value over time."
Wamu completed the last of the three California deals in October of 1998. As the integration progressed, the company appeared to be avoiding the operational and service problems associated with many of the late 1990s megamergers. But in April of the following year, investors came to believe that the Federal Reserve had finished its rate cuts and would start to raise rates in the future, and they sent the stock on a yearlong slide.
Except for a few small deals, such as the October 1999 purchase of the subprime lender Long Beach Financial Corp. in Orange, Calif., for $350 million, Wamu took a break from acquisitions. In November of that year Mr. Killinger told reporters that the company was focused on "internal growth" - for instance, on opening high-tech Occasio store branches in new Wamu markets including Las Vegas and Atlanta. And from late 1999 to 2000 it bought back an estimated $1.3 billion in stock.
Jim Bradshaw, an analyst with D.A. Davidson & Co. in Portland, Ore., says Wamu's share price usually anticipates rate changes by six to nine months. So with the Fed's moves to cool the economy seen nearing the end, the stock started to perk up about April 2000. Soon after, Washington Mutual started another acquisition streak that had two goals: make Wamu the largest servicer and originator in what had become a highly commoditized mortgage industry, and expand its consumer bank franchise to new, fast-growing urban markets.
In August of 2000 it announced it was buying the $18 billion-asset Houston thrift Bank United Corp, in October of that year it announced an agreement to buy the mortgage operations of Pittsburgh's PNC Financial Services Group Inc., and in April 2001 it announced it was buying Fleet Mortgage from FleetBoston Financial Corp.
Its most recent deal announcement was the one for Dime, in June. That pickup will give Wamu its first consumer bank presence in the New York metropolitan area, and Dime's North American Mortgage Co. subsidiary will make Wamu the top U.S. originator.
In just over 10 months, Wamu had announced four deals with a combined price of $21.9 billion. Through its mortgage acquisitions, it had also increased its servicing activity - a natural hedge against the impact of interest rate changes on its mortgage origination business.
Investor enthusiasm with the concept of a consumer bank/mortgage giant, plus Wamu's immunity from commercial loan problems, made it one of the best-performing financial services companies. Last year its stock rose 105%. American Banker's index of the top 25 thrifts rose 72.8% during the same period, and its index of the top 225 banks rose 35.6%.
Recently, the company entered another period in which observers expect its acquisition pace to slow down.
Despite an 84% rise in profits in the third quarter, to $832.3 million, investors started to sell off the stock after its most recent earnings reports. Worsening credit quality among residential homebuyers, plus the expectation that growth in net interest income - which contributes close to 70% of total revenues - will taper off, appears to have lowered Wamu's earning potential.
"The bear story is that a substantial portion of their earnings increase has come from margin expansion this year," said D.A. Davidson's Mr. Bradshaw, and that expansion won't be repeated next year. Combined with the company's need to reserve more against credit problems, and the fact that the year's record refinance boom has been shrinking its balance sheet, means that "I expect that the stock will lay flat for a few quarters."
Mr. Killinger said there's no question that the earnings growth rate will slow, but, "we think it's still going to be a very favorable environment for us."
He said the company continues to be on the lookout for acquisitions, but "we are going to be very disciplined on the pricing front, and we are going to be especially careful on the asset quality front."
Associates say that, though Wamu has changed a lot under Mr. Killinger, he has not. He has learned to delegate more, but he still relies on that inner circle of senior executives who for the most part started at Wamu when he did, and who now run many of its divisions.
At the elegant Washington Mutual tower in downtown Seattle, where the company has rented the lower floors for the cheaper rates, it's not uncommon for a new employee to pop into Mr. Killinger's office to shake his hand.
At staff meetings, one is apt to hear Mr. Killinger utter such maxims as "Check your ego at the door," "Frugal is sexy," and "What can't be measured can't be managed."
"There's no ego in the man, he's just the same as when I first met him," Mr. Pepper said.
