Bank You Kindly

SEATTLE

For about a century, Washington Mutual stuck to its heritage as a small local thrift born out of the great Seattle fire of 1889. It was content to focus on home loans in the Puget Sound area. Few outside the state knew about Washington Mutual--or cared, for that matter.

Then came Kerry K. Killinger.

Since taking over as chief executive in 1990, the affable securities-analyst-turned-banker has made almost 20 acquisitions in the West, including heavyweight Great Western Bank and American Savings Bank, building the thrift into the nation’s biggest, at about $96 billion in assets.

His acquisitive prowess has drawn a cult-like following on Wall Street. Analysts and employees alike rave about how Killinger works through the night, mows his own lawn and stays at Holiday Inn when traveling. Customers in the Pacific Northwest have flocked to his thrift, lured by free checking accounts and a catchy ad in which four real-life rodeo grandmas grouse about California’s banks.

“They haven’t missed a beat,” says Pat Fahey, a 30-year veteran of the Washington banking scene and chairman of Pacific Northwest Bank, a community bank down the street from Washington Mutual’s Seattle headquarters.

Now, having burst onto California’s huge and free-for-all banking scene, Killinger is hoping to make Washington Mutual the Golden State’s premier financial services company. His strategy: Deliver a high level of personalized service and keep a lid on banking fees--or at least the ones that most annoy consumers.

Washington Mutual’s basic checking account is free, regardless of the balance, although customers who bounce checks pay a stiff penalty. The thrift doesn’t hit non-customers with a surcharge for using its automated teller machines, as most big banks do. Nor does it charge for telephone inquiries, although it does levy 50 cents for each ATM balance inquiry.

“There’s a huge opportunity for us right now,” says the 48-year-old Killinger, who cracked the California market late last year with his acquisition of Irvine-based American Savings before snatching Great Western last summer from hostile suitor H.F. Ahmanson & Co., the Irwindale parent of Home Savings of America.

“Customer loyalty at California’s major banks is the lowest we’ve ever seen,” he says.

Killinger’s top two rivals are commercial banking giants BankAmerica Corp., which controls 20% of California’s deposit market share, and Wells Fargo & Co., which controls 14%. At the moment, Killinger is a distant third.

Between his two California thrifts, which will maintain the Great Western name, Killinger has about 9% of the state’s deposit share; 450 branches, of which he will shutter 85 by next June; and about 10,000 employees.

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Killinger will call the shots from Seattle, where the company leases space in a 55-story downtown office tower topped with the Washington Mutual name.

Unpretentious and informal, Killinger engages people easily and mixes seamlessly with the public. Visiting Watts recently to celebrate the opening of a new American Savings branch there, he spent the day with community leaders, then loosened his tie and played trumpet at a community jazz concert sponsored by the bank.

“He’s a regular guy,” says Craig Davis, a former American Savings executive who now heads Washington Mutual’s mortgage-lending department.

Killinger’s biggest immediate challenge is to smoothly merge Chatsworth-based Great Western with American Savings and Washington Mutual by June--a process fraught with risks.

Who can forget what happened to Wells Fargo after its hostile takeover of First Interstate Bank in early 1996? Former First Interstate customers headed for the exits after snafus denied them access to their accounts, long lines kept them waiting, and employees and services they liked disappeared.

Intent on avoiding a similar mistake, Killinger is giving himself a full year to complete the integration, compared with seven months for Wells, whose merger deal was bigger. But he has made some bold strikes at Great Western, a century-old institution that for many years was the nation’s second-biggest thrift, but also an under-performer.

Shortly after closing the $8-billion deal in June, Killinger jettisoned Great Western’s corporate jet. He then dismissed more than 400 high-level executives in Chatsworth, keeping just a handful of senior people.

Some of those who left were dismayed, wondering how Killinger could run his big California franchise without them. James Montgomery, Great Western’s longtime chairman, wasn’t asked to join Washington Mutual’s board, and John Maher, Great Western’s fiery chief executive who rebuffed Ahmanson, declined. (Neither was available for comment.)

“The irony is that we have more senior management from Great Western than they do,” says Ahmanson Chairman Charles Rinehart, who dueled with Killinger for four months but could not sway investors enamored with Killinger’s energetic presentations and track record.

During his seven years as CEO, the price of Washington Mutual’s stock, which trades on Nasdaq, has increased almost ninefold. Even as the company has grown from assets of $7.6 billion in 1990 to $96 billion today, Killinger has been careful not to let acquisitions weaken earnings. Washington Mutual’s return on equity, a common measure of a bank’s performance, is more than double the median for thrifts and higher than most commercial banks’.

Killinger’s hope in California is to continue the amazing run he has had. But rivals say he’s in for a surprise. Unlike the Pacific Northwest, California is much more complex, diverse and competitive, and things that work there, they say, won’t fly here. California is home to more than 650 banks and thrifts--almost 10 times more than in Washington.

“You’ve got so many small institutions here vying for the community niche--they’re willing to take up whatever slack,” says Milton Knox, vice president of marketing at Hawthorne Savings, a small thrift based in El Segundo.

Knox says he has already wooed unhappy customers of American Savings and is now sniffing out Great Western customers who may want to switch when Washington Mutual soon closes 29 branches in Los Angeles County and nine in Orange County.

Adds Terri A. Dial, vice chairman at San Francisco-based Wells Fargo: “California is just unique. People place such a premium on time. They’re technology-savvy. Californians use ATMs more than anyone else in the country.”

Although Killinger has a superb system for originating home loans, he can’t compete with Wells or BankAmerica on technology. In California, he has a fraction of their ATMs (560 to BankAmerica’s 4,000 and Wells’ 3,000) and hasn’t even begun home banking by computer. But Killinger is betting that many Californians want to deal with humans, not just machines. Warm humans, at that.

“We’re not trying to drive people out of branches and into ATMs,” he says, adding that he has benefited from competing in a marketplace where retailers such as Seattle-based Nordstrom and REI have set the standard for customer service. “What we’ve developed here in the Northwest will work better in California because competitors are not as focused on providing personalized services,” he says.

Killinger could be right. In the wake of mergers and acquisitions, layoffs and branch closures, bank customers in California have been complaining more and more to regulators and consumer groups. Bill Mitchell, head of the Better Business Bureau’s Los Angeles area office, says complaints from banking customers have surged in the last couple of years.

“The personal service that used to be there, that’s missing,” he says. “I have no doubt that people are frustrated with that.”

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In the Pacific Northwest, Killinger has exploited those sentiments with ads featuring the earthy-looking rodeo grandmas, who criticize big banks from out of state. The ads have played well even in Oregon, whose market Washington Mutual entered in 1993, engendering surprisingly positive feelings for a large outsider.

“They’ve been the temperance to a series of bad banking situations,” says Laura Culberson, consumer advocate for Oregon State Public Interest Research Group, referring to the numerous banking mergers and acquisitions in that state. Culberson says there’s strong local support for the Washington Mutual.

That may be because the thrift, as big as it has grown, still feels somewhat like a community bank. Even at its busy downtown branch, smiling bank officers greet customers in the lobby. Bob Strauss, branch manager, sits close to the entrance. Customers call the branch directly, not a remote site through a toll-free number. He answers his own phone and watches teller lines closely so they don’t stretch to more than a three-minute wait--the maximum, he says, before customers turn red.

“I’ve got a lot of people who want to go in and out quickly,” he says. “But there are other people who like to come in and chat a bit. I have one customer who comes in every three months. She brings me cookies and renews her CDs and sits at my desk for a half-hour. That’s not too much to ask.”

Great Western Bank, by contrast, wasn’t known for its service. As it strove to be more bank-like in the 1990s, it alienated some customers.

“I remember going in there wanting change for a $100 bill, and they were going to charge me,” says Debora Schnacker, an antiques dealer in Huntington Beach who has been a customer for eight years. “I almost pulled my account that day.”

Like an increasing number of banking companies nationwide, Great Western seemed to have a fee for every occasion. There was $5 for a lost ATM card, $10 to set up a bank-by-mail arrangement, $2 for visiting a safe-deposit box more than five times a month, even a $3 charge--per page--to have something faxed.

Killinger has eliminated all of those fees and is reviewing other charges. He hopes training and encouragement will push Great Western to provide better service and raise its loan sales performance. He has met with most of Great Western’s 10,000 employees, giving them wallet-sized cards imprinted with Washington Mutual’s mission and values statements. He has sent branch managers from Washington and Oregon to “buddy up” with their counterparts in California and is overhauling the compensation plan to give managers more incentives to perform.

Some doubt Killinger can turn around Great Western. “Whether they answer the phone with a friendlier voice or have longer hours, most of the same branch people are there. There’s no change,” says Stephen Trafton, chief executive of Glendale Federal Bank, a feisty mid-size thrift that has long battled big banks, especially Wells.

Wall Street investors and analysts, though, aren’t betting against Killinger.

Charlotte Chamberlain, a banking analyst at Jefferies & Co. in Los Angeles, gushes at the mention of him: “He’s just such a breath of fresh air. He’s the most amazingly likable guy in that position you could imagine. He’s got the energy. He’s accessible. It’s an amazing presence.”

Clearly, Killinger is different. With his big, gold-rimmed glasses and plain dark suits, he flies on dirt-cheap Southwest Airlines and stays at no-frills hotels, sources at the company say. He calls back reporters and analysts promptly, and rarely loses his cool. Even during the furious battle with Ahmanson, when many around him were abandoning their composure, Killinger was a picture of intense focus, always calm and collected, investors say.

On the morning Ahmanson withdrew from its fight for Great Western, Killinger heard the news while heading for a daylong series of meetings to persuade East Coast investors to support him. He kept right on going. Later that night he had a quick toast with his advisors, but then went back to work, answering two pages of e-mails and studying other notes before turning in at 1:30 a.m.

“What comes across is that he really enjoys what he is doing, his natural enthusiasm. He is the great promoter for his company,” says Joe Morford, an analyst at Alex. Brown & Sons in San Francisco. “One of the things [that impresses me most about] Kerry is the high level of ownership he has. He owns more than 1 million shares [now worth about $70 million]. He has a very vested interest in the company.”

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Killinger didn’t start out with much. After earning bachelor’s and master’s degrees in business administration in a little more than four years from the University of Iowa, he moved to Nebraska to work as an investment analyst with Bankers Life Insurance.

Still in his 20s, he headed for Washington to work for a small brokerage in Spokane, where he moved his family (he and his wife, Debbie, have two grown sons) into a mobile home to save money. He scraped by buying and restoring fixer-uppers on weekends.

Over time, he acquired a large stake in brokerage Murphey Favre Inc. by buying stock from retiring co-workers, and in 1982 he brokered the deal that sent Murphey Favre and him to Washington Mutual. He rose quickly, assuming the role of president in 1988, chief executive in 1990 and chairman a year later.

In 1994, after intensive research and marketing studies, Killinger decided to offer unconditional free checking--Washington Mutual’s core product aimed at building its consumer banking business. Today only 15% of the major banks and thrifts in the nation offer free checking; most require a minimum balance or direct deposit.

By acquiring American Savings and Great Western, Killinger gained access to more than 1.5 million households in California. Now he is racing for more checking accounts, which are critical because they give institutions an entry point to sell more loans and services.

R. Jay Tejera, an analyst at brokerage Dains Bosworth Inc. in Minneapolis, calls Washington Mutual’s free-checking strategy the McDonald’s approach. By offering an account with no upfront fees, Tejera says, Washington Mutual attracts households in the mid- and lower-income brackets that big banks deliberately drive away with fees.

As such, Washington Mutual’s customers maintain smaller balances--$900 on average--but the thrift makes up the difference because these customers tend to bounce more checks. And at Washington Mutual, that costs $20 a pop, more than what big commercial banks charge in California.

“The customer looks at this and says, ‘If I do everything right, I’m going to get it for free,’ ” says Tejera, who has researched Washington Mutual for 15 years. But the reality, he says, is that only 15% of Americans balance their checkbooks, and people on average bounce six checks a year. “So in the end, the numbers are about the same.”

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That troubles some consumer advocates, who say it’s not fair to charge more for mistakes you know people are going to make. But in interviews and new ads that are heavily promoting the roll-out of free checking in California, Washington Mutual stresses that there are no hidden fees and that people can control those costs. “It’s the consumer’s choice,” says Deanna W. Oppenheimer, Washington Mutual executive vice president.

Some bankers think free checking is a risky proposition in California, saying it will attract a lot of flighty and dormant account holders, who are costly to banks. “This is the fraud capital of the world,” Ahmanson’s Rinehart says.

But there is no question that free checking grabs consumers. Becky Monson, a health-care administrator who lives in San Juan Capistrano, says that was why she signed up with American Savings a few months ago. Monson says she wasn’t happy with the service of big banks.

Monson knows American is now owned by a big company. So whether she remains a customer will depend on whether American can act like a friendly small bank.

That, in a nutshell, is Killinger’s challenge.

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WASHINGTON MUTUAL AT A GLANCE

Assets (in billions) 1997: $95.6

Profit (in millions)1997: $243.9

Stock price (Nasdaq)1997: Friday $69.13

Notes: Assets and stock prices as of year-end, and net income figures are for the year, except 1997 data, which reflect assets as of Sept. 30, nine-month profits and stock price as of Friday.

Sources: Washington Mutual, Bloomberg News

Kerry K. Killinger

Age: 48

Residence: Bellevue, Wash.

Family: wife, Debbie; two grown sons

Current job: Chairman, chief executive and president of Washington Mutual Inc. Past jobs: vice president, Murphey Favre (1976-82) investment analyst, Bankers’ Life Insurance of Nebraska (1969-76)

Education: B.A. and M.A. in business administration, University of Iowa

Hobbies: Golf, racquetball, trumpet playing, home remodeling

HOW BANKS RANK IN SOUTHERN CALIFORNIA

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Deposit # of branches Bank market share 1. BankAmerica Corp. 19.7% 484 2. H.F. Ahmanson & Co. 12.7 228 (Home Savings of America, Coast Federal) 3. Washington Mutual Inc. 10.0 226 (Great Western, American Savings) 4. Wells Fargo & Co. 9.9 567 5. UnionBanCal Corp. 4.4 124 6. MacAndrews & Forbes 4.1 108 (California Federal) 7. Golden State Bancorp 3.8 101 (Glendale Federal) 8. Sanwa Bank 2.0 64 9. City National Corp. 1.9 44 10. Downey Financial Corp. 1.6 59

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Note: Deposit ownership as of November. Branch numbers are as of June 1996 and do not reflect pending closures. Region includes Los Angeles, Orange, San Bernardino and Riverside counties.

Source: SNL Securities, Charlottesville, Va.