Taylor J. Sakamoto, Partner 909-607-2111 [email protected] Liam Patrick, Partner 909-607-75820 James Lloyd, Partner 909-607-6833 Washington Mutual, Inc.: Maintaining Growth Amidst Increasing Integration Costs Table of Contents Executive Summary 3 Company Overview Company History 4 Company Description 4 Industry Analysis The Changing State of the Banking Industry 5 The Technological Revolution 5 Consolidation of Financial Firms 5 What is Washington Mutual? A Thrift in Transition 7 Company Financial Services and Products 8 Competitive Landscape Non-Bank Competition 9 Future Threat from Non-Bank Competition 9 Key Competitive Players 10 Gaining Market Share from Industry Heavyweights 11 Geographic Presence 11 Challenging, but Anticipated, Obstacles in New Markets 12 Cross Selling Complimentary Financial Products/Services 12 Cross Selling Through Mortgage Banking Platform 13 Protecting Market Share: Barriers to Entry 13 Break Down Barriers to Entry While Maintaining Market Share 14 2002 Financial Outcome 14 Future Strategy Managing Interest Rate Risk 16 Incorporation of Acquisitions 17 Long-Term Strategy Conclusion 18 - Washington Mutual, Inc.- 2 Executive Summary Throughout fiscal year 2002, Washington Mutual posted near record profits and further established itself as one of the most dominant players in the American mortgage market. The company found itself the beneficiary of the low interest rate environment, which acted to boost interest income beyond expectations. Additionally, an aggressive growth strategy by means of a recent acquisition spree has thus far paid off, establishing the company in numerous new markets around the nation. Going forward, Blaisdell Consulting believes that there will be two main considerations to concentrate on if Washington Mutual is to continue their strong performance of recent years: ?? Effect of uncertain fluctuations in interest rates ?? Improvement in operational efficiency as a driver for future earnings growth Although accompanied by the uncertainty of a sluggish American and global economy, these factors should not prove to be terribly difficult to overcome. As a result, Blaisdell Consulting maintains a positive outlook on the future earnings potential of Washington Mutual. For the coming year, in order to address these considerations, we recommend that Washington Mutual focus on: ?? Managing Interest Rate Risk Asset liability management and interest rate options should be employed in order to mitigate interest rate risk that exists in the Balance Sheet, Mortgage Servicing Rights Hedges, and Mortgage Pipeline. ?? Smoothly Integrating Recent and Future Acquisitions An aggressive acquisition strategy has made it imperative that the company maintain tight internal controls over operational costs and efficiency. Full integration must be accomplished before it is advisable that the company pursue further acquisitions in the future. ?? Establishment in New Markets and Long Term Growth By eliminating fees on not only checking accounts, but also other financial products/services, the company will draw in more business flow and a larger customer base, gaining market share from its competitors. Once the company achieves nationwide status, management will be faced with the decision of whether to follow the conglomeration trend witnessed in the banking industry. Their choice will depend on how industry heavyweights manage their conglomerate structure, and if it proves profitable. We believe that these are reasonable strategic goals for the future that will preserve the profitability that the company has managed to uphold throughout the struggles of the current U.S. market. - Washington Mutual, Inc.- 3 Company Overview Company History Tracing its roots back to the late 19th century, Seattle -based Washington Mutual has built and maintained a reputation as one of the nation’s premier financial services firms. Originally known as the Washington National Building Loan and Investment Association (WNBLIA), the company incorporated as a result of the wide spread fire destruction witnessed in Seattle’s business district on June 6, 1889. The WNBLIA desired to help the upstart Seattle community rebuild its city. By filing articles of incorporation, the WNBLIA was able to create a safe vehicle for stockholder investing and lending. As a result, the Association was able to provide capital to finance the reconstruction of the young city. Organic growth through the years, accompanied by a series of successful acquisitions pushed the company to go public on March 11, 1983. Over the next six years, the bank would undergo rapid expansion, more than doubling in total size.i Currently, Washington Mutual has total assets of approximately $300 billion.ii Company Description Washington Mutual has operations divided into three main areas: Banking and Financial Services, Home Loans and Insurance Services, and Specialty Finance. Operations revolve around the Home Loans and Insurance Services division, the company’s flagship business line. Through this division, the company sells its mortgage banking services, attempting to develop relationships with clients that will lead to the cross-selling of additional banking and consumer financial services.iii The company is currently attempting to push its operations nationwide with an aggressive acquisition strategy. Historically, Washington Mutual has been a West Coast operation, with heavy market share in the states of Washington, Oregon, and California. However, with over 20 acquisitions within the past 13 years, the company has stretched its presence into 30 states across the continental U.S. Presently, management is making a strong push into the states of New York and New Jersey, attempting to establish an East Coast foundation upon which to expand into the Atlantic states.iv Going forward, management eventually hopes to move away from the company’s mortgage heavy operations towards a more full-service consumer bank orientation. - Washington Mutual, Inc.- 4 Industry Analysis The Changing State of the Banking Industry The banking industry has undergone extensive changes recently. Once distinctly separated by their functions in the economy, banks and their principal competitors are undergoing a mass consolidation of the financial industry, causing economic roles to now overlap. Legislative proposals from Presidents George Bush and Bill Clinton during the 1990’s has recommended that banks with adequate capital be allowed to offer a wider range of services, affiliate with security broker/dealer firms and investment companies, and enter non financial industries on a limited basis. Continuing this trend, in November 1999, the Financial Services Modernization (Gramm-Leach-Bliley) Act was passed, allowing banks and other financial service firms to combine banking, insurance, and security operations beneath a single roof. As a result, modern banks, as well as financial service providers, are now able to create financial conglomerates that truly fulfill the concept of a one-stop-shop (Example: Citigroup). Consolidation of these once distinct financial industries has made it difficult, if not impossible, to accurately define the landscape of the industry. v Presently, the “modern bank” can be expected to conduct most of the following functions: Loan credit, transaction payments, savings accounts, investment/financial planning, real estate and community development, cash management, merchant banking, investment banking, security brokerage, and risk management. The Technological Revolution Facing higher operating costs, banks and financial service firms have increasingly turned to the use of electronic networks and automation to take over labor-intensive jobs. Such functions include, taking deposits, dispensing payments, and making credit available. This technological trend has been prominent throughout America, with ATMs and POS terminals allowing 24-hour access to deposit/checking accounts, in addition to making payments for goods at stores and shopping centers absolutely electronic in nature. Business can now move faster than it ever has before, with computer networks capable of instantly processing millions of business transactions throughout the entire world. Thus, banking is becoming more of a capital intensive, fixed cost industry and less of a labor intensive, variable cost industry.vi Some believe that the traditional branch banking system and “face to face” transactions will disappear in the near future, eventually to be supplanted by internet commerce. This trend towards full automation will continue as a means to minimize expenditures, as cost per transaction is expected to dramatically decrease with increased volumes of business flow. Consolidation of Financial Firms In order to justify investment in new technology, high volumes of business are required. Consequentially, consolidation has been a major force in the banking/financial services industry. Companies seek to expand their customer base, and increase business flow, through strategic acquisitions, expanding operations into new markets. Clearly reflective of this trend, the total - Washington Mutual, Inc.- 5 number of small banks in America has dropped by approximately one third since 1980. vii The increasing average size of banks, as well as decreasing bank employment numbers, further testifies to the current consolidation trend. In line with industry consolidation is the growing popularity of the conglomerate corporate structure. Envisioning economies of scale and other operational synergies, banks and financial