People

Revenue Growth: William Longbrake, Washington Mutual

Former FDIC official has helped turn the small thrift into the seventh largest savings institution in the U.S.
Stephen BarrOctober 4, 2001

What was supposed to be a career-altering job change for Bill Longbrake turned into a two-year sabbatical. In 1994, he left Washington Mutual Inc. after 12 years as finance chief to become CFO at the Federal Deposit Insurance Corp. He moved his family from Washington State to Washington, D.C.

But by 1996, he was back at the Seattle-based financial services firm — and just think of what he would have missed. “This is fun,” allows the somewhat subdued Longbrake, the winner of the 2001 CFO Excellence Award for Driving Revenue Growth.

It should be. Over the past five years, WaMu (as it is known) has seen its assets increase 10-fold, to $220 billion, with earnings up an average of 18.6 percent per year and the stock price nearly tripling for the same period, from around 14 to around 40. What once was a small, regional thrift in the Northwest is now the nation’s largest savings institution, with 2,300 branches, and ranks first in originating and servicing mortgages. Its 10-year total return of 1,817 percent is second only to Citigroup’s among banks.

Acquisitions have certainly been a key driver; each of the four major deals completed in the mid-1990s approximately doubled the bank’s asset size. Internal growth has been just as strong. Noninterest income from depositor and other retail banking fees, a critical revenue metric, reached $804.9 million in the second quarter, a record for the firm and a 60.8 percent increase from the year before. At the same time, WaMu’s operating efficiency ratio, a gross-margin concept, improved — to 43.4 percent, best among the bank’s major competitors.

And that’s not all. For a banker, the 58-year-old Longbrake often talks like a retailer, noting that the most telling measure of revenue growth is the “same-store sales comparison” in the markets where WaMu has made its acquisitions. In California between June 2000 and June 2001, for instance, fee income per branch grew by 31 percent, checking accounts increased 14 percent, and the dollar amount of consumer loans jumped 187 percent — all while the employment base dropped 2 percent.

Says CEO Kerry Killinger: “Bill has a great understanding of the importance of growing revenues faster than expenses and taking advantage of acquisitions, innovative products, and capital markets opportunities to get the highest return.”

The Revenue-Generating Machine

The Washington Mutual Longbrake rejoined in 1996 was a far cry from the one he’d first joined as CFO in 1982, when the savings bank was losing money on every dollar it loaned. It wasn’t until 1988, when Killinger (who had started the same day as Longbrake) became president, that WaMu began to expand regionally and then nationally, with an eye toward serving the “middle-market” consumer that commercial banks were ignoring.

Longbrake had been instrumental in the 1993 purchase of Pacific First Bank in Seattle, the first acquisition to double WaMu’s asset base. Pacific’s large presence in Oregon expanded WaMu’s reach beyond the Washington border. The second such deal, for California’s American Savings Bank, closed soon after Longbrake was back on board, and in the next 18 months the bank announced two more acquisitions of large California thrifts.

What made these deals work, Longbrake explains, was an immediate systems conversion to WaMu’s operating platform, followed by a conversion of the branches to WaMu’s “high-touch” model — a customer service-oriented environment that builds revenues by merchandizing financial services much as a clothing store would sell a shirt to go with those pants.

“WaMu has a whole vocabulary of products it offers that the targets [it bought] didn’t,” says Lehman Brothers banking analyst Bruce Harting, referring to not only savings and checking accounts but also mutual funds, brokerage services, insurance products, and so on. The average thrift, he notes, has 1.5 products per customer, and the average commercial bank has 3; in its various markets, WaMu has between 3 and 5.

Harting contends that what drives this revenue-generating machine is a compensation scheme, put in place during Longbrake’s first go-round as CFO, that pays for performance all the way down to the teller level. Profitability is fine-tuned by branch and by customer, and these measures encourage employees to cross-sell products and to treat customers better than they might expect to be treated at a bank.

“This was unheard of in the thrift industry, and rare in financial services,” explains Harting. “Everybody talks about all the acquisitions they’ve made, but it’s the pay plan that has created a vigorous sales force and boosted employee morale.” In addition, executives are expected to have significant holdings in WaMu stock. As of September 1, Longbrake owned $32 million in shares outright and another $29 million in options.

Reinventing the Team

To support a larger, more complex company, Longbrake set out in early 1997 to reinvent the finance team — and himself. “I could be very hands-on with a small staff,” he says, “but if I tried that today, I’d get in the way. My job has evolved into one that’s very strategic. I give guidance on priorities.”

To make the finance organization more strategic as well, he decentralized it, naming CFOs for the three major business units and passing on many responsibilities. Accountants and analysts, he argues, changed their focus from control to involvement in product development and pricing, which in turn has allowed for faster, more effective decision-making.

“A centralized finance organization, focused on the technical operational aspects of finance, was not going to work in a rapidly growing, geographically diverse firm,” he explains. A cross-divisional finance committee that includes Longbrake meets at least twice a month to review planning and profitability trends.

Longbrake also saw the need to upgrade the talent of his senior staffers. Since 1999, he has created a new position — CIO of corporate finance, charged with developing a new systems infrastructure — and has hired a new controller, treasurer, tax director, corporate planning manager, accounting manager, and head of financial reporting.

In Search of Respect

Beyond adapting the finance group to operate in a hypergrowth milieu, Longbrake has pursued several initiatives to increase revenues and enhance earnings quality. These include stressing the importance of noninterest income, which is not subject to interest-rate volatility, and retaining only the most profitable single- family mortgages in the bank’s loan portfolio to minimize the earnings effect of rate fluctuations. The result: Despite rising interest rates in 2000, WaMu had its most profitable year ever, earning $1.9 billion — a record several analysts expect the company will improve on this year.

And yet, Washington Mutual carries a multiple of 10.3 times forward earnings — below that of most other banks — largely because many investors still see it as a thrift. “Strip off the name, and you can’t find many companies in any industry with a growth rate in the mid-teens and a return-on-equity of more than 20 percent that you can buy for less than 12 PE,” says Jim Benson, an analyst and portfolio manager with the Oakmark Select Fund, which has 15 percent of its portfolio in WaMu stock.

Benson, in fact, sees no end to the bank’s revenue growth potential as it converts acquired branches (buying Dime Bancorp for $5.2 billion in June is its first move into the New York area) and opens new locations using a modern design concept that makes the branch seem more like a Starbucks. “WaMu could become a true national brand in the next five years,” he says. “Whether it buys branches or starts them from scratch, it is in a position to make financial decisions based on the highest returns, which we love as shareholders.”

As for the normally circumspect Longbrake, he acknowledges that he would like to see the stock get the recognition he thinks it deserves. But he has to content himself with going home at night and playing show tunes on the piano. His favorite song: “Hey, Look Me Over.”

Growth Spurt

WaMu’s revenue per share growth has far outdistanced its competitor’s between 1999 and Q2 2001…

  • Fleet Boston: -28.5%
  • Wells Fargo: -27.0
  • PNC: 1.1%
  • Citigroup: 9.0%
  • Fifth Third: 9.5%
  • WaMu: 43.2%

…as has core EPS growth.

  • Fleet Boston: -43.0%
  • Wells Fargo: -12.0
  • PNC: -5.0%
  • Citigroup: 19.7%
  • Fifth Third: -14.8%
  • WaMu: 45.9%