Washington Mutual (WaMu) (NYSE: WM)

About Washington Mutual (WaMu)

With $350.7 billion in assets, Washington Mutual, also known by its customers as WaMu, has grown large enough to rank as the sixth largest bank in the United States. WaMu is now the third largest mortgage lender in the United States and the ninth largest credit card company.

WaMu offers a broad range of financial products through a growing national network of more than 2,600 retail banking, mortgage lending, commercial banking and financial services offices. In addition, WaMu customers are able to choose from a variety of distribution channels. WaMu's customers can bank by phone, online or at any Washington Mutual financial center. WaMu's home loans are offered through retail, wholesale, correspondent and sales channels.

Washington Mutual has four primary business lines: Retail Banking & Financial Services, Home Loans, Commercial Banking and Card Services. Services provided by WaMu include:

• Mortgage origination, sales and servicing
• Payroll, cash management and retirement planning for small businesses
• Full brokerage services through WM Financial Services, including mutual funds through the WM Group of Funds
• Commercial real estate lending
• Community lending and investment
• Credit card services through WM Card Services

WaMu's Growth Through Acquisition

Much of WaMu's growth has been through acquisition. Most of its acquisitons have taken place since 1983, when the company demutualized.

WaMu has acquired 29 other banks and financial service companies since 1990, resulting in a strong national network of financial institutions. Recent WaMu acquisitions include, for example, Commercial Capital Bancorp and Providian Financial Corporation, both of California; HomeSide Lending, Inc. of Florida; Dame Bancorp, Inc. of New York; Fleet Mortgage Corp. of South Carolina; Bank United Corp. of Texas, and PNC Mortgage of Illinois.

WaMu's History of Innovation

Washington Mutual was founded in 1889 as The Washington National Building Loan and Investment Association shortly after a fire destroyed nearly the entire business district of Seattle.

WaMu's creative amortized home loans helped the company build 250 blocks of housing in Seattle in Washington Mutual's early days. WaMu initiated a school savings program that attracted nearly 17,000 students on the first School Bank Day in 1923.

WaMu was the first bank west of Minneapolis to install an IBM 1401 computer in 1962, and it pioneered the first shared cash machine network in the nation, The Exchange, in 1974. Along with a consortium of savings banks, WaMu helped finance the first Pay-by-Phone telephone banking program during the 1970s.

WaMu introduced the Step-Rate Loan in the 1970s, allowing low-income borrowers to meet underwriting requirements, and has continued its involvement in community and neighborhood reinvestment since then.

WaMu was the first bank in the country to acquire a full-service securities brokerage firm when it purchased Murphey Favre, Inc. in 1983.

WaMu Management Team

A new WaMu management team with a fresh perspective is showing promise, but Washington Mutual is also benefiting from stability at the top.

Chairman Kerry Killinger has served in that position since 1991 and previously served as CEO. His history with Washington Mutual traces back to 1982, when the bank acquired Murphey Favre, where Mr. Killinger served as Executive Vice President. He became Senior Executive Vice President of Washington Mutual in 1986.

Why Cutler Capital Invested in Washington Mutual (WaMu)

Cutler Capital was attracted to WaMu's convertible security because of its risk/reward characteristics. Its convertible security has a current yield of 5%, while its bond value provides some downside protection.

By reducing its mortgage lending exposure and focusing on more general retail business, WaMu has maintained stability even as many other banks in the industry have struggled. The last quarter earnings report shows the Washington Mutual Retail Banking Group contributing a majority of the bank's income.

WaMu continues to add branches, but at the same time is undertaking a cost-cutting initiative and is closing branches that are not profitable.

Market Outlook As It Relates To Washington Mutual's Convertible Security

The chief attraction of Washington Mutual's convertible security is its 5% yield. At the same time, it would be reasonable to expect the underlying security to appreciate by 7% to 10% over the next 12 months. That would translate to a return of about 7% for the convertible security, resulting in a total return of about 12% over the next year.

The banking industry in general is suffering through the current interest rate environment and from the downturn in the real estate industry. WaMu appears to be managing well in spite of the industry's current difficulties.

About Cutler Capital Management

Cutler Capital Management of Worcester, Mass. (www.cutlercapital.com) is an investment management firm specializing in investing in convertible securities, real estate investment trusts (REITs) and dividend-paying bank stocks to provide growth and income to high-net-worth investors, and charitable foundations and other non-profit organizations. Founder Melvin S. Cutler has researched and invested in securities since 1975 and currently manages more than $245 million in assets.

Cutler Capital currently manages two hedge funds to meet the differing investment goals, tolerance for risk and investment timelines of our clients. In each case, capital from like-minded investors is pooled and invested in a diversified group of convertible securities, REITs and dividend-paying bank stocks.

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