acquisition binge, chief executive Kerry K. Killinger is looking to transform Washington Mutual Inc.'s business so it more closely resembles that of a commercial bank.

That means big acquisitions are out and higher-yielding loans are in, Mr. Killinger said on a visit to Wall Street on Tuesday.

He said the company has set a higher minimum standard for return on equity -- 20% rather than 18% -- and that it is aiming for annual per-share earnings growth of 13% through 2004.

He acknowledged that Wamu's shares languished as the company struggled to absorb Great Western Financial Corp. and H.F. Ahmanson & Co., which it bought in 1997 and 1998 to cap its transformation from a $19 billion northwestern thrift into a $180 billion-asset West Coast behemoth. But Mr. Killinger also noted a recent surge in the share price as investors reacted to a strong third-quarter earnings report last month.

The company will now focus on shifting its portfolio mix, opening New Age retail branches in high-growth markets, and -- if the right opportunity arises -- making small purchases that would help Washington Mutual move away from a thrift-like balance sheet, Mr. Killinger said.

"The business plan we've laid out is based on internal growth," Mr. Killinger said during a visit with American Banker reporters and editors. "We can achieve all of our financial goals without acquisitions."

Mr. Killinger said a key component of his plan is to emphasize consumer, commercial, and real estate loans -- all higher-yielding assets than the residential mortgages that are the traditional thrift's staple.

On Sept. 30 these high-margin assets accounted for only 25% of the company's $118.8 billion loan portfolio, with the balance made up of home loans. Washington Mutual says it expects that by the end of 2004, these more attractive assets will make up about 40% of the portfolio -- a ratio that the thrift company was moving toward before it kicked off its heavy-duty acquisition spree with a 1996 deal for American Savings Bank.

"This is where they were going in 1994 and 1995, and they were starting to generate some promising results," said R. Jay Tejera, an analyst with Ragen MacKenzie Inc. in Seattle. "Then they began cobbling together single-product S&Ls. They're done with that now."

To achieve its balance sheet goals, Mr. Killinger said, his thrift company will retain fewer residential mortgages on its books while holding onto servicing rights, and allow mortgage-backed securities to "roll off" as they mature.

Washington Mutual will also aggressively push consumer lending, hoping to shift the success it has had in the Pacific Northwest to its newer markets in California, Florida, and Texas, he said.

"If we get the same penetration in our new markets, we ought to be able to increase our consumer loan portfolio about three-fold from the $6 billion it's at today," Mr. Killinger said. Commercial banking is expected to expand in new markets as well, he added, noting that the thrift company may enter strategic alliances with originators to purchase business loans.

Partly through its thrift acquisitions, Washington Mutual has created a company with a full array of products and services, said James Bradshaw, an analyst with Pacific Crest Securities of Portland, Ore. However, he said, the thrift company could not help but be distracted from peddling its wares as it focused on the massive task of melding these acquisitions.

"They already have all the different lending operations needed to build their consumer and business portfolios," Mr. Bradshaw said. "But they've been worrying about integrating these massive acquisitions for the past two years. Now they need to get out and market."

Washington Mutual said it would expand into new markets by opening de novo, "new concept" branches. The first 15 will be opened in the Las Vegas area by next spring, and they will incorporate roaming tellers in casual attire, play areas for children, and retail sales of financial planning software and books. Five more will open later in the year.

Mr. Killinger said Las Vegas was picked as ground zero to kick off the new branch push because of its large population base, rapid growth, and -- perhaps most importantly -- market research that found 22% of banking customers in the Las Vegas area dissatisfied with their institutions' service.

"There is an underlying theme that consumers believe banks are not providing the quality of service that we can," Mr. Killinger said. "If you can provide a higher level of personalized service, you've got a home run on your hands."

Other target areas could include Arizona, Colorado, Texas, and western Florida -- all high-growth population centers where Washington Mutual's presence is small, Mr. Killinger said.

Despite the focus on de novo branching and internal growth, Mr. Killinger did not rule out acquisitions outright. Small commercial banks that would help build Washington Mutual's small to mid-size business lending and boost its commercial portfolios are a possibility, he said.

"The areas of higher interest are those that would help us with diversification," he said.

Analysts, however, would not rule out thrift acquisitions, though they said these deals likely would be small and aimed at filling holes in Washington Mutual's marketing area.

"If they were able to pick up some thrift in Texas or Florida that could accelerate their market share, they'd be interested," Mr. Tejera said.

However, a stronger currency will be necessary before getting serious about doing deals, Mr. Killinger said. The thrift company's stock closed Tuesday at $35.0625 a share, down 56.25 cents, or 1.58%. The stock has gained 30% from its 52-week low of $26.9375 on Oct. 15, but it is still far lower than Mr. Killinger would like.

"Acquisitions are on the back burner ... because I am now looking at a materially undervalued stock price," Mr. Killinger said. "For a company that is earning an ROE in excess of 20%, has good asset quality, good capital generation -- that seems inconsistent with a stock selling with a less-than-10 price to earnings multiple."

The thrift company also announced plans to establish a $150 million venture capital fund that would invest in electronic commerce with a focus on financial products, services, and technologies. The investments would be similar to one made in Keystroke Financial Inc., a Seattle-based technology firm that helped Washington Mutual's on-line mortgage application Web site.

To provide additional support and marketing for the Web site, www.wamumortgage.com, the thrift company also announced it has formed a partnership with Organic Inc., a San Francisco commercial Web site builder whose clients include Compaq Computer Corp. and Blockbuster Inc.

Finally, the thrift company said it would change the name of its consumer finance unit, Aristar, to Washington Mutual Finance. Signage changes are expected at the unit's more than 500 offices countrywide within the next seven months.

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