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Principal Bank has no loan offices, no customer lobbies and no drive-up teller windows, but over the past 10 years it has grown to become one of the state’s largest financial institutions. With more than 150,000 customers in all 50 states, the bank has more customers in California – more than 17,000 – than in Iowa, its second-largest market with just under 13,700 customers.

When Principal Financial Group Inc. launched Principal Bank in February 1998, it was among the first Internet-only banks in the country. But Principal Bank (www.principalbank.com) has pursued a different strategy than other online banks, which officials say has positioned it to fill a growing niche in serving the needs of Principal’s expansive customer base.

“We’re very confident of our future,” Principal Bank President Art Bacci said last week, prior to an employee event recognizing the bank’s 10th anniversary. “We have a lot of exciting opportunities in store for us.”

Among those opportunities, Principal Bank will for the first time move into business banking this year, Bacci said, and will also introduce a new bank product designed to help retiring Baby Boomers better manage their assets.

Chartered by the Office of Thrift Supervision as a federal savings bank, Principal Bank began operations with just eight employees on the 12th floor of the Hub Tower. Today, it has more than 150 employees working at its 60,000-square-foot headquarters at 6200 Park Ave. in southwest Des Moines. That operation includes a 35-person contact center that handles more than 300,000 telephone calls a year on a round-the-clock basis.

At the end of the third quarter of 2007, Principal Bank reported quarterly net income of $3.09 million, a 56 percent increase over third-quarter 2006 net income of $1.98 million. As of Sept. 30, 2007, the latest period reported, the online bank had total assets of $2.45 billion, a small slice of the more than $215 billion in assets under management by its parent company.

According to Forrester Research, 41 million households now do some form of banking online, and that number is expected to double over the next three years. But Principal Bank is looking more toward using existing relationships with Principal clients rather than seeking a lot of new retail customers online.

“Our value proposition is to be a better price,” said Barrie Christman, Principal Bank’s chairman and chief executive officer. “We don’t have to be the best price in every single market, because obviously in 50 states that would be quite a challenge to do. So we are really going after a different market than (big banks) are. Are we aspiring to be (like) them? I don’t think so. Gosh, maybe I’d like some of the bottom lines you see from an ING (Groep NV), for instance, but it’s a very different business model, and we’re serving different needs for Principal Financial Group than they were designed to do.”

Principal Bank’s strategy has evolved over the years, said Christman, who joined the bank in September 2001 after nearly 30 years with several other large banks.

“It is a different path to success than we had expected when we first started,” she said. “I believe that when the bank was first opened, the thought was we would immediately cross-sell all of those 13 million customers that Principal had around the country, and that it would be a great opportunity to broaden financial services for our client base at Principal. What we found out was that because of the intermediary relationships, those advisers and brokers who bring us business, they have a lot to say about whom we should or shouldn’t be cross-selling services to.”

That led to a push several years ago to market Principal Bank as a retail bank to the general public. However, officials soon realized that the bank wouldn’t be able to compete on price on a long-term basis, Christman said. Additionally, the bank lost $1 billion in deposits in 2004 when Principal Financial Group sold its residential mortgage group, which led to a renewed focus on marketing services it could provide through Principal’s financial services network.

“We kind of coined a term for that: our ‘glue strategy,'” Christman said, “helping glue the relationships that customers have with Principal.”

An example of that type of sticky product is Principal Retirement Navigator, which is scheduled to launch later this year.

“With the Baby Boomers rushing to retire, we’re going to be faced very quickly with a situation where more and more people are going to need advice on what to do with that money,” Christman said. “We’re really accomplished at helping them accumulate money; we’ve got to help them also figure out how to make it last long enough.” The Retirement Navigator tool will enable bank customers to view all of their retirement accounts, whether Principal products or not, through one account, and to view “what-if” scenarios to see how withdrawals or shifts in those investments would affect their total assets, she said.

One of the newer ways Principal Bank is supporting its parent’s products is by providing health savings accounts to pair with Principal’s high-deductible health insurance plans. Within the last two years, the bank has opened more than 18,000 HSAs. Another supporting product is Safe Harbor 401(k) savings accounts, to which companies can transfer funds for retirees who can no longer be located. “We’re up to $335 million in deposits with safe-harbor accounts, and those were only introduced in the last three years or so,” Bacci said.

Another growth area will be business banking, particularly working with small to medium-sized companies that Principal already provides with other products, he said. Professional organizations such as law firms and medical offices, which don’t need daily deposit features like retailers do, are good candidates, Bacci said. Some services will be more sophisticated. For instance, Principal recently provided asset safekeeping for an employee-owned company that was acquired by a private-equity firm for approximately $600 million. “So Principal was not only able to provide the recordkeeping and administrative services,” Bacci said, “but also a bank where the money could be deposited very safely for three or four months while the employees made decisions about where to have that money distributed.”

The bank has already installed the information systems capability to expand into business banking, and has begun to conduct market research to determine the best prospects within Principal’s roster of clients, he said.

“When you look at how Principal positions itself with asset accumulation, retirement, asset management, that is the brand,” Bacci said. “We are here to support that brand.”