Expansion-minded banks usually think in terms of acquistions, but Oregon's U.S. Bancorp is defying convention by building an Idaho branch network from scratch.

In one of the most ambitious building programs ever carried out in banking, the company is assembling an Idaho franchise by opening branches throughout the state.

Within five years, U.S. Bancorp's Idaho unit plans to operate 21 offices, each with about $25 million in deposits.

A Modest Beginning

That will multiply the company's operations in the Gem State many times over.

At the beginning of the year, U.S. Bank of Idaho had just $43 million of assets, $26 million of deposits, and one office in the panhandle town of Coeur d'Alene, far from Boise, the state's business hub.

Since then, the bank has opened two branches in the Boise area. All told, seven branches are scheduled to come on line this year and another six by June.

Meanwhile, the bank has agreed to be the anchor tenant in a $16 million, 11-story administrative center in Boise.

Growing Fast in Tacoma

The Idaho plan comes on top of U.S. Bancorp's opening of nine new branches around Tacoma, Wash., an effort that will quadruple its presence in that market.

Executives of the Oregon banking company are well aware that their Idaho plan flies in the face of conventional wisdom.

But they counter that the company has long made mortgages and commercial loans in the state, which will make it easier to win new business.

|A Possibility of Success'

"If it's a market where you already have some presence and reputation," a branch opening program "has a possibility of success," said U.S. Bancorp president Kevin R. Kelly.

When entering a new market, bankers usually choose to buy a local institution with a ready-made book of business. Opening new offices is seen as a poor alternative because of the difficulty of attracting deposits quickly enough to pay back the initial investment.

The Hard Way

"The de novo approach is a much slower and more expensive way of building a franchise," says Steven R. Schroll, an analyst with Piper, Jaffray & Hopwood in Minneapolis.

To be sure, U.S. Bancorp is no stranger to acquisitions. It has grown to $20.8 billion of assets with the help of purchases in Oregon, Washington, California, and Nevada. But it says it will build when it can't buy banks on the terms it wants.

Company officials predict that it will be about two years before its expanding Idaho unit becomes profitable. The bank aims to hit the 1% return-on-assets level within five years.

Ahead of Plan

U.S. Bancorp's assets in Idaho operation have already jumped more than 60% this year to about $70 million.

"We're not had a problem attracting customers."

U.S. Bancorp strategists have long considered Idaho a vital market.

Given the relatively small population of the Northwest, officials believe the bank must be a dominant force everywhere in the region.

Idaho, with one of the fastest rates of economic and population growth in the nation, could not be passed over.

"We had an urgency to get into the market," Mr. Kelly said.

But expansion into the state clashed with another central U.S. Bancorp principle: that of price discipline in acquisitions.

In the last five years, the company has repeatedly tried to buy independent banks and thrifts in the state, but in every case it was unwilling to pay enough to do the deal.

In the Coeur d'Alene vicinity, for example, rivals snapped up two independent banks and the area's biggest thrift.

"They got outbid," said Parker G. Woodall, chief executive of Northern State Bank, one of the institutions U.S. Bancorp lost. "That's what happened in all three situations."

Jack W. Gustavel, former chief executive of First National Bank of North Idaho, another bank that got away, agreed.

"We sure thought they wanted to get into Idaho, but they didn't want it so bad they were willing to stretch," he said.

The largest missed opportunity was Mountain West Savings Bank, a $320 million-asset company in Coeur d'Alene that was bought by the former Security Pacific Corp. in 1990.

Walking Away in Boise

Security Pacific paid $31.5 million, about 1.5 times book value. U.S. Bancorp had offered about $1.5 million less, according to a source familiar with the bidding.

Elsewhere in the state, the Oregon company twice walked away from contacts with American Bancorp. of Boise, which owns the highly profitable American Bank of Commerce.

The Idaho company insisted on a price above 2.5 times book, according to William T. Speer, American Bancorp.'s chief executive.

Could End Up Paying More

Mr. Schroll, the Piper, Jaffray analyst, suspects that U.S. Bancorp will end up paying more for its de novo program than some of these acquisitions would have cost.

"In hindsight, it would have been less expensive to pay up," he said.

But Mr. Kelly insisted that none of the acquisitions would have given U.S. Bancorp the statewide coverage that it needed.

If the company had bought one of the northern Idaho institutions, it "would have had to open four or five branches in Boise anyway," he said.

Nonetheless, U.S. Bancorp is not giving up on Idaho acquisitions.

"There are two or three institutions we continue to be interested in," Mr. Kelly said.

The Oregon company opened its first Idaho branch in 1992 after the Office of the Comptroller of the Currency approved its application to relocate the main office of a Spokane, Wash.-based subsididary across the state line in Coeur d'Alene.

Idaho banking officials unsuccessfully sued to block the maneuver, which they said amounted to using a legal loop-hole to sneak into the state.

Once the Coeur d'Alene office was established, the new U.S. Bank of Idaho had authority under national banking laws to branch throughout the state.

Idaho is dominated by homegrown West One Bancorp and Utah-based First Security Corp. Between them, the banks hold two-thirds of the state's deposits. New York-based Keycorp, and California's BankAmerica Corp. and First Interstate Bancorp also have branch banking operations in Idaho.

Despite being the new kid on the block, U.S. Bancorp has already shaken up the marketplace. It is becoming known for high-energy salesmanship, aggressive pricing, and guerrilla marketing.

For example, it is relying heavily on alternative delivery channels, such as supermarket branches and telephone banking, that have not yet become familiar in Idaho.

U.S. Bank operates just seven automated teller machines in the entire state. But the bank is picking up interchange fees so that customers can use competitors' ATMs free of charge.

"We've caught some of the guys asleep in the state," said Mr. Howry, a 50-year-old California native who came to Idaho 18 months ago after serving as a regional manager at U.S. Bancorp's Washington unit.

Advantage Seen

Mr. Howry contended that the bank's de novo strategy gives it an important advantage over its competitors. Through U.S. Bancorp may be a latecomer in the state, it can customize its branches so that location, size, layout, and staffing bring maximum efficiency.

The executive said branches are being built on modular construction principles that permit the sites to expand as business grows. U.S. Bancorp also is adopting a part-time scheduling system licensed by Well Fargo & Co. in which no teller works more than 15 hours per week.

"We can try new things quickly," said Mr. Howry. "We're not dealing with all the built-in things you get when you acquire a bank."A Growing FranchiseU.S. Bank of Idaho's branchopening program Branches Total opened branches'92 1 1'93 7 8'94 7 15'95-'97 6 21Source: U.S. Bancorp

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