U.S. Bancorp's acquisition of State Farm Bank FSB's deposits and credit card loans marks its first deal for a bank or a deposit portfolio in about six years, and it fits in with the company's aspiration to add geographic and marketing scale.
The Minneapolis-based bank has for some time emphasized that its $2.5 billion annual technology budget is a signal of its stand-alone viability, and has highlighted its ability to move into new markets through branch expansion programs like the one it has underway in Charlotte, N.C. Executives have also expressed wariness about the potential for deal integrations to deflect attention and resources from organic growth.
But, in a slight shift in tone at a conference in December 2019, Chairman, President and CEO Andrew Cecere said the bank would be evaluating opportunities because "scale is becoming more important, not just technology scale, but marketing scale."
State Farm Bank does not operate traditional branches and had about $11.23 billion of deposits and about $1.50 billion of credit card loans at the end of 2019. In addition to acquiring those portfolios, U.S. Bancorp is entering into an alliance with State Farm Mutual Automobile Insurance Co. under which State Farm's "coast-to-coast network of agents" will market U.S. Bancorp's deposit and credit card products to their customers. The companies also said they are considering adding auto loans and business banking products to the arrangement.
"Whereas U.S. Bancorp currently has a physical consumer presence in 26 states, State Farm is a national company," a U.S. Bancorp spokesperson said. With State Farm, U.S. Bancorp will be able to "work with customers that are outside of what had previously been our traditional footprint without necessarily having to actually physically enter those markets."
In a note on March 6, analysts at Keefe Bruyette and Woods called the deal "an efficient way to increase [U.S. Bancorp's] production capacity through a low-cost distribution channel." They projected that the transaction could increase their estimate for U.S. Bancorp's 2021 EPS by about 2%, assuming the deposits that do not fund the card loans are invested in securities at low-duration yields.
The deal was announced shortly after authorities released U.S. Bancorp from a deferred prosecution agreement and a related enforcement action over anti-money laundering compliance issues that cost the bank about $600 million in penalties. The resolution of those matters might simplify regulatory review of U.S. Bancorp's deals, although coronavirus-related volatility is inhibiting merger activity across the industry over the near term.
U.S. Bancorp's last deal for a bank or deposits was its 2014 purchase of 103 branches in the Chicago area. That acquisition also involved about $11 billion in deposits. At the time, analysts praised the deal for building out the bank's presence in an important market, and for being small and relatively manageable for a company of U.S. Bancorp's size. Also at the time, executives said they were interested in additional branch acquisitions in the bank's footprint.
The banking exit by State Farm adds to a long list of insurance companies that have abandoned the business over a variety of regulatory and strategic concerns.
"Insurance companies often find it challenging to compete in the deposit business because insurance is an intermediated business," Andrew Frisbie, an executive vice president at the analytics and advisory firm Novantas, said in an interview. "In most cases, you've got commissioned agents or salespeople that are really managing the relationship with the customer. It's been very difficult for insurance companies to figure out: How do they make that salesperson motivated and interested in handling deposits, which for them is a secondary business?"
While the deal appears to be relatively straightforward for U.S. Bancorp, the company still faces the challenge of absorbing a high-cost portfolio of deposits onto its platform. In the fourth quarter of 2019, State Farm's cost of deposits was 1.79% in 2019, compared with 0.73% for U.S. Bancorp, according to data from S&P Global Market Intelligence.
The companies did not disclose deal terms, and the U.S. Bancorp spokesperson declined to describe the bank's expectations for deposit attrition or targets for product growth.
At the presentation in December, Terrance Dolan, the bank's vice chairman and CFO, argued that while deals might be part of the mix, the efficiency of U.S. Bancorp's single processing platform and spending on technology make it well-equipped to go it alone.
"While there may be opportunities," he said, "we feel like we have a scale in order to be successful."