As State Farm bows out, U.S. Bank seizes an expansion opportunity

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Another major insurance company has discovered how difficult it is for nonbanks to gain a foothold in banking.

State Farm’s decision to scale back its banking operations — and ultimately leave the business — resembles the hasty retreats of Nationwide, MetLife and Allstate over the past decade.

In a deal announced Thursday, U.S. Bancorp in Minneapolis will assume an undisclosed portion of State Farm’s $11.2 billion of deposits and $1.5 billion of credit card accounts.

Moreover, State Farm agents will be able to sell U.S. Bancorp deposit products and cobranded credit cards to State Farm customers nationwide, and there are ongoing discussions between the two parties about adding U.S. Bancorp vehicle loans and business banking products to the list of available services.

The transition is scheduled to start later this year and continue into 2021.

For U.S. Bancorp, the arrangement is a low-cost, low-risk way for U.S. Bancorp to expand its client base, analysts said. And for State Farm it’s a way to begin to bow out of a two-decade effort that never quite paid off.

The returns on equity and assets at State Farm Bank, which had $16.4 billion of assets on Dec. 31, might explain why its parent company has cooled to banking, said John Mackerey, an analyst at DBRS Morningstar who covers U.S. Bancorp.

State Farm Bank’s ROE, which was in the negative as recently as 2017, was 3.18% at the end of 2019 — well below the 9.79% average of the 20 banks in the $15 billion to $20 billion asset class, according to data on fdic.gov. And its ROA of 37 basis points trailed the group average of 1.31%.

“There are definitely a lot of costs, especially if you’re at a smaller scale,” Mackerey said. “I just think maybe the payback is too long, or it’s too much to build from scratch. It’s almost easier to outsource it.”

Michael Tipsord, chairman and CEO, was not made available Friday for an interview.

It is possible there could be more deals to come. State Farm said in a release that the agreement with U.S. Bancorp is "part of a broader strategy [by the company] to exit banking operations.” When asked about how that strategy could play out, a State Farm spokesman said the company "will continue to consider the best ways to serve [its] customers," but there is "nothing further to announce at this time."

State Farm Bank F.S.B. was founded in 1999 and is headquartered in Bloomington, Ill., where its parent company is also based. The bank offers checking and savings accounts, money market accounts, auto and home loans and credit cards to State Farm clients across the country. It does not have branches.

The bank’s growth has been mostly stagnant for several years, with deposits hovering in the $10 billion to $11 billion dollar range since 2014 while assets have generally stayed around $16 billion. Officials at both companies declined Friday to say exactly how many deposits are being offloaded by State Farm.

Tim Welsh, vice chairman of U.S. Bancorp’s consumer and business banking, called the opportunity to capture some of State Farm’s banking business “a natural partnership” for two organizations that look for new ways to serve customers. The bank, which has branches in 26 states, has been heavily focused on upgrading technology and opening digital-first branches in new markets, including Charlotte, N.C.

Executives have specifically cited Texas, Florida and Georgia as markets in which U.S. Bancorp plans to expand.

“This opens up a number of states for us” without having to open physical branches, Welsh said.

Regarding the discussions about cross-selling vehicle loans and business banking products to State Farm customers, Welsh said: "It's all in the spirit of finding new ways to serve customers, so auto lending is something that many customers want and business banking services are important, too. Those would be things we're excited to explore."

Analyst Terry McEvoy of Stephens said the State Farm deal is a way for U.S. Bancorp to capitalize on its brand recognition to reel in more deposits. Analyst Brian Klock of Keefe, Bruyette & Woods agreed, saying it is a “creative” way for a large bank to gain a new distribution channel. The real growth it offers, Klock said, is access to State Farm customers who could potentially become U.S. Bank customers.

Peter Winter, an analyst with Wedbush Securities, called the agreement “a great deal” for U.S. Bancorp. The company had been unable to pursue acquisitions in recent years due to enforcement actions by federal regulators that required the bank to upgrade its anti-money-laundering compliance systems.

A Federal Reserve order was terminated last year, and an Office of the Comptroller of the Currency order was resolved in 2018.

Winter, who does not cover insurance companies, said banks have one clear advantage over nonbanks.

“They’ve got the funding base of deposits to grow the balance sheet and basically own the customer,” Winter said. “There’s all this talk about technology infringing on banking, but we’re seeing more and more partnerships happening, and I think this is just another example of that, especially as banks ramp up their digital banking investments. … All of that makes it harder for nonbanks to get into the market.”

The price of the deal, which still must be approved by regulators, was not disclosed.

Laura Alix contributed to this article.

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