U.S. Bancorp (NYSE:USB) Morgan Stanley Financials Conference Call June 14, 2022 9:30 AM ET
Company Participants
Andy Cecere – Chairman, President and Chief Executive Officer
Terry Dolan – Vice Chair and Chief Financial Officer
Conference Call Participants
Betsy Graseck – Morgan Stanley
Betsy Graseck
Okay. Thanks, everybody, for joining us this morning. Just need to read a disclosure statement. For important disclosures, please see Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative.
Okay. With that, we will kick off. Thank you so much, Andy Cecere, Chairman and CEO and President of U.S. Bank. Thank you so much for joining us today.
Andy Cecere
Pleasure.
Betsy Graseck
Terry Dolan, Vice Chair and CFO.
Terry Dolan
Thank you.
Betsy Graseck
Appreciate your time.
Terry Dolan
Yes. Appreciate it.
Question-and-Answer Session
Q – Betsy Graseck
Alright. So Andy, this environment that we are experiencing today, it’s to me it’s just so unusual. I’d love to get your perspective. Have you ever seen anything like it?
Andy Cecere
Short answer is no, Betsy. It’s very unusual, sort of in the here and now, consumers and businesses are in great shape. As we have talked about, our deposit balances are still well above pre-COVID levels. Spend levels are strong. Our credit card spend is up 35% versus pre-COVID, 15% above last year. There is a little bit of a shift from discretionary and non-discretionary spend. And credit is really good. We are not seeing any early indicators of any weaknesses. So there is – if you look at the here and now, it’s very good. But while we all have a base case, I think the range around that base case is pretty wide and we are prepared with those scenarios because of the uncertainty given inflation and the war and COVID and all those things. So good now, but a lot of variation in terms of potential outcomes. Maybe Terry can talk about what that means for us for the second quarter at least?
Terry Dolan
Sure. So let me maybe give everybody a little bit of an update with respect to the second quarter. By and large, second quarter is coming in pretty much where we had expected and discussed on our earnings call. Maybe just to reiterate a couple of things, from a revenue standpoint, we expect it on a linked quarter basis, revenue to be up about 5% to 7% and expenses to be up about 1% to 2% on a linked quarter basis. And on the revenue side, we will probably have a little bit more pressure from a mortgage banking side, but generally, that’s in line. The one thing that I would maybe provide a little more clarity around is on the merger and integration costs, one of the things we talked about is the fact that we would have some merger and integration costs in the second quarter. And right now, our estimate is somewhere in the range of about $200 million to $210 million as we start to get prepared for the ultimate acquisition of Union Bank. Otherwise, everything else is pretty much on track.
One of the things I would just say maybe with respect to the merger and integration costs, our deal assumed about $1.2 billion to $1.3 billion and that’s still in line. So it’s really as much timing as it is anything else. And then maybe on a year-over-year basis for the year, one of the things – just again, the guidance is all in line with what our expectation is. But maybe a couple of things I would just reiterate and that is we expect revenue to be up 5% to 6% on a year-over-year basis, net interest income to be up somewhere between 8% and 11% and fee income will be relatively stable. And again, while we are seeing nice growth with respect to payments, we are seeing the pressure from mortgage banking side of the equation. And then we are targeting and expect positive operating leverage of at least 200 basis points or more.
Betsy Graseck
That’s for the full year?
Terry Dolan
For the full year.
Betsy Graseck
Okay, got it. And on…
Terry Dolan
And again, that’s all on a standalone basis, too. I should throw that out there simply because Union Bank tends to cloud the water a bit.
Betsy Graseck
Right. And on the rev guide for the quarter, 5% to 7%, that is including mortgage banking…
Terry Dolan
Yes.
Betsy Graseck
Down, because we just heard from Wells Fargo saying that they are looking for something like 50% down Q-on-Q in mortgage banking.
Terry Dolan
Yes. There is a little bit more pressure with respect to mortgage banking, we’ll be down kind of in line, I think, with the industry, maybe not quite at that level simply because we have a stronger mix of retail versus correspondent. And of course, we have made a lot of investment in retail and we are seeing that continue to hold up a little bit better.
Betsy Graseck
Okay. And the offset in payments being stronger?
Terry Dolan
Yes.
Betsy Graseck
Okay. Maybe we could flip to loan growth, wanted to dig in first on commercial and commercial real estate. On C&I I mean, you had an outstanding 1Q, right, 8%, Q2, I mean that was has really eye-popping. I am wondering if there has been any pullback in growth at all or what you are anticipating as you go through the rest of this year, what’s really driving that kind of growth that you have got?
Terry Dolan
Yes. Well, let me talk a little bit about maybe the dynamics we are seeing and Andy can add a little about the environment. First quarter linked quarter growth is about 8% on the C&I. So, it was particularly strong. And certainly, that is something that’s not sustainable on a long-term basis. We do expect second quarter to be relatively strong, but probably not quite at that level. I think some of the – certainly, some of the drivers behind it are where we are seeing it, there is – it’s relatively broad-based across most of our geographies. Part of it is being driven by just utilization rates getting stronger. So, we – in the fourth quarter of last year, we are at about 19% utilization. That has come back nicely. It’s 23%, 24% today. And kind of on a normalized basis, we run 25% plus. So there is still some room to run there with respect to loan growth.
I think part of the drivers behind it is just at least our customer base on the consumer side of the – excuse me, on the commercial side of the equation, continuing to build inventories, not necessarily on the retail side of the equation, but just more broadly in terms of manufacturers, industrials, etcetera. And one of the big drivers behind that is that they just – what I would call just in case sort of inventory management, they want to make sure that they have parts on hand as that demand continues to grow. And then I do think that there is some spend related to capital expenditure that’s taking place today as people think about the need to be able to automate business activities given the, what I would say, the talent management pressures that they are probably anticipating a bit. So it’s kind of a combination of things like that, Betsy.
Andy Cecere
Yes. And I’ll add, Terry, you mentioned the inventory. I think there is two components to the inventory build. One is to make sure they have the parts, just having the ability to get those parts to fulfill their needs, so to speak. And the second is getting those parts in advance of price increases, which continue to be more expensive than every batch that they purchase. So, those inventory accelerations are for those drivers, which is driving some of the utilization up which is driving the loan growth.
Betsy Graseck
Got it. So, inflation in this element is a little bit of a positive, I guess, you could say. What about in the commercial real estate side? It seems that your average loans have been holding steady at around $40 billion for a while. I am wondering if there is any opportunities or challenges in that space for you?
Terry Dolan
Yes. With respect to commercial real estate, that is an area that we, by design, have been kind of managing it at a certain level, kind of trying to maintain a relatively stable balance. And part of that is we are just managing down kind of the construction mix of the overall portfolio. Where we are continuing to see nice growth is on the multifamily and what I would say the industrial manufacturing side of the equation. Lodging has come back real nice as consumers start to spend. The area that we continue to just watch is just office space. With return-to-the-office still, I think, in a nascent sort of stage, we want to see how that develops over time. So, that’s probably the area that we continue to watch and manage down as well.
Betsy Graseck
Got it. So, we should think $40 billion is a good number.
Terry Dolan
Yes, that’s a reasonable number.
Betsy Graseck
Okay. On the consumer side, mortgage is up nicely. You have had 2% in Q2, the last couple of quarters. I am just wondering, is this all due to prepay slowing? And how are the Ginnie roll-offs impacting these numbers?
Terry Dolan
Yes. There is couple of reasons why we are seeing the growth. I mean I think that the slowdown in refinancing and just rising interest rates, have caused the prepayment rates to slow and that certainly helps. We have made a lot of investment though in our mortgage business over time from a retail point of view. So the growth we are seeing is on the jumbo side of the equation through our – both our wealth management business and just the markets we end up serving. If you end up thinking about mortgage banking maybe overall, that investment has been very nice, a lot of digital capabilities with a strong focus around retail as opposed to correspondent. What that does is it helps us in situations where refinancing is slow, but home sales are continuing to kind of hold up nicely. And so I think it’s kind of a combination of things, Betsy.
Betsy Graseck
So what about home equity, any interest in pursuing that asset class?
Andy Cecere
Yes. So, home equity for us and for many banks has been shrinking for the past couple of years because of a lot of the cash-out refis that were occurring. I think as rates continue to move up and equity in the homes continue to build because of home prices, I think that might present an opportunity for it to certainly stop shrinking and perhaps start to grow a little bit as more of a traditional way of thinking about financing.
Betsy Graseck
Okay. And card?
Andy Cecere
Card continues to be strong. As I said, consumer spend is up 35% on card, but the payment levels continue to be higher than normal. So, the balances are not quite growing as fast as you would think given that payment spread, but our payment levels are about 37%, typical is the low 30s. So it’s still at an elevated level.
Betsy Graseck
Okay. And then lastly, in the consumer retail asset class, we have got auto and RV, with gas prices up, you would think that would start to slow down a bit. Is that fair?
Andy Cecere
A little bit, but not as much as you would think given the supply/demand imbalance that’s occurring. So used car prices are still holding in there. And while the volume is up – down a little bit, it’s still pretty strong.
Terry Dolan
Yes. One other thing is, Betsy, I would just remind people is that we have both the auto lending as well as the leasing portfolio. And that’s something that maybe differentiates us a little bit from some of the other banks in the industry. One of the things that you see when you have rising interest rates is that people start to manage more to the cash payment that they have to make on their auto. And so the leasing portion of that business tends to perform better when interest rates are either rising or at a higher level. So I do think that, that kind of helps offset a little bit as well.
Betsy Graseck
Okay. So overall, the growth outlook for the consumer loan categories holding steady?
Terry Dolan
Yes. I would say steady to positive. Yes.
Betsy Graseck
Okay. And then a question here – I know it’s about Union Bank, but it seems that – and tell me if this is wrong. If you like, given their footprint, they have a bit more of a slightly more levered consumer maybe than you would have in your books. On average, is that fair? Or do you not see that?
Andy Cecere
I think the credit profile is similar. So there is about 1 million consumer customers, just under 200,000 business customers. They actually tend a little bit more affluent just given the markets that we’re in. And I think we have a lot of opportunity. We didn’t put in any revenue synergies in the transaction costs, as Terry talked about, the $900 million of cost benefit. But I think there is a tremendous level of amount of revenue opportunity because we have a more expanded product set. We have more digital capabilities, and I think we’re looking forward to bringing those customers on and offering them more.
Betsy Graseck
And then just on credit in general, the market is concerned about the impact of higher rates. And just wanted to understand – I’m sure you’ve done the bottoms-up analysis on your loan book. What’s your thought on the impact of higher rates on credit?
Andy Cecere
Go ahead, Terry.
Terry Dolan
Yes. I mean I think what you’re going to see over time is, I mean, credit is going to continue to normalize back to what I would say pre-COVID levels. But today, the consumer and business, at least our customer base is holding up really well, and credit quality continues to be strong, certainly net charge-offs at lower levels than what we have seen in the past. But that, again, will normalize over time. From a provision standpoint, I think a big part of that will be driven as much by loan growth as it is anything else as we kind of think about the dynamics within the portfolio. But again, the other thing I would just maybe remind people is that when you end up looking at our book of business, on the commercial side, it tends to be investment grade or high investment-grade type of customers that typically perform quite in well in – throughout the business cycle and then on the consumer side of the equation, Betsy, our portfolios, our prime or super prime type of customers. So again, from a credit standpoint, we tend to perform quite well even through the cycle.
Andy Cecere
And Terry, importantly, we also underwrite, assuming a higher rate scenario, a couple of hundred basis points to make sure cash flows will still be sufficient in that scenario.
Betsy Graseck
Got it. And then your reserve ratio, 1.90, is it fair to expect that to hold steady for a while or does that go up as credit does normalize?
Terry Dolan
Yes. I think, it’s really kind of a function of what happens with respect to the economy as much as anything and kind of what the – how the outlook ends up changing. At this particular point in time, again, when we end up looking at credit quality, within our own portfolio and our own customer base, I think that, that is a reasonable level. But again, the provision will probably be more driven based upon loan growth than anything else. The other thing I would just say is 1.90 is maybe a little bit lower than the 200 basis points that we were running at, but that’s principally because the mix of the portfolio has changed more so than credit quality being a lot different.
Betsy Graseck
Got it. Alright. Before we move down the income statement of fees, I did want to just get a sense as to how you’re funding the loan growth that you’ve got. As I’m sure you know, there is been a lot of debate in the market around QT and what that means for deposits, not only in growth rate of dollars, but also in deposit betas. And maybe you can give us a sense as to how you’re thinking that’s likely to impact you.
Terry Dolan
Yes. So over the last, obviously, several years, we’ve seen a pretty significant growth in deposits in the banking industry and at U.S. Bank as well. And what I would say today, it’s more stabilized than anything else. And as we kind of think about the rest of 2022 and maybe into 2023 being relatively stable, it’ll be driven by QT. That will put some pressure on it. Interest rates will put some pressure on deposit balances. And I think the ultimate determinant will be what does GDP do? And is the economy growing even to some – if it’s growing to some extent, I think those deposits will be relatively stable. From a funding standpoint, clearly, we believe that we have the opportunity to be able to draw in deposits. We have a big money market business as well. And we always have the opportunity to be able to – from a pricing standpoint to be able to utilize that to bring deposits on balance sheet, if necessary. The other thing is that if you think about the industry and certainly us, we have a lot of liquidity in our investment portfolio. And so being able to utilize the investment portfolio to fund some of that loan growth is another alternative. So I think there is a number of different levers that we can continue to pull.
Betsy Graseck
Okay. And any – how much smaller would you be willing to have the securities book migrate towards over time?
Terry Dolan
Yes. I think part of it is whether it’s migrating down or just – or maintaining the level that we’re at. So we’re at about $175 billion today. And when you end up looking at LCR and that liquidity ratio, we have billions of dollars that we could allow that to come down, if necessary.
Betsy Graseck
Got it. Alright. Let’s move to fees and a topic that I know you enjoyed talking about, payments, right? It sets you apart from many of your competitors. You’ve been investing in tech-led growth with talech and Bento. Just wanted to understand from your perspective, how much more addressable market these kind of acquisitions opened up for you? And if you could also comment on the profitability of this new opened up market relative to…
Andy Cecere
Yes. Betsy, it’s one of our key initiatives, which is this business banking payments ecosystem. We think that the opportunities to add customers in the neighborhood of 15% to 20% and revenue, 25% to 30%, by really weaving together, combining payments and banking capabilities to help businesses run their business. And we have management of receivables, management of payables that travel in addition to money movement and traditional depository and lending capabilities. And putting that all together, I think, offers a tremendous opportunity to the 1 million-plus customers we have, plus the couple of hundred thousand that Union Bank has and is one of our key focus areas across the bank right now.
Betsy Graseck
Okay. What about the opportunities that you see in the different revenue line items here? You’ve got the debit card, credit card fee line, merchant processing, corporate payments. I mean where do you see the most opportunity for growth there?
Terry Dolan
Yes. And I think there is opportunity in every one of those categories for different reasons as well. So when we think about merchant acquiring, as an example, merchant processing, Andy talked a lot about the opportunity related to that ecosystem between payments and business banking. And I think that’s one area. We have been making a pretty significant amount of investment in that business over the last several years and very focused on tech-led sort of initiatives. And our tech-led revenue, if you go back about 3 years ago or so, was about 15% of the overall mix. Today, it’s about 30%. And we would expect, with the investments we continue to make that, that 30% continue to grow. And of course, tech-led sort of revenue distribution is faster-growing and has very nice margins. And so when we end up looking at that component of the business, we expect high single-digit growth even on a normalized basis as we get beyond the pre-pandemic sort of recovery. That’s also true with respect to our corporate payments business. And we’ve been making some very nice investment there. And of course, a lot of that focus is around real-time payments and those types of initiatives. We also expect not only with those types of investments, but also some cyclical recovery still on the travel and entertainment, but that being a high single-digit type of growth business as well.
I think credit card, again, a very important part of our business mix. I think it’ll grow, what I would say, in-line with the industry. Where we end up differentiating is we end up having our own bank card. We have what people would traditionally think of as co-branded type of product. But then we serve a very large financial institution segment, if you will. And we’re – that does differentiate us because the systems that we have allow us to have the capability of being able to provide each one of those customers with a very different and unique sort of experience depending upon what they want to do. And that is something that helps drive our growth in that particular space, too. So we think all three businesses are very important.
Betsy Graseck
And the number of financial institutions you service there is…
Terry Dolan
Let’s say it’s in the 1,500 range.
Betsy Graseck
1,500?
Terry Dolan
Yes.
Betsy Graseck
Yes. Okay. I wanted to ask a question about how you are thinking about Apple’s entry into BNPL and how does that change the landscape, if at all, or enable any opportunities or risks for USB?
Andy Cecere
So, BNPL is an area that we have a couple of use cases, and we are actually looking at it. And there is three sort of categories is the low dollar amount actually accelerating or expanding the product set that customers will buy. It’s the medium component, large ticket items that you are putting on a certain payment plan. And then it’s the large purchases like Windows on a home or, in some cases, replacing home equity products, right. And we are looking at those second two categories with a focus on convenience, certainty of payments and purchase capabilities. And I think it offers an opportunity for the bank given our strong payments capabilities in our card portfolio.
Betsy Graseck
Okay. So, it’s a positive?
Andy Cecere
I think it is.
Betsy Graseck
Okay. And is there much that you have to do to integrate that or not?
Andy Cecere
We already have capabilities on the extended pay component on the card purchases and we have, as I said, use cases on some of those other categories, and we are going to continue to expand. From a system standpoint, there is not much we need to do.
Betsy Graseck
Okay. Great. I wanted to move on to expenses. And I know you mentioned earlier 200 basis points positive operating leverage expected in 2022, I think at least was the word you used. The question I have is, where are you finding the cost saves to offset the wage inflation and the rising tech investment spend that you are doing?
Terry Dolan
Yes. I mean – well, I mean when we think about expense management, one of the things we really focus on – we are always focused on how do we end up prudently managing those expenses. And I think there is a number of different levers that we have the opportunity to continue to pull. We have been focused on branch optimization. And so I would say just physical asset optimization is one of those areas. We have the opportunity still with respect to digitizing a lot of business processes. And so looking at business automation, those types of things, our investment that we have been making in digital capabilities, Betsy, also enable us to be able to not only drive revenue growth, but also get efficiencies on the expense side of the equation. So, in other words, kind of widening the wedge both on the revenue as well as the expense side. And then I think that there is just, what I would say, prudent business review. I mean we end up looking at organizational design and structure and management layers and things like that are all different levers that we can end up pulling as we deal with inflation.
Betsy Graseck
Okay.
Andy Cecere
Betsy, I keep it pretty simple in my head. We are down about 25% on our branches. So, we were at about 3,100 down to 2,200. That offers savings. But I think the most important component is we have actually, in the last 4 years or 5 years, increased our investment in digital capabilities. That investment spend is in the run rate, so we are not going to go above that. The opportunity for a minute is just starting to get into the run rate. And that – this is the efficiencies around digital acquisition, digital servicing and other components that, that investment allows is starting to get there. And so that’s how we achieved that positive operating…
Betsy Graseck
And it’s more on the revenue side.
Andy Cecere
It’s on the revenue side, certainly, but also on more efficiency in terms of servicing and acquiring customers on the expense side.
Betsy Graseck
Alright. Let’s turn to capital. I mean we have the AOCI hit in 1Q, right? The whole industry had to deal with that. I just wanted to get a sense of what you have done this quarter to reduce the impact of the rate hike that we are getting this quarter on AOCI.
Terry Dolan
Yes. So, we continue to look at the held-to-maturity category. So, within our investment portfolio, one of the things that we have done is we have continued to move more securities into the held-to-maturity. So, that is certainly one of the areas. With the Union Bank transaction, we also have the opportunity. They have about, I want to say, a $25 billion investment portfolio. We have the opportunity as that comes on to classify a fair amount of that as held-to-maturity. Our overall goal is ultimately to get to about a 50-50 split in terms of the investment portfolio, and that will help us kind of manage it. Then the last thing I would just say is that on a quarterly basis, we have about $5 billion of securities that are always maturing. And so as those mature and we reinvest those, we will look at how we end up classifying those in the portfolio, and that will help us manage it.
Betsy Graseck
And as of now, what’s the percentage of securities in HTM? Is it 36%?
Terry Dolan
Yes. It’s a little under 40%. And again, we will continue to move that up.
Betsy Graseck
Okay. And that’s higher than what it was in 1Q?
Terry Dolan
Yes.
Betsy Graseck
Okay. So, we should have for the same rate increase that we had in 1Q, we get the same rate increase in 2Q, you will have a slightly lower AOCI?
Terry Dolan
Yes.
Betsy Graseck
Okay. And then on CET1, I think you mentioned that you are not planning on doing buybacks for a while, right, just to make sure that you get to that not make sure, but until you are above 9%, is that fair?
Terry Dolan
Yes. So, along with the Union Bank acquisition, we put the share buyback program on hold, if you will, and just to build capital in anticipation of that particular transaction. At the time of the acquisition, we will be closer to the 8.5% target, a little above, a little below it, depending upon the mark. And we ill continue to hold on the buyback until CET1 gets back to 9%.
Betsy Graseck
Okay. And that is on your current status where you are, I think a category three bank. Is that right?
Terry Dolan
Yes. And we will be in the category three after the acquisition and for some period of time. And so – but that’s all predicated based upon category three. But from our perspective, we are preparing for and we ultimately will get to category two, and we will be in a position to be able to manage that.
Betsy Graseck
Okay. And do you have a sense as to what kind of CET1 you would want to hold as a category two bank?
Terry Dolan
Your capital level is really a function of your risk profile of the company. And so when we end up looking at U.S. Bank today, as you know, our stress test results are always industry-leading. And then when we end up thinking about Union Bank, the Union Bank profile, the piece that we are acquiring is fairly similar to the overall risk profile of U.S. Bank. So, our expectation is that we will continue to have a CET1 target of 8.5% and operate somewhere between that 8.5% and 9%.
Betsy Graseck
And the stress test is coming out next week. You have to run that with Union Bank in it?
Andy Cecere
The stress test that comes out next week would be U.S. Bank standalone, and then we had an add-on that we talked with that about with Union Bank.
Betsy Graseck
Right. Got it. Okay. Can we shift to some strategic priorities? Andy, maybe you could give us a sense as to how you are thinking about what’s most important.
Andy Cecere
Yes. So, I would categorize into three areas number one, first and foremost, is a successful close integration of Union Bank, which we still expect in the second half of the year. There are a number of people across the company working on this, both the successful data integration and systems integration. As a reminder, Betsy, it’s a lift and shift. So, we are not using any of their systems. We are applying all their customer and all the data to our systems and our platforms. So, that’s number one. Number two is that the business banking payments ecosystem, which is a tremendous opportunity, certainly in business banking, but I think it extends even to the corporate and commercial side. And again, that’s the strength of our payments business, which represents about 29% of our revenue streams, combined with our banking business, which in this environment is so important to leave those things together. And the third thing is across all the business is this digital initiative. We spent a lot of capital in the last few years on digital capabilities. We have come a long way and really leveraging those capabilities both in terms of additional sales as well as lower servicing and acquisition expense. Those are the three things I focus on.
Betsy Graseck
Okay. I want to dig into those. But first, I do want to ask a question about something you didn’t mention, which is the presence that you have in states through State Farm relationship, right? What do I mean by that? There is more than a couple of handfuls of states that you do not have branches, but you have State Farm networking relationship benefits. And I am wondering, does that partnership satisfy your ambitions in those regions where you don’t have branches, or are you seeing such interesting activity levels with the partnership that maybe you are incented to go a little more deeper into those locations?
Andy Cecere
Right. So, I would categorize that opportunity in that third bucket of the digital capabilities because that’s what allows us to do that more effectively. So, as a reminder, we are in about 20 – we are in 26 states where we have our branches and ATMs. We have 19,000 agents from State Farm that represent us, selling our products and services across all 50 states. And it’s an opportunity to extend our distribution where we don’t have physical presence, and it’s worked quite well. So, we have been able to gain deposits in the tune of three large MSAs, and credit cards as a large MSA. So, it offers that opportunity to extend distribution because of our digital capabilities and because of the opportunity to get a referral from a State Farm agent and acquire and put on that customer in a digital fashion. So, it’s in that third category I described.
Betsy Graseck
Okay. No need for branches to go into those?
Andy Cecere
We will always look at opportunities. We entered Charlotte in what we are calling a branch-light digital first where we have a core set of customers who are either mortgage customers or auto customers or card customers. We have a physical branch presence, but we don’t need to have 100 branches. We could have a dozen branches. And that’s the way we can think about leveraging locations where we are not currently in.
Terry Dolan
Yes. Maybe a couple of things that I would just add. The deposit accounts that we are able to generate through the State Farm alliance, well over half of those are coming outside of our footprint. So, if you think about the 19,000 agents that they have, a high percentage of those coming from outside of our footprint. And the other thing is that there is a lot of new customers to the bank that are being generated from that alliance, of that relationship, which I think is good. And then the last thing I would just say is that State Farm is one of the largest small business type of insurers. And given our focus around the business banking ecosystem and payments, that’s another opportunity or avenue for us to deepen the relationship with those – that customer base is really through the business banking channel.
Betsy Graseck
Okay. Great. On Union Bank, can you remind us how it impacts your asset sensitivity?
Terry Dolan
Yes. Union Bank is a little bit more asset-sensitive than we are. It should be about 35 basis points to 40 basis points accretive or increase our asset sensitivity when they come on.
Betsy Graseck
Okay. And then the other question on this is – you pushed out the close to sometime in the second half. Any sense of where in the second half?
Andy Cecere
So, we have about 1,000 people at U.S. Bank and about 1,000 people at Union Bank working on the integration. We are making great progress. We have defined the organization structure. We are working on the data migration, the compliance framework and the business line overview. So, we are prepared. We have been back and forth with the Fed and the OCC, a number of requests, and we fulfill those requests. So, we are just waiting for regulatory approval, which again, we expect in the second half.
Betsy Graseck
Okay. And does the second half close impact conversions or cost save timing?
Andy Cecere
So, it – the second half close still assumes a second half conversion. If that gets delayed or migrates a little bit, it would move to the right, but it wouldn’t change the overall number. It would just be a timing impact.
Betsy Graseck
Okay. And then what about revenue synergies? You mentioned you don’t have any in your official statements, but…
Andy Cecere
Right. We did not model any in the initial reflection of the information we provided. But the more I work with the team and the more we learn about it, I think the more positive, I think about the opportunities. Again, they have a very loyal, great core customer base, and they service them very well. They just don’t have quite the array of products that we do, and that’s true of both the consumer as well as the business banking. So, I think the opportunity to deepen relationships is quite expensive.
Betsy Graseck
And I noticed – I think it was in the disclosure that once you get regulatory approval, the timing to close is something like 45 days instead of the usual 14 days?
Andy Cecere
45 days, principally because of Japanese regulatory approval that’s required, plus customer communication, 45 days after approval.
Betsy Graseck
Okay. That’s a Japanese rule.
Andy Cecere
Driven by Japanese regulatory.
Betsy Graseck
Okay. Got it. And is there anything that you can do to ensure the acquisition closes this year, or is there a possibility that it could slip into next?
Andy Cecere
We are doing everything we can. Again, we have been in close contact with both of our principal regulators and fulfilling their information requests, which we are complete with. So, we are optimistic that it will happen in the second half.
Betsy Graseck
Okay, great. Alright. Well, thank you very much for joining me this morning.
Andy Cecere
Thank you, Betsy.
Terry Dolan
Thanks, Betsy. Appreciate it.
Source: news.google.com
