U.S. Bancorp has joined several super-regional peers with a large deal that will boost market share.

The company announced an $8 billion deal for MUFG Union Bank NA, and management put scale front-and-center during the deal call. Several regional banks have highlighted the importance of scale to generate efficiencies, especially the ability to invest in technology in an increasingly digitized world.

"The acquisition of Union Bank meaningfully increases our scale at a time when scale is as important as it's ever been for the industry," said Chairman, President and CEO Andy Cecere during the deal call.

The deal will boost U.S. Bancorp's presence on the West Coast, and the bank projected cost reductions equal to 40% of Union Bank's expenses. U.S. Bancorp projects 8% EPS accretion and reported tangible book value dilution of roughly 1%.

Cecere said the acquisition represents "a step function in terms of scale and acquiring customers in attractive markets," while adding that the bank is still committed to its de novo branch expansion strategy in Charlotte, N.C., and other growth initiatives. "This is just another mechanism, a little bit faster and bigger, but the same concept," Cecere said.

The move will strengthen U.S. Bancorp's presence in California, where the majority of Union Bank's 297 branches are concentrated. Cecere said the deal met the bank's long-standing acquisition criteria that transactions are "big enough to matter" and either expand geography or increase market share. The deal will push U.S. Bancorp's deposit share in California to No. 5, up from No. 10, according to the bank.

"It adds scale [and] provides significant opportunity to optimize our combined distribution network," Cecere said.

Jefferies analyst Ken Usdin highlighted in a Sept. 21 note that the tie-up will add "meaningful scale" in markets such as San Francisco, Los Angeles and San Diego where U.S. Bancorp was "somewhat undersized."

Analysts were not surprised to see U.S. Bancorp finally strike a deal. "I feel like we've all kind of waited for about a decade for it, so it's nice to see you guys pull the trigger," Piper Sandler analyst Scott Siefers said on the deal call. Usdin called the deal "the one to wait for," observing that U.S. Bancorp had yet to announce a big bank acquisition in recent years as other super-regional peers pursued transformational transactions.

In a note before the deal was announced, Keefe Bruyette & Woods analysts tabbed U.S. Bancorp as the likeliest U.S. bank buyer for Union Bank after a Bloomberg report that Mitsubishi UFJ was considering such a move. The KBW analysts said the acquisition would make financial sense, but "it may not make strategic sense" because of market overlap and "execution risk" given Union Bank's high cost base.

Market reaction to the deal was relatively favorable. While large bank deals have often triggered sell-offs, U.S. Bancorp's stock was up 2.4% at around 12:20 p.m. ET, compared to a 0.5% gain in the KBW Nasdaq Bank Index.

But U.S. Bancorp will face challenges with the deal, including the need to resolve a recent consent order at Union Bank and intensifying regulatory scrutiny of big deals.

Wells Fargo analyst Mike Mayo expressed concern that the deal will not be approved despite U.S. Bancorp's plans to retain all front-line workers and not to exit any markets. Big banks might face a tougher approval process after President Joe Biden's executive order calling for tougher scrutiny of deals.

"We're going to work closely with the regulators to make sure this gets done," Cecere said. U.S. Bancorp expects the deal to close in the first half of 2022.

The company said it is not planning to retain any of Union Bank's systems, including its two data centers. Instead, the bank is planning to "lift and shift" Union Bank's customers onto its own systems, which management said should help address the issues raised by the consent order.

"We want to emphasize that the consent order will not restrict our ability to operate or grow our businesses," CFO Terrance Dolan said on the call.

Anticipated costs of remediation were factored into the modeling process and estimated expense reductions, he said. U.S. Bancorp is targeting about $900 million in pre-tax cost saves, with 25% realized in 2022, 75% realized in 2023, and fully realized in 2024.

A portion of the cost savings will come from branch closures, which present "significant opportunity" given that 80% of Union Bank's branches are within three miles of a U.S. Bancorp branch, Cecere said on the call. U.S. Bancorp will not exit any markets that both banks currently operate in.

U.S. Bancorp management said they see opportunity to bolster its small-business lending with the addition of Union Bank's 190,000 small-business customers, as well as an opening to grow wealth management with an affluent customer base.

Prior to the deal, the bank had said it was evaluating opportunities to build scale, a factor it said was becoming increasingly important from technological and marketing viewpoints. U.S. Bancorp had $558.89 billion of assets at June 30.

Union Bank's $105.5 billion in total assets would bring U.S. Bancorp close to the $700 billion threshold, at which point banks are subject to stricter regulation. U.S. Bancorp has said that it does not view the $700 billion boundary as a "bright line" as it evaluates ways to increase scale.

Cecere said that U.S. Bancorp has been familiar with Union Bank for some time, including through a previous acquisition of a Union Bank debt servicing and securities custody portfolio. Discussions for the current deal started early in the third quarter.

U.S. Bancorp's most recent bank deal was the purchase of about $11 billion in deposits and $1.5 billion of credit card loans from State Farm Mutual Automobile Insurance Co. in 2020. That acquisition came shortly after U.S. Bancorp was released from a deferred prosecution agreement and a related enforcement action over anti-money laundering compliance issues.