Federal Reserve grants U.S. Bancorp relief from stricter regulations after acquisition

U.S. Bancorp will not have to endure stricter financial regulations as a result of its acquisition of MUFG Union Bank, a boon after months of preparation for the elevated requirements.

This week, the Federal Reserve notified the nation's fifth-largest bank it can retain its Category III status — banks with under $700 billion in assets — since the Minneapolis-based institution has taken actions to reduce its assets and risk profile while also strengthening its capital position.

As of Sept. 30, U.S. Bancorp had $667 billion in assets on its balance sheet.

As part of the $8 billion acquisition last year of the West Coast's MUFG Union Bank, the bank had agreed the Fed could review whether to move the bank to the higher category, which comes with heightened regulations and scrutiny, by the end of next year.

Executives said Wednesday the biggest benefit of the Fed's decision was to give the bank more time to adapt to higher capital requirements, putting it on the same timeline as other banks of its size when grappling with additional financial regulations phasing in over the next three years. Other Category III banks include fellow large regionals such as PNC and Truist.

"It gives us more flexibility given the uncertainty in the environment, and that flexibility is really important," said Terry Dolan, U.S. Bancorp's chief administration officer. "More importantly, it levels the playing field between us and our peer banks. And I think that that's extremely helpful."

Financial analysts welcomed the news and peppered executives with questions about it on a conference call after the company reported better-than-expected third-quarter results Wednesday morning.

Still, its shares dropped about 4% after executives gave more conservative guidance for the fourth quarter than analysts anticipated.

The bank's net income for the third quarter declined 16% from a year ago to $1.5 billion, partly due to $213 million in merger and integration costs as well as an increase in its provision for credit losses.

When adjusted for some of those one-time charges, the bank posted earnings per share of $1.05, a few cents higher than what analysts expected.

Total revenue in the quarter rose 11% from a year ago to $7 billion, which higher interest rates and higher fee income largely drove.

Average total loans rose 12% in the quarter compared to a year ago but declined 3% from the previous quarter. Average total deposits also increased 12% through the year, in part because of the Union Bank acquisition, and ticked up 3% from the second quarter.

Dolan said deposits industrywide are down about 1% to 2%, so executives were pleased to see a small increase at U.S. Bank. He attributed it to a strategic focus on protecting market share by increasing rates on deposits.

Still, he noted, the expectation going forward is deposits will drop as the Fed may continue to tighten monetary policy.

Whereas earlier this year, U.S. Bancorp was anticipating a moderate recession later in 2023, executives said they have now revised their outlook to a soft landing.

"The Fed has done a pretty good job in terms of managing the trajectory of it," Dolan said. "There's still a lot of uncertainty though."

That uncertainty is why the bank is still being cautious and set aside more reserves for potential credit losses, he added.