425: UMB Financial to Acquire Heartland Financial USA in $2 Billion All-Stock Deal

UMB Financial Corporation (UMBF) announced an agreement to acquire Heartland Financial USA (HTLF) for approximately $2 billion in an all-stock transaction, aiming to expand its footprint and diversify its business model.

Summary

• UMB Financial Corporation will acquire Heartland Financial USA in an all-stock transaction valued at approximately $2 billion.
• The merger will create a nearly $65 billion asset bank with a broader geographic footprint across 13 states.
• UMB expects the acquisition to enhance its ROTCE by approximately 800 basis points with an implied earn-back of 3.1 years.
• The transaction is projected to be 31% EPS accretive, including rate marks, and is expected to close in the first quarter of 2025.
• UMB also announced a $210 million public offering of common shares to support the transaction.
• Cost savings are estimated at 27.5% of Heartland's non-interest expense, with 40% of these savings realized in 2025.
• The combined company anticipates approximately $700 million in net income with fully phased-in cost saves based on 2025 estimates.
• The pro forma loan to deposit ratio will be 67%, providing ample capacity for future growth.
• Heartland adds $6 billion in consumer deposits and $4.9 billion in assets under management and administration to UMB's portfolio.
• UMB expects to return to its Q1 2024 CET1 ratio of 11.1% in less than 18 months after closing the transaction.

Sentiment

Score: 8

Explanation: The document conveys a positive outlook on the acquisition, highlighting strategic benefits, financial accretion, and cultural fit. While acknowledging some dilution, management expresses confidence in achieving synergies and delivering value to shareholders.

Positives

• The acquisition expands UMB's geographic footprint into attractive new markets.
• Heartland's strong retail and small business capabilities will diversify UMB's business model.
• The combined company will have a conservative loan to deposit ratio of 67%.
• UMB expects significant cost savings and revenue synergies from the merger.
• The transaction is expected to be accretive to UMB's earnings per share.
• Heartland's deposit base is considered a valuable asset.
• UMB's strong commercial banking capabilities will expand into new markets.
• The acquisition will nearly double UMB's retail presence.
• The deal is expected to enhance ROTCE by approximately 800 basis points.
• UMB has a strong history of asset quality and growing its fee business.

Negatives

• The transaction results in day one tangible book value dilution, driven by interest rate marks.
• The integration of the two companies could present challenges.
• The deal is subject to regulatory and shareholder approvals, which may not be obtained.
• There are one-time charges of $215 million associated with the transaction.
• The deal relies on achieving projected cost savings and revenue synergies, which may not materialize.

Risks

• The risk that regulatory and shareholder approvals are not received or are delayed.
• The risk that the benefits from the transaction may not be fully realized or may take longer to realize than expected.
• Potential adverse reactions of UMB's or Heartland's customers, employees, or other business partners.
• The diversion of management's attention from ongoing business operations.
• The possibility that the transaction may be more expensive to complete than anticipated.
• Interest rate marks have a large role on the merger math and financial metrics and flows.

Future Outlook

UMB anticipates strong core earnings power with approximately $700 million in net income and fully phased-in cost saves based on 2025 estimates. They expect to return to their first quarter 2024 CET1 ratio of 11.1% in less than 18 months after close.

Management Comments

• Mariner Kemper: 'The addition of this high-quality franchise is a great fit from a strategic, financial and cultural perspective.'
• Mariner Kemper: 'We found the right unicorn in Heartland, a bank that understands the key part of a value of a franchise within its deposits.'
• Mariner Kemper: 'We believe we can put our engine in their chassis to accelerate this transformation, extract value and grow, and bring those benefits to Heartland's customers sooner and more efficiently.'
• Ram Shankar: 'We had a great start to 2024, reporting GAAP earnings of $110.3 million or $2.25 per share.'
• Ram Shankar: 'We see upside to both sets of projections, but wanted to be conservative for our presentation.'

Industry Context

The acquisition reflects a trend of consolidation in the banking industry, as institutions seek to gain scale, expand their geographic reach, and diversify their business models. UMB's focus on acquiring a bank with a strong deposit base aligns with the current emphasis on stable funding sources in the wake of recent banking sector challenges.

Comparison to Industry Standards

• The pricing multiples are attractive at 9.7 times 2025 consensus EPS, 6.7 times with fully phased-in synergies representing a price to tangible book value of 1.53 times.
• UMB's loan growth has consistently outpaced peer loan growth.
• The pro forma loan to deposit ratio of 67% is conservative compared to the peer median.
• The cost savings target of 27.5% is in line with typical merger synergies in the banking sector.
• The credit mark of 1.3% on Heartland's loans is roughly 28% higher than Heartland's current ACL of $124 million.

Stakeholder Impact

• Shareholders of both UMB and Heartland will be impacted by the transaction, requiring their approval.
• Employees of both companies may experience changes as a result of the integration.
• Customers of both banks will have access to a broader range of products and services.
• The combined company will have a larger presence in the communities it serves.

Next Steps

• Obtain regulatory and shareholder approvals.
• Close the transaction, expected in the first quarter of 2025.
• Integrate the businesses of UMB and Heartland.
• Realize cost savings and revenue synergies.
• Convert systems, currently planned for early October 2025.
• Settle the forward agreement on the public offering.

Key Dates