As the largest bank deal announced since 2021, UMB Financial Corp.'s acquisition of Heartland Financial USA Inc. stands as a test to regulators' appetite for big deals.
Equity analysts responded positively to the announcement in research notes and interviews with S&P Global Market Intelligence, citing upsides to the deal such as potential revenue synergies, earnings accretion and the acceleration of Heartland's strategic transformation. Given the size of the transaction, with a deal value of $1.99 billion, it will also be a reference point for regulatory willingness to approve medium- and large-sized deals, Wells Fargo analyst Timur Braziler said in an interview.
Luckily, the regulatory approval process could be made smoother thanks to UMB Financial's equity raise of over $200 million in conjunction with the deal, which could serve as a model for other banks to manage purchase accounting marks.
"It's going to be something that's replicated by other banks," Braziler said. "That could certainly be a catalyst to see accelerated M&A transactions."
The path to approval
Stephens analyst Terry McEvoy agreed that UMB Financial's equity raise could aid in gaining regulatory approval for the deal.
Several recent bank deals have announced capital raises in conjunction with a transaction, such as Banc of California Inc.'s reverse merger with PacWest and FirstSun Capital Bancorp's acquisition of HomeStreet Inc., as a way to manage purchase accounting marks.
Regulators recently showed their favor for capital raises with deals when the Federal Deposit Insurance Corp. approved Provident Financial Services Inc.'s long-pending acquisition of Lakeland Bancorp Inc. with the condition that Provident raise $200 million prior to closing. Provident said it would issue subordinated debt to satisfy the conditions.
It is also possible that conversations with regulators prior to the announcement gave both companies confidence of a timely approval process, McEvoy said. UMB Financial expects the deal to close in the first quarter of 2025, a timeline that is plausible given typical closing timelines for other deals, Braziler of Wells Fargo said.
The median time for the completion of US bank deals is about 175 days after announcement, or just under six months, during the 12 months ending March 19, according to Market Intelligence data.
Even so, UMB Financial has never done a transaction this large, which could create regulatory risks, Janney Montgomery Scott analyst John Rodis said in an interview. Deal completion timelines, particularly with bigger deals, are "basically a guess," he said.
"It's the biggest deal that's been announced in a while, so we'll see how it plays out," the analyst said.
Additionally, UMB Financial's stock price growth could be limited until there is more clarity around the closing timeline, but the stock has held up in the days since the announcement, Rodis said.
After the company announced the deal on April 29, the stock fell 6.5% to $77.75 from the previous close on April 26, but subsequently rebounded to $79.81 by market close on May 1. Meanwhile, Heartland's stock rose 15.2% to $41.13 by market close on April 29. Given the $75 per share price of the equity raise, Rodis said he views UMB Financial's stock price closing above that as a positive.
Heartland's heavy lifting
Heartland's strategic transformation plan, HTLF 3.0, made the deal more attractive for UMB Financial, analysts said. Heartland completed the consolidation of 11 charters in October 2023 and announced the sale of its Montana branches in February as part of the strategic plan. In a note on the deal, D.A. Davidson analyst Jeff Rulis wrote that Heartland's "heavy lifting" attracted the acquirer.
Similarly, Stephens analyst McEvoy said the reorganization and streamlining efforts highlighted the company's growth potential for UMB Financial and should make integration more manageable. Furthermore, UMB Financial can accelerate Heartland's transformation, he added.
"Heartland was in the early innings of what I felt would be a successful transformation that would generate more consistent, higher quality earnings and profitability," McEvoy said.
The retirement of Heartland's CEO in February also played a role in the transaction, Wells Fargo analyst Braziler said. The deal allows Heartland to accelerate its strategic transformation without having to look for a new CEO, he added.
As long as the transaction doesn't dilute the growth UMB Financial has generated over the last year, the deal's financials are "fairly attractive," Braziler said.
In a note following the announcement, Barclays upgraded its rating of UMB Financial to "overweight" from "equal weight" given the company's financial performance during the first quarter, potential upsides from the deal to long-term earnings per share and potential revenue synergies as the company expands fee income lines into new markets. UMB Financial will take a hit to its capital due to purchase accounting math, but the deal will be "highly accretive" over the five years after closing, Barclays analyst Jared Shaw wrote in another note.
In other notes, Piper Sandler analysts said the positives of the deal "far outweigh" the negatives, and Raymond James analyst David Long wrote that UMB Financial shares are becoming increasingly attractive.
"We view the transaction as an excellent strategic initiative and see many long-term benefits," Long wrote.
