UMB Financial Corp. and Heartland Financial USA Inc. are working to close a $2 billion merger, but the combination didn't come easily, after talks withered and went silent for about 18 months, a new SEC filing shows.
UMB (Nasdaq: UMBF) and Heartland Financial (Nasdaq: HTLF) officially signed an all-stock merger agreement on April 28. It is UMB’s largest acquisition and, at the time, the largest U.S. bank deal announced in two years.
If the merger is approved, HTLF shareholders can exchange their shares at a rate of 0.55 for shares in UMB, an implied premium of 28.1% based on share prices when the deal was announced. HTLF shareholders would end up with about a 31% stake in the combined company and get to appoint five members to an expanded 16-member UMB board.
UMB has about $43.7 billion in assets in 90 branches, with about 3,600 associates; HTLF has about $19.3 billion in assets in 107 branches, with about 1,900 associates. UMB has almost $25 billion in local deposits, far and away the market leader; HTLF has about $753 million in local deposits.
Hot then cold
Merger negotiations started in December 2021 with a phone call from UMB Chairman and CEO Mariner Kemper to HTLF CEO Bruce Lee, according to a new filing with the Securities and Exchange Commission.
Kemper and Lee met in person in January 2022, discussing the benefits of a potential merger. In early March, Lee shared the discussions with the HTLF board, which approved continuing preliminary talks. HTLF and UMB entered a nondisclosure agreement, and discussions continued.
On March 9, a group of HTLF shareholders sent an open letter to the HTLF board expressing “profound disappointment” in the company's direction under Lee. Former HTLF Chairman Lynn "Butch" Fuller led the shareholders, who included former Bank of Blue Valley majority owner Bob Regnier and former Morrill & Janes Bank majority owner Kurt Saylor.
They voiced worries about the company’s financial performance and inability to improve shareholder returns. The letter also expressed concerns about how bankers sold to Heartland because they were attracted to the ability to remain a community bank with local leadership, but Lee was pushing to consolidate charters.
When the letter was issued, Fuller was aware of negotiations with UMB. On March 14, UMB sent HTLF a letter of intent contemplating an all-stock merger. The offer was for HTLF shareholders to get 0.64 shares of UMB common stock for each share of HTLF common stock, representing a premium of 29.6% to HTLF stock's market price at the time. The letter required HTLF to negotiate exclusively with UMB for 60 days. The HTLF board signed off on March 15.
On April 20, the Fuller group sent another letter to the board urging the company to conduct a broad-based process to determine whether other suitors were willing to pay more. The board asked UMB to waive its exclusivity requirement. On April 22, Kemper sent a letter to Lee stating that UMB would waive exclusivity but was not prepared to make a new proposal at that time.
HTLF contacted about five potential suitors for the next few weeks. Four declined to participate, and the fifth initially expressed interest but later bowed out. On May 5, UMB informed HTLF that it no longer was interested and terminated discussions.
In December 2022, the HTLF board reached a cease-fire with the disgruntled shareholders, and Fuller agreed to resign from the board.
Then hot again
A few months later, the failure of Silicon Valley Bank and Signature Bank triggered widespread panic among investors in the entire banking sector, which complicated getting deals done.
UMB faced particular scrutiny at the time, getting lumped into a category of banks with a high level of potential — but unrealized — losses in their securities portfolio and a high level of depositors exceeding Federal Deposit Insurance Corp. coverage. UMB’s stock shed about $850 million in value from February 2023 to March 2023.
At the time, UMB had $28.37 billion in uninsured deposits, or 71.3% of its $32.83 billion in deposits, prompting Raymond James to list it as the fourth worst in the nation. But UMB explained in an SEC filing that about $2 billion of those deposits were bank owned and that an additional $6.1 billion were collateralized deposits, which should be excluded from calculations about risk. Eliminating those two categories put UMB around 51% uninsured deposits, more in line with the national average of 45.9% at the end of 2022.
None of that mattered to the ratings agencies. In August 2023, S&P Global downgraded UMB Financial's credit rating from A-1 to A-2, though it stated an expectation for UMB Bank to remain profitable.
But by the end of 2023, its stock had largely rallied, and by this year UMB once again was ready to consider merger talks. On Feb. 16, Kemper and UMB Financial CFO Ram Shankar attended a financial conference where they expressed the possibility of re-engaging in merger discussions with HTLF. On March 7, Kemper contacted Lee to formally express his desire to once again start merger discussions. Lee and the HTLF board agreed.
On March 20, Lee told Kemper that HTLF wanted an exchange rate of 0.55 shares of UMB common stock for each HTLF share and to appoint five members to UMB's board. On March 22, HTLF and UMB entered a nondisclosure agreement, and UMB signed a letter of intent agreeing to the share exchange rate and the addition of five board members. The talks continued until the parties executed a merger agreement on April 28.
The two banks now are asking shareholders to vote in favor of the deal.
