UMB Financial Corporation (NASDAQ:UMBF) has announced a strategic acquisition of Heartland Financial USA (NASDAQ:HTLF), aiming to significantly expand its market presence and asset base. In a recent earnings call, UMB revealed strong first-quarter 2024 results, with GAAP earnings of $110.3 million and operating earnings per share (EPS) of $2.47. The acquisition, set to close in Q1 2025 pending approvals, is expected to bolster UMB's assets to nearly $65 billion and enhance its retail and private wealth sectors.
Key Takeaways
- UMB Financial is acquiring Heartland Financial USA, a move to diversify and grow its business.
- The acquisition will elevate UMB's assets to nearly $65 billion and strengthen its market share in 13 states.
- UMB reported Q1 2024 GAAP earnings of $110.3 million and an operating EPS of $2.47.
- The company has an excess deposit capacity of $10 billion, which will fund growth initiatives.
- UMB's balance sheet post-acquisition is expected to be modestly asset-sensitive with a CET1 ratio projected at 11% within 18 months.
- System conversion following the merger is planned for October 2025.
Company Outlook
- The merger with Heartland is part of UMB's strategy to diversify and derisk its portfolio.
- Post-merger, UMB will have a significant scale and presence across multiple markets.
- The combined entity will have a strong asset quality focus with potential for revenue synergies and cross-selling opportunities.
Bearish Highlights
- Specific guidance on CET1 ratio was not provided, only an expectation of reaching 11% in 18 months.
Bullish Highlights
- UMB's excess deposit capacity stands at $10 billion, well above peer medians.
- The company expects to benefit from Heartland's well-diversified portfolios and low-cost funding.
- Revenue growth is anticipated from the transaction, with additional upside from revenue synergies.
Misses
- The securities restructuring of $2.5 billion is not factored into the current earnings per share outlook.
Q&A Highlights
- CEO Ram Shankar discussed the balance sheet's modestly asset-sensitive nature post-acquisition.
- Shankar also confirmed that the forward settlement of shares is priced at $75 and will occur at the transaction's close.
- Management addressed questions regarding expenses, revenue synergies, securities restructuring, and system conversion timing.
UMB Financial Corporation's strategic decision to acquire Heartland Financial USA represents a significant step in the company's growth trajectory. With a strong first-quarter performance and a clear vision for the future, UMB is poised to extend its influence and capabilities in the financial sector. The merger is anticipated to close in the first quarter of 2025, subject to regulatory and shareholder approvals, with system integration to follow later that year.
InvestingPro Insights
UMB Financial Corporation's (UMBF) latest strategic move to acquire Heartland Financial USA is underpinned by strong financial metrics and positive analyst revisions. InvestingPro data highlights the company's robust market position with a market capitalization of approximately $4.11 billion. The company's P/E ratio stands at a favorable 10.69, indicating a potentially undervalued stock relative to earnings, while the adjusted P/E ratio for the last twelve months as of Q1 2024 is slightly higher at 11.18.
InvestingPro Tips for UMBF include a noteworthy track record of raising its dividend for 31 consecutive years, showcasing a strong commitment to shareholder returns. Additionally, four analysts have revised their earnings upwards for the upcoming period, reflecting optimism about the company's future performance. Moreover, UMBF has maintained dividend payments for an impressive 54 consecutive years, further solidifying its reputation as a reliable dividend-paying stock. These factors, combined with the prediction by analysts that the company will remain profitable this year, underscore the financial stability and growth prospects of UMBF.
For readers interested in a deeper dive into UMBF's financial health and future outlook, more InvestingPro Tips are available at https://www.investing.com/pro/UMBF. To enhance your experience, use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With InvestingPro, discover a wealth of information, including additional tips that provide a comprehensive analysis of UMBF's potential in the market.
Full transcript - UMB Financial Corp (UMBF) Q1 2024:
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the UMB Financial Conference Call. All lines have been placed on mute during the presentation portion of the call with an opportunity for question-and-answer at the end. [Operator Instructions] I would now like to hand this conference call over to our host, Kay Gregory, Investor Relations. Please go ahead.
Kay Gregory: Good morning and thank you for joining us on our call with such short notice. Earlier this morning, we announced our agreement to acquire Heartland Financial, USA or HTLF, a $19.4 billion asset bank headquartered in Denver. Both companies also released first quarter 2024 results and these materials can be found on our respective Investor Relations website. You will note that we have posted two presentations to our website, our typical quarterly review and an overview of the announced transaction. We will provide some brief comments about UMB’s first quarter results and we’ll spend most of the call discussing the announcement. On the call today is Mariner Kemper (NYSE:KMPR), Chairman and CEO of UMB Financial; and Ram Shankar, CFO. Following our comments, we’ll open the call for questions. Jim Rine, CEO of UMB Bank; and Tom Terry, Chief Credit Officer, will be available for the question-and-answer session. Before we begin, let me remind you that today’s presentation contains forward-looking statements, including the discussion of future financial and operating results, benefits, synergies, gains and costs that the company expects to realize from this transaction, as well as other opportunities management foresees. Forward-looking statements are subject to assumptions, risks and uncertainties. These risks are included in our SEC filings and are summarized on Slide 2 of our presentation. Actual results may differ from those set forth in forward-looking statements, which speak only as of today. We undertake no obligation to update them except to the extent required by securities laws. Reconciliations of non-GAAP financial measures have been included in the press release and the accompanying presentation. Pro forma financial information presented is based on March 31, 2024 results for both companies. Presentation materials are available online at investorrelations.umb.com. Now, I’ll turn the call over to Mariner Kemper.
Mariner Kemper: Thank you, Kay, and good morning, everyone. On the heels of a great quarter, I’m very excited to share details about this transaction, which accelerates UMB’s growth strategy, further diversifying and derisking our business model. The addition of this high-quality franchise is a great fit from a strategic, financial and cultural perspective. I’ll ask Ram to share some quick thoughts about the quarter and then we’ll get right into the details of the transaction. Ram?
Ram Shankar: Thanks, Mariner. We had a great start of 2024, reporting GAAP earnings of $110.3 million or $2.25 per share. Operating EPS of $2.47 per share represented an increase of 7.7% compared to the fourth quarter of 2023. We reported balance sheet growth that included a 4.2% annualized increase in average loan balances led by construction draws of previously improved lines, along with C&I. Credit quality in our loan portfolio remains excellent, with non-performing loans of 8 basis points of total loans, net charge-offs earned 5 basis points of average loans for the quarter and charge-offs have averaged just 4 basis points over the past seven quarters. Provision of $10 million included about $7 million related to the previously disclosed co-branded credit card portfolio acquisition. The 10.4% increase in average deposits was driven largely by our institutional businesses, specifically Investor Solutions, with increased sweep activity and corporate trust where balances fluctuate related to customer bond distributions and dividends. DDA balances were 30% of average deposits for the first quarter. Looking ahead, second quarter DDAs are typically lower as clients make tax payments and cover seasonally high payroll expense related to the recent FICA and payroll tax. The 3.9% increase in net interest income reflected continued loan growth and higher levels of liquidity, in addition to $1.4 million from amortization of a municipal bond hedge gain. Net interest margin increased 2 basis points to 2.48% in the quarter, outpacing the expectations I shared in January. Positives include loan repricing and mix, as well as the impact of the bond hedge gain. Looking into the second quarter, we expect some modest pressure on net interest margin to net interest income, driven by an expected pipeline of higher cost institutional client deposits, lower liquidity levels, coupled with the seasonal contraction in DDA balances typically associated with tax payments. Slide 18 of our first quarter deck covers the highlights and drivers for the first quarter. Fee income increased $19 million from the fourth quarter to $159 million and benefited from an 18% increase in bank card fees, driven both by strong purchase volumes and lower rewards, as well as a $3 million increase in trust and securities processing income from our private wealth and institutional banking businesses that include corporate trust, custody and fund services. Card purchase volumes increased 12% from a year ago to a record $4.6 billion, driving the interchange income I noted earlier. First quarter fees also included about $15 million of benefits that do not occur in the typical course of business as shown in our deck. Operating expenses, excluding the $53 million and the $13 million FDIC assessment incurred in the fourth and first quarters, increased 2.3% sequentially and reflected typical seasonal increase in payroll taxes, health insurance and 401(k) expense. Additional metrics about our first quarter results are included in our earnings release and slide deck, and we’ll be happy to answer any follow-up questions during the Q&A portion of the call. I’ll hand it back to Mariner to discuss this morning’s exciting announcement.
Mariner Kemper: Thanks, Ram. Our great first quarter results set up well for this transaction and I’m looking forward to continuing the momentum throughout the rest of 2024 and beyond, bolstered by the acquisition we’re here to discuss today. UMB is an asset-generating machine, consistently outpacing peer loan growth. We have a strong history of asset quality and a strong history of growing our fee business to support our total revenue. Events of the past year have served to remind us the importance of diverse granular deposits. While we have a well-developed diverse business model, one area where we have under-penetrated is our consumer banking franchise. We have continued to look for the right transaction that will meet that need. We screen for banks with a strong under-levered deposit base and a core retail component and quality credit metrics, all in the right markets. Our search for the right fit has been elusive, but we found the right unicorn in Heartland, a bank that understands the key part of a value of a franchise is in its deposits. As we did our diligence, we came to realize that their strong deposit franchise was undervalued by the market at large. We saw this as an opportunity, as we believe that banks with low-cost granular deposit bases will garner a greater premium moving forward. The combination of UMB and Heartland creates a nearly $65 billion asset bank, will accelerate UMB’s organic growth strategy and create significant value. And importantly, it is a great cultural fit. Our banking cultures are similar in tone, with similar approaches to business and focus on our associates and communities. The thesis for this transaction is laid out on Slide 3. UMB will have significant scale in several markets, expanding density in some of our existing regions, including Denver, Kansas City, and Phoenix, as well as gaining entry into attractive new geographies, including Iowa, West Texas, New Mexico, Wisconsin, Illinois, Minnesota and California. We will combine two franchises with similar values of conservative credit culture, complementary businesses. UMB’s strong commercial banking capabilities will expand into new markets and Heartland’s successful consumer and business efforts will bring further density and diversity to our business model. In fact, we will nearly double our retail presence. Bruce and his leadership team have done a great job in recent years and done the heavy lifting, laying out the groundwork. This includes successfully handling the consolidation of their multiple charters, and the strategy and vision they laid out in their 3.0 initiative. Through the combination with us, we believe we can put our engine in their chassis to accelerate this transformation, extract value and growth, and bring those benefits to Heartland’s customers sooner and more efficiently. While the combination results in day one TBV solution, driven entirely by interest trademarks, it positions us well and enhances ROTCE by approximately 800 basis points with an implied earn-back of just 3.1 years. We’ll gain meaningful scale in both retail banking with the addition of $6 billion in consumer deposits with the raw material to sustain our growth. And in private wealth, Heartland adds an additional $4.9 billion in asset under management and administration and increases our totals by approximately 31%. The pro forma loan-to-deposit ratio of 67% preserves our conservative profile while positioning us for future growth. Finally, the pricing and financial metrics are compelling with EPS accretion of 31%, including rate marks and will strengthen our return and performance metrics. As is typical with such analysis, the accretion math is based on consensus estimates. As demonstrated by both of our first quarter results, we hope to generate more shareholder value by continuing to execute. The pricing multiples are attractive at 9.7 times 2025 consensus EPS estimates, 6.7 times with fully phased-in synergies, representing a price to tangible book value of 1.53 times. This is an all-stock transaction. Details are on Slide 5. The exchange ratio is fixed with 0.55 UMBF shares for every HTLF share. This equates to the transaction value of approximately $2 billion. And currently, we announced this morning the pricing of a very successful unwritten public offering of $210 million or 2.8 million common shares. We also have a forward agreement on this offering, which has an up to 18-month term. The offering includes participation from high-quality institutional investors, including some of our top shareholders. We expect the transaction with Heartland to close in the first quarter of 2025, subject to regulatory and shareholder approvals. We have been keeping our prudential regulators and other agencies engaged throughout our due diligence process, and because of the feedback we have received, we are excited to move forward. On Slide 6, we’re projecting top quartile profitability and capital generation, with key expectations shown on the right-hand side. We anticipate strong core earnings power with approximately $700 million in net income and fully phased-in cost days, based on 2025 estimates. Additionally, with a loan deposit ratio of 67%, we have about $10 billion of excess deposit capacity versus peer medians to fund our growth. Slide 8 is a snapshot of Heartland’s and bank divisions, located in attractive and fast-growing markets. We see the benefit of our combined scale in the chart on Slide 9. We will have a 13-state footprint, with a top 10 market share in five of those states. On Slide 10 and 11, we’ve included a look at Heartland’s granular deposit based and commercially-focused loan portfolio, followed by details on commercial real estate. The investor real estate CRE is well-diversified by property type and geography. The average loan size is just under $2 million and has no non-accruals at the end of the first quarter. Details on the office portfolio is on the right-hand side of Slide 12. Again, well-diversified, with an average loan-to-value of 57% in line with ours. Moving to Slide 14, we have a long-term look at asset quality. If you follow us, you know asset quality is a topic I like to talk about. UMB has a track record and metrics I’m extremely proud of, and Heartland has a similar approach to managing credit. On Slide 15, we’ve shown the two companies side-by-side, highlighting our capabilities on each. The combination of UMB’s products and services and Heartland’s deposits, lending verticals and customer base, provides meaningful cross-sell opportunities. Heartland’s strong retail and small business capabilities will have revenue synergies to UMB’s platform, and our commercial capabilities and access to key municipalities, newly acquired geographies, could open doors for corporate trusts and other institutionalists. We will work hard for you to unlock value in this combined franchise. For example, in their 3.0 strategy, HTLF has laid out their vision to increase their fee income to 25%. With our more sophisticated treasury management product and commercial card strength, we can penetrate deeper into their existing client base and new prospects in their markets. This will accelerate fee income to mimic our profile and drive higher quality earnings. Similarly, since the American economy is driven more than 75% by small business, we are looking forward to leveraging their small business capabilities to our existing market. Finally, we’ve provided a look at the diligence process that got us to this point on Slide 16. As you can see, well over 200 of our associates, along with multiple outside experts, have given hundreds of hours reviewing data on multiple lines of business, processes, operational support function and the risks involved in all areas. Every line of business reviewed their own area, met with counterparties at Heartland and documented their findings for a comprehensive review. At the end of the day, our work gives us confidence in the metrics and assumptions surrounding the transaction. Now I’ll turn it back over to Ram to cover additional details on the transaction. Ram?
Ram Shankar: Thanks, Mariner, and good morning, everyone. The transaction assumptions are on Slide 17. The earnings projections we’ve included are based on consensus estimates for 2025, growing at a 5% rate thereafter. We see upside to both sets of projections, but wanted to be conservative for our presentation. We put together a thorough bottoms-up analysis and expect cost saves of 27.5% of Heartland’s non-interest expense, 40% of which is to be recognized in 2025, assuming a first quarter close. And as Mariner noted, we’ve identified numerous revenue synergies that we’re excited about, but are not included in our metrics, providing additional potential for upside. One-time charges were similarly put together with a bottoms-up analysis, with inputs from all business lines across the bank and are $215 million in total. Purchase accounting marks are important to get right, and we use a prominent third-party firm to assist in our calculations. Our transaction model assumes a conservative credit mark of 1.3% on Heartland’s loans and a core deposit intangible of 3.4% of deposits, amortized over 10 years, using the sum-of-the-years digit method. The credit mark, based on internal reviews and independent third-party analysis, is roughly 28% higher than Heartland’s current ACL of $124 million. The interest rate marks assumed on the loan portfolio are expected to accrete over five years in total on a straight-line basis and are estimated to be approximately $550 million at close. For the securities portfolio, we expect to sell approximately $2.5 billion of Heartland’s bonds that don’t match our investment profile simultaneously with the closing of the transaction and reinvest those proceeds into agency mortgage-backed securities and/r U.S. Treasuries. Inclusive of the rate marks on loans, retained securities, and other debt instruments, we expect approximately $660 million of after-tax income to flow through earnings over time. Interest rate marks clearly have a large role on the merger map and financial metrics at close. The core impact of the acquisition is very attractive. If you strip out the rate marks and CDI, the deal is roughly 15% EPS accreted. Tangible book value dilution, in this case, would be approximately 6%, and earn-back would go to under two years. Turning to Slide 18, the combined franchise will generate meaningful capital. At close, including the equity offering, we expect CET1 to be 10.1%. Combined earnings plus cost savings is nearly $700 million per year and net of presumed dividends that equates to 115 basis points per year of CET1 before accounting for any balance sheet growth. Additionally, the previously mentioned $660 million in rate marks over the next few years will add another 135 basis points of CET1. Based on these factors, we expect to return to our first quarter 2024 CET1 ratio of 11.1% in less than 18 months after close. Now, I’ll turn it over to the operator for the Q&A session.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Timur Braziler of Wells Fargo. Your line is now open. Please go ahead.
Timur Braziler: Have a good morning.
Mariner Kemper: Good morning, Timur.
Timur Braziler: Can you maybe go through some details on how the deal came about? Was this a negotiated transaction between the two parties or was this something that was more of an auction process?
Mariner Kemper: Yeah. Timur, it’s Mariner. I’ve known the company for some time and built a long-term relationship with their CEO, Bruce. You’ll be able to read the details and further detail in the proxy when it comes out.
Timur Braziler: Okay. And then, Mariner, UMB has had quite good success, particularly on a relative basis, maybe to a more challenged group of being able to maintain a high growth rate. I know this deal is accretive from an earnings standpoint, but just looking at a growth rate standpoint, is this dilutive to kind of standalone UMB-type growth or do you think that once everything is layered in, that growth rate as a combined company is going to be unchanged or even faster?
Mariner Kemper: Yeah. I mean, our expectation is you know, the modeling that you have and is used in these decks is that consensus. We certainly expect and hope that we can accelerate growth through layering our engine on top of their chassis and all the revenue synergies. So, that is our desired expectation.
Timur Braziler: Okay. What about from a balance sheet standpoint? Does this dilute the opportunities for balance sheet growth, maybe on a percentage standpoint as a combined company or is the expectation that balance sheet growth is going to accelerate as well?
Mariner Kemper: Well, I think, we’re really thinking about this from the standpoint of raw material providing funding for growth. From that perspective, that’s kind of how we’re thinking about it. And also, layering 100 -- another 100-plus distribution points to continue to build our strong profile as a deposit generator ourselves. So, on a combined basis, we expect that we can leverage the combined entity to continue the already great profile we have as being a strong funding provider to back up our excellent asset-generating machine that we already are.
Timur Braziler: Okay. And then just last one for me, maybe can you provide a composition of the cost savings, kind of where those are coming from and with the greater kind of focus on the retail component of that franchise, I’m assuming maybe it doesn’t come quite as much from the branch network. Any kind of detail you can provide on where those cost savings are going to materialize would be great? Thanks.
Ram Shankar: Yeah. Timur, this is Ram, and it’s the usual stuff. Unlike other deals, there’s not a lot of branch overlap in the combined franchises, even in the three common markets of Kansas City, Denver and Phoenix. So, not a lot of those opportunities, maybe a handful of branches, but otherwise, it’s the standard people, process, technology, contracts that are part of our bottoms-up analysis when we came up with the cost saves.
Timur Braziler: Great. Thanks for the question.
Operator: Thank you. Your next question comes from the line of Chris McGratty of KBW. Your line is now open. Please go ahead.
Chris McGratty: Oh! Great. Thanks for the question. Ram, Mariner, the balance sheet’s got plenty of capacity post-closing. I think you talked about a 67 LD ratio. I’m interested in maybe how does this deal affect your thoughts on that over time, and also, how will the rate profile change if it does with the deal?
Mariner Kemper: I’ll take the first part and let Ram follow up on the rate mark. On the change in the profile, nothing really changes in the way we operate. That’s one of the beauties of doing this deal, is we think it allows us to continue to be the company that we are. So we are -- we -- as I’ve said many times, and you’ve seen in our numbers for years, we’ve been able to generate 2 times our peer group in assets, quarter in, quarter out, for pretty much the 20 years I’ve been CEO and this allows us -- this is raw material, this allows us to lever what they’ve got at some level, but also it’s given us distribution and outlets to continue to do what we do, generating our raw material to just keep the engine moving. With the rate mark, I think, Ram…
Ram Shankar: Yeah. The combined balance sheet, Jim, or Chris, we expect it to be modestly asset sensitive. They have a very similar profile on the loan side. About 63% of their loans are variable in nature compared to our 65%. And then the added, as Mariner talked about in his script, the added benefit is they have a very attractive, low cost, low beta funding base that’s retail, that’s basically doubling our retail presence. So, we’re modestly asset sensitive on a combined balance sheet basis.
Chris McGratty: Okay. Great. And then just a couple, I guess, housekeeping ones, Ram. The forward settlement, just -- can you just help us on, will those shares come in immediately at close? And then also, if I’m reading Slide 17, is the CECL Day 2 roughly $80 million? If I’m looking at that.
Ram Shankar: On the second question, yes, 50% of the $160 million. So, yes, the non-BCD mix is about $50 million. And then, I’m sorry, remind me of your first question.
Chris McGratty: The forward settlement logistics.
Ram Shankar: Oh! The forward settlement. Thank you. Yeah. The -- yeah. So, the price is fixed out of yesterday at $75. We raised 2.8 million shares at $210 million. So, we have the option with the forward provider to pick that up anytime between now and 18 months. So, it’s an 18-month contract. But as you rightly surmised, we would probably do it closer to the actual closing of the transaction. There is no impact or change in price. It’s just a cash settlement based on when we decide to pull that optionality.
Chris McGratty: Okay. But so, the thing of the shares coming in at close, that’s the easiest way to do it. Okay.
Ram Shankar: I would…
Chris McGratty: Thank you.
Ram Shankar: Yeah. I would model it that way. It’s just our way of deferring dilution and taking capital just in time. It avoids the draft before the close.
Chris McGratty: Yeah. Got it.
Ram Shankar: Yeah.
Chris McGratty: Thank you.
Operator: Thank you. The next question comes from the line of Jared Shaw of Barclays. Your line is now open. Please go ahead.
Jared Shaw: Hey. Good morning.
Mariner Kemper: Hey. Good morning, Jared.
Ram Shankar: Good morning.
Jared Shaw: Maybe -- hey, looking at the, going back to the expenses, do you feel that, now that you’re going to be approaching, you’re going to be bigger at $67 billion, are there other investments that you’ll need to make to offset some of those expenses just to handle the larger balance sheet?
Mariner Kemper: Hey. Jared, it’s Mariner. Basically, for all on the line, that basically translates into what the regulators call heightened standards. So that’s the $50 billion threshold. What I would tell you is that we were well on our way. We’re sitting at $45 billion. And so we had hired a year ago, PwC, for a GAAP analysis that came back clean. We know what we need to do. We’re well prepared, all pretty well along the way to do that anyway, even before and independent of doing this transaction. So very comfortable with where we stand from that standpoint. There will be some investment we need to make along the way, but it’s identified and easy to do. Regulators have been supportive of the process that we’ve been going through and we’re very comfortable and excited about crossing that $50 billion threshold.
Ram Shankar: And as we did the bottoms-up analysis, Jared, that was part of our consideration as included in our analysis as well.
Mariner Kemper: Yeah. We end up taking, Heartland has a lot of great people, actually, to lean on as we cross that threshold.
Jared Shaw: Okay. Okay. Great. So that growth rate is or that investment is sort of reflected in the growth rate and keeping that growth rate probably pro forma?
Mariner Kemper: Yeah. For sure.
Ram Shankar: Yeah.
Jared Shaw: Okay. And then on capital, you mentioned, getting back to CET1 at 11% in 18 months. Is that how we should think about sort of your target of where you would like CET1 to be or has that been a little bit elevated because you were hoping to be able to deploy in a deal like this? I’m just thinking, you know, trying to match the forward settlement contract with the buyback and post-close?
Mariner Kemper: Yeah. So, we don’t do guidance on that. I would say that that’s where we are now, right? And so, and where we expect to be at close, then therefore that’s, we’re comfortable there, right? And I think just generally speaking, a bit of a higher level capital is expected in the operating environment that we’re all in now. So, no specific guidance on that. And if we were a little below that or a little above that nuance from one quarter to the next or something, it doesn’t drive anything one way or the other. But, yeah, definitely, we’re certainly comfortable in that range and I think it’s prudent to carry a little bit higher level capital in the industry these days.
Jared Shaw: Yeah. Okay. And then there’s finally for me, maybe a more of a boring earnings question versus an exciting deal question. But when we look at the DDA trends, strong two quarters there, you talked about seasonality. It’s been a little while since we’ve seen, I think, a normal second quarter seasonality. What’s the potential impact on that? And then, apart from the seasonality, do we think that DDAs have found their floor and now we’re in a normal growth environment?
Ram Shankar: Our guidance for margin for the next quarter was a handful of basis points, downward pressure, just from a makeshift. So we’ve talked for a long about a healthy institutional deposit pipeline. So we’re expecting those to come sometime in the second quarter, coupled with what might happen with seasonality on the DDA side. So that’s baked into our margin guidance that we said for about a few basis points. Whether it’s bottomed out DDA, I mean, we’re at 30%. The rest of the deposits, the interest bearing deposit base, as you saw this quarter, is growing pretty rapidly. So just as a result of that math, we might see DDA as a percentage come down. But the hope is, our DDAs are in somewhere between $9.5 million and $10 billion.
Mariner Kemper: Yeah. We don’t expect too much more rotation if you take the seasonality out. So we’re likely at the bottom on rotation based on the interest rate environment. And I think, Ram was just saying, with the growth and everything else on a percentage basis, it may come down slightly.
Ram Shankar: Yeah.
Jared Shaw: Thanks.
Mariner Kemper: Thank you.
Operator: The next question comes from the line of Terry McEvoy of Stephens, Inc. Your line is now open. Please go ahead.
Terry McEvoy: Hi. Thanks for taking my questions. I was wondering if you could just talk about the diligence on HTLF’s franchise people infrastructure. They’ve gone through a lot over the last couple of years in terms of kind of an upset shareholder base, collapsing the charters, et cetera. So what type of disruption do you expect? How do you minimize that disruption, particularly on the consumer banking side, which you’ve talked about the value there a few times on the call?
Mariner Kemper: Yeah. Thanks for that question. Yeah. Obviously, you’re referring to some public disclosures around some issues the Board had a couple of years ago. It’s well behind them. As I said, we’ve gotten to know this company over time and very comfortable that they’ve settled those issues and they’re behind them. As far as the due diligence process and the charter collapse, exciting. We see all that really what they’ve been going through the last couple of years as great opportunity. They’ve been, as I would describe, plowing the field and planting the seeds and we basically get to harvest. So they have done a lot of heavy lifting and that’s great for us, collapsing the charter, centralizing activities. So they’ve done a lot of really great work to really kind of mimic the kind of company we are and allow us really to harvest all that awesome work.
Terry McEvoy: Thanks for that. And then just as a follow up, what are your thoughts on maintaining and growing that Food and Ag business lending portfolio, which is, I think about a $1 billion today. Is that a business you’d like to continue to grow?
Mariner Kemper: Yeah. We absolutely love that. It’s one of the things we really like about the transaction. We’re actually the 24th largest agricultural lender in the country ourselves. They picked up Robbo’s team and Robbo has a really great reputation in the business. So they have a great team of people in California and the average size is pretty small and the diligence is great on that book. And we’re really excited to leverage their team and our team combined and just keep rocking and rolling with our ag business unit.
Terry McEvoy: That’s great. Thanks again for taking my questions.
Mariner Kemper: Thanks, Terry.
Operator: [Operator Instructions] The next question comes from the line of David Long of Raymond James. Your line is now open. Please go ahead.
David Long: Good morning, everyone, and congrats on getting the deal announced this morning.
Mariner Kemper: Good morning.
David Long: First question I wanted to ask is about the revenue synergy, or I’m sorry, the expense synergies. With the numbers that you put out there, are you assuming any revenue synergies at this point?
Ram Shankar: No. We’re not in the model that we presented, but that’s the opportunity. And as Mariners said, the harvest that we can do on the great work done already by the HTDLF team. So that’s not included. We haven’t quantified it or disclosed it, but certainly there’s a lot of opportunities that we see as part of our diligence process.
David Long: Yeah. Of course. Okay. Great. And then the securities restructuring, the $2.5 billion, was the accretion from that, I assume, is included in your earnings per share outlook as well?
Ram Shankar: No. Not on the disclosed securities. Those are assumed to be gone on day one, so any accretion related to that is just part of the marks and it’s not part of the EPS accretion that we presented. The 800 basis points are the 31%.
Mariner Kemper: And ultimately that …
David Long: Got it. Thanks for that clarity.
Mariner Kemper: I was just going to say, and ultimately that move is derisking -- an additional derisker for the transaction. We as an organization don’t take credit risk in our investment portfolio and so in their investment portfolio, they were taking some credit risks. We’re just removing that in the combined entity.
David Long: Got it. Got it. Thank you. And then, as you’ve mentioned, Bruce and his team did a lot of the heavy lifting with charter consolidation. With HTLF 3.0, they had some more expense rationalization initiatives out there. So when you look at the number, the 27.5% cost takeout from the current levels, it seems like they were progressing to do some of that on their own. You mentioned a lot of the heavy lifting has been done. It’s just -- if I said to you that 27.5% seems conservative, how would you respond to that?
Mariner Kemper: Well, you hit the right words. What you see in our presentations is conservative, and no, what they contemplate is not included in our numbers. So whatever they do before close and whatever we do together after close from that rationalization perspective is not assumed in our assumptions.
David Long: Okay. And then, just the last thing, deal closing in the first quarter of 2025, that’s the expectation. What about the systems conversion? Any thoughts on timing of that?
Mariner Kemper: Yeah. We’re currently planning, and obviously, this is all very fluid. We don’t have a lot of control over what happens the regulatory process. But if it closes when we expect it to, our current plan is to close, to convert in October, early October, on a three-day weekend, ultimately, of next year, of 2025.
David Long: Right. Right. All right. Great. Thanks, guys. Appreciate it.
Ram Shankar: Thanks, David.
Operator: Thank you. As there are no additional questions, waiting at this time, I’d like to hand the conference back over to the UMB management team for closing remarks.
Mariner Kemper: Okay. Thank you all for your questions. As you can tell, we’re super excited about this opportunity. We’ve gotten to know Heartland and their amazing team for a handful of years now and we’re coming together. We’re super excited to bring these two great companies together and unlock serious value for all of you, our shareholders and we’re highly confident in our ability to really unlock and deliver that value. So, appreciate everybody’s interest in getting on and we’ll be talking again soon.
Kay Gregory: Thanks, Mariner. And as always, you can follow up. Any questions, Investor Relations at 816-860-7106. Thanks for your time today.
Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your line.
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