Heartland Integration Will Yield Cost Savings And Market Expansion

Key Takeaways

• Strategic acquisition boosts deposit base, enhances cost efficiencies, and expands margins through granular core deposits, supporting robust revenue and margin growth.
  
• Diversification in fee income and integration of Heartland's portfolio strengthen asset performance, enabling sustained revenue growth and improved margins through merger synergies.
  
• Integration risks and economic uncertainties could challenge UMB Financial's revenue and margins, potentially resulting in diluted returns and impacted earnings.

Catalysts

Operates as the bank holding company that provides banking services and asset servicing in the United States and internationally.

• The acquisition of Heartland significantly increased UMB Financial's deposit base by $14 billion, with expectations of improving cost efficiencies and expanding net interest margins. This is due to the cheaper and granular core deposits acquired, which are likely to enhance revenue and margins.
  
• There is a strong pipeline for loan growth, particularly from market share gains rather than economic activity. UMB Financial is poised to leverage Heartland's footprint, expecting continued robust loan production and penetration into new markets, which should boost revenue and earnings.
  
• Fee income is experiencing growth across segments due to increased service charges, interchange income, and wealth management services expansion from both acquisition-related and organic avenues. This diversification is likely to sustain revenue growth moving forward.
  
• The ongoing integration of Heartland's credit portfolio with UMB standards aims to maintain high asset quality. This effort should support stable net margins by controlling credit losses and sustaining strong asset performance.
  
• UMB is on track to achieve over 40% of anticipated cost savings by the end of 2025 due to merger-related synergies. These efficiencies are expected to enhance net margins and bolster earnings, particularly as systems conversion completes and operations fully integrate.

UMB Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming UMB Financial's revenue will grow by 25.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.8% today to 36.7% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $12.36) by about May 2028, up from $410.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 18.5x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

UMB Financial Future Earnings Per Share Growth

Risks

• UMB Financial's acquisition of Heartland included $62.1 million in day 1 provisioning and $54.2 million in merger-related charges, which could increase costs and impact earnings negatively.
  
• The unpredictability of tariffs and general economic conditions could pose risks to UMB Financial, especially given its large commercial customer base, potentially impacting revenue and margins.
  
• Despite early synergies from the Heartland acquisition, integration risks remain, including aligning credit standards and achieving planned cost saves, which could impact net margins if not managed effectively.
  
• UMB Financial has a significant amount of cash and securities post-acquisition, which may dilute returns if not reinvested efficiently, potentially impacting net interest margins.
  
• There are uncertainties in interest rate environments and shifts in deposit balances, which could affect net interest income and margins as UMB Financial adapts to these changes.

Valuation

• The analysts have a consensus price target of $120.5 for UMB Financial based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $137.0, and the most bearish reporting a price target of just $109.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.3 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $100.09, the analyst price target of $120.5 is 16.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.