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Heartland Financial: An Enterprising Bank Selling At An Excellent Valuation

Edward J. Roche profile picture
Edward J. Roche


  • Heartland Financial is an enterprising bank that has greatly expanded over the last 5 years.
  • The bank saw a decrease in earnings over the first half of 2020 but rebounded in the most recent quarter.
  • The stock is cheap relative to historic values and should represent a solid investment assuming the pandemic comes to an end.

Buying bank stocks during a recession has historically been an excellent investment. Banks are one of the most economically sensitive businesses. They can see sharp reductions in earnings or even losses during a recession. The market knowing this tends to punish banks more than other businesses during economic downturns. This can create opportunity provided the investor has good assurance that the bank will survive the economic downturn.

The Business

Heartland Financial (NASDAQ:HTLF) is a diversified financial services company based in Dubuque, Iowa originating in 1981. Historically, the principal operations of the bank were in the mid-west including Iowa, Wisconsin, and Illinois. The bank has completed a series of acquisitions in recent years that have greatly expanded the business into Arizona, Colorado, Kansas, Missouri, New Mexico, Texas, Montana, California and Minnesota. Assets have grown by over 89% in the last 4 years and now stand at $15.6B. During the period of 2014-2019 earnings per share increased from $2.19 to $4.14 (89%), while book value increased from $22.40 to $43 (92%). As with most banks, earnings decreased in the first two quarters on 2020 as the COVID-19 recession hit. The bank reported EPS of $0.54 vs. 0.91 in Q1 and $0.82 vs.1.26 in Q2 (comparing to same quarter prior year). However, in the most recent quarter, earnings rebounded sharply to $1.23 vs. 0.94 in the same quarter 2019. The most recent report represented a strong 0.32 beat vs. analyst estimates.

In the most recent quarter analyst call, management detailed the current status of loan modifications as a result of the COVID-19 recession:

$1.1 billion, or 14% of total loans saw deferrals or modifications. As of September 30, 2020, approximately $860 million or 77% of the $1.1 billion of COVID Loan modifications have returned to normal payment status. Approximately 58% are interest only modifications, remainder are principal and interest modifications. Loan modifications are predominately 90

This article was written by

Edward J. Roche profile picture
Edward Roche is the President of Freedom Mountain Investments (http://www.freedommount.com/), an investment firm founded in 2006, located in Paoli, Pennsylvania. Freedom Mountain specializes in identifying hidden value in small and mid size companies before they are recognized by the market. The investment approach is based upon fundamental analysis and places a high emphasis on real and rising financials including sales and earnings. One special approach used to identify a catalyst for release of value is the “Venerable Owner” strategy. This strategy tracks all companies where an older owner owns 40% or more of a company. These situations often lead to sale of the company at a significant premium to market value when the owner seeks to retire. Edward Roche received a Ph. D. degree in Polymer Science and Engineering from the University of Massachusetts and earned an MBA in Finance from the Haub School of Business, St. Joseph’s University, Philadelphia PA. He recently completed a career at the McNeil division of Johnson & Johnson that included high level positions in Business Development and R&D. He is the inventor on 15 US patents in the area of drug delivery and has authored ten scientific publications.

Analyst’s Disclosure: I am/we are long HTLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (12)

Edward J. Roche profile picture
I sold all my regional bank stocks last year. JPM is my only significant bank stock holding currently. At some point HTLF may be interesting again..
Edward J. Roche profile picture
up 31% ytd, banks have been the place to be with rising interest rates...
Edward J. Roche profile picture
HTLF up 9.7% so far today. Interest rates ticking up.
be very cautious, Their only asset growth is coming from buying some other bank. Their organic internal growth is poor, Closing or selling offices is never a sign of a successful business
Edward J. Roche profile picture
From the most recent earnings statement:

"We had outstanding organic commercial and commercial real estate loan growth in the fourth quarter of 2019 of $96.8 million and $293.4 million for the year, and we expect this growth to continue in 2020," said Lee.

They are doing some rationalization and have closed some branches. This is not surprising after large acquisitions. They also cite the consumer switch to digital transactions during the pandemic.
They have had organic growth as well sure a portion of it is acquisition related however they have also had consistent growth in earnings per share even as interest rates started to decline. Of course 2020 is a little different for all banks as they dedicated a large amount to reserve build in Q1 and Q2 and lesser builds in Q3.

They have always closed some nearby branches to improve efficiency and get more bang for their buck as well. This results in the loss of a small portion of deposits but growth more than makes up for it.
Edward J. Roche profile picture
Thanks for the good comments.

They report 90%+ retention of deposits where branch offices have been closed.
their growth is only by buying books of business. Their internal organic growth is poor and they have been closing and selling offices, Not a sign of success to me.
I used to own them for several years. I sold them but own two other bank stocks but consider HTLF to be a well run bank with good growth over the years in the 2-3 years I owned them. Bank stocks have been out of favor and generally not participated in this years rally off of the March lows as much. There of course are reasons for the concern though there also are with other companies that rebounded more as well. Generally HTLF and its various banks are a well run and its a good company though.
Edward J. Roche profile picture
Thanks for your comments.

Yes banks have not rebounded as much as many other types of companies. I think some of them are undervalued assuming the pandemic can be put under control.
Edward J. Roche profile picture
I did not mention management in my review.

Lynn B. Fuller, Chairman of the Board, has been with the bank for decades and has been a guiding light for the overall strategy.

Bruce K. Lee, CEO, has been with the company since 2015 and has over 30 years of experience in the banking industry.
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