- 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.
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 day modifications. The customer segments that had the most sensitivity to pandemic change (lodging, retail, restaurants and bars, and oil and gas) represented just over 14% of total loan exposure. The company reported only two significant charge offs during the quarter (a frac sand business and a California wine business). Management commented:
"Excluding charge-offs from these two large commercial borrowers, charge-offs would have remained close to flat from last quarter. And we are encouraged with the overall improvement in our credit metrics during the pandemic."
The number of non performing loans decreased as did the delinquency ratio. The efficiency ratio decreased to 54.67% from 60.85% in the same quarter 2019. A lower number here is good.
The company reported a return on average common equity of 10.9% vs. 8.91% in the same quarter 2019. This number is at or above numbers for other regional banks I have evaluated. Net interest margin declined slightly from the prior Q to 3.51%. Loan/Deposits were 0.71. That number has remained fairly constant over the last year.
HTLF currently sells at a P/E of 10 times projected 2020 earnings. Current Price to Book Value is 0.88. These numbers compare to an average 13 P/E ratio in the last five years and average P/B ratios of 1.6 over that time period. So if the business can continue to rebound, there is room for significant stock price increases. A business rebound assumes that the pandemic will recede due to the introduction of new vaccines.
As seen in the five year chart, the stock price bottomed in March 2020, but is still well below levels seen prior to the pandemic.
HTLF has a relatively low ratio of debt to equity (0.17) compared to other regional banks. An examination of its loans shows stable/improving trends in terms of loan performance. The company reported positive trends in its business in the most recent quarter. While the most recent surge in COVID-19 infections may create some issues in the current quarter, long-term performance should improve as the pandemic recedes in the face of the new vaccines. The bank's increasing geographic diversification is also a positive in assessing the ability of the business to withstand economic adversity.
HTLF currently has a dividend yield of about 2% which is less than many other regional banks. However, dividends have increased at a rate of over 18%/year during the last 5 years. The company has not engaged in any substantial share repurchases and the number of shares outstanding has increased substantially from 18.5 to 36.7 million over the last 5 years as a result of acquisitions.
HTLF is currently covered by 5 analysts. Three analysts rate HTLF as market perform/equal weight. Piper Sandler and D. A. Davidson rate the stock as a buy. D.A. Davidson upped its rating on December 18, 2020 with a $49 price target (22% over the current stock price). The average price target is $44.5 which represents an 11% increase relative to the current stock price. The average analyst estimate for 2021 earnings is $3.69. I think these estimates are likely to be exceeded if the pandemic sees a substantial reduction in 2021. An end to the pandemic is also likely to increase longer term interest rates which is a positive for banks. I would project total returns for HTLF stock of 15-20%/year over the next two years in the case where the P/E and P/B values return to historic levels.
There have been 18 open market Buys for HTLF stock over the last 12 months and 8 Sells. The most recent purchases occurred in November. These included a 3000 share purchase by CEO Bruce Lee.
The primary risk that I see would be if the vaccines fail to stop the COVID-19 pandemic resulting in economic damage. Another thing to consider is that HTLF continues to engage in expansion by acquisition. To date it has done well in the integration of these acquisitions. However, there is no guarantee that this will be the case with future expansion.
Summary and Actions
Heartland Financial is a regional bank that has been expanding rapidly through acquisition and organic growth. The company has a long history of successful operations but saw decreased results in the first two quarters of 2020 due to the COVID-19 pandemic. The most recent results show evidence for a rebound. Assuming an end to the pandemic, results would be expected to show continued improvement. Such improvement should return the stock to historic levels for P/E and P/B. That should produce an attractive investment return.
I have held shares in HTLF for over ten years. I have purchased additional shares in the last months in my personal account and in accounts for Freedom Mountain Investment clients.
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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.
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