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Heartland Financial Boosts Dividend on Record Earnings

By Dave Kovaleski - Feb 28, 2020 at 6:55AM

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The Dubuque, Iowa-based regional bank has increased its dividend three times in 18 months in response to its strong performance.

Heartland Financial (HTLF 0.73%), a regional bank based in Dubuque, Iowa, raised its dividend for the third time in the past 16 months in February. This latest move comes on the heels of a strong performance by the bank in 2019 when it posted record earnings for the year.

Founded in 1981, the bank holding company has grown to operate 11 different community banks throughout the Midwest and western United States. The banks have 115 branches throughout Iowa, Illinois, Wisconsin, New Mexico, Arizona, Montana, Colorado, Minnesota, Kansas, Missouri, Texas, and California. It provides banking, mortgage, private client, investment, insurance, and consumer finance services to individuals and businesses with roughly $13.2 billion in total assets. 

The stock popped about 9% since its strong fourth-quarter earnings report on Jan. 27, but it has lost about 5% in the last week in February following the COVID-19 coronavirus market meltdown. But overall, it's a solid company that's been in acquisition mode and is poised to deliver growth for investors.

An illustration of a community showing buildings downtown

Heartland Financial owns and operates 11 community banks. Image source: Getty Images.

Dividend growth and strong earnings

Heartland Financial boosted its quarterly dividend 11% to $0.20 a share in February -- its second dividend boost in the past 12 months and third in the past year and a half. Since November 2018, the dividend has increased by 48%. Its dividend yield is 1.66%, up from 1.5% in the previous quarter. It has a payout ratio of 11.5%, which is the percentage of earnings paid out as dividends. Going forward, investors will earn $0.80 per share each year.

The dividend increases came during a year in which Heartland posted record earnings. Net income jumped 28% to $149.1 million in 2019, which is an all-time high. Net income in the fourth quarter climbed 18% compared to the fourth quarter of 2018, to $37.9 million. Diluted earnings per share (EPS) was $1.03 in the fourth quarter, up from $0.93 in the prior-year quarter. For the full year, it was $4.14, up 17% over the previous year. 

The growth was fueled by two sizable acquisitions in 2019. The company bought Blue Valley Ban Corp., headquartered in Overland Park, Kansas, and Rockford Bank and Trust Co., based in Rockford, Illinois. Overall assets increased by 16% to $13.2 billion, including the acquired assets, but the company also had 5% organic growth (outside of the acquired assets). 

"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," president and CEO Bruce K. Lee said in the fourth-quarter earnings report. For the year, loans held to maturity increased by 13% to $8.37 billion. 

Also, total deposits were $11 billion at year-end, up 18% from 2018. That included organic non-time deposit growth of $225 million for the fourth quarter and $758.2 million for the year. Non-time deposits -- which are deposits not tied to a maturity date -- represented 89% of total deposits at year-end, Lee said.

Part of the success is due to the companyʻs Operation Customer Compass initiative, launched in 2018. The initiative streamlined certain job functions and activities, and reinvested about $14 million in savings in improvements to "people, processes, and technology," explained Lee on the fourth-quarter earnings call. "The combination of these activities has enhanced our profitability, improved our efficiency and ultimately, provides superior customer experiences." The full-time employee count was reduced by 14% from the second quarter of 2018 to the end of 2019. 

What is the outlook?

The company plans to continue to expand through mergers and acquisitions. In February, Heartland Financial agreed to acquire Texas-based AIM Bancshares and its subsidiary AimBank for $280 million. AimBank will be merged into Heartland's Lubbock, Texas-based subsidiary, FirstBank & Trust. After the deal closes later this year, Heartland will have $15 billion in assets with 140 branches in 12 states.

Also, Heartland will update its technology platform to enhance the efficiency of its sales teams, improve back-office functions, and shorten the sales cycle. The expectation is that this will provide increased sales over time once it is rolled out throughout the company.

Heartland is a bank stock with a relatively low forward P/E ratio of 11.7 and is a solid buy with good balance sheet management, growth potential, and a dividend that should continue to rise.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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