Rising earnings estimates on the back of strong third-quarter results and the payment of a special cash dividend have aided Heartland Financial USA Inc. ( HTLF - Snapshot Report ) achieve a Zacks #1 Rank (Strong Buy) on January 1. Moreover, this regional bank has delivered positive earnings surprises in three of the last four quarters with an average beat of 50.8%.

With a solid return of 67.8% in a year’s time, a long-term earnings growth projection of 4% and a decent dividend yield of 1.5%, Heartland Financial offers an attractive investment opportunity.

The Rank Driver

Better-than-expected third-quarter earnings, improving credit quality, completion of two acquisitions – First Shares Inc. and Heritage Bank – and the special cash dividend are the primary rank drivers for this stock.

On October 29, 2012, Heartland Financial reported third-quarter earnings of 75 cents per share, surpassing the Zacks Consensus Estimate by 15.4% and last year’s earnings by 275.0%. An improved top-line growth was partially offset by higher operating expenses.

Net interest income was $36.8 million, up 1.6% from the year-ago quarter on the back of lower total interest expense. Non-interest income surged significantly to $29.8 million, driven by higher gains on sale of loans. Yet, non-interest expense escalated 48.0% to $47.2 million as a result of rising salaries and employee benefits costs.

Asset quality continued to show an improvement at Heartland Financial during the third quarter. As of September 30, 2012, the ratio of nonperforming assets to total assets was 1.68%, down 104 basis points year over year. Furthermore, allowance for loan and lease losses was $40.4 million, declining 8.6% from $44.2 million in the prior-year quarter.

Moreover, Heartland Financial is one of the few banks that have maintained regular dividend payments throughout the financial crisis. Further on December 28, the company paid a special cash dividend of 10 cents per share.

Earnings Estimates Advances

Over the last 90 days, the Zacks Consensus Estimate for 2012 jumped 4.4% to $2.86 per share, implying year-over-year growth of 132.4%. For 2013, the Zacks Consensus Estimate increased 2.6% to $2.39 over the same time frame.

Valuation

On a price-to-book basis, the shares of Heartland Financial currently trade at 1.4x, a 27% premium to the industry median of 1.1. The valuation on a price-to-earnings basis looks attractive given the shares trade at a forward P/E of 9.4x, a 15% discount to the 11.1x for the industry average.

Moreover, Heartland Financial has a trailing 12-month ROE of 15.4% compared with the peer group average of 8.8%. This implies that the company reinvests its earnings more efficiently than its industry peers.

About The Company

Headquartered in Dubuque, Iowa, Heartland Financial provides various banking products and services. The company focuses primarily on clients in the Midwestern, Southwestern and Western United States, to whom it delivers high-quality financial products and services. Founded in 1981, the company conducts business through 65 full-service banking locations. The company has a market capital of roughly $431.7 million. Other Zacks #1 Rank bank stocks include Old National Bancorp. ( ONB - Snapshot Report ) .