HBT Financial, Inc. annual report, FY2022

Business context and reporting period

HBT Financial, Inc. is a bank holding company headquartered in Bloomington, Illinois, operating through Heartland Bank and Trust Company across Central and Northeastern Illinois and Eastern Iowa. This Form 10-K covers the fiscal year ended December 31, 2022; it does not provide a standalone fourth-quarter income statement. At year-end, the company reported $4.29 billion in assets, $2.62 billion in loans held for investment and $3.59 billion in deposits.

Key financial metrics

MetricFY 2022 / year-endFY 2021 / comparison
Net interest income$145.9 million$122.4 million
Net interest margin3.54%; 4.10% in Q43.18%
Net income$56.5 million; diluted EPS $1.95$56.3 million; diluted EPS $2.02
Adjusted net income / diluted EPS (non-GAAP)$55.8 million / $1.93$56.8 million / $2.04
Noninterest income$34.7 million$37.3 million
Noninterest expense$105.1 million$91.2 million
Loans, before allowance$2.62 billion, up 4.8%$2.50 billion
Deposits$3.59 billion, down 4.0%$3.74 billion
Allowance for loan losses$25.3 million; 0.97% of loans$23.9 million; 0.96%
Operating cash flow$72.6 million$43.0 million

Reported income before tax was $76.2 million. Return on average assets was 1.32% (1.41% in 2021), and the efficiency ratio was 57.72% (56.46%).

Material changes versus the prior comparable period

  • Net interest income rose 19.2%, reflecting higher average earning-asset balances following the NXT acquisition, a more favorable asset mix and higher asset yields as rates increased. This more than offset a $7.7 million decline in PPP loan-fee income.
  • Net interest margin improved from 3.18% to 3.54%; the quarterly margin reached 4.10% in Q4. Management noted that deposit pricing and funding costs were expected to rise as competition intensified.
  • Noninterest expense increased 15.2%, including $8.2 million of net expense accruals for pending legal matters and a higher post-NXT operating cost base. Noninterest income fell 7.0%, principally because mortgage-loan sale gains declined $4.4 million as refinancing slowed.
  • Loan balances grew $120.6 million despite PPP loan runoff of $29.5 million. Growth was strongest in regulatory commercial real estate categories. Deposits declined $151.2 million, while year-end FHLB advances rose to $160.0 million from none in 2021.
  • Cash and cash equivalents declined $295.1 million to $114.2 million as excess cash was redeployed into securities and loans and deposits fell. Investing cash flow was negative $335.1 million; financing cash flow was negative $32.6 million.
  • Rising rates produced $105.5 million of pretax unrealized losses in available-for-sale securities and a $73.2 million after-tax decline in accumulated other comprehensive income. Year-end stockholders’ equity fell 9.3% to $373.6 million; tangible book value per share declined to $11.94 from $13.13.
  • Credit indicators remained low: nonperforming assets were $5.2 million, or 0.12% of assets, versus $6.1 million, or 0.14%, in 2021. The company recorded net recoveries of $2.1 million and a negative provision for loan losses of $0.7 million.

Outlook, commentary, risks and unusual items

  • Management expects higher market rates generally to support net interest margin, but also expects deposit costs to increase during 2023. Deposit balances may fall and be replaced with higher-cost funding, including FHLB advances or brokered deposits. The filing gives no numerical earnings or margin guidance.
  • The company adopted CECL on January 1, 2023. Management expected the initial allowance for credit losses and reserve for unfunded commitments together to be approximately 30%–50% above the prior allowance level; the one-time, after-tax adjustment was to opening retained earnings. The estimate was not final in the filing.
  • On February 1, 2023, HBT completed its acquisition of Town and Country Financial Corporation for approximately $109.4 million in stock and cash. Town and Country had $923.1 million of assets, $662.0 million of loans and $762.2 million of deposits at December 31, 2022; its results are not included in this 10-K. Core system conversion was expected in April 2023.
  • Pending litigation is a significant unusual item. The company accrued $13.0 million for a proposed settlement of two related cases, with a $7.4 million insurer recovery receivable; it also accrued $2.6 million for two overdraft-fee class actions. Court approval and final settlement terms remained outstanding for the proposed settlement. Management’s total 2022 legal accruals net of the insurance recovery were $8.2 million.
  • Key risks include rate sensitivity and securities valuation, deposit retention and liquidity, credit exposure in CRE and agriculture, economic conditions in Illinois and Iowa, and operational, cybersecurity, regulatory and acquisition-integration risks. The bank reported it was well-capitalized; its year-end total capital ratio was 15.43%, and tangible common equity to tangible assets was 8.06%.
  • The Bank reported $409.9 million of remaining FHLB credit availability and management considered liquidity adequate for reasonably foreseeable needs. Uninsured deposits were estimated at $739.0 million. The company also reported $756.9 million of commitments to extend credit and $17.8 million of standby letters of credit.
  • The independent auditor issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal controls because the company qualified as an emerging growth company.

Important facts for investors to verify

  1. Track deposit outflows, uninsured-deposit levels, borrowing dependence and the cost of funding after year-end.
  2. Review the realized and unrealized effects of rate changes on securities, tangible book value and net interest margin.
  3. Assess the final CECL adoption adjustment and subsequent allowance levels, particularly given CRE loan growth and portfolio concentrations.
  4. Confirm court approval, final payments and insurance recovery for the proposed litigation settlement, and monitor the overdraft-fee cases.
  5. Evaluate Town and Country integration, final purchase accounting, dilution and realized synergies against the stated acquisition terms.
  6. Compare reported results with non-GAAP adjusted figures, noting the legal accruals and other adjustments affecting comparability.