HBT Financial, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2022, compared with Q1 2021; balance-sheet comparisons are with December 31, 2021. HBT is the holding company for Heartland Bank and Trust Company, serving individuals, businesses and municipalities in Illinois and eastern Iowa. It reported 61 branches and operates as one reportable segment. The NXT Bancorporation acquisition closed in October 2021, so Q1 2022 includes its operations while Q1 2021 does not.
Financial and operating results
- Profit and revenue: Net income was $13.6 million, down 10.8% from $15.2 million; diluted EPS was $0.47 versus $0.55. Net interest income rose 9.6% to $31.9 million, while noninterest income fell 7.1% to $10.0 million. Total operating revenue (net interest income plus noninterest income) was $42.0 million versus $39.9 million.
- Interest income and margins: Interest and dividend income was $33.3 million, up from $30.6 million; interest expense declined to $1.4 million from $1.5 million. Net interest margin decreased to 3.08% from 3.25% (3.13% versus 3.30% on a tax-equivalent basis). The efficiency ratio rose to 56.97% from 55.73%.
- Credit provision: The company recorded a $0.6 million negative provision (reserve release), compared with a $3.4 million negative provision in Q1 2021. The current-quarter release reflected net recoveries and improved qualitative factors, partly offset by higher specific reserves.
- Expenses and returns: Noninterest expense increased 7.2% to $24.2 million, including higher costs following the NXT acquisition and $0.6 million of accelerated stock-compensation expense. Return on average assets was 1.27% versus 1.64%.
- Cash flow: Operating activities provided $21.3 million; investing activities used $133.4 million; financing activities provided $61.8 million. Cash and cash equivalents decreased $50.3 million during the quarter to $359.0 million.
- Balance sheet and funding: Total assets were $4.35 billion, deposits $3.82 billion, and loans before allowance $2.49 billion. Deposits increased $77.9 million from year-end, while loans declined $11.9 million, primarily as PPP loans were forgiven. Cash was $359.0 million. The balance sheet included $50.8 million of repurchase agreements, $39.3 million of subordinated notes and $37.7 million of junior subordinated debentures.
- Capital and liquidity: Stockholders’ equity was $383.2 million, down $28.7 million; tangible common equity to tangible assets was 8.16%, versus 8.89% at year-end. The Bank’s total capital, Tier 1 capital and common equity Tier 1 ratios were 15.95%, 15.11% and 15.11%, respectively, and it remained “well capitalized.” Management reported $356.7 million of remaining FHLB borrowing capacity and said liquidity was adequate. The holding company had $24.4 million in cash and received $6.0 million in Bank dividends.
- Credit quality: Nonperforming assets were $5.5 million, or 0.13% of total assets, compared with $6.1 million, or 0.14%, at year-end. The allowance was $24.5 million, 0.99% of loans, versus $23.9 million and 0.96%. Net recoveries were $1.2 million.
Material changes and unusual items
- Net interest income increased $2.8 million, mainly from higher average loan and securities balances; this more than offset a $1.5 million decline in PPP loan fees.
- Mortgage loan sale gains fell $1.5 million to $0.6 million as refinancing activity and margins weakened. Wealth-management fees and deposit service charges increased.
- Rising market rates drove $53.4 million of pretax unrealized losses on available-for-sale debt securities in other comprehensive income. Accumulated other comprehensive income moved from a $1.5 million gain at year-end to a $36.1 million loss, contributing to the decline in GAAP equity. The company transferred securities to held-to-maturity in part to reflect its intention to hold them amid potential rate volatility; held-to-maturity securities had a reported fair value of $416.6 million against a carrying amount of $438.1 million.
- Q1 2022 included a $0.2 million gain on sale of closed branch premises and a $1.7 million mortgage servicing rights fair-value adjustment. Management’s non-GAAP adjusted net income, which excludes these items, was $12.2 million versus $14.0 million.
Outlook, commentary and risks
Management stated that rising market rates were expected to improve net interest margin, excluding PPP loan fees and loan discount accretion. It anticipated lower mortgage refinancing activity, margin pressure and mortgage-sale gains for the remainder of 2022 relative to 2021. Loan production faced seasonally lighter demand, project delays related to higher input costs and rates, and competitive pricing. The filing gives no specific numerical earnings, loan-growth or margin guidance.
Key risks include economic weakness, inflation and supply constraints; COVID-19 effects on customers; credit deterioration and loan concentrations; changes in interest rates and benchmark rates; competition for loans and deposits; the Illinois/Iowa geographic concentration; cybersecurity and technology disruptions; and regulatory and compliance costs. Management said routine legal claims were not expected to have a material effect and reported no material changes to the risk factors in the 2021 Form 10-K. It also noted that interest-rate sensitivity models rely on assumptions and are not precise forecasts. Regulatory capital calculations exclude accumulated other comprehensive income.
Important facts for investors to verify
- Track the magnitude and accounting treatment of securities’ unrealized losses, the AFS/HTM mix, and the potential effect of interest-rate changes on GAAP equity and capital.
- Monitor loan risk ratings, specific reserves, recoveries and nonperforming assets—particularly the rise in substandard loans despite lower aggregate pass-watch and substandard balances.
- Assess deposit stability and cost, including $817 million of estimated uninsured deposits, and confirm available liquidity under changing funding conditions.
- Evaluate whether improving rates translate into stronger net interest margin, and how reduced PPP fees, mortgage activity, acquisition-related expenses and the Q1 stock-compensation acceleration affect earnings comparisons.
- Review the assumptions and limitations behind management’s interest-rate simulations: the filing estimates higher year-one net interest income under a parallel +100 basis-point shock and lower income under a -100 basis-point shock, but actual results may differ.