HBT Financial, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. HBT is a community bank holding company operating primarily in Illinois and eastern Iowa; it reported 61 branches and one reportable segment. Unless indicated otherwise, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $34.4 million | $29.7 million | $66.3 million | $58.8 million |
| Net interest margin | 3.34% | 3.14% | 3.21% | 3.19% |
| Noninterest income | $8.6 million | $8.8 million | $18.6 million | $19.6 million |
| Noninterest expense | $23.8 million | $22.2 million | $48.0 million | $44.7 million |
| Provision for loan losses | $0.1 million | $(2.2) million | $(0.4) million | $(5.6) million |
| Net income | $14.1 million | $13.7 million | $27.7 million | $29.0 million |
| Diluted EPS | $0.49 | $0.50 | $0.95 | $1.05 |
- Q2 net income rose 2.7% year over year, while first-half net income declined 4.4%. Q2 revenue, defined as net interest income plus noninterest income, was $42.9 million versus $38.5 million; first-half revenue was $84.9 million versus $78.4 million.
- At June 30, total assets were $4.224 billion, loans before allowance were $2.452 billion, and deposits were $3.702 billion. From year-end 2021, assets fell 2.1%, loans fell 1.9%, and deposits fell 1.0%. The loan-to-deposit ratio was 66.23%.
- Cash and cash equivalents were $160.0 million, down $249.2 million from year-end. First-half cash flow was $30.8 million from operations, $(221.1) million from investing, and $(59.0) million from financing. Securities purchases were $349.8 million; management said excess liquidity was reinvested in debt securities.
- Total deposits were predominantly non-maturity deposits; core deposits were $3.677 billion, or 99.31% of deposits. Estimated uninsured deposits were $800.9 million. The Bank had $361.6 million of remaining FHLB borrowing capacity, and management stated liquidity was adequate.
- Reported debt and funding included $51.1 million in repurchase agreements, $39.4 million in subordinated notes, and $37.7 million in junior subordinated debentures. The Bank and holding company met regulatory capital requirements; the Bank’s total risk-based capital ratio was 15.93% and CET1 ratio was 15.10%.
- Stockholders’ equity was $373.8 million, down $38.1 million from year-end; tangible common equity to tangible assets was 8.18%, versus 8.89%. Book value per share was $12.97, down from $14.21.
Material changes versus comparable periods
- Q2 net interest income increased 15.7%, primarily from higher average earning-asset balances following the October 2021 NXT acquisition, a more favorable asset mix, and higher rates. First-half net interest income increased 12.7%.
- Noninterest expense rose 7.6% in Q2 and 7.4% for the first half, mainly reflecting the higher cost base after NXT. First-half employee-benefit expense also included $0.6 million of accelerated stock compensation expense following an award modification.
- Noninterest income fell 2.5% in Q2 and 5.0% for the first half. Mortgage-loan sale gains declined $1.2 million in Q2 and $2.7 million year to date as higher rates reduced refinancing activity.
- The 2022 loan-loss provision was modestly positive for Q2 and a credit for the first half, versus larger credits in 2021. First-half net recoveries were $1.2 million. The allowance was $24.7 million, or 1.01% of loans, compared with $23.9 million, or 0.96%, at year-end.
- Nonperforming assets were $6.3 million, or 0.15% of assets, versus $6.1 million, or 0.14%, at year-end. Pass-watch loans decreased by $84.7 million; nonaccrual loans were $3.2 million.
Outlook, risks, and unusual items
- Management expected further increases in market rates to support net interest margin, while also anticipating higher deposit costs in the second half of 2022; it expected earning-asset yield increases to more than offset those costs. These are management expectations, not guaranteed results.
- Management anticipated lower mortgage refinancing gains for the remainder of 2022 and warned that market declines in assets under management could reduce wealth-management revenue.
- Rising rates drove substantial securities valuation losses: the available-for-sale portfolio had $63.6 million of gross unrealized losses at June 30, and after-tax other comprehensive loss was $54.3 million for the first half. Accumulated other comprehensive loss stood at $52.8 million. Management attributed the losses primarily to market-rate changes and considered declines temporary. Securities were transferred from available-for-sale to held-to-maturity in part to reflect revised intentions amid potential rate volatility.
- Interest-rate sensitivity modeling estimated that an immediate parallel +100-basis-point shock would increase Year 1 net interest income by 4.3%, while a -100-basis-point shock would decrease it by 7.8%. Management cautioned that model assumptions limit predictive precision.
- Key risks include inflation and economic deterioration, credit quality, interest-rate and deposit repricing, competition for loans and deposits, geographic concentration in Illinois and Iowa, cybersecurity and technology risks, and regulatory changes. Management noted inflation-related concerns and a slowing housing market in its Q2 reserve assessment.
- Off-balance-sheet commitments included $656.4 million to extend credit and $14.5 million of standby letters of credit; many commitments may not be drawn. Two purported class actions involving overdraft and insufficient-funds fees were disclosed. No loss accrual was recorded; an unfavorable outcome was considered reasonably possible, but a loss range could not be estimated.
- The company repurchased 136,746 shares during Q2 for an average $17.61 per share and paid a $0.16-per-share quarterly dividend. The filing reported no material change to previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether the higher-rate environment produces the expected margin benefit after deposit costs and deposit balances reprice.
- Whether loan production resumes growth and whether deterioration in housing, inflation, or the broader economy affects credit quality, the allowance, or nonperforming assets.
- How much securities valuation pressure persists or reverses, and the resulting implications for equity, liquidity, and the distinction between AFS and HTM carrying values.
- Whether mortgage banking and wealth-management revenue weaken as management anticipated, and whether expense growth moderates after the NXT integration.
- Developments in the two overdraft-related lawsuits and any eventual estimate of potential loss.
- Changes in uninsured deposits, deposit competition, FHLB capacity, and the availability of dividends from the Bank to the holding company.