HBT Financial, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Amounts are in U.S. dollars. HBT is an Illinois-based community banking company operating through Heartland Bank, with its operations focused on Central and Northeastern Illinois and expansion into Eastern Iowa following a subsequent acquisition.
Financial performance and position
- Q3 earnings: Net income was $13.7 million, up 29.8% from $10.6 million; diluted EPS was $0.50 versus $0.38. For the first nine months, net income was $42.7 million, up 76.3% from $24.2 million; diluted EPS was $1.56 versus $0.88.
- Revenue and margin: Q3 net interest income rose 6.4% to $30.7 million, while net interest margin declined to 3.18% from 3.39%. Nine-month net interest income rose 1.2% to $89.5 million; margin fell to 3.19% from 3.63%. PPP loan fees contributed $3.0 million in Q3 and $7.6 million year to date.
- Other income and expenses: Q3 noninterest income fell 16.5% to $8.4 million, mainly reflecting lower mortgage loan sale gains and branch-related impairment. Nine-month noninterest income increased 19.7% to $28.0 million, including a $4.4 million year-over-year improvement in mortgage servicing rights fair value adjustments. Noninterest expense declined 1.4% in Q3 to $22.2 million and 3.5% year to date to $66.9 million.
- Credit costs and quality: The company recorded negative loan-loss provisions of $1.7 million in Q3 and $7.2 million for nine months, compared with provisions of $2.2 million and $10.1 million in the respective 2020 periods. The allowance was $24.9 million, or 1.16% of loans, versus $31.8 million, or 1.42%, at year-end. Nonperforming assets were $12.8 million (0.33% of assets), down from $14.1 million (0.39%).
- Balance sheet and funding: Assets were $3.95 billion, up 7.7%; deposits were $3.42 billion, up 9.2%. Cash and cash equivalents totaled $471.9 million. Loans before allowance were $2.15 billion, down 4.4%; excluding PPP loans, they increased $4.5 million, or 0.2%. The loan-to-deposit ratio was 62.81%, down from 71.78%.
- Cash flow: Nine-month operating cash flow was $26.7 million, compared with cash used of $5.1 million in 2020. Investing used $143.8 million, largely reflecting securities purchases; financing provided $276.5 million, including deposit growth. Cash and cash equivalents increased $159.5 million from year-end.
- Debt, liquidity, and capital: At quarter-end, the balance sheet included $39.3 million of subordinated notes, $37.7 million of junior subordinated debentures, and $48.0 million of repurchase agreements; there were no FHLB or Federal Reserve discount-window borrowings. The Bank had $320.1 million of remaining FHLB credit availability. The holding company reported $25.5 million of cash. HBT and the Bank met regulatory capital requirements; consolidated total capital and common equity Tier 1 ratios were 18.15% and 14.08%, respectively.
- Shareholder returns: The company paid quarterly dividends of $0.15 per share. It repurchased 143,103 shares for $2.3 million year to date; $12.7 million remained under the $15 million authorization at September 30.
Material changes versus comparable periods
- Higher earnings chiefly reflected sharply lower loan-loss provisions; nine-month results also benefited from better mortgage servicing rights fair value adjustments and lower employee-benefit expense, including a prior-year SERP charge.
- Margin compression continued despite higher net interest income: substantial deposit and PPP-related inflows increased cash and lower-yielding securities, while lower market rates weighed on asset yields. Deposit costs fell, but did not fully offset the lower asset yields.
- PPP balances declined to $59.8 million from $163.5 million at year-end as forgiveness outpaced new originations. Loans with COVID-related modifications not yet returned to regular payments fell to $0.3 million from $28.0 million at year-end.
- Available-for-sale securities had $19.95 million of pretax unrealized losses for the first nine months, and accumulated other comprehensive income declined $13.6 million after tax. Management attributed securities losses primarily to market-rate movements and considered declines temporary. Some securities were transferred from available-for-sale to held-to-maturity in 2021 to reflect revised intentions amid potential interest-rate volatility.
Outlook, commentary, and risks
- The filing gives no formal quantitative earnings or margin guidance. Management expected lower mortgage banking profits during the remainder of 2021 as refinancing activity slowed. It estimated annual pretax savings of approximately $1.1 million from closing or consolidating six branches, with savings expected in future periods.
- NXT Bancorporation’s acquisition closed October 1, 2021, after quarter-end, and is not included in Q3 results. NXT reported September 30 assets of $232 million, loans of $196 million, and deposits of $181 million. Consideration was approximately $10.6 million in cash and 1.8 million HBT shares; integration and bank merger activities were planned after closing.
- Management cited continuing uncertainty from COVID-19, including possible renewed impacts on customers and vulnerable industries. Other principal risks include credit quality and loan concentrations, interest-rate and benchmark-rate changes, liquidity and deposit retention, competition, Illinois geographic concentration, cybersecurity and technology, and regulatory and compliance costs.
- Interest-rate sensitivity modeling showed higher modeled net interest income in rising-rate scenarios and declines in Year 1 and Year 2 net interest income under an immediate 100-basis-point rate decrease. Management cautioned that the models rely on assumptions and are not precise forecasts.
- Management said liquidity was adequate and reported effective disclosure controls; it reported no material changes to internal control over financial reporting. Routine legal claims were not expected to have a material effect, and the filing reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the large provision releases and improving credit indicators are sustainable, including trends in classified, nonaccrual, and acquired loans and the adequacy of the allowance.
- How margin and net interest income respond to excess liquidity, reinvestment yields, interest-rate changes, and PPP fee recognition.
- Whether NXT integration delivers the anticipated funding and relationship benefits, and the final purchase accounting, costs, and dilution from the stock consideration.
- Whether slower mortgage refinancing and branch closures affect recurring fee income, and whether estimated branch savings are realized.
- The effect of securities rate sensitivity, unrealized losses, and the held-to-maturity transfers on reported equity, liquidity, and future flexibility.
- Deposit stability and concentration: uninsured deposits were estimated at $713.2 million at quarter-end; confirm subsequent trends and available liquidity under stress.