HBT Financial, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unaudited consolidated results. HBT Financial is a bank holding company operating Heartland Bank across Illinois and Eastern Iowa. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $48.3 | $37.4 | $144.0 | $103.7 |
| Provision for credit losses | $0.5 | $0.4 | $6.5 | $(0.1) |
| Noninterest income | $9.5 | $8.2 | $26.8 | $26.8 |
| Noninterest expense | $30.7 | $24.0 | $100.6 | $72.0 |
| Net income | $19.7 | $15.6 | $47.4 | $43.3 |
| Diluted EPS | $0.62 | $0.54 | $1.49 | $1.49 |
| Net interest margin | 4.07% | 3.65% | 4.14% | 3.36% |
- Q3 net income rose 26.2%; management attributed higher net interest income to improved asset yields and larger average earning assets following the Town and Country acquisition.
- Interest costs rose sharply: Q3 deposit expense was $7.2 million versus $0.6 million a year earlier. Q3 cost of total deposits was 0.69%, compared with 0.06%.
- Reported nine-month net income increased 9.4%. Non-GAAP adjusted net income was $58.9 million versus $41.9 million; this measure excludes specified items, including acquisition-related expenses and securities-sale losses.
Financial position, liquidity, and capital
- At September 30, total assets were $4.99 billion, loans before allowance $3.34 billion, deposits $4.20 billion, and stockholders’ equity $456.3 million.
- Loans increased 27.6% from December 31, 2022, including $635.4 million acquired with Town and Country. Excluding the acquisition, loans grew $87.2 million, or 3.3%. Deposits increased 17.0% overall, but decreased $109.4 million excluding the acquisition; the company added $115.0 million of brokered deposits.
- Cash and cash equivalents were $111.9 million. For the first nine months, operating cash flow was $52.8 million, investing cash flow was positive $161.3 million, and financing cash flow was negative $216.4 million; cash declined $2.2 million from year-end.
- Funding included $177.7 million of FHLB advances, $28.9 million of repurchase agreements, $39.5 million of subordinated notes, and $52.8 million of junior subordinated debentures. Uninsured deposits were estimated at $876.0 million; brokered deposits were $115.0 million.
- Management said available liquidity was adequate for reasonably foreseeable short- and intermediate-term needs. The Bank reported regulatory capital ratios above applicable minimums, including 13.89% Common Equity Tier 1 and 14.78% total capital. Tangible common equity to tangible assets was 7.64%, down from 8.06% at year-end.
Material changes and notable items
- HBT completed its Town and Country acquisition on February 1, 2023, for approximately $109.4 million in cash and stock. It added approximately $937 million of assets and $720 million of deposits; $30.5 million of goodwill was recorded. Core system conversion was completed in April.
- Q3 noninterest expense rose 27.8%, mainly reflecting the acquired business and higher personnel, occupancy, data-processing, and marketing costs. Nine-month acquisition-related expenses were $13.7 million, including credit-loss allowances; management did not expect material acquisition-related expenses in subsequent quarters.
- The company sold $185.3 million of securities in the first nine months, recording $1.8 million of realized losses; Q3 sales were $39.4 million with an $0.8 million loss. Proceeds were used to reduce FHLB borrowings and fund loan growth. Available-for-sale securities had $101.6 million of gross unrealized losses at quarter-end, principally attributed by management to market-rate and other non-credit factors.
- CECL adoption on January 1, 2023 reduced opening retained earnings by $6.9 million. The allowance for credit losses on loans was $38.9 million, or 1.16% of loans, versus $25.3 million, or 0.97%, at year-end.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or margin guidance. Management said deposit competition remained elevated, funding costs had increased and were expected to continue increasing during the remainder of 2023; core deposits could decline and be replaced by higher-cost FHLB advances or brokered deposits. Net interest margin eased from 4.20% in Q1 to 4.07% in Q3.
- The credit-loss forecast assumed a mild recession beginning in 2024, with rising unemployment and slowing then contracting GDP over the forecast period. Management cautioned that weaker economic conditions could increase credit losses.
- Nonperforming assets were $8.2 million, or 0.16% of assets, versus $5.2 million, or 0.12%, at year-end. Nonaccrual loans increased to $6.7 million from $2.2 million; the acquisition contributed to the increase.
- Interest-rate sensitivity modeling showed estimated Year 1 net interest income increases of 6.5% under an immediate +400 basis-point shock and decreases of 12.5% under a -400 basis-point shock. These are model estimates with stated limitations, not forecasts.
- The Bank paid $13.0 million in Q3 to settle two “Income Store” lawsuits without admission of liability; the net $5.6 million expense was recorded in Q4 2022 after an insurance recovery. Separate overdraft-fee class-action settlements totaling $3.4 million were proposed, accrued, and subject to court approval at filing. A further class action was filed in October 2023; the Bank said it intended to defend it.
- Other principal risks cited include economic conditions in Illinois and Iowa, interest-rate changes, deposit concentration and uninsured balances, loan concentrations and asset quality, competition, cybersecurity and technology interruptions, regulation, and litigation. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether deposit competition, brokered funding, and rising funding costs continue to pressure margins and liquidity.
- How much of reported loan and deposit growth reflects Town and Country versus organic growth, and whether acquired synergies materialize.
- Trends in nonaccrual loans, criticized/pass-watch credits, the allowance, and commercial real estate exposure.
- Potential further securities sales or realized losses, and the effect of the securities portfolio’s unrealized losses on capital and flexibility.
- Final court approval, payment timing, and any additional exposure related to the overdraft-fee cases and the October lawsuit.