HBT Financial, Inc. annual report, FY2020

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HBT Financial, Inc. — FY2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. HBT Financial is an Illinois-focused community bank holding company operating through Heartland Bank, with 60 full-service and three limited-service branches across 18 counties. State Bank of Lincoln merged into Heartland Bank on December 31, 2020.

Financial performance and condition

  • Profitability: Net income was $36.8 million, down 44.9% from $66.9 million in 2019; compared with 2019 C-corporation-equivalent net income of $53.4 million, the decline was 31.0%. Diluted EPS was $1.34 versus $3.33 reported in 2019; adjusted diluted EPS, a non-GAAP measure, was $1.44 versus $2.86. The comparison is affected by the company’s conversion from S-corporation to C-corporation tax status in October 2019.
  • Revenue and margins: Net interest income declined 12.1% to $117.6 million, while noninterest income rose 5.2% to $34.5 million; together, these components totaled $152.1 million, down from $166.6 million. Net interest margin fell to 3.54% from 4.31% (3.60% versus 4.38% on a tax-equivalent basis). The efficiency ratio increased to 59.66% from 53.80%.
  • Drivers: Lower market rates reduced asset yields and net interest income. Mortgage-loan sale gains rose $5.7 million to $8.8 million amid strong refinancing activity. Provision for loan losses increased to $10.5 million from $3.4 million.
  • Cash flow: Net cash provided by operating activities was $31.3 million, versus $89.1 million in 2019. Investing activities used $380.5 million, primarily reflecting $523.6 million of securities purchases; financing activities provided $377.7 million, mainly from $353.7 million of deposit growth and the subordinated-note issuance. Cash and cash equivalents ended the year at $312.5 million, up $28.5 million.
  • Balance sheet and liquidity: Total assets were $3.67 billion, up 13.0%; loans before allowance were $2.25 billion, up 3.8%; and deposits were $3.13 billion, up 12.7%. The loan-to-deposit ratio declined to 71.8% from 77.9%, and core deposits were 99.15% of deposits. The Bank reported $342.8 million of remaining FHLB borrowing capacity and no FHLB or Federal Reserve discount-window borrowings outstanding at year-end. Management stated that liquidity was adequate.
  • Credit quality: The allowance for loan losses increased to $31.8 million, or 1.42% of loans, from $22.3 million, or 1.03%. Net charge-offs remained low at 0.04% of average loans. Nonperforming assets fell to $14.1 million (0.39% of assets) from $24.1 million (0.74%). However, pass-watch loans rose 64.8% to $208.6 million and substandard loans rose 16.7% to $84.5 million, reflecting COVID-related credit migration.
  • Capital and debt: Consolidated total risk-based capital was 17.40%, up from 14.54%; the Bank’s ratio was 15.63%, and it was classified as well capitalized. The company issued $40 million of 4.50% fixed-to-floating subordinated notes in September; carrying value at year-end was $39.2 million. Junior subordinated debentures had a carrying value of $37.6 million. Stockholders’ equity was $363.9 million.

Material changes and unusual items

  • COVID-19-related factors included economic weakness, lower interest rates, fee waivers, and elevated credit uncertainty. HBT approved and funded $185.4 million of PPP loans to 2,329 businesses; net PPP loans were $163.5 million at year-end, with $4.1 million of net deferred origination fees remaining.
  • Loans with COVID-related payment modifications that had not returned to regular payments totaled $28.0 million across 40 loans at year-end, down from $203.2 million across 395 loans at June 30, 2020.
  • The allowance increase included a $5.8 million COVID-related qualitative reserve build and a $3.8 million increase in specific reserves on individually evaluated loans.
  • The company paid quarterly dividends of $0.15 per share during 2020. A $15 million repurchase authorization was approved in November, but no shares were repurchased in the fourth quarter.
  • Mortgage servicing rights fair-value adjustment was a negative $2.6 million, and the SERP termination generated $1.5 million of expense in 2020. Goodwill was assessed and reported as not impaired.

Outlook, management commentary, and risks

Management provided no specific numerical earnings or growth guidance. It expected lower refinancing activity to reduce 2021 mortgage banking profits relative to 2020 and said low interest rates and possible COVID-related credit deterioration could continue to pressure net interest margin and credit costs. The $40 million note issuance strengthened capital and holding-company liquidity, while adding interest expense and expected downward pressure on future net interest income and margin.

Key risks include the duration and economic effects of COVID-19; deterioration in commercial real estate, small-business, and other borrower credit; concentration in Illinois; continued low rates and deposit competition; liquidity and funding access; LIBOR transition and SOFR comparability; cybersecurity and third-party technology dependencies; and regulatory or legal exposure, including potential PPP-related disputes. Management said routine legal matters were not expected to have a material adverse effect. The company reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements but did not attest to internal control, consistent with the company’s emerging-growth-company status.

Important facts for investors to verify

  • Track allowance adequacy, criticized and classified loans, remaining COVID-modified loans, and subsequent delinquencies or charge-offs.
  • Assess whether deposit growth persists and whether excess liquidity can be deployed into loans without weakening underwriting or returns.
  • Monitor net interest margin, asset yields, funding costs, and the actual effect of the subordinated notes on earnings.
  • Verify PPP loan forgiveness, fee recognition, and any SBA guarantee or litigation developments.
  • Compare future mortgage banking results with the unusually strong 2020 refinancing period, and review dividend capacity and any repurchases against capital and regulatory constraints.