HBT Financial, Inc. quarterly report, Q2 FY2023

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HBT Financial, Inc. — Q2 2023 Form 10-Q

Business context and reporting period. HBT Financial is the holding company for Heartland Bank and Trust, serving customers in Illinois and eastern Iowa. This unaudited quarterly report covers the three and six months ended June 30, 2023; balance-sheet comparisons are with December 31, 2022. On February 1, 2023, the company acquired Town and Country Financial Corporation, expanding its Central Illinois footprint and entering metro-east St. Louis. The acquisition added about $906 million of assets, including $635 million of loans and $720 million of deposits, before subsequent balance-sheet activity.

Financial performance and condition

Q2 results (dollars in millions unless noted):

  • Net interest income was $48.9 million, up 42.2% year over year; net interest margin rose to 4.16% from 3.34%. Higher asset yields and acquisition-related balance growth were partly offset by higher funding costs.
  • Noninterest income was $9.9 million, up 15.9%; noninterest expense was $34.0 million, up 42.5%. The efficiency ratio increased to 56.57% from 54.97%.
  • Net income was $18.5 million, up 31.2%; diluted earnings per share were $0.58 versus $0.49. Return on average assets was 1.49%, compared with 1.32%.

First-half results: Net interest income was $95.7 million, up 44.4%; net interest margin was 4.18% versus 3.21%. Noninterest income declined 6.7% to $17.4 million, while noninterest expense rose 45.6% to $69.9 million. Net income was nearly unchanged at $27.7 million, and diluted EPS was $0.88 versus $0.95. Results included $13.7 million of acquisition-related expenses, a $1.0 million realized securities loss, and volatile mortgage-servicing-rights fair-value adjustments. Management’s non-GAAP adjusted net income was $38.6 million versus $26.1 million; adjusted diluted EPS was $1.22 versus $0.90.

  • Balance sheet at June 30: Total assets were $4.98 billion, up 16.1% from year-end; loans before allowance were $3.24 billion, up 23.8%; deposits were $4.16 billion, up 16.1%. Excluding Town and Country, deposits declined $142.9 million and loans declined $11.0 million from year-end.
  • Credit: Allowance for credit losses was $37.8 million, or 1.17% of loans, versus $25.3 million, or 0.97%, at year-end. Nonperforming assets were $10.6 million, up from $5.2 million; nonaccrual loans were $7.5 million. Second-quarter provision was a net benefit of $0.2 million; first-half provision was $6.0 million, including acquisition-related credit allowances.
  • Funding and debt: Cash and cash equivalents were $109.8 million. Total deposits included $1.13 billion noninterest-bearing and $3.04 billion interest-bearing deposits. Uninsured deposits were estimated at $824.1 million. Borrowings, primarily FHLB advances, were $177.6 million; repurchase agreements were $38.7 million, subordinated notes $39.4 million, and junior subordinated debentures $52.8 million.
  • Capital: Stockholders’ equity was $450.9 million. The bank’s regulatory total capital, Tier 1, common equity Tier 1, and leverage ratios were 14.82%, 13.94%, 13.94%, and 10.69%, respectively; the company and bank met applicable capital requirements. Tangible common equity to tangible assets was 7.54%, down from 8.06% at year-end.
  • Cash flow, first half: Operating activities provided $36.1 million; investing activities provided $192.5 million; financing activities used $233.0 million. Cash and cash equivalents decreased $4.4 million to $109.8 million.

Material changes versus comparable periods

  • Q2 earnings increased year over year, driven primarily by higher net interest income; first-half GAAP earnings were essentially flat as acquisition costs, higher operating expenses, credit provisioning, and securities-sale losses offset revenue growth.
  • Deposit and borrowing costs rose sharply: Q2 cost of interest-bearing liabilities was 0.95% versus 0.20% a year earlier; total deposit cost was 0.41% versus 0.05%. The company reported that market competition contributed to higher deposit pricing.
  • The Town and Country acquisition increased reported assets, loans, deposits, goodwill, and intangible assets. HBT issued 3.38 million shares and paid about $38.0 million cash; recorded goodwill was $30.6 million. Core system conversion was completed in April.
  • HBT sold $145.8 million of securities during the first half, realizing a $1.0 million loss; proceeds were used to reduce FHLB borrowings. A further $39.4 million securities sale after quarter-end generated $0.8 million of net losses.
  • Adoption of CECL on January 1, 2023 reduced opening retained earnings by $6.9 million and increased the loan allowance and created an allowance for unfunded commitments.

Outlook, risks, contingencies, and unusual items

  • Management expects deposit costs to continue increasing during the remainder of 2023 and says core deposits may decline, potentially requiring more expensive FHLB advances, brokered deposits, or other wholesale funding. It also notes that higher market rates generally support net interest income and margin, but results depend on the pace of rate changes and deposit repricing.
  • The CECL economic forecast assumed a mild recession beginning in 2024, with higher unemployment and slowing then contracting GDP over the forecast period. Management cautions that weaker economic conditions could raise credit losses.
  • Interest-rate risk modeling showed that a parallel 100-basis-point rate decrease could reduce estimated Year 1 net interest income by 4.3% and Year 2 by 5.9%; a 300-basis-point decrease showed reductions of 10.1% and 15.7%. Management cautions that these models rely on assumptions and are not forecasts.
  • Available-for-sale securities had $90.3 million of gross unrealized losses at quarter-end; held-to-maturity securities had a $63.5 million fair-value shortfall versus amortized cost. Management said it did not intend to sell the securities and expected to recover amortized cost before any required sale. An $0.8 million credit-loss allowance was recorded on one bank subordinated security.
  • The bank had agreed to a $13.0 million settlement of two related lawsuits, with $7.4 million expected from insurance; final written court approval was still pending. Separately, it accrued $3.4 million for proposed settlements of two overdraft/insufficient-funds class actions, also subject to court approval. The company denies wrongdoing in these matters.
  • Management stated that bank and holding-company liquidity were adequate for reasonably foreseeable short- and intermediate-term needs. The filing identifies risks including deposit concentration and uninsured balances, credit and real-estate exposure, interest-rate changes, competition, cyber and technology threats, and economic conditions in Illinois and Iowa. No material changes to the prior annual report’s risk factors were reported.

Most important facts for investors to verify

  • Whether deposit balances and funding costs stabilize, and the resulting effect on net interest margin and earnings.
  • Town and Country integration, purchase-accounting adjustments, realization of expected benefits, and remaining acquisition-related costs.
  • Trends in nonaccrual loans, criticized/pass-watch credits, allowance adequacy, and commercial real-estate concentrations.
  • Liquidity and funding exposure, including uninsured deposits, brokered deposits, FHLB reliance, and securities sale activity.
  • Final court orders and payment timing for the pending legal settlements, including the expected insurance recovery.
  • Changes in securities valuations, capital ratios, and tangible common equity as rates and balance-sheet composition evolve.