HBT Financial, Inc. — 2019 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2019, filed March 27, 2020. HBT is an Illinois-focused bank holding company operating Heartland Bank and State Bank of Lincoln, with 61 full-service and three limited-service branches. It reported $3.25 billion in assets, $2.16 billion in loans and $2.78 billion in deposits at year-end.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Net interest income | $133.8 million | $129.4 million |
| Noninterest income | $32.8 million | $31.2 million |
| Net income | $66.9 million | $63.8 million |
| Net interest margin | 4.31% | 4.16% |
| Efficiency ratio | 53.80% | 55.24% |
| Return on average assets | 2.07% | 1.96% |
| Operating cash flow | $89.1 million | $80.0 million |
Amounts are in U.S. dollars. Net income is GAAP and reflects the company’s prior S corporation tax status for most of 2019; C-corporation-equivalent net income, a non-GAAP measure, was $53.4 million versus $48.3 million. Adjusted C-corporation-equivalent net income was $57.4 million versus $50.3 million. Basic and diluted GAAP EPS was $3.33 versus $3.54; C-corporation-equivalent EPS was $2.66 versus $2.68. The share count increased with the October IPO, affecting per-share comparisons.
Fourth quarter: Net income was $16.1 million versus $11.9 million in Q4 2018; diluted EPS was $0.61 versus $0.66. Net interest income was $32.3 million versus $33.1 million. Q4 2019 included $4.4 million of income tax expense, compared with $0.2 million in Q4 2018, as the company became a taxable C corporation.
Balance sheet, liquidity and capital: Year-end cash and equivalents were $284.0 million, up $97.1 million; securities declined by about $120.4 million and loans grew $19.6 million. Deposits declined 0.7% to $2.78 billion; 98.4% were core deposits. The loan-to-deposit ratio rose to 77.9% from 76.7%. No FHLB or other borrowings were outstanding at year-end; subordinated debentures were $37.6 million and repurchase agreements were $44.4 million. Available FHLB borrowing capacity was $343.8 million. Management considered liquidity adequate. Operating cash flow was $89.1 million; investing activities provided $115.3 million and financing activities used $107.3 million, including $225.0 million of dividends paid.
Consolidated capital ratios at year-end included CET1 of 12.15%, Tier 1 risk-based capital of 13.64%, total capital of 14.54%, and Tier 1 leverage of 10.38%. Management said both banks were well capitalized. The allowance for loan losses was $22.3 million, or 1.03% of loans, versus $20.5 million and 0.96% a year earlier.
Changes, outlook and notable items
- Net income increased 4.8%; net interest income rose 3.4%, supported by higher asset yields and organic loan growth. Deposit and interest-bearing liability costs also increased. Tax-equivalent net interest margin rose to 4.38% from 4.25%.
- Credit costs improved: provision for loan losses declined to $3.4 million from $5.7 million, and net charge-offs fell to 0.07% of average loans from 0.23%. Nonperforming loans increased to 0.88% of loans from 0.74%, while nonperforming assets declined to 0.74% of assets from 0.78%, primarily as foreclosed assets were sold. Agricultural nonaccrual loans rose, mainly from one acquired relationship.
- The company completed its IPO on October 11, issuing 9.43 million shares at $16 and receiving about $138.5 million net of offering costs. Proceeds helped fund a $170 million special dividend to pre-IPO stockholders. Total 2019 dividends were $225.0 million. A quarterly dividend of $0.15 per share was announced in January 2020.
- HBT revoked its S corporation status effective October 11, 2019. It recorded a $0.5 million deferred tax asset and benefit; prior-year reported earnings are not directly comparable with fully taxed C-corporation results. Potential tax liabilities and indemnification obligations related to pre-IPO S corporation periods are disclosed.
- Noninterest expense increased 0.8% to $91.0 million, including a $3.8 million charge related to terminating the supplemental executive retirement plan; lump-sum payments were scheduled for June 2020. Mortgage servicing rights generated a $2.4 million fair-value loss, reflecting expected refinancing activity. Sale of First Community Title Services was completed in February 2019.
- Management expected the Federal Reserve’s 2019 rate cuts, followed by an additional 150 basis points of cuts in March 2020, to pressure net interest margin. The filing provides no quantified earnings or revenue guidance. Management expected COVID-19 to affect 2020 results and said it anticipated supporting customers; the magnitude and duration were uncertain.
Risks, contingencies and reporting
Key exposures include commercial real estate and other commercial lending, agricultural borrowers and commodity prices, local Illinois economic conditions, interest-rate and funding changes, deposit competition, and the effects of COVID-19. Other cited risks include cybersecurity and third-party technology disruptions, regulatory and compliance costs, acquisition execution, and the transition from LIBOR. The company had $542.7 million of commitments to extend credit and $9.0 million of standby letters of credit; these are not equivalent to funded loans, and commitments may expire undrawn. Management did not expect routine legal proceedings to have a material adverse effect.
The independent auditor issued an unqualified opinion on the financial statements. The report did not include an auditor opinion on internal control over financial reporting; HBT was a newly public emerging growth company, and management’s first annual assessment was not yet required. Management reported disclosure controls and procedures were effective at December 31, 2019.
Investor verification priorities
- Assess COVID-19’s realized effects on borrower performance, credit-loss provisions, customer assistance and 2020 earnings; these effects were uncertain when the filing was made.
- Review commercial real estate concentrations and the rise in nonperforming loans, especially acquired agricultural exposure and the adequacy of the allowance.
- Reconcile GAAP earnings and EPS with C-corporation-equivalent and adjusted measures, including the effects of the S-to-C conversion, IPO share issuance and one-time items.
- Check whether the approximately $40.2 million of fourth-quarter deposits from a small number of retail accounts flowed out as expected in Q1 2020, and monitor deposit trends and funding costs.
- Evaluate the sustainability of the 2019 dividend level after the $170 million special dividend, subject to bank dividend, capital and liquidity restrictions.