HBT Financial, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Results are unaudited. HBT Financial is a bank holding company serving Illinois and eastern Iowa through Heartland Bank and Trust Company.
Financial performance and condition
Unless otherwise noted, dollar amounts below are in millions.
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Net interest income | $46.8 | $31.9 in Q1 2022 |
| Net interest margin | 4.20% | 3.08% in Q1 2022 |
| Net income; diluted EPS | $9.2; $0.30 | $13.6; $0.47 in Q1 2022 |
| Adjusted net income; adjusted diluted EPS (non-GAAP) | $19.9; $0.64 | $12.2; $0.42 in Q1 2022 |
| Total assets | $5,013.8 | $4,286.7 at December 31, 2022 |
| Loans before allowance; allowance | $3,195.5; $38.8 | $2,620.3; $25.3 at December 31, 2022 |
| Total deposits | $4,310.5 | $3,587.0 at December 31, 2022 |
| Cash and cash equivalents | $177.1 | $114.2 at December 31, 2022 |
| Stockholders’ equity | $450.1 | $373.6 at December 31, 2022 |
- Interest and dividend income rose to $51.8 million from $33.3 million, while interest expense increased to $4.9 million from $1.4 million. Management attributed higher net interest income mainly to asset repricing and greater average earning assets following the Town and Country acquisition.
- Noninterest income was $7.4 million, down from $10.0 million; noninterest expense was $35.9 million, up from $24.2 million. The efficiency ratio increased to 65.27% from 56.97%.
- Net cash provided by operating activities was $21.5 million, versus $21.2 million in Q1 2022. Investing activities provided $225.0 million, including securities-sale proceeds; financing activities used $183.6 million, including repayment of FHLB advances. Cash increased $63.0 million during the quarter.
- At March 31, FHLB advances were $75.2 million, down from $160.0 million at year-end; repurchase agreements were $34.9 million. Subordinated notes were $39.4 million and junior subordinated debentures were $52.7 million.
- The loan-to-deposit ratio was 74.13%. Estimated uninsured deposits were $936.1 million; the company reported no brokered deposits. Core deposits were 98.61% of deposits.
- The Bank’s total capital, Tier 1 capital, common equity Tier 1, and leverage ratios were 15.00%, 14.11%, 14.11%, and 11.03%, respectively. The company and Bank met applicable capital requirements; the Bank was well capitalized.
Material changes versus prior periods
- HBT completed its acquisition of Town and Country Financial Corporation on February 1, 2023. Consideration was approximately $109.4 million, comprising 3.4 million HBT shares and $38.0 million cash. The acquisition added $905.6 million of assets, including $635.4 million of loans and $720.4 million of deposits, and generated $30.6 million of goodwill. The core system conversion was completed in April.
- Actual Q1 net income fell 32.3% year over year despite higher net interest income. HBT recorded $13.1 million of acquisition-related costs, including $5.2 million of provision for acquired non-PCD loans and $0.7 million for unfunded commitments. Excluding specified items, the company reported adjusted net income of $19.9 million; this is a non-GAAP measure.
- The vast majority of securities acquired from Town and Country were sold. Proceeds of $145.8 million were used to reduce FHLB borrowings, and the sales generated a $1.0 million realized loss.
- Loans grew 22.0% from year-end, primarily because of the acquisition. Excluding the acquisition, loans decreased $60.1 million, which management linked to portfolio balance reductions, refinancings, payoffs, and lower seasonal grain-elevator credit usage. Deposits also increased mainly because of the acquisition; excluding it, deposits were nearly unchanged.
- HBT adopted CECL on January 1, 2023, recording a $6.9 million net reduction to opening retained earnings. The allowance for loan losses was 1.21% of loans at quarter-end, compared with 0.97% at year-end.
Outlook, risks, contingencies, and unusual items
- No specific earnings or balance-sheet guidance is provided. Management said it expects deposit costs to rise during 2023 and deposit balances may decline, potentially requiring higher-cost FHLB, brokered, or other wholesale funding. Management expects rising market rates generally to support net interest margin, while rate declines may pressure it.
- The allowance forecast assumes a mild recession beginning in the second half of 2023, with higher unemployment and slowing or contracting GDP over the forecast period. Management cautioned that weaker economic conditions could increase credit losses.
- Nonperforming assets were $9.9 million, or 0.20% of assets, versus $5.2 million and 0.12% at year-end. Nonaccrual loans rose to $6.5 million from $2.2 million, largely reflecting acquired loans. Pass-watch and substandard balances also increased, primarily because of the acquisition.
- Interest-rate modeling showed estimated year-one net interest income decreasing 3.1% under an immediate 100-basis-point rate decline and increasing 1.1% under a 100-basis-point increase. These simulations rely on assumptions and are not forecasts.
- Available-for-sale securities had $78.0 million of gross unrealized losses at March 31, 2023; held-to-maturity securities had $54.9 million. Management said it did not intend to sell securities in loss positions and expected to recover amortized cost before any required sale. A $0.6 million credit-loss allowance was established on one bank subordinated security.
- A proposed $13.0 million settlement of two litigation matters remained subject to definitive agreements and court approval. A $13.0 million liability and $7.4 million insurance receivable were recorded; the estimated $5.6 million net cost was recognized in Q4 2022. Separate overdraft-fee class actions had a $2.6 million accrual; management could not estimate a range of possible loss.
- Other stated risks include deposit competition and concentration, interest-rate and securities-value changes, loan concentrations and credit quality, economic conditions in Illinois and Iowa, regulatory changes, cybersecurity and technology disruption, and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How recurring earnings, operating costs, and integration benefits develop after the Town and Country acquisition, given acquisition expenses and the gap between GAAP and adjusted results.
- Deposit retention, deposit pricing, uninsured-deposit levels, and any increased reliance on wholesale funding as rates and competition evolve.
- Credit trends in acquired and existing portfolios, including criticized loans, nonaccrual loans, allowance adequacy, and the recession assumptions underpinning CECL.
- Liquidity and capital resilience under stress, including the sensitivity of earnings to falling rates and the unrealized losses in the securities portfolio.
- Final court approval and terms of the proposed $13.0 million settlement, insurance recovery, and developments in the other class actions.
- Execution of acquisition integration and whether asset-quality and earnings comparisons are affected by acquisition accounting or other non-GAAP adjustments.