HBT Financial, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. HBT is an Illinois-focused community banking holding company operating Heartland Bank and State Bank of Lincoln. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Financial performance and condition
- Q3 earnings: Net income was $10.6 million and diluted EPS was $0.38. Net interest income was $28.9 million; provision for loan losses was $2.2 million.
- Nine-month earnings: Net income was $24.2 million and diluted EPS was $0.88. Net interest income was $88.4 million; provision for loan losses was $10.1 million.
- Margins: Net interest margin was 3.39% in Q3 and 3.63% for the first nine months, down from 4.27% and 4.38% in the comparable 2019 periods. Q3 efficiency ratio was 56.98%, versus 53.94%.
- Balance sheet at September 30: Total assets were $3.535 billion, loans before allowance were $2.280 billion, deposits were $3.017 billion, and stockholders’ equity was $355.3 million. Since year-end 2019, assets grew 8.9%, loans 5.4%, and deposits 8.6%.
- Credit reserves and quality: Allowance for loan losses was $31.7 million, or 1.39% of loans, versus $22.3 million and 1.03% at year-end. Nonperforming loans were $15.2 million (0.67% of loans), down from $19.0 million (0.88%); nonperforming assets were $19.1 million, down from $24.1 million.
- Liquidity and funding: Cash and cash equivalents were $236.7 million. Deposits were predominantly core deposits (99.18%); the loan-to-deposit ratio was 75.57%. The Banks had $337.0 million of remaining FHLB borrowing capacity and no FHLB or Federal Reserve discount-window borrowings outstanding.
- Debt and capital: HBT issued $40 million of 4.50% fixed-to-floating subordinated notes in September, due 2030; $39.2 million was the carrying value at quarter-end. The notes qualified as Tier 2 capital. Consolidated total risk-based capital was 16.81%, up from 14.54% at year-end; management said the Company and Banks met applicable capital requirements.
- Cash flows, nine months: Operating cash flow was negative $5.1 million, investing cash flow negative $309.8 million, and financing cash flow positive $267.6 million. Cash and cash equivalents declined $47.2 million to $236.7 million. Investing outflows included $344.3 million of securities purchases; financing inflows included $239.8 million of deposit growth and the subordinated-note issuance.
Changes versus comparable periods
- Q3 net income fell 39.4% from reported 2019 net income; nine-month net income fell 52.3%. These reported comparisons are affected by HBT’s conversion from S corporation to C corporation effective October 11, 2019. On a pro forma C-corporation basis, 2019 net income was $13.1 million for Q3 and $38.3 million for nine months; the respective declines were 19.5% and 36.8%.
- Management attributed lower earnings principally to reduced net interest income from lower market rates and higher loan-loss provision. Mortgage-loan sale gains partially offset these pressures: $3.2 million in Q3 versus $1.0 million, and $5.9 million for nine months versus $2.2 million.
- Loan-loss provision rose from $0.7 million to $2.2 million in Q3 and from $3.3 million to $10.1 million for nine months. Management said the nine-month increase primarily reflected a $9.2 million reserve build for COVID-19-related economic weakness.
- PPP loans totaled $179.7 million at quarter-end, net of deferred fees, and HBT reported $185.4 million of PPP originations to 2,329 businesses. Deposits increased in part from PPP proceeds and federal stimulus received by customers.
- Loans with COVID-related payment modifications that had not returned to regular payments declined to 57 loans totaling $36.4 million at September 30, from 395 loans totaling $203.2 million at June 30.
Outlook, risks and notable items
- HBT gave no specific numerical earnings or margin guidance. Management expected the low-rate environment and potential credit deterioration to continue pressuring net interest margin; quarterly margin declined from 4.03% in Q1 to 3.51% in Q2 and 3.39% in Q3.
- The filing identifies COVID-19, Illinois economic conditions, loan quality and concentrations, interest-rate movements, deposit competition, liquidity and capital access, and operational/cybersecurity risks as factors that could affect results. Retail, restaurant and hotel borrowers were identified as particularly susceptible to pandemic effects.
- Pass-watch loans increased 43.6% and substandard loans 41.4% from year-end 2019. Management attributed this credit migration to current or emerging weaknesses among borrowers affected by the downturn, while noting that charge-offs remained low.
- After quarter-end, the two bank subsidiaries agreed to a proposed merger, subject to regulatory approvals. On November 2, the board authorized a common-stock repurchase program of up to $15 million through December 31, 2021; purchases are not required and may be suspended or discontinued.
- Other notable matters: HBT terminated its supplemental executive retirement plan, making a lump-sum payment in June 2020; management reported no goodwill impairment. Management stated that routine legal claims were not expected to have a material financial effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How loan performance, criticized classifications, payment modifications and reserve adequacy evolve as pandemic-related support measures change.
- Whether lower rates, deposit pricing and the cost of subordinated funding continue to reduce net interest margin and earnings.
- The extent to which PPP fee recognition and elevated mortgage refinancing gains are temporary contributors to revenue.
- How much of the decline in reported year-over-year net income reflects the tax-status change; compare C-corporation-equivalent and adjusted results as well as GAAP figures.
- Regulatory approval and expected timing of the proposed bank merger, and whether the authorized share repurchase is undertaken.