HBT Financial, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2022. HBT Financial is the holding company for Heartland Bank and Trust Company, serving customers in Central and Northeastern Illinois and Eastern Iowa. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $37.4m | $30.7m | $103.7m | $89.5m |
| Net interest margin | 3.65% | 3.18% | 3.36% | 3.19% |
| Net income | $15.6m | $13.7m | $43.3m | $42.7m |
| Diluted EPS | $0.54 | $0.50 | $1.49 | $1.56 |
| Noninterest income | $8.2m | $8.4m | $26.8m | $28.0m |
| Noninterest expense | $24.0m | $22.2m | $72.0m | $66.9m |
At September 30, 2022, total assets were $4.21 billion, loans before allowance were $2.58 billion, deposits were $3.64 billion, and stockholders’ equity was $359.1 million. Loans rose 3.2% and deposits declined 2.5% from December 31, 2021. The loan-to-deposit ratio was 70.81%; core deposits were 99.29% of deposits.
Cash and cash equivalents fell $331.1 million from year-end to $78.2 million. For the first nine months, operating cash flow was $49.1 million, investing cash outflow was $313.7 million, and financing cash outflow was $66.5 million. HBT had $60.0 million of FHLB advances outstanding and reported $330.6 million of remaining FHLB borrowing capacity. Management said available liquidity was adequate for reasonably foreseeable needs. Estimated uninsured deposits were $772.0 million.
Debt securities had a combined carrying amount of $1.40 billion, including $853.7 million of available-for-sale securities and $546.7 million of held-to-maturity securities. The held-to-maturity portfolio’s disclosed fair value was $481.7 million. Rising rates drove substantial unrealized securities losses: accumulated other comprehensive income moved from positive $1.5 million at year-end to a loss of $77.5 million. Total stockholders’ equity declined 12.8% to $359.1 million; tangible common equity to tangible assets was 7.85%.
Regulatory capital remained above stated minimums: the Bank’s total capital ratio was 15.60%, CET1 ratio 14.79%, and leverage ratio 10.83%. Asset quality indicators included a 0.97% allowance-to-loans ratio, $3.2 million in nonaccrual loans, and nonperforming assets equal to 0.14% of total assets.
Material changes versus comparable periods
- Q3 net income increased 13.9%; nine-month net income increased 1.5%. Net interest income rose 21.7% in Q3 and 15.8% year to date, aided by higher asset balances following the NXT acquisition, a more favorable asset mix, and higher asset yields.
- Higher benchmark rates helped lift margins, more than offsetting sharply lower PPP loan-fee contributions. PPP fees recognized as loan interest were $0.1 million in Q3 2022 versus $3.0 million a year earlier.
- Q3 included a $0.4 million provision for loan losses, compared with a $1.7 million provision credit in Q3 2021. The nine-month provision was a $0.1 million credit, versus a $7.2 million credit in 2021.
- Mortgage-loan sale gains declined $0.9 million in Q3 and $3.7 million for the first nine months, reflecting reduced refinancing activity as rates rose. Nine-month noninterest income fell 4.1%, while noninterest expense increased 7.7%, primarily reflecting the higher expense base after the NXT acquisition.
- Deposits decreased $94.7 million from year-end, while cash fell as liquidity was reinvested in securities and loans. Loans grew $80.2 million; growth was partly offset by PPP forgiveness.
- Pass-watch loans declined 61.0% and substandard loans declined 11.9% from year-end, which management attributed primarily to upgrades and paydowns. Nonperforming assets remained low at 0.14% of assets.
Outlook, risks, contingencies, and unusual items
- Management expected deposit competition and deposit costs to increase during the remainder of 2022, with balances potentially declining and outflows potentially replaced by higher-cost FHLB advances, brokered deposits, or other wholesale funding. Management expected higher asset yields to more than offset increased funding costs, but this is forward-looking and subject to change.
- Interest-rate sensitivity modeling estimated that an immediate parallel increase of 100 basis points would raise net interest income by 3.0% in year one and 5.1% in year two; a 100-basis-point decrease was estimated to reduce it by 5.2% and 7.6%, respectively. The filing cautions that model assumptions limit forecast precision.
- HBT agreed to acquire Town and Country Financial Corporation for approximately $101.4 million in implied aggregate value, with consideration consisting of approximately 3.4 million HBT shares and $38.0 million cash. The transaction was expected to close in Q1 2023, subject to shareholder, regulatory, and customary approvals. HBT recorded $0.5 million of Q3 pretax acquisition expenses. The stock-repurchase program was paused pending the Town and Country shareholder vote.
- Two purported class actions allege improper overdraft or insufficient-funds fees. HBT said loss was not probable, recorded no accrual, but described an unfavorable outcome as reasonably possible; it could not estimate a loss range.
- HBT recorded $112.9 million of nine-month pretax unrealized losses on available-for-sale securities, primarily attributed to interest-rate movements. Management considered the declines temporary. Most held-to-maturity fair-value changes do not flow through reported equity while securities remain classified as held-to-maturity.
- Other risks cited include inflation, economic conditions, credit quality, interest-rate and deposit competition, cybersecurity and technology, regulation, and the company’s Illinois/Iowa geographic concentration. The filing reported no material changes to the risk factors in its 2021 Form 10-K. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the Town and Country transaction received required approvals, closed on the expected terms and timing, and produced the anticipated benefits and share dilution.
- Subsequent deposit trends, funding costs, liquidity usage, and reliance on FHLB or other wholesale funding as rates and competition change.
- The scale and duration of securities’ unrealized losses, including held-to-maturity fair values, and any implications for capital, liquidity, or planned portfolio actions.
- Whether margin gains persist as deposit costs reprice, and how actual results compare with the filing’s interest-rate sensitivity assumptions.
- Developments in the overdraft-fee lawsuits, credit quality, and the allowance for loan losses.