HBT Financial, Inc. — Q1 2020 Form 10-Q
Business and period. Unaudited results for the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. HBT is an Illinois community banking holding company operating Heartland Bank and State Bank of Lincoln, with 64 branches across Central and Northeastern Illinois. It reports one community banking segment. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2020 | Comparable / prior |
|---|---|---|
| Interest and dividend income | $32.7 | $36.9 in Q1 2019 |
| Net interest income | $30.7 | $34.5 in Q1 2019 |
| Net interest margin | 4.00% | 4.44% in Q1 2019 |
| Noninterest income | $5.3 | $7.5 in Q1 2019 |
| Provision for loan losses | $4.4 | $0.8 in Q1 2019 |
| Noninterest expense | $23.3 | $22.2 in Q1 2019 |
| Income before taxes | $8.3 | $19.0 in Q1 2019 |
| Net income / diluted EPS | $6.2 / $0.23 | $18.7 / $1.04 in Q1 2019 |
| Adjusted net income / adjusted diluted EPS | $8.4 / $0.30 | $14.4 / $0.80 in Q1 2019 |
| Efficiency ratio | 64.01% | 52.07% in Q1 2019 |
| Return on average assets / equity | 0.78% / 7.29% | 2.32% / 21.59% in Q1 2019 |
The 2019 reported earnings comparison is affected by HBT’s S corporation status through October 10, 2019; the company provides a 2019 C corporation-equivalent net income of $14.0 million and diluted EPS of $0.78. Adjusted figures are non-GAAP measures and exclude specified items. Weighted average shares were 27.46 million in Q1 2020 versus 18.03 million in Q1 2019, also affecting per-share comparisons.
- Balance sheet: Assets were $3.213 billion, down 1.0% from year-end. Gross loans were $2.133 billion, down 1.4%; deposits were $2.730 billion, down 1.7%; stockholders’ equity was $339.8 million.
- Credit: The allowance for loan losses rose to $26.1 million, or 1.22% of gross loans, from $22.3 million, or 1.03%, at year-end. Q1 net charge-offs were $0.6 million, an annualized 0.11% of average loans. Nonperforming assets declined to $19.8 million from $24.1 million.
- Cash flow: Operating activities provided $12.5 million and investing activities provided $23.3 million; financing activities used $54.3 million. Cash and cash equivalents decreased $18.5 million to $265.4 million.
- Funding and debt: The loan-to-deposit ratio was 78.1%; core deposits were 99.0% of total deposits. Subordinated debentures were $37.6 million and repurchase agreements were $40.8 million. No FHLB or Federal Reserve borrowings were outstanding; available FHLB borrowing capacity was $335.7 million.
- Capital and shareholder returns: Consolidated total capital to risk-weighted assets was 15.03%, and tangible common equity to tangible assets was 9.81%. Management said the company and banks met applicable capital requirements and the banks were well capitalized. HBT paid a $0.15-per-share quarterly dividend, totaling $4.1 million.
Changes, outlook, and risks
- Net income fell year over year, driven principally by lower net interest income, a larger credit-loss provision, and a more negative mortgage servicing rights (MSR) valuation adjustment. Net interest income declined 11.0%; management attributed the decline mainly to lower rates and lower interest-earning assets.
- The provision increase included a $3.3 million reserve build reflecting COVID-19-related economic weakness. Management warned that further deterioration could increase provisions and impair borrower repayment capacity.
- The MSR fair value adjustment was a $2.2 million reduction to income, versus a $1.0 million reduction in Q1 2019, primarily reflecting faster expected prepayments amid refinancing activity. Goodwill was assessed for impairment at March 31 and was not impaired.
- Employee benefits expense included an approximately $0.8 million charge related to termination of the supplemental executive retirement plan; its remaining $13.6 million liability was scheduled for lump-sum payment in June 2020. Total noninterest expense rose 4.9% year over year.
- Management expected Federal Reserve rate cuts and potential further rate decreases to pressure net interest margin; it also cited potential increases in nonperforming loans. The filing provides no specific earnings or margin guidance.
- COVID-19 response included remote work, limited branch-lobby service, customer fee relief, and loan payment modifications. Through April 30, 438 loans totaling $258.5 million had been modified; through March 31, the count and balance were 191 and $129.1 million. HBT also reported $147.2 million of PPP loans for 1,225 businesses approved and funded after quarter-end through April 30.
- Risks include pandemic duration and economic effects, credit deterioration, low interest rates, deposit and liquidity pressures, Illinois market concentration, and PPP processing or litigation exposure. Commitments to extend credit were $502.2 million and standby letters of credit were $9.5 million; these are contractual amounts, not necessarily expected cash outflows. Management did not expect routine legal matters to have a material financial effect.
Important facts for investors to verify
- How COVID-era loan modifications perform, whether additional deferrals occur, and how much of the modified portfolio becomes delinquent or nonaccrual.
- Whether the $26.1 million allowance adequately reflects economic forecasts and credit exposure, particularly commercial real estate, commercial and industrial, and acquired loans.
- Subsequent-period net interest margin, deposit retention and funding costs following the rate cuts and the quarter’s $46.6 million deposit decline.
- Actual PPP loan balances, fee income, forgiveness outcomes, and any SBA guarantee disputes or related litigation.
- The cash and capital impact of the planned June 2020 SERP payout, continued dividends, and any further MSR valuation changes.