HBT - Doubling Down On HBT Financial At ~$19

2023-04-26 10:40:26 ET

Summary

• My top bank pick for 2023 is Heartland Financial of HBT Financial, Inc., based in Bloomington, IL.
• Yesterday (April 25), when bank stocks fell hard, I bought as many HBT Financial, Inc. shares as I could at a YTD low of <$18.
• HBT Financial, Inc. released Q1 this a.m. and, as I expected, results were solid. Adjusted for one-time acquisition expenses, HBT EPS beat consensus, though revenue light.
• My original Buy premise remains the same: the bank has excellent credit, superior low-cost sticky core deposits, is family-controlled, has solid expense management, makes buybacks and accretive acquisitions.
• Buying HBT Financial, Inc. today <$19.

Top Bank Pick for 2023

As noted in this December 27, 2022, article , HBT Financial, Inc. (HBT), the bank holding company for Heartland Bank and Trust Company, is now a holding in my long-term buy-and-hold bank portfolio. It is also my top pick for 2023, which means I buy it on weakness.

Disclosure: My most recent purchases were April 25 at prices ranging between $17.88 and $17.95 and I continue to buy shares.

HBT Key Statistics at a Glance

Source: YCharts, Seeking Alpha, Company Q1 2023 Press Release :

• April 25 closing price: $17.81
• Market Cap: $572 million
• Share count: 32.096 million.
• Shares Repurchased Q1: 79,463 @ $19.92
• Repurchase $ Capacity: $13.4 million.
• One month price: -9.9%
• YTD price: -8.3%
• One year price: -3.6%
• YTD price range: $17.81-$23.21.
• Analyst one-year price target: $22.90. (5 analysts, 1 Buy, 1 Outperform, 2 Holds, 1 Underperform, Consensus 2.6, Price Targets: $19.00 - $24.00).
• P/E: 8.5x (Pre-Q1 Earnings Report.)
• Forward P/E: 7.4x (Pre-Q1 Earnings Report)
• Loan/Deposit Ratio: 74%
• Adj. Return on Equity Q1: 19.1%.
• ROA Q1: 1.69%
• Cost of Deposits Q1: .24%.
• Cost of Funds Q1: .47%.
• Net Interest Margin Q1: 420 basis points, +112 BP Y/Y, +10 BP Q/Q.
• Efficiency Ratio Q1: 65%
• Dividend yield: 3.50%
• Payout Ratio: 33%.
• Beta (3-year): .48

Confirming Buy Case for My Long-Term Buy-and-Hold Portfolio

Profitability

My chief interest in HBT is its superior through-the-cycle profitability that consistently exceeds cost of capital.

According to my calculations, the bank's Risk-Adjusted Return on Equity (RAROE) since 2003 is ~12% and roughly the same over the past decade. (RAROE calculation: Average ROE - Standard Deviation of ROE.)

HBT's superior RAROE places it among the nation's top 5% of banks.

Before adjusting for one-time merger costs, Q1 2023 ROAE was 8.4% and ROAA was .78%. Adjusting for the one-time acquisition-related expenses, ROAE and ROAA exceeded HBT's historic run-rates for profitability.

Since the bank engages in only accretive acquisitions, my expectation is that recent acquisition will generate accretive earnings beginning in Q2.

Management

Heartland is family controlled, and I view that as a major positive.

In my December 2022 article, I identified succession planning as a risk. Earlier this month, the bank addressed this concern by announcing the promotion of a long-tenured executive to the role of bank CEO. The bank's controlling shareholder is now Executive Chairman.

Low Cost of Funds/Strong Core Deposits

The bank's Q1 earnings press release dated April 26 confirmed the strength of Heartland's deposit franchise.

HBT's recently issued 10-K is a must-read, especially the section entitled, "Quantitative and Qualitative Disclosure about Market Risk." The beneficial impact of rising interest rates is documented in this section of the 10-K.

Liquidity/Moderate Loan to Deposit Ratio

Heartland's loan to deposit ratio is now 74%, up modestly from 70% in 2022 when I began acquiring shares.

Credit Quality

HBT is high-quality lender. My rough calculation shows the bank's rolling net charge-offs ratio to be .10%.

Q1 credit metrics were excellent.

Q1 Share Repurchase/Capacity

The bank repurchased 79,463 shares at an average cost of $19.92 per share. The $1.56 million buyback in Q1 is against a board approved capacity of $15 million. I like buying shares when the board and insiders are also buyers.

In March, two directors made modest open market purchases of HBT shares at prices of $19.69 and $21.43.

Knowing the bank bought back shares at $19.92, and insiders bought shares at an average cost of $20.50, reinforces my conviction to be a buyer of HBT when share price is below $20.

Risks

The principal short-term (<1 year) risk is systemic risk, which results from macro-economic or public policy errors that HBT and other well-run banks cannot escape by virtue of being important cogs in the U.S. economy.

A secondary systemic risk is that HBT (and other great U.S. banks) cannot escape investor sentiment when "Mr. Market" marks down the prices of all banks. Call this "Beta" risk. Clearly, as investors saw yesterday (April 25), virtually all bank stocks fell hard when bank worries heightened after First Republic Bank (FRC) announced massive deposit outflows.

HBT's long-term record of operational excellence mitigates my worries about idiosyncratic risk.

As I believe HBT is in a unique position to be an accretive acquirer of other Midwest banks, I will monitor closely any future acquisitions. As a rule, I do not want to own serial acquirers; this rule is based on the industry's documented history of overpaying for acquisitions, a topic I have addressed in a series of articles and White Papers for The Risk Management Association. That said, if HBT remains a disciplined acquirer, I am ok with accretive acquisitions where goodwill is kept at a minimum.

Caveat

The foregoing is my opinion which I share for the purpose of getting feedback and questions that challenge my ideas and assumptions.

Every investor needs to do his/her own due diligence before investing as well as determine their risk profile. I am risk-averse, preferring to invest in the nation's best banks which reliably earn returns exceeding the cost of capital.

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