Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-39085
HBT Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware
37-1117216
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
401 North Hershey Rd
Bloomington, Illinois 61704
(888) 897-2276
(Address of principal executive offices,including zip code)
(Registrant’s telephone number,including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
HBT
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 27, 2021, there were 27,366,459 shares outstanding of the registrant’s common stock, $0.01 par value.
TABLE OF CONTENTSHBT Financial, Inc.
Page
PART I. FINANCIAL INFORMATION
3
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Income
4
Consolidated Statements of Comprehensive Income
5
Consolidated Statement of Changes in Stockholders’ Equity
6
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
47
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
80
Item 4.
Controls and Procedures
81
PART II. OTHER INFORMATION
82
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
83
Item 5.
Other Information
Item 6.
Exhibits
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report are forward-looking statements. Forward-looking statements may include statements relating to our plans, strategies and expectations, the economic impact of the COVID-19 pandemic and our future financial results, near-term loan growth, net interest margin, mortgage banking profits, wealth management fees, expenses, asset quality, capital levels, continued earnings and liquidity. Forward looking statements are generally identifiable by use of the words "believe," "may," "will," "should," "could," "expect," "estimate," "intend," "anticipate," "project," "plan" or similar expressions. Forward looking statements are frequently based on assumptions that may or may not materialize and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or prospects include, but are not limited to:
1
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HBT FINANCIAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(Unaudited)
March 31,
December 31,
2021
2020
ASSETS
Cash and due from banks
$
22,976
24,912
Interest-bearing deposits with banks
406,760
287,539
Cash and cash equivalents
429,736
312,451
Debt securities available-for-sale, at fair value
856,835
922,869
Debt securities held-to-maturity (fair value of $195,608 in 2021 and $72,441 in 2020)
192,994
68,395
Equity securities with readily determinable fair value
3,332
3,292
Equity securities with no readily determinable fair value
1,552
Restricted stock, at cost
2,498
Loans held for sale
12,882
14,713
Loans, net of allowance for loan losses of $28,759 in 2021 and $31,838 in 2020
2,241,946
2,215,168
Bank premises and equipment, net
52,548
52,904
Bank premises held for sale
121
Foreclosed assets
4,748
4,168
Goodwill
23,620
Core deposit intangible assets, net
2,509
2,798
Mortgage servicing rights, at fair value
7,629
5,934
Investments in unconsolidated subsidiaries
1,165
Accrued interest receivable
12,718
14,255
Other assets
18,781
20,664
Total assets
3,865,614
3,666,567
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing
968,991
882,939
Interest-bearing
2,386,975
2,247,595
Total deposits
3,355,966
3,130,534
Securities sold under agreements to repurchase
41,976
45,736
Subordinated notes
39,257
39,238
Junior subordinated debentures issued to capital trusts
37,665
37,648
Other liabilities
33,344
49,494
Total liabilities
3,508,208
3,302,650
COMMITMENTS AND CONTINGENCIES (Notes 7 and 18)
Stockholders' Equity
Preferred stock, $0.01 par value; 25,000,000 shares authorized; none issued or outstanding
—
Common stock, $0.01 par value; 125,000,000 shares authorized; shares issued of 27,477,531 in 2021 and 27,457,306 in 2020; shares outstanding of 27,382,069 in 2021 and 27,457,306 in 2020
275
Surplus
191,004
190,875
Retained earnings
165,735
154,614
Accumulated other comprehensive income
1,906
18,153
Treasury stock at cost, 95,462 shares in 2021
(1,514)
Total stockholders’ equity
357,406
363,917
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements (Unaudited)
HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable
25,134
26,941
Federally tax exempt
610
674
Securities:
3,633
3,334
1,136
1,028
Interest-bearing deposits in bank
729
Other interest and dividend income
13
14
Total interest and dividend income
30,606
32,720
INTEREST EXPENSE
Deposits
644
1,595
20
Borrowings
470
355
443
Total interest expense
1,477
2,058
Net interest income
29,129
30,662
PROVISION FOR LOAN LOSSES
(3,405)
4,355
Net interest income after provision for loan losses
32,534
26,307
NONINTEREST INCOME
Card income
2,258
1,792
Service charges on deposit accounts
1,297
1,834
Wealth management fees
1,972
1,814
Mortgage servicing
685
724
Mortgage servicing rights fair value adjustment
1,695
(2,171)
Gains on sale of mortgage loans
2,100
536
Gains (losses) on securities
40
(52)
Gains (losses) on foreclosed assets
(76)
35
Gains (losses) on other assets
(3)
Other noninterest income
836
743
Total noninterest income
10,808
5,252
NONINTEREST EXPENSE
Salaries
12,596
12,754
Employee benefits
1,722
2,434
Occupancy of bank premises
1,938
1,828
Furniture and equipment
623
603
Data processing
1,688
1,586
Marketing and customer relations
565
1,044
Amortization of intangible assets
289
317
FDIC insurance
240
36
Loan collection and servicing
365
348
143
89
Other noninterest expense
2,375
2,268
Total noninterest expense
22,544
23,307
INCOME BEFORE INCOME TAX EXPENSE
20,798
8,252
INCOME TAX EXPENSE
5,553
2,031
NET INCOME
15,245
6,221
EARNINGS PER SHARE - BASIC
0.55
0.23
EARNINGS PER SHARE - DILUTED
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
27,430,912
27,457,306
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized (losses) gains on debt securities available-for-sale
(23,074)
7,602
Reclassification adjustment for amortization (accretion) of net unrealized gain (loss) on debt securities transferred to held-to-maturity
32
(9)
Unrealized gains (losses) on derivative instruments
219
(970)
Reclassification adjustment for net settlements on derivative instruments
99
Total other comprehensive (loss) income, before tax
(22,724)
6,625
Income tax (benefit) expense
(6,477)
1,888
Total other comprehensive (loss) income
(16,247)
4,737
TOTAL COMPREHENSIVE (LOSS) INCOME
(1,002)
10,958
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Other
Total
Common Stock
Retained
Comprehensive
Treasury
Stockholders’
Shares
Amount
Earnings
Income (Loss)
Stock
Equity
Balance, December 31, 2020
Net income
Other comprehensive loss
Stock-based compensation
129
Issuance of common stock upon vesting of restricted stock units
20,225
Repurchase of common stock
(95,462)
Cash dividends and dividend equivalents ($0.15 per share)
(4,124)
Balance, March 31, 2021
27,382,069
Balance, December 31, 2019
190,524
134,287
7,832
332,918
Other comprehensive income
67
(4,130)
Balance, March 31, 2020
190,591
136,378
12,569
339,813
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
774
690
Provision for loan losses
Net amortization of debt securities
1,732
790
Amortization of unrealized gain on dedesignated cash flow hedge
(32)
Deferred income tax expense (benefit)
(678)
Net accretion of discount and deferred loan fees on loans
(2,562)
(922)
Net unrealized (gain) loss on equity securities
(40)
52
Net loss on sales of bank premises and equipment
Net loss (gain) on sales of foreclosed assets
(75)
Write-down of foreclosed assets
73
Amortization of intangibles
(Increase) decrease in mortgage servicing rights
(1,695)
2,171
Amortization of discount and issuance costs on subordinated notes and debentures
16
Mortgage loans originated for sale
(71,835)
(32,156)
Proceeds from sale of mortgage loans
75,766
32,418
Net gain on sale of mortgage loans
(2,100)
(536)
Decrease in accrued interest receivable
1,537
1,855
Decrease in other assets
875
887
Decrease in other liabilities
(9,032)
(2,971)
Net cash provided by operating activities
6,475
12,519
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits with banks
248
Proceeds from paydowns, maturities, and calls of debt securities
59,641
48,305
Purchase of securities
(142,980)
(56,349)
Net (increase) decrease in loans
(21,482)
31,210
Purchases of bank premises and equipment
(418)
(841)
Proceeds from sales of foreclosed assets
15
677
Net cash (used in) provided by investing activities
(105,224)
23,250
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits
225,432
(46,552)
Net decrease in repurchase agreements
(3,760)
(3,622)
Cash dividends and dividend equivalents paid
Net cash provided by (used in) financing activities
216,034
(54,304)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
117,285
(18,535)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
283,971
CASH AND CASH EQUIVALENTS AT END OF PERIOD
265,436
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest
2,077
2,166
Cash paid for income taxes
985
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Transfers of loans to foreclosed assets
671
19
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ACCOUNTING POLICIES
Basis of Presentation
HBT Financial, Inc. (the Company) is headquartered in Bloomington, Illinois and is the holding company for Heartland Bank and Trust Company (the Bank or Heartland Bank). The Bank provides a comprehensive suite of business, commercial, wealth management and retail banking products and services to individuals, businesses, and municipal entities throughout Central and Northeastern Illinois.
The unaudited consolidated financial statements, including the notes thereto, have been prepared in accordance with generally accepted accounting principles (GAAP) interim reporting requirements. Certain information in footnote disclosures normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These interim unaudited consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 12, 2021.
The unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.
The Company qualifies as an "emerging growth company" as defined by the Jumpstart Our Business Startups Act (JOBS Act). The JOBS Act permits emerging growth companies an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to use the extended transition period until the Company is no longer an emerging growth company or until the Company chooses to affirmatively and irrevocably opt out of the extended transition period. As a result, the Company’s financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies.
Merger of State Bank of Lincoln into Heartland Bank
On October 20, 2020, Heartland Bank and State Bank of Lincoln, both wholly-owned bank subsidiaries of the Company on that date, entered into a Bank Merger Agreement providing for the merger of State Bank of Lincoln into Heartland Bank. The merger was consummated on December 31, 2020, resulting in Heartland Bank being our sole bank subsidiary, with the branch locations in Lincoln, Illinois operating as “State Bank of Lincoln, a division of Heartland Bank and Trust Company.”
Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the reported results of operations for the periods then ended.
Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses, goodwill, and income taxes.
Segment Reporting
The Company’s operations consist of one reportable segment called community banking.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation without any impact on the reported amounts of net income or stockholders’ equity.
Subsequent Events
In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities available-for-sale and purchased financial assets with credit deterioration. ASU 2016-13 is effective for years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for years beginning after December 31, 2018, including interim periods within those years. The Company is currently evaluating the effect that this standard will have on the consolidated results of operations and financial position.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under the ASU, a company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for annual or any interim goodwill impairment tests in years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. This standard is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, if certain criteria are met. In January 2021, the FASB also issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope which refined the scope for certain optional expedients and exceptions for contract modifications and hedge accounting to apply to derivative contracts and certain hedging relationships affected by the discounting transition. Entities may apply the provisions as of the beginning of the reporting period when the election is made and are available until December 31, 2022. The Company is currently evaluating the effect that this standard will have on the consolidated results of operations and financial position.
10
NOTE 2 – SECURITIES
The carrying balances of the securities were as follows:
Debt securities available-for-sale
Debt securities held-to-maturity
Total securities
1,054,713
996,108
There were no sales of securities during the three months ended March 31, 2021 and 2020. Gains (losses) on securities were as follows during the three months ended March 31:
Net realized gains (losses) on sales
Net unrealized gains (losses) on equity securities:
Readily determinable fair value
No readily determinable fair value
On March 31, 2021, the Company transferred certain debt securities from the available-for-sale category to the held-to-maturity category in order to better reflect the revised intentions of the Company due to possible market value volatility, resulting from a potential rise in interest rates. The following is a summary of the amortized cost and fair value of securities transferred to the held-to-maturity category:
Amortized
Cost
Fair Value
U.S. government agency
7,593
7,323
Mortgage-backed:
Agency residential
8,776
8,536
Agency commercial
118,792
113,861
135,161
129,720
The debt securities were transferred between categories at fair value, with the transfer date fair value becoming the new amortized cost for each security transferred. The unrealized gain (loss), net of tax, at the date of transfer remains a component of accumulated other comprehensive income, but will be amortized over the remaining life of the debt securities as an adjustment of yield in a manner consistent with amortization of any premium or discount. As a result, the amortization of an unrealized gain (loss) reported in accumulated other comprehensive income will offset or mitigate the effect on interest income of the amortization of the premium or discount for that held-to-maturity debt security.
11
Debt Securities
The amortized cost and fair values of debt securities, with gross unrealized gains and losses, are as follows:
March 31, 2021
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Available-for-sale:
129,494
1,785
(3,341)
127,938
Municipal
280,212
6,479
(4,358)
282,333
164,942
4,366
(204)
169,104
208,692
2,861
(3,556)
207,997
Corporate
67,959
1,950
(446)
69,463
Total available-for-sale
851,299
17,441
(11,905)
Held-to-maturity:
21,067
1,188
22,255
20,335
388
20,723
144,269
1,323
(285)
145,307
Total held-to-maturity
2,899
195,608
Total debt securities
1,044,293
20,340
(12,190)
1,052,443
December 31, 2020
118,282
3,720
121,993
265,309
9,232
(280)
274,261
198,543
4,871
(162)
203,252
246,649
4,651
(534)
250,766
70,917
1,786
(106)
72,597
899,700
24,260
(1,091)
22,484
1,390
23,874
13,031
452
13,483
32,880
2,222
(18)
35,084
4,064
72,441
968,095
28,324
(1,109)
995,310
12
As of March 31, 2021 and December 31, 2020, the Bank had debt securities with a carrying value of $283,967,000 and $308,064,000, respectively, which were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes required or permitted by law.
The Company has no direct exposure to the State of Illinois, but approximately 43% of the obligations of local municipalities portfolio consists of debt securities issued by municipalities located in Illinois as of March 31, 2021. Approximately 94% of such debt securities were general obligation issues as of March 31, 2021.
The amortized cost and fair value of debt securities by contractual maturity, as of March 31, 2021, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale
Held-to-Maturity
Due in 1 year or less
31,406
31,734
2,772
2,817
Due after 1 year through 5 years
76,138
78,807
12,000
12,770
Due after 5 years through 10 years
242,096
242,487
13,227
13,580
Due after 10 years
128,025
126,706
391
411
The following tables present gross unrealized losses and fair value of debt securities, aggregated by category and length of time that individual debt securities have been in a continuous unrealized loss position, as of March 31, 2021 and December 31, 2020:
Investments in a Continuous Unrealized Loss Position
Less than 12 Months
12 Months or More
UnrealizedLoss
80,395
119,502
(165)
26,810
(39)
3,594
30,404
119,719
7,009
(11,866)
353,435
357,029
7,669
(12,151)
361,104
364,698
5,919
19,652
(142)
20,387
(20)
4,490
24,877
(524)
57,126
(10)
3,449
60,575
4,849
(1,061)
107,933
(30)
7,939
115,872
2,983
(1,079)
110,916
118,855
As of March 31, 2021, there were 14 debt securities in an unrealized loss position for a period of twelve months or more, and 184 debt securities in an unrealized loss position for a period of less than twelve months. These unrealized losses are primarily a result of fluctuations in market interest rates. In analyzing an issuer’s financial condition, management considers whether the debt securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management believes that all declines in value of these debt securities are deemed to be temporary.
Equity Securities
The Company has elected to measure equity securities with no readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes for identical or similar securities of the same issuer.
The initial cost and carrying values of equity securities, with cumulative net unrealized gains and losses are as follows:
Readily
No Readily
Determinable
Initial cost
3,098
1,717
Cumulative net unrealized gains (losses)
234
Carrying value
194
As of March 31, 2021 and December 31, 2020, the cumulative net unrealized losses on equity securities with no readily determinable fair value reflect downward adjustments based on observable price changes of an identical investment. There have been no impairments or upward adjustments based on observable price changes to equity securities with no readily determinable fair value.
NOTE 3 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Major categories of loans are summarized as follows:
Commercial and industrial
412,812
393,312
Agricultural and farmland
228,032
222,723
Commercial real estate - owner occupied
224,599
222,360
Commercial real estate - non-owner occupied
516,963
520,395
Multi-family
236,381
236,391
Construction and land development
215,375
225,652
One-to-four family residential
300,768
306,775
Municipal, consumer, and other
135,775
119,398
Loans, before allowance for loan losses
2,270,705
2,247,006
Allowance for loan losses
(28,759)
(31,838)
Loans, net of allowance for loan losses
Paycheck Protection Program (PPP) loans (included above)
175,389
153,860
8,921
3,049
6,249
6,587
Total PPP loans
190,559
163,496
The following tables detail activity in the allowance for loan losses for the three months ended March 31:
Commercial
Municipal,
Agricultural
Real Estate
Construction
One-to-four
Consumer,
and
Owner
Non-owner
and Land
Family
Three Months Ended March 31, 2021
Industrial
Farmland
Occupied
Multi-Family
Development
Residential
Allowance for loan losses:
3,929
793
3,141
11,251
1,957
4,232
1,801
4,734
31,838
(1,802)
72
(426)
133
(316)
(198)
(940)
Charge-offs
(72)
(123)
(195)
Recoveries
293
90
42
521
2,420
865
2,715
11,330
2,090
4,006
1,573
3,760
28,759
Consumer
Three Months Ended March 31, 2020
4,441
2,766
1,779
3,663
1,024
2,977
2,540
3,109
22,299
538
254
(97)
820
450
237
777
1,376
(809)
(27)
(56)
(1)
(104)
(224)
(1,221)
54
440
71
74
654
4,224
2,993
2,122
4,432
1,474
3,223
3,284
4,335
26,087
The following tables present the recorded investments in loans and the allowance for loan losses by category:
Loan balances:
Collectively evaluated for impairment
408,664
226,668
204,327
477,116
234,257
208,835
283,562
122,266
2,165,695
Individually evaluated for impairment
3,230
548
12,680
25,871
874
4,165
9,443
13,455
70,266
Acquired with deteriorated credit quality
918
816
7,592
13,976
1,250
7,763
34,744
1,218
845
2,032
6,947
2,080
3,846
1,091
1,328
19,387
1,095
420
4,142
144
479
2,431
8,730
107
263
241
642
387,072
217,077
201,417
480,165
234,252
219,822
287,845
105,796
2,133,446
5,312
4,793
13,132
25,993
876
3,809
10,343
13,546
77,804
928
853
7,811
14,237
1,263
2,021
8,587
56
35,756
2,736
771
2,306
6,736
3,984
1,237
1,432
21,152
1,193
22
429
4,255
222
560
3,301
9,982
406
260
26
704
17
The following tables present loans individually evaluated for impairment by category of loans:
Unpaid
Principal
Recorded
Related
Balance
Investment
Allowance
With an allowance recorded:
2,252
2,240
166
165
3,156
3,121
20,605
20,256
2,229
2,196
2,835
2,587
8,770
8,744
40,013
39,309
With no related allowance:
1,738
990
383
9,635
9,559
5,747
5,615
1,978
1,969
8,556
6,856
4,774
4,711
33,685
30,957
Total loans individually evaluated for impairment:
3,990
549
12,791
26,352
4,207
11,391
13,544
73,698
18
2,737
2,725
169
168
3,072
3,040
20,726
20,394
2,081
2,055
2,963
2,739
12,207
12,181
43,955
43,302
3,322
4,625
10,164
10,092
5,727
5,599
1,762
1,754
9,325
7,604
1,431
1,365
37,232
34,502
6,059
4,794
13,236
26,453
3,843
12,288
13,638
81,187
The following table presents the average recorded investment and interest income recognized for loans individually evaluated for impairment by category of loans during the three months ended March 31:
Average
Interest
Income
Recognized
2,266
31
3,486
49
573
3,244
41
828
20,361
208
2,248
27
3,064
2,644
23
3,261
8,802
12,487
39,733
372
23,798
217
1,068
5,941
58
12,520
161
9,600
122
10,432
131
5,665
68
3,340
1,764
324
6,981
8,344
62
4,746
1,370
31,083
42,271
513
45
9,427
551
13,093
12,844
163
11,260
142
26,026
276
3,439
43
4,012
53
3,388
9,625
11,605
13,548
13,857
139
70,816
689
66,069
730
The following tables present the recorded investment in loans by category based on current payment and accrual status:
Accruing Interest
30 - 89 Days
90+ Days
Current
Past Due
Nonaccrual
Loans
412,005
807
224,026
512,889
92
3,982
215,221
296,530
706
29
3,503
135,550
113
102
2,260,634
926
39
9,106
392,490
822
221,308
112
940
516,387
4,008
225,508
301,282
984
595
3,914
119,055
211
21
111
2,235,144
1,307
616
9,939
The following tables present total loans by category based on their assigned risk ratings determined by management:
Pass
Pass-Watch
Substandard
Doubtful
392,957
15,734
4,121
196,773
29,994
1,265
180,381
31,165
13,053
429,273
58,874
28,816
208,800
26,707
182,730
28,480
276,413
13,839
10,516
121,991
330
13,454
1,989,318
205,123
76,264
368,843
18,258
6,211
191,662
25,540
5,521
176,823
31,990
13,547
432,752
58,699
28,944
204,449
31,066
193,646
28,193
3,813
280,198
14,526
12,051
105,539
312
1,953,912
208,584
84,510
There were no troubled debt restructurings during the three months ended March 31, 2021 and 2020.
Of the troubled debt restructurings entered into during the last 12 months, there were none which had subsequent payment defaults during the three months ended March 31, 2021 and 2020. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due as to interest or principal or were on nonaccrual status subsequent to restructuring.
As of March 31, 2021 and December 31, 2020, the Company had $8,673,000 and $8,950,000 of troubled debt restructurings, respectively. Restructured loans are evaluated for impairment quarterly as part of the Company’s determination of the allowance for loan losses. There were no material commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings.
The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), along with a joint statement issued by banking regulatory agencies, provided that short-term loan payment modifications to borrowers experiencing financial hardship due to COVID-19 generally do not need to be accounted for as a troubled debt restructuring. As of March 31, 2021 and December 31, 2020, the Company had loans that were granted a payment modification due to a COVID-19 related financial hardship and have not returned to regular payments were $16,697,000 and $27,986,000, respectively. Substantially all modifications were in the form of a three-month interest-only period or a one-month payment deferral. Some borrowers have received more than one loan payment modification.
Changes in the accretable yield for loans acquired with deteriorated credit quality were as follows:
Beginning balance
1,397
1,662
Reclassification from non-accretable difference
Accretion income
(133)
(160)
Ending balance
1,338
1,510
NOTE 4 – LOAN SERVICING
Mortgage loans serviced for others, which are not included in the accompanying consolidated balance sheets, amounted to $1,077,291,000 and $1,090,219,000 as of March 31, 2021 and December 31, 2020, respectively. Activity in mortgage servicing rights is as follows:
8,518
Capitalized servicing rights
397
214
Fair value adjustment:
Attributable to payments and principal reductions
(467)
(403)
Attributable to changes in valuation inputs and assumptions
1,765
(1,982)
Total fair value adjustment
1,298
(2,385)
6,347
NOTE 5 – FORECLOSED ASSETS
Foreclosed assets activity is as follows:
5,099
Transfers from loans
Proceeds from sales
(15)
(677)
Net gain (loss) on sales
75
Direct write-downs
(73)
(47)
4,469
Gains (losses) on foreclosed assets includes the following:
Guarantee reimbursements
The carrying value of foreclosed one-to-four family residential real estate property as of March 31, 2021 and December 31, 2020, was $1,341,000 and $868,000, respectively. As of March 31, 2021, there were 8 one-to-four family residential real estate loans in the process of foreclosure totaling approximately $947,000. As of December 31, 2020, there were 11 one-to-four family residential real estate loans in the process of foreclosure totaling approximately $1,526,000.
24
NOTE 6 – DEPOSITS
The Company’s deposits are summarized below:
Noninterest-bearing deposits
Interest-bearing deposits:
Interest-bearing demand
1,008,954
968,592
Money market
499,088
462,056
Savings
593,472
517,473
Time
285,461
299,474
Total interest-bearing deposits
Money market deposits include $6,853,000 and $6,489,000 of reciprocal transaction deposits as of March 31, 2021 and December 31, 2020, respectively. Time deposits include $2,687,000 and $3,164,000 of reciprocal time deposits as of March 31, 2021 and December 31, 2020, respectively.
The aggregate amounts of time deposits in denominations of $250,000 or more amounted to $21,900,000 and $26,687,000 as of March 31, 2021 and December 31, 2020, respectively. The aggregate amounts of time deposits in denominations of $100,000 or more amounted to $92,266,000 and $99,649,000 as of March 31, 2021 and December 31, 2020, respectively.
The components of interest expense on deposits are as follows:
117
251
394
70
880
Total interest expense on deposits
NOTE 7 – BORROWINGS
There were no Federal Home Loan Bank of Chicago (FHLB) borrowings outstanding as of March 31, 2021 and December 31, 2020. Available borrowings from the FHLB are secured by FHLB stock held by the Company and pledged security in the form of qualifying loans. The total amount of loans pledged as of March 31, 2021 and December 31, 2020 was $499,886,000 and $493,690,000, respectively. As of March 31, 2021 and December 31, 2020, loans pledged also served as collateral for credit exposure of approximately $355,000 associated with the Bank’s participation in the FHLB’s Mortgage Partnership Finance Program.
The Bank also has available borrowings through the discount window of the Federal Reserve Bank of Chicago (FRB). Available borrowings are based on the collateral pledged. As of March 31, 2021 and December 31, 2020, the carrying value of debt securities pledged amounted to $479,000 and $499,000, respectively. There was no outstanding borrowings under the FRB discount window as of March 31, 2021 and December 31, 2020.
25
NOTE 8 – SUBORDINATED NOTES
On September 3, 2020, the Company issued $40,000,000 of fixed-to-floating rate subordinated notes that mature on September 15, 2030. The subordinated notes, which are unsecured obligations of the Company, bear a fixed interest rate of 4.50% for the first five years after issuance and thereafter bear interest at a floating rate equal to three-month SOFR, as determined on the Floating Interest Determination Date, plus 4.37%. Interest is payable semi-annually during the five year fixed rate period and quarterly during the subsequent five year floating rate period. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after September 15, 2025. If the subordinated notes are redeemed before they mature, the redemption price will be the principal amount plus any accrued but unpaid interest. The transaction resulted in debt issuance costs of $789,000 which will be amortized over 10 years. As of March 31, 2021 and December 31, 2020, 100% of the subordinated notes qualified as Tier 2 capital.
The face value and carrying value of the subordinated notes are summarized below:
Subordinated notes, at face value
40,000
Unamortized issuance costs
(743)
(762)
Subordinated notes, at carrying value
NOTE 9 – JUNIOR SUBORDINATED DEBENTURES ISSUED TO CAPITAL TRUSTS
Five subsidiary business trusts of the Company have issued floating rate capital securities (“capital securities”) which are guaranteed by the Company.
The Company owns all of the outstanding stock of the five subsidiary business trusts. The trusts used the proceeds from the issuance of their capital securities to buy floating rate junior subordinated deferrable interest debentures (“junior subordinated debentures”) issued by the Company. These junior subordinated debentures are the only assets of the trusts and the interest payments from the junior subordinated debentures finance the distributions paid on the capital securities. The junior subordinated debentures are unsecured and rank junior and subordinate in the right of payment to all senior debt of the Company.
The trusts are not consolidated in the Company’s financial statements.
The face and carrying value of junior subordinated debentures are summarized below:
Heartland Bancorp, Inc. Capital Trust B
10,310
Heartland Bancorp, Inc. Capital Trust C
Heartland Bancorp, Inc. Capital Trust D
5,155
FFBI Capital Trust I
7,217
National Bancorp Statutory Trust I
5,773
Total junior subordinated debentures, at face value
38,765
National Bancorp Statutory Trust I unamortized discount
(1,100)
(1,117)
Total junior subordinated debentures, at carrying value
The interest rates on the junior subordinated debentures are variable, reset quarterly, and are equal to the three-month LIBOR, as determined on the LIBOR Determination Date specific to each junior subordinated debenture, plus a fixed percentage. The interest rates and maturities of the junior subordinated debentures are summarized as follows:
Interest Rate at
Variable
Maturity
Interest Rate
Date
LIBOR plus
2.75
%
2.99
April 6, 2034
1.53
1.71
1.75
June 15, 2037
1.35
1.57
September 15, 2037
2.80
3.04
2.90
3.08
3.12
December 31, 2037
The distribution rate payable on the junior subordinated debentures is cumulative and payable quarterly in arrears. The Company has the right, subject to events in default, to defer payments of interest on the junior subordinated debentures at any time by extending the interest payment period for a period not exceeding 20 quarterly periods with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the junior subordinated debentures. The capital securities are subject to mandatory redemption upon payment of the junior subordinated debentures and carry an interest rate identical to that of the related junior subordinated debenture. The junior subordinated debentures maturity dates may be shortened if certain conditions are met, or at any time within 90 days following the occurrence and continuation of certain changes in either tax treatment or the capital treatment of the debentures or the capital securities. If the junior subordinated debentures are redeemed before they mature, the redemption price will be the principal amount plus any accrued but unpaid interest. The Company has the right to terminate each Capital Trust and cause the junior subordinated debentures to be distributed to the holders of the capital securities in liquidation of such trusts.
Under current banking regulations, bank holding companies are allowed to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier 1) capital elements, net of goodwill and other intangible assets less any associated deferred tax liability. As of March 31, 2021 and December 31, 2020, 100%of the trust preferred securities qualified as Tier 1 capital under the final rule adopted in March 2005.
NOTE 10 – DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are negotiated contracts entered into by two issuing counterparties containing specific agreement terms, including the underlying instrument, amount, exercise price, and maturities. The derivatives accounting guidance requires that the Company recognize all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. The Company may utilize interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position.
Interest Rate Swaps Designated as Cash Flow Hedges
The Company designated certain interest rate swap agreements as cash flow hedges on variable-rate borrowings. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on interest rate swaps designated as cash flow hedging instruments, net of tax is reported as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings.
The interest rate swap agreements designated as cash flow hedges are summarized as follows:
Notional
Fair
Value
Fair value recorded in other liabilities
17,000
(1,140)
(1,458)
As of March 31, 2021, the interest rate swap agreements designated as cash flow hedges had contractual maturities between 2024 and 2025. As of March 31, 2021 and December 31, 2020, the Company had cash pledged and held on deposit at counterparties of $1,310,000 and $1,630,000, respectively.
In 2019, the Company had an interest rate swap contract with a notional amount of $10,000,000 designated as a cash flow hedge on variable-rate loans. Beginning April 1, 2019, this hedging relationship was no longer considered highly effective, and the Company discontinued hedge accounting. In accordance with hedge accounting guidance, the net unrealized gain associated with the discontinued hedging relationship, recorded within accumulated other comprehensive income, was reclassified into earnings through April 7, 2020, the period the hedged forecasted transactions affected earnings.
The effect of interest rate swap agreements designated as cash flow hedges on the consolidated statements of income are summarized as follows:
Location of gross gain (loss) reclassified
Amounts of gross gain (loss)
from accumulated other
reclassified from accumulated
comprehensive income to income
other comprehensive income
Three Months Ended
Designated as cash flow hedges:
Taxable loan interest income
Junior subordinated debentures interest expense
(99)
(34)
(2)
28
Interest Rate Swaps Not Designated as Hedging Instruments
The Company may offer interest rate swap agreements to its commercial borrowers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party financial institution. While these interest rate swap agreements generally work together as an economic interest rate hedge, the Company did not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes occurred.
The interest rate swap agreements not designated as hedging instruments are summarized as follows:
Fair value recorded in other assets:
Interest rate swaps with a commercial borrower counterparty
115,378
8,496
122,313
15,360
Interest rate swaps with a financial institution counterparty
3,992
64
Total fair value recorded in other assets
119,370
8,560
Fair value recorded in other liabilities:
(64)
(8,496)
(15,360)
Total fair value recorded in other liabilities
(8,560)
As of March 31, 2021, the interest rate swap agreements not designated as hedging instruments had contractual maturities between 2022 and 2042. As of March 31, 2021 and December 31, 2020, the Company had $9,974,000 and $15,490,000, respectively, of debt securities pledged and held in safekeeping at the financial institution counterparty.
The effect of interest rate contracts not designated as hedging instruments recognized in other noninterest income on the consolidated statements of income are summarized as follows:
Not designated as hedging instruments:
Gross gains
7,564
13,571
Gross losses
(7,564)
(13,571)
Net gains (losses)
NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the activity and accumulated balances for components of other comprehensive income (loss):
Unrealized Gains (Losses)
on Debt Securities
Derivatives
19,578
(118)
(1,307)
Transfer from available-for-sale to held-to-maturity
3,890
(3,890)
Other comprehensive income (loss) before reclassifications
(22,855)
Other comprehensive income (loss), before tax
318
Income tax expense (benefit)
(6,577)
91
Other comprehensive income (loss), after tax
(16,497)
227
6,971
(3,985)
(1,080)
8,659
(131)
(696)
6,632
(7)
(968)
(276)
5,436
(692)
14,095
(138)
(1,388)
The amounts reclassified from accumulated other comprehensive income (loss) for unrealized gains (losses) on debt securities available-for-sale are included in gain (loss) on securities in the accompanying consolidated statements of income.
The amounts reclassified from accumulated other comprehensive income (loss) for unrealized gains on debt securities held-to-maturity are included in securities interest income in the accompanying consolidated statements of income.
The amounts reclassified from accumulated other comprehensive income (loss) for the fair value of derivative financial instruments represent net interest payments received or made on derivatives designated as cash flow hedges. See Note 10 for additional information.
30
NOTE 12 – INCOME TAXES
Allocation of income tax expense between current and deferred portions is as follows:
Federal
3,170
1,721
State
1,698
988
Total current
4,868
2,709
Deferred
457
(457)
228
(221)
Total deferred
Income tax expense
Income tax expense differs from the statutory federal rate due to the following:
Percentage
Federal income tax, at statutory rate
4,368
21.0
1,733
Increase (decrease) resulting from:
Federally tax exempt interest income
(367)
(1.8)
(357)
(4.3)
State taxes, net of federal benefit
1,514
7.3
631
7.6
38
0.2
0.3
26.7
24.6
The components of the net deferred tax asset (liability) are as follows:
Deferred tax assets
8,170
9,046
Compensation related
1,802
2,301
Deferred loan fees
2,470
Nonaccrual interest
646
660
59
287
336
1,049
1,011
Total deferred tax assets
14,483
14,994
Deferred tax liabilities
Fixed asset depreciation
4,361
Mortgage servicing rights
2,175
1,692
Other purchase accounting adjustments
1,080
1,115
Intangible assets
580
Prepaid assets
557
Net unrealized gain on debt securities
6,569
367
370
Total deferred tax liabilities
9,069
15,372
Net deferred tax asset (liability)
5,414
(378)
NOTE 13 – EARNINGS PER SHARE
The Company has granted certain restricted stock units that contain non-forfeitable rights to dividend equivalents. Such restricted stock units are considered participating securities. As such, we have included these restricted stock units in the calculation of basic earnings per share and calculate basic earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.
Diluted earnings per share is computed using the treasury stock method and reflects the potential dilution that could occur if the Company’s outstanding restricted stock units were vested.
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Earnings allocated to participating securities
(31)
Numerator for earnings per share - basic and diluted
15,214
6,206
Denominator:
Weighted average common shares outstanding
Dilutive effect of outstanding restricted stock units
2,489
Weighted average common shares outstanding, including all dilutive potential shares
27,433,401
Earnings per share - Basic
Earnings per share - Diluted
NOTE 14 – DEFERRED COMPENSATION
The Company maintained a supplemental executive retirement plan (the SERP) for certain key executive officers. The SERP benefit payments were scheduled to be paid in equal monthly installments over 30 years. In June 2019, the Company approved the termination of the SERP agreements, and a lump sum payment was made in June 2020 to each participant equal to the present value of any remaining installment payments. During the three months ended March 31, 2020, the Company recognized employee benefits expense for the SERP of $970,000.
NOTE 15 – STOCK-BASED COMPENSATION PLANS
The Company has adopted the HBT Financial, Inc. Omnibus Incentive Plan (the “Omnibus Incentive Plan”). The Omnibus Incentive Plan provides for grants of (i) stock options, (ii) stock appreciation rights, (iii) restricted shares, (iv) restricted stock units, (v) performance awards, (vi) other share-based awards and (vi) other cash-based awards to eligible employees, non-employee directors and consultants of the Company. The maximum number of shares of common stock available for issuance under the Omnibus Incentive Plan is 1,820,000 shares.
The following is a summary of stock-based compensation expense (benefit):
Restricted stock units
114
Performance restricted stock units
Total awards classified as equity
Stock appreciation rights
130
(335)
Total stock-based compensation expense (benefit)
259
(268)
33
Restricted Stock Units
A restricted stock unit grants a participant the right to receive one share of common stock, following the completion of the requisite service period. Restricted stock units are classified as equity. Compensation cost is based on the Company’s stock price on the grant date and is recognized on a straight-line basis over the service period for the entire award. Dividend equivalents on restricted stock units, which are either accrued until vested or paid at the same time as dividends on common stock, are classified as dividends charged to retained earnings.
On February 19, 2021, the Company granted 43,047 restricted stock units to certain key employees which vest in three annual installments beginning on February 28, 2022. On February 19, 2021, the Company also granted 3,300 restricted stock units to non-employee directors which vest on February 28, 2022. The total fair value of the restricted stock units granted on February 19, 2021 was $720,000, based on the grant date closing price of $15.53 per share.
The following is a summary of restricted stock unit activity:
Weighted
Restricted
Grant Date
Stock Units
71,000
18.98
Granted
46,347
15.53
73,150
19.03
Vested
(20,225)
18.86
Forfeited
97,122
17.36
A further summary of restricted stock units as of March 31, 2021, is as follows:
Weighted Average
Remaining
Grant Date Fair Values
Contractual Term
$ 15.53
2.8
years
$ 19.03
50,775
As of March 31, 2021, unrecognized compensation cost related to non-vested restricted stock units was $1,602,000.
34
Performance Restricted Stock Units
A performance restricted stock unit is similar to a restricted stock unit, except that the number of shares of common stock awarded is based on a performance condition and the completion of the requisite service period. Performance restricted stock units are classified as equity. Compensation cost is based on the Company’s stock price and an assessment of the probable outcome of the performance condition and is recognized on a straight-line basis over the service period of the entire award. Dividend equivalents on performance restricted stock units, which are accrued until vested, are classified as dividends charged to retained earnings.
On February 19, 2021, the Company granted 28,697 performance restricted stock units to certain key employees which vest on February 28, 2024. The performance condition is based on the average annual return on average tangible common equity during a three-year performance period. The number of shares of common stock that may be earned ranges from 0% to 150% of the number of performance restricted stock units granted. The total fair value of the performance restricted stock units granted on February 19, 2021 was $405,000, based on the grant date closing price of $15.53 per share and an assessment of the probable outcome of the performance condition on the grant date.
The following is a summary of performance restricted stock unit activity:
Three months ended March 31,
Maximum
Awarded
Performance
43,046
A further summary of performance restricted stock units as of March 31, 2021, is as follows:
2.9
As of March 31, 2021, unrecognized compensation cost related to non-vested performance restricted stock units was $390,000, based on the current assessment of the probable outcome of the performance condition.
Stock Appreciation Rights
A stock appreciation right grants a participant the right to receive an amount of cash, the value of which equals the appreciation in the Company’s stock price between the grant date and the exercise date. Stock appreciation rights units are classified as liabilities. The liability is based on an option-pricing model used to estimate the fair value of the stock appreciation rights. Compensation cost for unvested stock appreciation rights is recognized on a straight line basis over the service period of the entire award. The unvested stock appreciation rights vest in four equal annual installments beginning on the first anniversary of the grant date.
The following is a summary of stock appreciation rights activity:
StockAppreciationRights
WeightedAverageGrant DateAssigned Value
105,570
16.32
110,160
Exercised
Expired
(1,530)
104,040
A further summary of stock appreciation rights as of March 31, 2021, is as follows:
Grant Date Assigned Values
Outstanding
Exercisable
$ 16.32
85,680
7.9
As of March 31, 2021, unrecognized compensation cost related to non-vested stock appreciation rights was $67,000.
As of March 31, 2021 and December 31, 2020, the liability recorded for outstanding stock appreciation rights was $402,000 and $272,000, respectively. The Company used an option pricing model to value the stock appreciation rights, using the assumptions in the following table. Expected volatility is derived from the historical volatility of the Company’s stock price and a selected peer group of industry-related companies.
Risk-free interest rate
1.55
0.80
Expected volatility
34.96
34.72
Expected life (in years)
8.4
8.7
Expected dividend yield
3.50
3.96
As of March 31, 2021, the liability recorded for previously exercised stock appreciation rights was $797,000, which will be paid in three remaining equal annual installments. As of December 31, 2020, the liability recorded for previously exercised units was $1,087,000.
NOTE 16 – REGULATORY MATTERS
The ability of the Company to pay dividends to its stockholders is dependent upon the ability of the Bank to pay dividends to the Company.
The Company (on a consolidated basis) and the Bank are each subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the regulators that, if undertaken, could have a direct material effect on the consolidated financial statements of the Company and the Bank.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. As allowed under the regulations, the Company and the Bank elected to exclude accumulated other comprehensive income, including unrealized gains and losses on securities, in the computation of regulatory capital. Prompt corrective action provisions are not applicable to bank holding companies.
Additionally, the Company and the Bank must maintain a “capital conservation buffer” to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. As of March 31, 2021 and December 31, 2020, the capital conservation buffer was 2.5%.
As of March 31, 2021, the Company and the Bank each met all capital adequacy requirements to which they were subject.
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The actual and required capital amounts and ratios of HBT Financial, Inc. (on a consolidated basis) and the Bank are as follows:
Actual
For Capital Adequacy Purposes
To Be Well Capitalized Under Prompt Corrective Action Provisions
Ratio
Total Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
434,408
17.37
200,018
8.00
N/A
Heartland Bank and Trust Company
397,098
15.90
199,847
249,809
10.00
Tier 1 Capital (to Risk Weighted Assets)
366,392
14.65
150,014
6.00
368,339
14.74
149,885
Common Equity Tier 1 Capital (to Risk Weighted Assets)
329,892
13.19
112,510
4.50
112,414
162,376
6.50
Tier 1 Capital (to Average Assets)
9.85
148,768
4.00
9.91
148,616
185,770
5.00
426,283
17.40
195,970
382,511
15.63
195,787
244,733
356,410
14.55
146,977
351,904
14.38
146,840
319,927
13.06
110,233
110,130
159,077
9.94
143,454
9.82
143,296
179,120
NOTE 17 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Recurring Basis
The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Additional information on fair value measurements is summarized in Note 1 to the Company’s annual consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC on March 12, 2021. There were no transfers between levels during the three months ended March 31, 2021 and 2020. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.
The following tables present the balances of the assets measured at fair value on a recurring basis:
Level 1 Inputs
Level 2Inputs
Level 3 Inputs
Total Fair Value
Debt securities available-for-sale:
Equity securities with readily determinable fair values
Derivative financial assets
Derivative financial liabilities
9,700
16,818
The following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy. There were no changes to the valuation techniques from December 31, 2020 to March 31, 2021.
Investment Securities
When available, the Company uses quoted market prices to determine the fair value of securities; such items are classified in Level 1 of the fair value hierarchy. For the Company’s securities where quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, cannot be obtained or cannot be corroborated, a security is generally classified as Level 3. The change in fair value of debt securities available-for-sale is recorded through an adjustment to the consolidated statement of comprehensive income. The change in fair value of equity securities with readily determinable fair values is recorded through an adjustment to the consolidated statement of income.
Derivative Financial Instruments
Interest rate swap agreements are carried at fair value as determined by dealer valuation models. Based on the inputs used, the derivative financial instruments subjected to recurring fair value adjustments are classified as Level 2. For derivative financial instruments designated as a hedging instruments, the change in fair value is recorded through an adjustment to the consolidated statement of comprehensive income. For derivative financial instruments not designated as a hedging instruments, the change in fair value is recorded through an adjustment to the consolidated statement of income.
Mortgage Servicing Rights
The Company has elected to record its mortgage servicing rights at fair value. Mortgage servicing rights do not trade in an active market with readily observable prices. Accordingly, the Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced as calculated by an independent third party. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds and discount rates. Due to the nature of the valuation inputs, mortgage servicing rights are classified as Level 3. The change in fair value is recorded through an adjustment to the consolidated statement of income.
The following tables present additional information about the unobservable inputs used in the fair value measurement of the mortgage servicing rights (dollars in thousands):
Valuation Technique
Unobservable Inputs
Range(Weighted Average)
Discounted cash flows
Constant pre-payment rates (CPR)
7.0% to 85.0% (12.3%)
Discount rate
8.8% to 11.0% (9.0%)
7.0% to 85.0% (17.3%)
9.0% to 11.0% (9.0%)
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as there is evidence of impairment or a change in the amount of previously recognized impairment.
The following tables present the balances of the assets measured at fair value on a nonrecurring basis:
Collateral-dependent impaired loans
30,579
33,320
Loans Held for Sale
Mortgage loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically, these quotes include a premium on the sale and thus these quotes indicate fair value of the held for sale loans is greater than cost.
Collateral-Dependent Impaired Loans
In accordance with the provisions of the loan impairment guidance, impairment was measured for loans which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of collateral-dependent impaired loans is estimated based on the fair value of the underlying collateral supporting the loan. Collateral-dependent impaired loans require classification in the fair value hierarchy. Impaired loans include loans acquired with deteriorated credit quality. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.
Bank Premises Held for Sale
Bank premises held for sale are recorded at the lower of cost or fair value, less estimated selling costs, at the date classified as held for sale. Values are estimated using Level 3 inputs based on appraisals and customized discounting criteria. The carrying value of bank premises held for sale is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.
Foreclosed Assets
Foreclosed assets are recorded at fair value based on property appraisals, less estimated selling costs, at the date of the transfer. Subsequent to the transfer, foreclosed assets are carried at the lower of cost or fair value, less estimated selling costs. Values are estimated using Level 3 inputs based on appraisals and customized discounting criteria. The carrying value of foreclosed assets is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.
Collateral-Dependent Impaired Loans, Bank Premises Held for Sale, and Foreclosed Assets
The estimated fair value of collateral-dependent impaired loans, bank premises held for sale, and foreclosed assets is based on the appraised fair value of the collateral, less estimated costs to sell. Collateral-dependent impaired loans, bank premises held for sale, and foreclosed assets are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or a similar evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals or a similar evaluation of the collateral underlying collateral-dependent loans and foreclosed assets are obtained at the time a loan is first considered impaired or a loan is transferred to foreclosed assets. Appraisals or a similar evaluation of bank premises held for sale are obtained when first classified as held for sale. Appraisals or similar evaluations are obtained subsequently as deemed necessary by management but at least annually on foreclosed assets and bank premises held for sale. Appraisals are reviewed for accuracy and consistency by management. Appraisals are performed by individuals selected from the list of approved appraisers maintained by management. The appraised values are reduced by estimated costs to sell. These discounts and estimates are developed by management by comparison to historical results.
The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements (dollars in thousands):
FairValue
ValuationTechnique
Range (Weighted Average)
Appraisal of collateral
Appraisal adjustments
Not meaningful
Appraisal
7% (7%)
Other Fair Value Methods
The following methods and assumptions were used by the Company in estimating fair value disclosures of its other financial instruments. There were no changes in the methods and significant assumptions used to estimate the fair value of these financial instruments.
Cash and Cash Equivalents
The carrying amounts of these financial instruments approximate their fair values.
Interest-bearing Time Deposits with Banks
The carrying values of interest-bearing time deposits with banks approximate their fair values.
Restricted Stock
The carrying amount of FHLB stock approximates fair value based on the redemption provisions of the FHLB.
The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the market place. Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type such as commercial and industrial, agricultural and farmland, commercial real estate - owner occupied, commercial real estate - non-owner occupied, multi-family, construction and land development, one-to-four family residential, and municipal, consumer, and other. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate.
Investments in Unconsolidated Subsidiaries
The fair values of the Company’s investments in unconsolidated subsidiaries are presumed to approximate carrying amounts.
Time Deposits
Fair values of certificates of deposit with stated maturities have been estimated using the present value of estimated future cash flows discounted at rates currently offered for similar instruments. Time deposits also include public funds time deposits.
Securities Sold Under Agreements to Repurchase
The fair values of repurchase agreements with variable interest rates are presumed to approximate their recorded carrying amounts.
Subordinated Notes
The fair values of subordinated notes are estimated using discounted cash flow analyses based on rates observed on recent debt issuances by other financial institutions.
Junior Subordinated Debentures
The fair values of subordinated debentures are estimated using discounted cash flow analyses based on rates observed on recent debt issuances by other financial institutions.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument.
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The following table provides summary information on the carrying amounts and estimated fair values of the Company’s financial instruments:
Hierarchy
Carrying
Estimated
Level
Financial assets:
Level 1
Level 2
Restricted stock
Level 3
Loans, net
2,264,145
2,235,767
Financial liabilities:
Time deposits
286,430
300,989
38,162
38,403
Junior subordinated debentures
23,528
23,766
Accrued interest payable
1,151
The Company estimated the fair value of lending related commitments as described in Note 18 to be immaterial based on limited interest rate exposure due to their variable nature, short-term commitment periods and termination clauses provided in the agreements.
NOTE 18 – COMMITMENTS AND CONTINGENCIES
Financial Instruments
The Bank is party to credit-related financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.
The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Such commitments and conditional obligations were as follows:
Contractual Amount
Commitments to extend credit
523,646
530,191
Standby letters of credit
10,235
10,031
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, by the Bank upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant, and equipment, and income-producing properties.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those standby letters of credit are primarily issued to support extensions of credit. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loans to customers. The Bank secures the standby letters of credit with the same collateral used to secure the related loan.
Legal Contingencies
Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to HBT Financial, Inc. and its subsidiaries.
The following is management’s discussion and analysis of the financial condition as of March 31, 2021 (unaudited), as compared with December 31, 2020, and the results of operations for the three months ended March 31, 2021 and 2020 (unaudited). Management’s discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Results of operations for the three months ended March 31, 2021 are not necessarily indicative of results to be attained for any other period.
OVERVIEW
HBT Financial, Inc. is headquartered in Bloomington, Illinois and is the holding company for Heartland Bank and Trust Company. The Bank provides a comprehensive suite of business, commercial, wealth management, and retail banking products and services to individuals, businesses, and municipal entities throughout Central and Northeastern Illinois through 63 branches. As of March 31, 2021, the Company had total assets of $3.9 billion, total loans of $2.3 billion, and total deposits of $3.4 billion. HBT Financial, Inc. is a longstanding Central Illinois company, with banking roots that can be traced back to 1920.
Market Area
We currently operate 63 branch locations across 18 counties in Central and Northeastern Illinois. We hold a leading deposit share in many of our markets in Central Illinois, which we define as a top three deposit share rank, providing the foundation for our strong deposit base. The stability provided by this low-cost funding is a key driver of our strong track record of financial performance.
Below is a summary of the loan and deposit balances by the metropolitan and micropolitan statistical areas in which we operate:
Bloomington-Normal
535,934
523,418
Champaign-Urbana
201,597
214,646
Chicago
1,168,524
1,132,893
Lincoln
98,301
103,614
Ottawa-Peru
106,920
107,098
Peoria
159,429
165,337
829,832
774,082
190,533
174,653
1,171,392
1,077,691
198,591
201,012
373,704
347,211
591,914
555,885
The Bloomington-Normal metropolitan statistical area includes our branches within McLean and De Witt counties. The Champaign-Urbana metropolitan statistical area includes our branches within Champaign and Ford counties. The Chicago metropolitan statistical area includes our branches within Cook, DeKalb, Grundy, Kane, Kendall, Lake, and Will counties. The Lincoln micropolitan statistical area includes our branches within Logan county. The Ottawa-Peru micropolitan statistical area includes our branches within Bureau and LaSalle counties. The Peoria metropolitan statistical area includes our branches within Peoria, Marshall, Tazewell, and Woodford counties.
COVID-19 Response and Impact Overview
The Company has taken a number of steps to support our employees and customers while maintaining the health and safety of all involved, including, but not limited to:
Paycheck Protection Program Loans
We continue to process forgiveness applications for Paycheck Protection Program (PPP) loans, with $80.0 million of PPP loans originated in round 1 receiving full or partial forgiveness by March 31, 2021. We expect the vast majority of the PPP loans from round 1 that were outstanding as of March 31, 2021 to be forgiven in the second quarter of 2021.
In December 2020, the PPP was extended and allowed eligible borrowers to receive a second PPP loan. Through March 31, 2021, we have funded $92.3 million of PPP loans as part of the second round of the program.
The following table summarizes outstanding PPP loans as of March 31, 2021:
Round 1
Round 2
PPP loan balance, before net deferred origination fees
105,405
92,309
197,714
Net deferred origination fees
(2,071)
(5,084)
(7,155)
PPP loan balance
103,334
87,225
During the three months ended March 31, 2021, the deferred origination fees on round 2 PPP loans were reduced by direct origination costs of $0.3 million, consisting primarily of salaries and benefits costs. During the three months ended March 31, 2021, net deferred origination fees on PPP loans of $2.2 million were recognized as taxable loan interest income. Recognition of net deferred originations fees is accelerated upon loan forgiveness or repayment prior to contractual maturity.
Payment Modifications Related to COVID-19
Loan payment modifications have been made for borrowers experiencing financial hardship due to COVID-19, with substantially all modifications in the form of a three-month interest-only period or a one-month payment deferral. Consistent with the applicable accounting and regulatory guidance, short-term loan payment modifications such as these are generally not considered to be a troubled debt restructuring.
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The volume of loan modification requests related to a COVID-19 financial hardship have declined significantly from its height during the second quarter of 2020. As of March 31, 2021 and December 31, 2020, total loans granted a payment modification related to a COVID-19 financial hardship were $16.7 million and $28.0 million, respectively.
Industries Adversely Impacted by COVID-19
While many industries have been and may continue to be adversely impacted by the COVID-19 pandemic, the restaurant and hotel industries are considered particularly susceptible to significant adverse impacts. While many areas of consumer and business spending have rebounded in recent months, there is uncertainty about the longer lasting impact on the restaurant and hotel industries resulting from the COVID-19 pandemic. Adverse impacts in these and other industries may result in a deterioration of the loan portfolio’s credit quality or an increase in loan losses.
The below table summarizes loan balances within the restaurant and hotel industries, along with select credit quality information, as of March 31, 2021.
Carrying Balance
Modified Payments (1)
Non-PPP Loans
PPP Loans
Risk Rating (2)
Restaurants
2,590
22,983
25,573
192
522
15,506
504
2,692
5,743
458
23,839
46,822
834
1,026
3,480
Hotels
300
2,716
3,016
20,360
2,526
6,619
1,734
22,394
25,110
Branch Rationalization Plan
In April 2021, the Company made plans to close or consolidate six branches during the third quarter of 2021. This branch rationalization plan is expected to result in approximately $0.8 million of pre-tax nonrecurring costs, primarily related to asset impairment charges and severance payments. When fully realized, the Company estimates annual cost savings, net of associated revenue impacts, related to the branch rationalization plan to be approximately $1.1 million.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Economic Conditions
The Company's business and financial performance are affected by economic conditions generally in the United States and more directly in the Illinois markets where we primarily operate. The significant economic factors that are most relevant to our business and our financial performance include the general economic conditions in the U.S. and in the Company's markets, unemployment rates, real estate markets, and interest rates.
COVID-19 Pandemic
Although the Company has maintained business operations since the beginning of the COVID-19 pandemic, it has caused significant economic disruption throughout the United States and the communities that we serve. While the economic outlook has generally improved in 2021, compared to 2020, uncertainty surrounding potential surges in COVID-19 infections and the longer lasting impact on specific industries remains. As a result, the businesses we serve may continue to be adversely impacted and the ability of our customers to fulfill their contractual obligations to us may deteriorate. This could adversely affect our asset valuations, financial condition, liquidity and results of operations, and the impacts may be material.
During 2020, we experienced the following adverse impacts of the COVID-19 pandemic:
While some of these trends have reversed in 2021, sustained improvements are highly dependent upon strengthening economic conditions. The COVID-19 pandemic continues to cause economic uncertainties which may again result in these and other adverse impacts to our financial condition and results of operations.
The Company’s executive management continues to closely monitor the COVID-19 pandemic. As of the date of this filing, we anticipate we will continue to take actions to support our customers in a manner consistent with the current guidance provided by federal banking regulatory authorities.
Interest Rates
Net interest income is our primary source of revenue. Net interest income equals the excess of interest income earned on interest earning assets (including discount accretion on purchased loans plus certain loan fees) over interest expense incurred on interest-bearing liabilities. The level of interest rates as well as the volume of interest-earning assets and interest-bearing liabilities both impact net interest income. Net interest income is also influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market interest rates.
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The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the Federal Reserve Board’s actions. The yields generated by our loans and securities are typically driven by short-term and long-term interest rates, which are set by the market and, to some degree, by the Federal Reserve Board’s actions. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur.
With significant cash inflows realized from the forgiveness of PPP loans and growth in deposit balances, driven by federal economic stimulus payments received by retail customers, the current yields on funds reinvested into new securities are lower than existing portfolio yields. Considering the recent drastic changes in market rates and the ongoing economic uncertainty, our net interest income and net interest margin could decrease in future periods.
Credit Trends
We focus on originating loans with appropriate risk / reward profiles. We have a detailed loan policy that guides our overall loan origination philosophy and a well-established loan approval process that requires experienced credit officers to approve larger loan relationships. Although we believe our loan approval process and credit review process is a strength that allows us to maintain a high quality loan portfolio, we recognize that credit trends in the markets in which we operate and in our loan portfolio can materially impact our financial condition and performance and that these trends are primarily driven by the economic conditions in our markets.
The economic slow-down caused by the COVID-19 pandemic has resulted in, and may continue to result in, decreased loan demand, excluding PPP loans. In addition, potential surges in COVID-19 infections and the longer lasting impact on specific industries may result in deterioration in the loan portfolio’s credit quality and an increase in loan losses.
Competition
Our profitability and growth are affected by the highly competitive nature of the financial services industry. We compete with community banks in all our markets and, to a lesser extent, with money center banks, primarily in the Chicago MSA. Additionally, we compete with non-bank financial services companies and other financial institutions operating within the areas we serve. We compete by emphasizing personalized service and efficient decision-making tailored to individual needs. We do not rely on any individual, group, or entity for a material portion of our loans or our deposits. We continue to see increased competitive pressures on loan rates and terms which may affect our financial results in the future.
Digital Banking
Throughout the banking industry, in-person branch traffic continues to decline as more customers turn to digital banking for routine banking transactions. The COVID-19 pandemic has accelerated this transition, and in-person branch traffic is not expected to return to pre-pandemic levels. We plan to continue investing in our digital banking platforms, while maintaining an appropriately sized branch network. An inability to meet evolving customer expectations for both digital and in-person banking may adversely affect our financial results in the future.
Regulatory Environment / Trends
We are subject to federal and state regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment includes extensive regulation and supervision in areas such as consumer compliance, the BSA and anti-money laundering compliance, risk management and internal audit. We anticipate that this environment of extensive regulation and supervision will continue for the industry. As a result, changes in the regulatory environment may result in additional costs for additional compliance, risk management and audit personnel or professional fees associated with advisors and consultants.
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RESULTS OF OPERATIONS
Overview of Recent Financial Results
The following table presents selected financial results and measures:
Statement of Income Information
Net income after provision for loan losses
Income before income tax expense
Adjusted net income (1)
14,033
8,379
Net interest income (tax-equivalent basis) (1) (2)
29,632
31,125
Share and Per Share Information
Adjusted earnings per share - Diluted (1)
0.51
0.30
Weighted average shares of common stock outstanding
Summary Ratios
Net interest margin *
3.25
4.03
Net interest margin (tax-equivalent basis) * (1) (2)
3.30
4.09
Yield on loans *
4.57
5.19
Yield on interest-earning assets *
3.41
4.30
Cost of interest-bearing liabilities *
0.25
0.39
Cost of total deposits *
0.08
0.24
Efficiency ratio
55.73
64.01
Efficiency ratio (tax-equivalent basis) (1) (2)
55.03
63.20
Return on average assets *
1.64
0.78
Return on average stockholders' equity *
17.01
7.33
Return on average tangible common equity * (1)
18.33
7.97
Adjusted return on average assets * (1)
1.51
1.06
Adjusted return on average stockholders' equity * (1)
15.65
9.87
Adjusted return on average tangible common equity * (1)
16.88
10.73
* Annualized measure.
Comparison of the Three Months Ended March 31, 2021 to the Three Months Ended March 31, 2020
For the three months ended March 31, 2021, net income was $15.2 million increasing by $9.0 million, or 145.1%, when compared to net income for the three months ended March 31, 2020. Net income increased primarily due to the following:
Net Interest Income
Net interest income equals the excess of interest income (including discount accretion on acquired loans) plus fees earned on interest earning assets over interest expense incurred on interest-bearing liabilities. Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and stockholders’ equity, also support interest-earning assets.
The following table sets forth average balances, average yields and costs, and certain other information for the three months ended March 31, 2021 and 2020. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs, discounts and premiums, as well as purchase accounting adjustments that are accreted or amortized to interest income or expense.
March 31, 2020
Yield/Cost *
2,284,159
25,744
2,141,031
27,615
Securities
1,004,877
4,769
1.92
668,572
4,362
2.62
Deposits with banks
345,915
0.09
251,058
1.17
2.04
2,425
2.38
Total interest-earning assets
3,637,449
3,063,086
(31,856)
(22,474)
Noninterest-earning assets
155,622
148,131
3,761,215
3,188,743
997,720
0.05
811,866
0.12
482,385
0.07
464,124
0.34
541,896
0.03
434,276
0.06
294,172
341,770
1.04
2,316,173
0.11
2,052,036
0.31
46,348
41,968
0.19
500
0.44
221
0.52
39,245
4.85
37,655
3.83
37,589
4.74
Total interest-bearing liabilities
2,439,921
2,131,814
920,514
670,714
Noninterest-bearing liabilities
37,223
44,696
3,397,658
2,847,224
363,557
341,519
Net interest income/Net interest margin (3)
Tax-equivalent adjustment (2)
503
463
Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) (1) (2)
Net interest rate spread (4)
3.16
3.91
Net interest-earning assets (5)
1,197,528
931,272
Ratio of interest-earning assets to interest-bearing liabilities
1.49
1.44
Cost of total deposits
The following table sets forth the components of loan interest income, which includes contractual interest on loans, loan fees, accretion of acquired loan discounts and net earnings on cash flow hedges.
Yield
Contribution *
Contractual interest
22,683
4.02
26,022
4.89
Loan fees (excluding PPP loans)
776
0.14
1,164
0.22
PPP loan fees
2,226
0.40
Accretion of acquired loan discounts
0.01
Net cash flow hedge earnings
Total loan interest income
The following table sets forth the components of net interest income. Total interest income consists of contractual interest on loans, contractual interest on securities, contractual interest on interest-bearing deposits in banks, loan fees, accretion of acquired loan discounts, securities amortization, net and other interest and dividend income. Total interest expense consists of contractual interest on deposits, contractual interest on other interest-bearing liabilities and other interest expense.
Net Interest
Margin
Interest income:
Contractual interest on loans
2.53
3.42
Contractual interest on securities
6,501
0.72
5,151
0.68
Contractual interest on deposits with banks
0.15
Securities amortization, net
(1,732)
(0.20)
(790)
(0.10)
Total interest income
Interest expense:
Contractual interest on deposits
641
1,588
0.21
Contractual interest on other interest-bearing liabilities
698
413
138
57
0.16
0.27
Tax equivalent adjustment (1)
Net interest income (tax equivalent) (1) (2)
55
Rate/Volume Analysis
The following table sets forth the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate), and changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both volume and rate that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
vs.
Increase (Decrease) Due to
Volume
Rate
Interest-earning assets:
(3,636)
(1,871)
1,806
(1,399)
407
202
(851)
(649)
3,773
(5,887)
(2,114)
Interest-bearing liabilities:
(182)
(134)
(319)
(305)
(43)
(29)
(110)
(373)
(483)
(917)
(951)
(13)
(89)
(88)
(1,021)
(581)
Change in net interest income
3,333
(4,866)
(1,533)
Net interest income for the three months ended March 31, 2021 was $29.1 million, decreasing $1.5 million, or 5.0%, from the three months ended March 31, 2020. The decrease is primarily attributable to declines in benchmark interest rates, which drove lower yields on interest-earning assets. Partially offsetting this decline was a substantial increase in interest-earning asset balances, driven by PPP loan originations and federal economic stimulus payments received by our retail customers. Also partially mitigating the decline in net interest income were lower costs on deposits and a decrease in time deposit balances.
Net interest margin decreased as well to 3.25% for the three months ended March 31, 2021 compared to 4.03% for the three months ended March 31, 2020. The decrease was primarily attributable to the decline in the average yield on earning assets. The contribution of acquired loan discount accretion to net interest income declined to less than $0.1 million, or 1 basis points of the net interest margin, for the three months ended March 31, 2021 from $0.4 million, or 5 basis points of the net interest margin, for the three months ended March 31, 2020.
Additionally, the $40 million of subordinated notes issued during the third quarter of 2020 has added downward pressure to net interest income and net interest margin in subsequent periods. However, the proceeds from the issuance, which were primarily invested in debt securities, provide additional regulatory capital to buffer against higher than estimated credit losses and support organic or acquisitive growth.
The quarterly net interest margins were as follows:
Three months ended:
March 31
June 30
3.51
September 30
3.39
December 31
3.31
In March 2020, the Federal Open Markets Committee lowered Federal Funds target rates twice, for a combined decrease of 150 basis points in response to the economic downturn related to the COVID-19 pandemic. These rate cuts have put downward pressure on our net interest margin. In general, we believe that rate increases will lead to improved net interest margins while rate decreases will result in lower net interest margins.
Provision for Loan Losses
Provisions for loan losses are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan losses, management considers past and current loss experience, evaluations of collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or events change. We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance. The provision for loan losses is a function of the allowance for loan loss methodology we use to determine the appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted.
The deterioration of economic conditions related to the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the communities that we serve. As a result, our allowance for loan losses has increased since the onset of the COVID-19 pandemic, and may remain elevated until economic conditions improve.
The Company recorded a negative provision for loan losses of $3.4 million during the three months ended March 31, 2021, compared to a provision for loan losses of $4.4 million during the three months ended March 31, 2020. The negative provision was primarily due to changes to qualitative factors reflecting an improved economic environment and improved asset quality metrics, resulting in a $1.8 million decrease in required reserve; a decrease in specific reserves on loans individually evaluated for impairment, resulting in a $1.3 million decrease in required reserves; and a $0.3 million net recovery during the three months ended March 31, 2021.
Noninterest Income
The following table sets forth the major categories of noninterest income for the periods indicated:
$ Change
466
(537)
158
3,866
1,564
(111)
93
5,556
Total noninterest income for the three months ended March 31, 2021 was $10.8 million, an increase of $5.6 million, or 105.8%, from the three months ended March 31, 2020. Noninterest income increased primarily due to the following:
Noninterest Expense
The following table sets forth the major categories of noninterest expense for the periods indicated:
(158)
(712)
110
(479)
(28)
204
(763)
Total noninterest expense for the three months ended March 31, 2021 was $22.5 million, a decrease of $0.8 million, or 3.3%, from the three months ended March 31, 2020. Noninterest expense decreased primarily due to the following:
Income Taxes
We recorded income tax expense of $5.6 million, or 26.7% effective tax rate, during the three months ended March 31, 2021 compared to $2.0 million, or 24.6% effective tax rate, during the three months ended March 31, 2020. The effective tax rate increased primarily due to the tax exempt interest income making up a smaller portion of pre-tax income during the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The effective income tax rate was lower than the combined federal and state statutory rate of approximately 28.5% primarily due to tax exempt interest income.
FINANCIAL CONDITION
% Change
Balance Sheet Information
37.5
(66,034)
(7.2)
124,599
182.2
(1,831)
(12.4)
23,699
1.1
Less: allowance for loan losses
(3,079)
(9.7)
26,778
1.2
(289)
(10.3)
105,092
106,553
(1,461)
(1.4)
199,047
5.4
7.2
(8.2)
(16,150)
(32.6)
205,558
6.2
Total stockholders' equity
(6,511)
Total liabilities and stockholders' equity
Tangible assets (1)
3,839,485
3,640,149
199,336
5.5
Tangible common equity (1)
331,277
337,499
(6,222)
Core deposits (1)
3,334,066
3,103,847
230,219
7.4
Book value per share
13.05
13.25
Tangible book value per share (1)
12.10
12.29
Shares of common stock outstanding
Balance Sheet Ratios
Loan to deposit ratio
67.66
71.78
Core deposits to total deposits (1)
99.35
99.15
Stockholders' equity to total assets
9.25
9.93
Tangible common equity to tangible assets (1)
8.63
9.27
Total assets were $3.87 billion at March 31, 2021, an increase of $199.0 million, or 5.4%, from December 31, 2020. Significant changes in our balance sheet include the following:
60
Loan Portfolio
The following table sets forth the composition of the loan portfolio, excluding loans held-for-sale, by type of loan.
Percent
18.2
17.5
10.0
9.9
22.8
23.2
10.4
10.5
9.5
13.2
13.7
6.0
5.3
100.0
Loans, before allowance for loan losses (originated) (1)
2,156,095
95.0
2,126,323
94.6
Loans, before allowance for loan losses (acquired) (1)
114,610
5.0
120,683
PPP loans (included above)
Loans, before allowance for loan losses were $2.27 billion at March 31, 2021, an increase of $23.7 million, or 1.1%, from December 31, 2020. The increase in loans was primarily attributable to an increase in PPP loans, as originations of round 2 PPP loans exceeded the payoffs and paydowns from PPP loan forgiveness.
61
Loan Portfolio Maturities
The following table summarizes the scheduled maturities of the loan portfolio. Demand loans (loans having no stated repayment schedule or maturity) and overdraft loans are reported as being due in one year or less.
After 1 Year
After 5 Years
1 Year
Through
After
or Less
5 Years
15 Years
152,849
248,293
11,670
95,218
97,488
33,167
2,159
33,031
127,919
61,005
87,197
307,684
120,724
1,358
40,914
121,757
73,710
127,304
84,584
2,962
525
45,160
121,737
79,114
54,757
16,606
32,841
72,496
13,832
598,279
1,142,303
454,848
75,275
The following table summarizes loans maturing after one year, segregated into variable and fixed interest rates.
Variable Interest Rates
Repricing
Predetermined
(Fixed)
12,591
4,402
16,993
242,970
259,963
15,625
5,139
20,764
112,050
132,814
31,860
20,239
52,099
139,469
191,568
71,046
21,167
92,213
337,553
429,766
15,196
26,575
41,771
153,696
195,467
35,689
35,719
52,352
88,071
99,542
16,656
116,198
139,410
255,608
45,573
4,805
50,378
68,791
119,169
327,122
99,013
426,135
1,246,291
1,672,426
Nonperforming Assets
Nonperforming loans consist of all loans past due 90 days or more or on nonaccrual. Nonperforming assets consist of all nonperforming loans and foreclosed assets. Typically, loans are placed on nonaccrual when they reach 90 days past due, or when, in management’s opinion, there is reasonable doubt regarding the collection of the amounts due through the normal means of the borrower. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance and we must believe that all remaining principal and interest is fully collectible, before the loan is eligible to return to accrual status. Management believes the Company’s lending practices and active approach to managing nonperforming assets has resulted in timely resolution of problem assets.
Loans acquired with deteriorated credit quality are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans may be considered performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is discontinued on loans acquired with deteriorated credit quality if management can no longer estimate future cash flows on the loan. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all loans acquired with deteriorated credit quality, except those management can no longer estimate future cash flows.
The following table below sets forth information concerning nonperforming loans and nonperforming assets as of each of the dates indicated.
NONPERFORMING ASSETS
Past due 90 days or more, still accruing (1)
Total nonperforming loans
9,116
9,960
Total nonperforming assets
13,864
14,128
NONPERFORMING ASSETS (Originated) (2)
2,101
2,908
Past due 90 days or more, still accruing
Total nonperforming loans (originated)
2,111
2,929
737
Total nonperforming assets (originated)
2,848
3,603
NONPERFORMING ASSETS (Acquired) (2)
7,005
7,031
Total nonperforming loans (acquired)
4,011
3,494
Total nonperforming assets (acquired)
11,016
10,525
Loans, before allowance for loan losses (originated) (2)
Loans, before allowance for loan losses (acquired) (2)
CREDIT QUALITY RATIOS
Allowance for loan losses to loans, before allowance for loan losses
1.27
1.42
Allowance for loan losses to nonperforming loans
315.48
319.66
Nonperforming loans to loans, before allowance for loan losses
Nonperforming assets to total assets
0.36
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets
0.61
0.63
CREDIT QUALITY RATIOS (Originated) (2)
0.10
0.13
0.17
CREDIT QUALITY RATIOS (Acquired) (2)
6.11
5.83
9.29
8.48
Total nonperforming assets were $13.9 million at March 31, 2021, a decrease of $0.3 million, or 1.9%, from December 31, 2020. The decrease was primarily attributable to the pay down, pay off, or return to accrual status of several smaller loans.
63
Troubled Debt Restructurings
In general, if the Company grants a troubled debt restructuring (TDR) that involves either the absence of principal amortization or a material extension of an existing loan amortization period in excess of our underwriting standards, the loan will be placed on nonaccrual status. However, if a TDR is well secured by an abundance of collateral and the collectability of both interest and principal is probable, the loan may remain on accrual status. A nonaccrual TDR in full compliance with the payment requirements specified in the loan modification for at least six months may return to accrual status, if the collectability of both principal and interest is probable. All TDRs are individually evaluated for impairment.
The following table presents TDRs by loan category.
283
296
6,471
6,491
1,335
1,354
250
454
Total accrual troubled debt restructurings
8,339
8,595
137
141
Total nonaccrual troubled debt restructurings
334
Total troubled debt restructurings
8,673
8,950
TDRs have remained a small portion of our loan portfolio as loan modifications to borrowers with deteriorating financial condition are generally offered only as part of an overall workout strategy to minimize losses to the Company.
Risk Classification of Loans
Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as pass-watch, substandard, doubtful, or loss.
A pass-watch loan is still considered a "pass" credit and is not a classified or criticized asset, but is a reflection of a borrower who exhibits credit weaknesses or downward trends warranting close attention and increased monitoring. These potential weaknesses may result in deterioration of the repayment prospects for the loan. No loss of principal or interest is expected, and the borrower does not pose sufficient risk to warrant classification.
A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized as probable that the borrower will not pay principal and interest in accordance with the contractual terms.
An asset classified as doubtful has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted; such balances are promptly charged-off as required by applicable federal regulations.
As of March 31, 2021 and December 31, 2020, our risk classifications of loans were as follows:
Pass-watch
Pass-watch loans decreased $3.5 million, or 1.7% from December 31, 2020 to March 31, 2021. Additionally, substandard loans decreased $8.2 million, or 9.8%, from December 31, 2020 to March 31, 2021. These improvements were primarily the result of improving economic conditions.
65
Net Charge-offs and Recoveries
The following table sets forth activity in the allowance for loan losses.
Balance, beginning of period
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net (charge-offs) recoveries
326
(567)
Balance, end of period
Net charge-offs (recoveries)
(326)
567
Net charge-offs (recoveries) - (originated) (1)
(320)
172
Net charge-offs (recoveries) - (acquired) (1)
(6)
395
Average loans, before allowance for loan losses
Average loans, before allowance for loan losses (originated) (1)
2,166,079
1,984,066
Average loans, before allowance for loan losses (acquired) (1)
118,080
156,965
Net charge-offs (recoveries) to average loans, before allowance for loan losses *
(0.06)
Net charge-offs (recoveries) to average loans, before allowance for loan losses (originated) * (1)
Net charge-offs (recoveries) to average loans, before allowance for loan losses (acquired) * (1)
(0.02)
1.01
66
The following table summarizes net charge-offs (recoveries) to average loans, before allowance for loan losses, by loan category.
(293)
755
(440)
(90)
150
419,163
308,488
212,327
208,614
208,071
237,182
553,074
549,782
232,502
183,280
216,404
217,475
316,419
320,208
126,199
116,002
(0.28)
0.98
(0.75)
(0.01)
0.04
(0.17)
Net charge-offs (recoveries) to average total loans before allowance for loan losses have remained low during each of the three months ended March 31, 2021 and March 31, 2020. This ratio has remained low for several years, due primarily to the favorable economic conditions prior to the COVID-19 pandemic and substantial federal economic stimulus during the pandemic. We also believe our continuous credit monitoring and collection efforts have resulted in lower levels of loan losses.
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of allowance for loan losses by major loan categories:
Allowance for
Loan
Loan Losses
Balances
The Company’s investment policy is established by management and approved by the board of directors. The policy emphasizes safety of the investment, liquidity requirements, potential returns, cash flow targets and consistency with our interest rate risk management strategy.
The following table sets forth the composition, amortized cost, and fair values of debt securities:
We evaluate securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired. There were no other-than-temporary impairments during the three months ended March 31, 2021 and 2020.
Portfolio Maturities and Yields
The composition and maturities of the debt securities portfolio as of March 31, 2021 are summarized in the following tables. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Security yields have not been adjusted to a tax-equivalent basis.
4,514
2.18
15,219
2.65
17,991
1.30
9,223
2.10
11,673
2.13
40,664
2.32
43,436
5,004
1.91
48,279
2.36
3.64
60,279
2.61
5,771
2.19
41,215
2.76
3,097
2.83
44,312
22,855
2.93
123,124
2.57
15,097
3.47
138,221
2.67
90,271
1.12
97,594
1.70
120,394
1.82
5,904
126,298
1.90
56,552
1.11
65,088
2.41
108,973
1.54
81,663
190,636
31,431
4.27
407,621
2.03
103,426
1.61
511,047
1.94
29,705
1.39
96,320
1.89
4.26
96,711
102,584
1.60
11,799
114,383
1.68
49,281
1.81
59,509
108,790
1.66
2,000
279,890
1.73
71,699
351,589
1.72
1.69
136,817
1.98
3.56
301,279
2.09
1.96
1.85
185,277
1.95
1.87
1.58
352,961
3.46
2.02
69
Management continues to focus on growing non-maturity deposits, through the Company’s relationship-driven banking philosophy and community-focused marketing programs, and to deemphasize higher cost deposit categories, such as time deposits. Additionally, the Bank continues to add and improve ancillary convenience services tied to deposit accounts, such as mobile, remote deposits and peer-to-peer payments, to solidify deposit relationships.
The following table sets forth the distribution of average deposits, by account type:
Change in
Percent of
Total Deposits
Average Cost *
28.5
37.2
30.8
29.8
22.9
14.9
17.0
3.9
16.7
16.0
24.8
Total non-maturity deposits
2,942,515
90.9
2,380,980
87.4
23.6
9.1
12.6
(13.9)
3,236,687
2,722,750
18.9
The average balances of non-maturity deposits increased 23.6% from the three months ended March 31, 2020 to the three months ended March 31, 2021, with the increase primarily attributable to PPP loan proceeds received by commercial customers and federal economic stimulus received by retail customers. Partially offsetting the increase in non-maturity deposits was a 13.9% decline in the average balances of time deposits, which resulted in a 18.9% increase in average balances of total deposits from the three months ended March 31, 2020 to the three months ended March 31, 2021.
The following table sets forth time deposits by remaining maturity as of March 31, 2021:
3 Months or
Over 3 through
Over 6 through
Over
Less
6 Months
12 Months
Time deposits:
Amounts less than $100,000
40,340
34,745
59,357
58,753
193,195
Amounts of $100,000 but less than $250,000
12,661
15,512
24,056
18,137
70,366
Amounts of $250,000 or more
1,760
4,695
11,524
3,921
21,900
Total time deposits
54,761
54,952
94,937
80,811
As of March 31, 2021 and December 31, 2020, the Bank’s uninsured deposits, including related accrued interest, were estimated to be $607.0 million and $573.8 million, respectively.
IMPACT OF INFLATION
The consolidated financial statements and the related notes have been prepared in conformity with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The impact of inflation, if any, is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
LIQUIDITY
Bank Liquidity
The overall objective of bank liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. The Bank manages liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
The Bank continuously monitors its liquidity positions to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. The Bank manages its liquidity position to meet the daily cash flow needs of clients, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives. The Bank also monitors liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.
As part of the Bank’s liquidity management strategy, the Bank is also focused on minimizing costs of liquidity and attempts to decrease these costs by promoting noninterest bearing and low-cost deposits and replacing higher cost funding including time deposits and borrowed funds. While the Bank does not control the types of deposit instruments our clients choose, those choices can be influenced with the rates and the deposit specials offered.
Additional sources of liquidity include unpledged securities, federal funds purchased, and borrowings from the Federal Home Loan Bank of Chicago (FHLB). Unpledged securities may be sold or pledged as collateral for borrowings to meet liquidity needs. Interest is charged at the prevailing market rate on federal funds purchased and FHLB borrowings. Funds obtained from federal funds purchased and FHLB borrowings are used primarily to meet daily liquidity needs. The total amount of the remaining credit available to the Bank from the FHLB at March 31, 2021 was $311.0 million.
As of March 31, 2021, management believed adequate liquidity existed to meet all projected cash flow obligations of the Bank. As of March 31, 2021, the Bank had no material commitments for capital expenditures.
Holding Company Liquidity
The Company is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity. As of March 31, 2021, HBT Financial, Inc. had cash and cash equivalents of $36.7 million.
The Company’s main source of funding is dividends declared and paid to it by the Bank. Due to state banking laws, the Bank may not declare dividends in any calendar year in an amount that would exceed the accumulated retained earnings, after giving effect to any unrecognized losses and bad debts, without the prior approval of the Illinois Department of Financial and Professional Regulation. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements. Management believes that these limitations will not impact the Company’s ability to meet its ongoing short-term cash obligations. During the three months ended March 31, 2021, the Bank did not pay a dividend to the Company. During the three months ended March 31, 2020, the Bank paid $4.4 million in dividends to the Company.
The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to stockholders and interest payments on the subordinated notes and junior subordinated debentures. During the three months ended March 31, 2021 and 2020, holding company operating expenses consisted of interest expense of $0.8 million and $0.4 million, respectively, and other operating expenses of $0.6 million and $0.5 million, respectively. As of March 31, 2021, management was not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on the Company’s liquidity.
As of March 31, 2021, management believed adequate liquidity existed to meet all projected cash flow obligations of the Company. As of March 31, 2021, the Company had no material commitments for capital expenditures.
CAPITAL RESOURCES
The overall objectives of capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. The Company seeks to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.
Regulatory Capital Requirements
The Company and Bank are each subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company and the Bank.
In addition to meeting minimum capital requirements, the Company and the Bank must also maintain a “capital conservation buffer” to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. As of March 31, 2021 and December 31, 2020, the capital conservation buffer requirement was 2.5% of risk-weighted assets.
As of March 31, 2021 and December 31, 2020, the Company and the Bank met all capital adequacy requirements to which they were subject. As of those dates, the Bank was “well capitalized” under the regulatory prompt corrective action provisions.
The following table sets forth actual capital ratios of the Company and the Bank for the dates indicated, the minimum ratios for capital adequacy purposes with the capital conservation buffer, and the minimum ratios to be well capitalized under regulatory prompt corrective action provisions.
For Capital
To Be Well
Adequacy Purposes
Capitalized Under
With Capital
Prompt Corrective
Conversation Buffer (1)
Action Provisions (2)
10.50
8.50
7.00
N/A Not applicable.
Cash Dividends
The below table summarizes the cash dividends paid by quarter for three months ended March 31, 2021 and the year ended December 31, 2020.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Regular
4,116
Restricted stock unit dividend equivalent
Total cash dividends
4,124
4,119
4,118
16,474
4,130
4,129
16,518
During the first quarter of 2021 and each quarter of 2020, the Company announced quarterly cash dividends of $0.15 per share.
Stock Repurchase Program
During the first quarter of 2021, the Company repurchased 95,462 shares of its common stock at a weighted average price of $15.86 under its stock repurchase program. The Company’s Board of Directors authorized the repurchase of up to $15.0 million of its common stock under its stock repurchase program in effect until December 31, 2021. As of March 31, 2021, the Company had $13.5 million remaining under the current stock repurchase authorization.
OFF-BALANCE SHEET ARRANGEMENTS
As financial services providers, the Bank routinely is a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit, standby letters of credit, unused lines of credit and commitments to sell loans. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process afforded to loans originated by the Bank. Although commitments to extend credit are considered while evaluating our allowance for loan losses, as of March 31, 2021 and December 31, 2020, there were no reserves for unfunded commitments. For additional information, see “Note 18 – Commitments and Contingencies” to the consolidated financial statements.
CONTRACTUAL OBLIGATIONS
There have been no material changes to our contractual obligations and other funding needs as disclosed in our Annual Report on Form 10-K filed with the SEC on March 12, 2021.
JOBS ACT ACCOUNTING ELECTION
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to use the extended transition period until we are no longer an emerging growth company or until we choose to affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has established various accounting policies that govern the application of accounting principles generally accepted in the United State of America in the preparation of its consolidated financial statements.
Critical accounting estimates are those that are critical to the portrayal and understanding of the Company's financial condition and results of operations and require management to make assumptions that are difficult, subjective or complex. These estimates involve judgments, assumptions and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending on the severity of such changes, the possibility of a materially different financial condition or materially different results of operations is a reasonable likelihood. Further, changes in accounting standards could impact the Company's critical accounting estimates.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the Company's Annual Report on Form 10-K filed with the SEC on March 12, 2021. For more information, please refer to “Note 1 – Summary of Significant Accounting Policies” to our consolidated financial statements included in the Company's Annual Report on Form 10-K filed with the SEC on March 12, 2021.
NON-GAAP FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q contains certain financial information determined by methods other than in accordance with GAAP. Management believes that it is a standard practice in the banking industry to present these non-GAAP financial measures, and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP; nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures below.
Non-GAAP Financial Measure
Definition
How the Measure Provides Useful Information to Investors
Adjusted Net Income
Net Interest Income (Tax Equivalent Basis)
Efficiency Ratio (Tax Equivalent Basis)
Tangible Common Equity to Tangible Assets
Core Deposits
Originated Loans and Acquired Loans
76
Reconciliation of Non-GAAP Financial Measure - Adjusted Net Income and Adjusted Return on Average Assets
Adjustments:
Charges related to termination of certain employee benefit plans
(848)
Total adjustments
(3,019)
Tax effect of adjustments
861
Less adjustments after tax effect
1,212
(2,158)
Adjusted net income
Average assets
Adjusted return on average assets *
Reconciliation of Non-GAAP Financial Measure - Adjusted Earnings Per Share
Earnings allocated to participating securities (1)
(19)
Numerator for adjusted earnings per share - basic and diluted
14,005
8,360
Adjusted earnings per share - Basic
Adjusted earnings per share - Diluted
77
Reconciliation of Non-GAAP Financial Measure - Net Interest Margin (Tax Equivalent Basis)
Net interest income (tax equivalent basis)
Tax-equivalent adjustment (1)
Net interest income (tax equivalent basis) (1)
Net interest margin (tax equivalent basis)
Tax-equivalent adjustment * (1)
Net interest margin (tax equivalent basis) * (1)
Average interest-earning assets
Reconciliation of Non-GAAP Financial Measure - Efficiency Ratio (Tax Equivalent Basis)
Efficiency ratio (tax equivalent basis)
Less: amortization of intangible assets
Adjusted noninterest expense
22,990
Operating revenue
39,937
35,914
Operating revenue (tax-equivalent basis) (1)
40,440
36,377
Efficiency ratio (tax equivalent basis) (1)
78
Reconciliation of Non-GAAP Financial Measure - Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share
Tangible Common Equity
Less: Goodwill
Less: Core deposit intangible assets, net
Tangible common equity
Tangible Assets
Tangible assets
Total stockholders' equity to total assets
Tangible common equity to tangible assets
Tangible book value per share
Reconciliation of Non-GAAP Financial Measure – Adjusted Return on Average Stockholders’ Equity and Adjusted Return on Tangible Common Equity
Average Tangible Common Equity
2,686
3,898
Average tangible common equity
337,251
314,001
Return on average tangible common equity *
Adjusted return on average stockholders' equity *
Adjusted return on average tangible common equity *
Reconciliation of Non-GAAP Financial Measure - Core Deposits
Less: time deposits of $250,000 or more
26,687
Less: brokered deposits
Core deposits
Core deposits to total deposits
79
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are interest rate risk and credit risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due and is disclosed in detail above.
Interest Rate Risk
The most significant form of market risk is interest rate risk inherent in the normal course of lending and deposit-taking activities. Management believes that our ability to successfully respond to changes in interest rates will have a significant impact on our financial results. To that end, management actively monitors and manages our interest rate exposure.
The Asset/Liability Management Committee (ALCO), which is authorized by the Company’s board of directors, monitors our interest rate sensitivity and makes decisions relating to that process. The ALCO’s goal is to structure our asset/liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital in either a rising or declining interest rate environment. Profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.
We monitor the impact of changes in interest rates on our net interest income and economic value of equity, or EVE, using rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market rates of interest in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. EVE measures our long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the current balance sheet.
The following table sets forth, as of March 31, 2021 and December 31, 2020, the estimated impact on our EVE and net interest income of immediate changes in interest rates at the specified levels.
Increase (Decrease) in
Estimated Increase
Estimated Net Interest Income
(Decrease) in EVE
Year 1
Year 2
Change in Interest Rates (basis points)
+400
122,361
29.4
28,053
24.4
45,970
43.7
+300
96,117
23.1
21,454
18.7
35,848
34.0
+200
61,967
14,393
12.5
24,841
+100
15,007
3.6
6,820
5.9
12,657
12.0
Flat
-100
13,280
3.2
(4,906)
(9,061)
(8.6)
81,406
21.1
27,461
23.8
44,487
42.1
50,943
21,149
18.3
34,815
32.9
11,166
14,272
12.4
24,197
(26,976)
(7.0)
6,851
12,350
11.7
29,295
(4,088)
(3.5)
(7,262)
(6.9)
This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors or changes in earning assets mix, which could reduce the actual impact on EVE and net interest income, if any.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The EVE and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the EVE and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Credit Risk
Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Our loan policy documents underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the borrower, industry, and product levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent loan review process that assesses compliance with loan policy, compliance with loan documentation standards, accuracy of the risk rating and overall credit quality of the loan portfolio.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2021, the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
We are sometimes party to legal actions that are routine and incidental to our business. Management, in consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business, including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws, we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 12, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
On November 2, 2020, the Company’s board of directors approved a stock repurchase program that authorizes the Company to repurchase up to $15 million of its common stock. The stock repurchase program will be in effect until December 31, 2021 with the timing of purchases and number of shares repurchased dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements, and market conditions. The Company is not obligated to purchase any shares under the stock repurchase program, and the stock repurchase program may be suspended or discontinued at any time without notice.
The following table sets forth information about the Company’s purchases of its common stock during the first quarter of 2021:
Total Number
Approximate
of Shares
Dollar Value of Shares
Purchased as
That May Yet be
Part of Publicly
Purchased Under the
Price Paid
Announced Plans
Plans or Programs
Period
Purchased
Per Share
or Programs
(in thousands)
January 1 - 31, 2021
15,000
February 1 - 28, 2021
66,250
15.43
13,978
March 1 - 31, 2021
29,212
16.86
13,486
95,462
15.86
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No.
Description
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 *
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.2 *
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350.
101.INS
iXBRL Instance Document.
101.SCH
iXBRL Taxonomy Extension Schema Document.
101.CAL
iXBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
iXBRL Taxonomy Extension Label Linkbase Document.
101.PRE
iXBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF
iXBRL Taxonomy Extension Definition Linkbase Document.
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101).
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HBT FINANCIAL, INC.
May 7, 2021
By:
/s/ Matthew J. Doherty
Matthew J. Doherty
Chief Financial Officer
(on behalf of the registrant and as principal financial officer)
84