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 September 30, 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 October 26, 2021, there were 29,054,879 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
8
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
52
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
90
Item 4.
Controls and Procedures
91
PART II. OTHER INFORMATION
92
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
93
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)
September 30,
December 31,
2021
2020
ASSETS
Cash and due from banks
$
36,508
24,912
Interest-bearing deposits with banks
435,421
287,539
Cash and cash equivalents
471,929
312,451
Debt securities available-for-sale, at fair value
896,218
922,869
Debt securities held-to-maturity (fair value of $321,156 in 2021 and $72,441 in 2020)
318,730
68,395
Equity securities with readily determinable fair value
3,366
3,292
Equity securities with no readily determinable fair value
1,867
1,552
Restricted stock, at cost
2,739
2,498
Loans held for sale
8,582
14,713
Loans, net of allowance for loan losses of $24,861 in 2021 and $31,838 in 2020
2,122,951
2,215,168
Bank premises and equipment, net
49,337
52,904
Bank premises held for sale
1,462
121
Foreclosed assets
7,315
4,168
Goodwill
23,620
Core deposit intangible assets, net
1,999
2,798
Mortgage servicing rights, at fair value
7,359
5,934
Investments in unconsolidated subsidiaries
1,165
Accrued interest receivable
13,376
14,255
Other assets
16,211
20,664
Total assets
3,948,226
3,666,567
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing
1,003,723
882,939
Interest-bearing
2,415,833
2,247,595
Total deposits
3,419,556
3,130,534
Securities sold under agreements to repurchase
47,957
45,736
Subordinated notes
39,297
39,238
Junior subordinated debentures issued to capital trusts
37,698
37,648
Other liabilities
24,897
49,494
Total liabilities
3,569,405
3,302,650
COMMITMENTS AND CONTINGENCIES (Notes 8 and 19)
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 27,334,428 in 2021 and 27,457,306 in 2020
275
Surplus
191,413
190,875
Retained earnings
184,919
154,614
Accumulated other comprehensive income
4,537
18,153
Treasury stock at cost, 143,103 shares in 2021 and none in 2020
(2,323)
Total stockholders’ equity
378,821
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 September 30,
Nine Months Ended September 30,
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable
25,604
25,118
76,016
77,396
Federally tax exempt
572
542
1,722
1,748
Securities:
4,632
3,266
12,323
9,772
1,103
1,233
3,383
3,488
Interest-bearing deposits in bank
190
65
385
873
Other interest and dividend income
14
39
42
Total interest and dividend income
32,115
30,238
93,868
93,319
INTEREST EXPENSE
Deposits
564
843
1,821
3,480
9
23
40
Borrowings
470
147
1,409
357
367
1,069
1,209
Total interest expense
1,400
1,367
4,324
4,878
Net interest income
30,715
28,871
89,544
88,441
PROVISION FOR LOAN LOSSES
(1,667)
2,174
(7,234)
10,102
Net interest income after provision for loan losses
32,382
26,697
96,778
78,339
NONINTEREST INCOME
Card income
2,509
2,146
7,216
5,936
Service charges on deposit accounts
1,677
1,493
4,364
4,460
Wealth management fees
2,036
1,646
6,013
4,967
Mortgage servicing
699
724
2,095
2,175
Mortgage servicing rights fair value adjustment
(268)
1,425
(2,947)
Gains on sale of mortgage loans
1,257
3,184
4,919
5,855
Gains (losses) on securities
28
(2)
74
Gains (losses) on foreclosed assets
(14)
27
126
120
Gains (losses) on other assets
(672)
(719)
(71)
Other noninterest income
832
1,101
2,461
2,866
Total noninterest income
8,392
10,052
27,974
23,364
NONINTEREST EXPENSE
Salaries
11,988
12,595
36,859
38,023
Employee benefits
1,500
1,666
4,677
6,555
Occupancy of bank premises
1,610
1,609
5,011
5,079
Furniture and equipment
657
679
1,883
1,891
Data processing
1,767
1,583
5,176
4,841
Marketing and customer relations
883
690
2,291
2,551
Amortization of intangible assets
252
305
799
927
FDIC insurance
279
222
763
476
Loan collection and servicing
400
450
1,098
1,292
242
226
704
403
Other noninterest expense
2,589
2,460
7,604
7,253
Total noninterest expense
22,167
22,485
66,865
69,291
INCOME BEFORE INCOME TAX EXPENSE
18,607
14,264
57,887
32,412
INCOME TAX EXPENSE
4,892
3,701
15,210
8,209
NET INCOME
13,715
10,563
42,677
24,203
EARNINGS PER SHARE - BASIC
0.50
0.38
1.56
0.88
EARNINGS PER SHARE - DILUTED
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
27,340,926
27,457,306
27,377,809
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on debt securities available-for-sale
(5,676)
1,176
(19,950)
15,368
Reclassification adjustment for amortization of net unrealized losses on debt securities transferred to held-to-maturity
195
426
Unrealized (losses) gains on derivative instruments
(8)
173
(1,098)
Reclassification adjustment for net settlements on derivative instruments
105
97
306
138
Total other comprehensive income (loss), before tax
(5,384)
1,286
(19,045)
14,413
Income tax expense (benefit)
(1,535)
366
(5,429)
4,114
Total other comprehensive income (loss)
(3,849)
920
(13,616)
10,299
TOTAL COMPREHENSIVE INCOME
9,866
11,483
29,061
34,502
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Common Stock
Other
Total
Shares
Retained
Comprehensive
Treasury
Stockholders’
Outstanding
Amount
Earnings
Income (Loss)
Stock
Equity
Balance, June 30, 2021
27,355,053
191,185
175,328
8,386
(1,980)
373,194
Net income
Other comprehensive income
Stock-based compensation
228
Repurchase of common stock
(20,625)
(343)
Cash dividends and dividend equivalents ($0.15 per share)
(4,124)
Balance, September 30, 2021
27,334,428
Balance, June 30, 2020
190,687
139,667
17,211
347,840
100
(4,129)
Balance, September 30, 2020
190,787
146,101
18,131
355,294
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
Balance, December 31, 2020
Other comprehensive loss
538
Issuance of common stock upon vesting of restricted stock units
20,225
(143,103)
Cash dividends and dividend equivalents ($0.45 per share)
(12,372)
Balance, December 31, 2019
190,524
134,287
7,832
332,918
263
(12,389)
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation expense
2,297
2,176
Provision for loan losses
Net amortization of debt securities
5,205
3,298
Amortization of unrealized gain on dedesignated cash flow hedge
(64)
Deferred income tax expense
2,409
(628)
Net accretion of discount and deferred loan fees on loans
(9,529)
(3,459)
Net unrealized gain on equity securities
(74)
(3)
Net loss on disposals of bank premises and equipment
33
Impairment losses on bank premises held for sale
652
Net gain on sales of foreclosed assets
(321)
(269)
Write-down of foreclosed assets
156
Amortization of intangibles
(Increase) decrease in mortgage servicing rights
(1,425)
2,947
Amortization of discount and issuance costs on subordinated notes and debentures
109
56
Mortgage loans originated for sale
(152,036)
(271,903)
Proceeds from sale of mortgage loans
163,086
258,566
Net gain on sale of mortgage loans
(4,919)
(5,855)
Decrease in accrued interest receivable
879
131
Decrease in other assets
1,639
437
Decrease in other liabilities
(18,284)
(26,156)
Net cash provided by (used in) operating activities
26,696
(5,073)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits with banks
248
Proceeds from paydowns, maturities, and calls of debt securities
149,659
147,561
Purchase of securities
(398,387)
(344,335)
Net decrease (increase) in loans
104,376
(113,533)
Purchase of restricted stock
(241)
(73)
Purchases of bank premises and equipment
(773)
(1,463)
Proceeds from sales of bank premises and equipment
17
Proceeds from sales of foreclosed assets
1,793
Capital improvements to foreclosed assets
(6)
Net cash used in investing activities
(143,766)
(309,807)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
289,022
239,806
Net increase in repurchase agreements
2,221
1,005
Issuance of subordinated notes, net of issuance costs
39,211
Cash dividends and dividend equivalents paid
Net cash provided by financing activities
276,548
267,633
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
159,478
(47,247)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
283,971
CASH AND CASH EQUIVALENTS AT END OF PERIOD
236,724
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest
4,992
5,191
Cash paid for income taxes
17,295
14,308
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Transfers of loans to foreclosed assets
4,856
499
Sales of foreclosed assets through loan origination
67
Transfers of bank premises and equipment to bank premises held for sale
1,345
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ACCOUNTING POLICIES
Basis of Presentation
HBT Financial, Inc. (the Company or HBT Financial) 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 as of September 30, 2021.
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 (SEC). 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 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.
11
NOTE 2 – ACQUISITIONS
NXT Bancorporation, Inc.
On June 7, 2021, HBT Financial and NXT Bancorporation, Inc. (NXT), the holding company for NXT Bank, entered into a merger agreement. Under the merger agreement, NXT merged with and into HBT Financial, with HBT Financial as the surviving entity, on October 1, 2021. Additionally, NXT Bank will be merged with and into Heartland Bank, with Heartland Bank as the surviving entity, on or about December 3, 2021. As of September 30, 2021, NXT had total assets of $232 million, total loans of $196 million, and total deposits of $181 million. NXT’s results of operations are not reflected in the Company’s consolidated financial statements as of and for the three and nine months ended September 30, 2021.
Under the terms of the merger agreement, NXT’s shareholders have the right to receive 67.6783 shares of HBT Financial, Inc.’s common stock and $400 in cash for each share of common stock of NXT. Based on the number of shares of NXT common stock outstanding prior to closing, NXT shareholders are entitled to receive cash consideration of approximately $10.6 million and stock consideration of approximately 1.8 million shares of HBT common stock.
During the three and nine months ended September 30, 2021, the Company incurred $380,000 and $537,000, respectively, in pre-tax acquisition expenses related to the planned acquisition of NXT, comprised primarily of professional fees and data processing expense.
NOTE 3 – SECURITIES
The carrying balances of the securities were as follows:
Debt securities available-for-sale
Debt securities held-to-maturity
Total securities
1,220,181
996,108
There were no sales of securities during the three and nine months ended September 30, 2021 and 2020. Gains (losses) on securities were as follows during the three and nine months ended September 30:
Net realized gains (losses) on sales
Net unrealized gains (losses) on equity securities:
Readily determinable fair value
No readily determinable fair value
12
On June 30, 2021 and 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:
June 30, 2021
March 31, 2021
Amortized
Cost
Fair Value
U.S. government agency
7,593
7,323
Mortgage-backed:
Agency residential
8,776
8,536
Agency commercial
99,271
99,275
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.
13
Debt Securities
The amortized cost and fair values of debt securities, with gross unrealized gains and losses, are as follows:
September 30, 2021
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Available-for-sale:
U.S. Treasury
59,943
374
(22)
60,295
130,146
1,842
(2,295)
129,693
Municipal
295,251
6,232
(2,736)
298,747
172,372
3,111
(371)
175,112
164,999
2,002
(1,100)
165,901
Corporate
64,851
1,899
(280)
66,470
Total available-for-sale
887,562
15,460
(6,804)
Held-to-maturity:
12,341
124
(12)
12,453
18,667
998
19,665
22,065
354
(1)
22,418
265,657
2,679
(1,716)
266,620
Total held-to-maturity
4,155
(1,729)
321,156
Total debt securities
1,206,292
19,615
(8,533)
1,217,374
December 31, 2020
118,282
3,720
(9)
121,993
265,309
9,232
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
As of September 30, 2021 and December 31, 2020, the Bank had debt securities with a carrying value of $357,608,000 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 48% of the obligations of local municipalities portfolio consists of debt securities issued by municipalities located in Illinois as of September 30, 2021. Approximately 95% of such debt securities were general obligation issues as of September 30, 2021.
The amortized cost and fair value of debt securities by contractual maturity, as of September 30, 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
37,707
38,206
3,055
3,072
Due after 1 year through 5 years
74,925
77,508
17,110
17,797
Due after 5 years through 10 years
309,565
311,729
10,452
10,844
Due after 10 years
127,994
127,762
391
405
15
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 September 30, 2021 and December 31, 2020:
Investments in a Continuous Unrealized Loss Position
Less than 12 Months
12 Months or More
UnrealizedLoss
9,926
70,210
(2,066)
112,240
(670)
12,406
124,646
(323)
47,264
(48)
4,649
51,913
(983)
89,468
(117)
6,888
96,356
4,679
(5,689)
329,108
(1,115)
28,622
357,730
4,988
1,570
(1,596)
127,713
(120)
2,793
130,506
(1,609)
134,271
137,064
(7,298)
463,379
(1,235)
31,415
494,794
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 September 30, 2021, there were 32 debt securities in an unrealized loss position for a period of twelve months or more, and 189 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.
16
Equity Securities
Equity securities with readily determinable fair values are measured at fair value with changes in fair value recognized in gains (losses) on securities on the consolidated statements of income.
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
2,032
Cumulative net unrealized gains (losses)
268
(165)
Carrying value
1,717
194
As of September 30, 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 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Major categories of loans are summarized as follows:
Commercial and industrial
261,763
393,312
Agricultural and farmland
229,718
222,723
Commercial real estate - owner occupied
203,096
222,360
Commercial real estate - non-owner occupied
579,860
520,395
Multi-family
215,245
236,391
Construction and land development
232,291
225,652
One-to-four family residential
294,612
306,775
Municipal, consumer, and other
131,227
119,398
Loans, before allowance for loan losses
2,147,812
2,247,006
Allowance for loan losses
(24,861)
(31,838)
Loans, net of allowance for loan losses
Paycheck Protection Program (PPP) loans (included above)
55,374
153,860
3,462
3,049
985
6,587
Total PPP loans
59,821
163,496
18
The following tables detail activity in the allowance for loan losses for the three and nine months ended September 30:
Commercial
Municipal,
Agricultural
Real Estate
Construction
One-to-four
Consumer,
and
Owner
Non-owner
and Land
Family
Three Months Ended September 30, 2021
Industrial
Farmland
Occupied
Multi-Family
Development
Residential
Allowance for loan losses:
2,717
781
1,946
9,825
2,009
3,924
1,520
3,785
26,507
162
(26)
(395)
(710)
(228)
413
(499)
(384)
Charge-offs
(135)
(95)
(278)
Recoveries
114
135
43
299
2,858
755
1,551
9,121
1,781
4,338
1,108
3,349
24,861
Three Months Ended September 30, 2020
4,356
2,890
3,257
6,767
1,581
3,010
4,496
29,723
(98)
(585)
86
2,496
614
179
(656)
(881)
(39)
(42)
(90)
(1,078)
517
198
46
69
835
3,894
2,305
3,304
9,268
2,195
3,717
3,152
3,819
31,654
Nine Months Ended September 30, 2021
3,929
793
3,141
11,251
1,957
4,232
1,801
4,734
31,838
(1,062)
(38)
(1,590)
(2,149)
(176)
(164)
(742)
(1,313)
(430)
(161)
(284)
(875)
421
19
270
210
212
1,132
Consumer
Nine Months Ended September 30, 2020
4,441
2,766
1,779
3,663
1,024
2,977
2,540
3,109
22,299
565
(434)
1,124
5,591
1,171
551
598
936
(1,690)
(27)
(56)
(154)
(466)
(2,459)
578
440
70
216
168
240
1,712
The following tables present the recorded investments in loans and the allowance for loan losses by category:
Loan balances:
Collectively evaluated for impairment
252,260
228,550
187,842
536,795
214,021
227,766
280,221
118,003
2,045,458
Individually evaluated for impairment
9,050
389
9,584
29,774
2,414
7,394
13,186
71,791
Acquired with deteriorated credit quality
453
779
5,670
13,291
1,224
2,111
6,997
38
30,563
1,149
5,864
1,773
814
1,296
18,170
663
361
3,171
289
2,052
6,536
41
155
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
35,756
2,736
771
2,306
6,736
1,950
3,984
1,237
1,432
21,152
1,193
22
429
4,255
560
3,301
9,982
406
260
26
20
The following tables present loans individually evaluated for impairment by category of loans:
Unpaid
Principal
Recorded
Related
Balance
Investment
Allowance
With an allowance recorded:
1,925
1,912
3,213
3,173
15,064
15,041
1,927
1,787
8,611
8,585
30,740
30,498
With no related allowance:
7,272
7,138
6,498
6,411
14,802
14,733
2,470
7,093
5,607
4,659
4,601
43,183
41,293
Total loans individually evaluated for impairment:
9,197
9,711
29,866
9,020
13,270
73,923
21
2,737
2,725
169
3,040
20,726
20,394
2,081
2,055
2,963
12,207
12,181
43,955
43,302
3,322
2,587
4,625
10,164
10,092
5,727
5,599
1,762
1,754
9,325
1,431
1,365
37,232
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 and nine months ended September 30:
Average
Interest
Income
Recognized
2,763
174
3,192
45
1,281
15,136
4,216
2,080
25
1,827
3,587
24
8,641
8,823
30,721
323
22,924
154
7,137
115
2,894
61
10,220
144
6,551
81
11,766
150
15,283
101
28,544
282
889
2,439
1,476
5,713
7,500
63
4,635
4,763
42,143
370
68,052
722
9,062
141
5,657
102
10,394
146
9,743
13,047
30,419
295
32,760
284
3,556
7,540
11,087
87
13,276
13,586
72,864
693
90,976
2,025
84
3,124
129
110
307
3,060
132
1,141
17,001
599
1,504
741
2,571
2,209
64
3,240
8,722
119
10,069
230
33,868
1,029
21,956
603
5,222
205
4,637
213
384
13,187
500
273
11,367
401
8,880
239
17,358
388
580
2,060
637
6,427
142
8,167
266
4,695
3,660
78
35,464
978
59,312
1,849
7,247
7,761
342
494
13,494
506
10,276
12,508
457
25,881
838
18,862
395
2,801
54
3,208
94
8,636
206
11,407
350
13,417
184
13,729
308
69,332
2,007
81,268
2,452
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
261,034
202,626
178
292
579,675
185
229,942
2,349
291,948
496
2,112
131,001
2,141,189
1,068
66
5,489
392,490
822
221,308
112
940
516,387
4,008
225,508
301,282
984
595
3,914
119,055
211
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
246,013
6,385
9,365
203,742
24,901
1,075
175,978
18,302
8,816
511,583
35,602
32,675
192,549
22,696
201,097
28,780
274,029
12,404
8,179
117,762
1,922,753
149,349
75,710
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 and nine months ended September 30, 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 and nine months ended September 30, 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 September 30, 2021 and December 31, 2020, the Company had $3,670,000 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 loans 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 September 30, 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 $329,000 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
1,350
1,378
1,397
1,662
Reclassification from non-accretable difference
280
116
433
Accretion income
(86)
(111)
(286)
(441)
Ending balance
1,544
1,383
NOTE 5 – LOAN SERVICING
Mortgage loans serviced for others, which are not included in the accompanying consolidated balance sheets, amounted to $1,028,140,000 and $1,090,219,000 as of September 30, 2021 and December 31, 2020, respectively. Activity in mortgage servicing rights is as follows:
7,319
5,839
8,518
Capitalized servicing rights
241
658
994
Fair value adjustment:
Attributable to payments and principal reductions
(451)
(650)
(1,408)
(1,844)
Attributable to changes in valuation inputs and assumptions
250
(276)
1,839
(2,535)
Total fair value adjustment
(201)
(926)
431
(4,379)
5,571
NOTE 6 – FORECLOSED ASSETS
Foreclosed assets activity is as follows:
7,757
4,450
5,099
Transfers from loans
172
Capitalized improvements
Proceeds from sales
(354)
(792)
(1,583)
(1,793)
Sales through loan origination
(252)
(67)
Net gain (loss) on sales
108
125
321
269
Direct write-downs
(122)
(195)
(156)
3,857
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 September 30, 2021 and December 31, 2020, was $486,000 and $868,000, respectively. As of September 30, 2021, there was 1 one-to-four family residential real estate loans in the process of foreclosure totaling approximately $34,000. 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.
NOTE 7 – DEPOSITS
The Company’s deposits are summarized below:
Noninterest-bearing deposits
Interest-bearing deposits:
Interest-bearing demand
1,013,678
968,592
Money market
519,343
462,056
Savings
611,050
517,473
Time
271,762
299,474
Total interest-bearing deposits
Money market deposits include $6,191,000 and $6,489,000 of reciprocal transaction deposits as of September 30, 2021 and December 31, 2020, respectively. Time deposits include $850,000 and $3,164,000 of reciprocal time deposits as of September 30, 2021, and December 31, 2020, respectively.
The aggregate amounts of time deposits in denominations of $250,000 or more amounted to $24,319,000 and $26,687,000 as of September 30, 2021 and December 31, 2020, respectively. The aggregate amounts of time deposits in denominations of $100,000 or more amounted to $88,243,000 and $99,649,000 as of September 30, 2021 and December 31, 2020, respectively.
The components of interest expense on deposits are as follows:
123
373
536
96
608
48
37
157
291
587
1,034
2,179
Total interest expense on deposits
NOTE 8 – BORROWINGS
There were no Federal Home Loan Bank of Chicago (FHLB) borrowings outstanding as of September 30, 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 September 30, 2021 and December 31, 2020, was $503,283,000 and $493,690,000, respectively. As of September 30, 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 September 30, 2021, there was no collateral pledged. As of December 31, 2020, the carrying value of debt securities pledged amounted to $499,000. There were no outstanding borrowings under the FRB discount window as of September 30, 2021 and December 31, 2020.
29
NOTE 9 – 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 September 30, 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
(703)
(762)
Subordinated notes, at carrying value
NOTE 10 – 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
(1,067)
(1,117)
Total junior subordinated debentures, at carrying value
30
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
%
2.88
2.99
April 6, 2034
1.53
1.65
1.75
June 15, 2037
1.35
1.47
1.57
September 15, 2037
2.80
2.93
3.04
2.90
3.02
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 September 30, 2021 and December 31, 2020, 100%of the trust preferred securities qualified as Tier 1 capital under the final rule adopted in March 2005.
31
NOTE 11 – 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
(979)
(1,458)
As of September 30, 2021, the interest rate swap agreements designated as cash flow hedges had contractual maturities between 2024 and 2025. As of September 30, 2021 and December 31, 2020, the Company had cash pledged and held on deposit at counterparties of $1,030,000 and $1,630,000, respectively.
Prior to 2020, the Company also 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
Nine Months Ended
Designated as cash flow hedges:
Taxable loan interest income
Junior subordinated debentures interest expense
(105)
(97)
(306)
(202)
(138)
32
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
113,170
9,488
122,313
15,360
Interest rate swaps with a financial institution counterparty
3,918
Total fair value recorded in other assets
117,088
9,526
Fair value recorded in other liabilities:
(9,488)
(15,360)
Total fair value recorded in other liabilities
(9,526)
As of September 30, 2021, the interest rate swap agreements not designated as hedging instruments had contractual maturities between 2022 and 2042. As of September 30, 2021 and December 31, 2020, the Company had $7,693,000 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
1,843
2,188
12,281
17,369
Gross losses
(1,843)
(2,188)
(12,281)
(17,369)
Net gains (losses)
NOTE 12 – 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
13,260
(3,840)
(1,034)
Other comprehensive income (loss) before reclassifications
(5,684)
300
Other comprehensive income (loss), before tax
(1,618)
Other comprehensive income (loss), after tax
(4,058)
139
9,202
(3,701)
(964)
18,806
(133)
(1,462)
Other comprehensive income before reclassifications
1,181
Other comprehensive income, before tax
Income tax expense
336
Other comprehensive income, after tax
840
19,646
(127)
(1,388)
19,578
(118)
(1,307)
Transfer from available-for-sale to held-to-maturity
3,887
(3,887)
(19,777)
732
479
(5,687)
122
136
(14,263)
304
343
8,659
(131)
(696)
14,270
143
(960)
4,381
10,987
(692)
34
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 11 for additional information.
NOTE 13 – INCOME TAXES
Allocation of income tax expense between current and deferred portions is as follows:
Federal
2,330
2,921
8,273
5,619
State
1,290
1,593
4,528
3,218
Total current
3,620
4,514
12,801
8,837
Deferred
846
(542)
1,614
(419)
(271)
795
(209)
Total deferred
1,272
(813)
35
Income tax expense differs from the statutory federal rate due to the following:
Percentage
Federal income tax, at statutory rate
3,907
21.0
2,995
Increase (decrease) resulting from:
Federally tax exempt interest income
(352)
(1.9)
(372)
(2.6)
State taxes, net of federal benefit
1,353
7.3
1,039
(16)
(0.1)
0.2
26.3
25.9
12,156
6,806
(1,072)
(1.8)
(1,099)
(3.4)
4,170
7.2
2,397
7.4
(44)
0.3
25.3
The components of the net deferred tax asset (liability) are as follows:
Deferred tax assets
7,014
9,046
Compensation related
2,301
Deferred loan fees
1,392
1,595
Nonaccrual interest
660
189
995
1,011
Total deferred tax assets
12,186
14,994
Deferred tax liabilities
Fixed asset depreciation
3,944
4,361
Mortgage servicing rights
2,083
1,692
Other purchase accounting adjustments
1,050
1,115
Intangible assets
417
Prepaid assets
546
685
Net unrealized gain on debt securities
1,004
6,569
Total deferred tax liabilities
9,544
15,372
Net deferred tax asset (liability)
2,642
(378)
36
NOTE 14 – 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 from the Company’s outstanding restricted stock units.
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Earnings allocated to participating securities
(25)
(28)
(81)
(62)
Numerator for earnings per share - basic and diluted
13,690
10,535
42,596
24,141
Denominator:
Weighted average common shares outstanding
Dilutive effect of outstanding restricted stock units
13,921
11,412
Weighted average common shares outstanding, including all dilutive potential shares
27,354,847
27,389,221
Earnings per share - Basic
Earnings per share - Diluted
NOTE 15 – DEFERRED COMPENSATION
The Company maintained a supplemental executive retirement plan (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, 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 nine months ended September 30, 2020, the Company recognized employee benefits expense for the SERP of $1,660,000.
NOTE 16 – 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
153
415
Performance restricted stock units
75
Total awards classified as equity
Stock appreciation rights
(87)
(75)
(303)
Total stock-based compensation expense (benefit)
581
(40)
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.
On April 27, 2021, the Company granted 4,000 restricted stock units to certain key employees which vest in four equal annual installments beginning on February 28, 2022. The total fair value of the restricted stock units granted on April 27, 2021, was $72,000, based on the grant date closing price of $17.93 per share.
The following is a summary of restricted stock unit activity:
Weighted
Restricted
Grant Date
Stock Units
99,597
17.37
73,700
18.98
Granted
Vested
Forfeited
71,000
50,347
15.72
(20,225)
18.86
(1,525)
18.11
As of September 30, 2021, unrecognized compensation cost related to the non-vested restricted stock units was $1,346,000. This cost is expected to be recognized over the weighted average remaining contractual term of 2.2 years.
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 on the grant date and an assessment of the probable outcome of the performance condition. Compensation cost 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:
Maximum
Awarded
Performance
43,046
15.53
Nine months ended September 30,
As of September 30, 2021, unrecognized compensation cost related to non-vested performance restricted stock units was $485,000, based on the current assessment of the probable outcome of the performance condition. This cost is expected to be recognized over the weighted average remaining contractual term of 2.4 years.
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 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 non-vested stock appreciation rights is recognized on a straight line basis over the service period of the entire award. The non-vested 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:
StockAppreciationRightsOutstanding
WeightedAverageGrant DateAssigned Value
97,920
16.32
110,160
Exercised
Expired
StockAppreciationRights
105,570
(6,120)
(1,530)
A further summary of stock appreciation rights as of September 30, 2021, is as follows:
Weighted Average
Remaining
Grant Date Assigned Values
Exercisable
Contractual Term
$ 16.32
85,680
7.5
years
As of September 30, 2021, unrecognized compensation cost related to non-vested stock appreciation rights was $41,000.
As of September 30, 2021 and December 31, 2020, the liability recorded for outstanding stock appreciation rights was $302,000 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
1.33
0.80
Expected volatility
35.36
34.72
Expected life (in years)
7.9
8.7
Expected dividend yield
3.86
3.96
As of September 30, 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 17 – 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 September 30, 2021 and December 31, 2020, the capital conservation buffer was 2.5%.
As of September 30, 2021, the Company and the Bank each met all capital adequacy requirements to which they were subject.
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.
449,773
18.15
198,272
8.00
N/A
Heartland Bank and Trust Company
423,419
17.17
197,253
246,566
10.00
Tier 1 Capital (to Risk Weighted Assets)
385,615
15.56
148,704
6.00
398,558
16.16
147,939
Common Equity Tier 1 Capital (to Risk Weighted Assets)
349,082
14.08
111,528
4.50
110,955
160,268
6.50
Tier 1 Capital (to Average Assets)
9.83
156,903
4.00
10.17
156,764
195,955
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 18 – 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 and nine months ended September 30, 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
10,505
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 September 30, 2021.
44
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 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 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 83.4% (12.3%)
Discount rate
9.0% to 11.0% (9.0%)
7.0% to 85.0% (17.3%)
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
23,962
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 with respect to 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.
47
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 marketplace. 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.
49
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
2,141,308
2,235,767
Financial liabilities:
Time deposits
272,105
300,989
42,371
38,403
Junior subordinated debentures
32,270
23,766
Accrued interest payable
483
1,151
The Company estimated the fair value of lending related commitments as described in Note 19 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 19 – 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
565,979
530,191
Standby letters of credit
9,845
10,031
50
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.
51
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 September 30, 2021 (unaudited), as compared with December 31, 2020, and the results of operations for the three and nine months ended September 30, 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 and nine months ended September 30, 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 and NXT Bank. HBT 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 and Eastern Iowa through 61 branches, including 4 branches acquired through the NXT Bancorporation, Inc. acquisition completed on October 1, 2021. As of September 30, 2021, the Company had total assets of $3.9 billion, total loans of $2.1 billion, and total deposits of $3.4 billion. HBT Financial, Inc. is a longstanding Central Illinois company, now with operations in Eastern Iowa, with banking roots that can be traced back to 1920.
Market Area
As of September 30, 2021, we had 57 branch locations 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
508,325
523,418
Champaign-Urbana
187,030
214,646
Chicago
1,135,346
1,132,893
Lincoln
83,888
103,614
Ottawa-Peru
103,670
107,098
Peoria
129,553
165,337
812,448
774,082
196,176
174,653
1,205,762
1,077,691
206,668
201,012
384,656
347,211
613,846
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
In December 2020, the Paycheck Protection Program (PPP) was extended and allowed eligible borrowers to receive a second PPP loan. During 2021, we funded $104.7 million of PPP loans as part of the second round of the program.
We continue to process forgiveness applications for PPP loans, with $184.5 million of PPP loans originated in round 1 and $42.7 million of PPP loans originated in round 2 receiving full or partial forgiveness by September 30, 2021.
The following table summarizes outstanding PPP loans as of September 30, 2021:
Round 1
Round 2
PPP loan balance, before net deferred origination fees
957
61,934
62,891
Net deferred origination fees
(3,056)
(3,070)
PPP loan balance
943
58,878
During the nine months ended September 30, 2021, the deferred origination fees on round 2 PPP loans were reduced by direct origination costs of $0.5 million, consisting primarily of salaries and benefits costs. Net deferred origination fees on PPP loans of $3.0 million and $0.9 million during the three months ended September 30, 2021 and 2020, respectively, and $7.6 million and $1.7 million during the nine months ended September 30, 2021 and 2020, respectively, were recognized as taxable loan interest income. Recognition of net deferred origination fees is accelerated upon loan forgiveness or repayment prior to contractual maturity.
53
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.
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 September 30, 2021, December 31, 2020, and September 30, 2020, total loans granted a payment modification related to a COVID-19 financial hardship were $0.3 million, $28.0 million, and $36.4 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 have suffered significant adverse impacts. 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 risk rating information, as of September 30, 2021:
Carrying Balance
Non-PPP Loans
PPP Loans
Risk Rating
Restaurants
13,339
15,800
14,239
2,454
4,518
21,817
35,156
2,458
Hotels
1,053
1,128
34,643
4,198
8,104
42,822
43,875
As of September 30, 2021, there were no loans within the restaurant and hotel industries that were granted a loan payment modification related to a COVID-19 financial hardship that had not returned to regular payments.
NXT Bancorporation, Inc. Acquisition
On October 1, 2021, the Company completed its acquisition of NXT Bancorporation, Inc. (NXT), the holding company for NXT Bank, which was previously announced on June 7, 2021. The acquisition expands the Company’s footprint into Eastern Iowa with four locations that will begin operating as branches of Heartland Bank following the merger and system conversion of NXT Bank into Heartland Bank scheduled for December 3, 2021. As of September 30, 2021, NXT had total assets of $232 million, total loans of $196 million, and total deposits of $181 million. NXT’s results are not reflected in HBT’s results as of or for the period ended September 30, 2021.
The acquisition of NXT provides an opportunity to utilize the Company’s existing excess liquidity to replace NXT’s higher cost funding. Additionally, Heartland Bank’s broader range of products and services provides an opportunity to expand NXT customer relationships with a greater ability to meet larger borrowing needs.
The Company incurred the following pre-tax acquisition expenses related to the acquisition of NXT during the three and nine months ended September 30, 2021:
Legal fees and other noninterest expense
225
375
Total NXT acquisition-related expenses
380
537
Branch Rationalization Plan
In April 2021, the Company made plans to close or consolidate six branches. One branch was consolidated during the second quarter of 2021, and the remaining five branches were closed during the third quarter of 2021. The Company estimates annual pre-tax cost savings, net of associated revenue impacts, related to the branch rationalization plan to be approximately $1.1 million to be reflected in future periods.
The Company incurred the following pre-tax branch closure costs during the three and nine months ended September 30, 2021:
(648)
(682)
(5)
(4)
Total branch closure costs
644
748
55
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 and Iowa 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 had continuous business operations since the beginning of the COVID-19 pandemic, the pandemic 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 with new virus variants 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 maintain historic deposit levels or 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 is equal to 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.
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.
Growth in deposit balances and the forgiveness of PPP loans has resulted in significant cash inflows and excess liquidity. While excess liquidity is being reinvested into new securities, the current yields available are lower than existing portfolio yields. Potential changes in market rates and the ongoing economic uncertainty, could cause our net interest income and net interest margin to 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 is expected to continue 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, with the appropriate level of security, 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.
57
RESULTS OF OPERATIONS
Overview of Recent Financial Results
The following table presents selected financial results and measures:
(dollars in thousands, except per share amounts)
Consolidated Statement of Income Information
Income before income tax expense
Adjusted net income (1)
14,479
10,755
42,680
27,352
Net interest income (tax-equivalent basis) (1) (2)
31,223
29,366
91,058
89,882
Share and Per Share Information
Adjusted earnings per share - Diluted (1)
0.53
0.39
0.99
Weighted average shares of common stock outstanding
Summary Ratios
Net interest margin *
3.18
3.39
3.19
3.63
Net interest margin (tax-equivalent basis) * (1) (2)
3.23
3.45
3.24
3.69
Yield on loans *
4.86
4.48
4.69
4.74
Yield on interest-earning assets *
3.33
3.55
3.34
3.83
Cost of interest-bearing liabilities *
0.22
0.24
0.23
0.29
Cost of total deposits *
0.07
0.11
0.16
Efficiency ratio
56.04
56.98
56.22
61.15
Efficiency ratio (tax-equivalent basis) (1) (2)
55.32
56.27
55.50
60.37
Return on average assets *
1.37
1.20
0.96
Return on average stockholders' equity *
14.29
11.83
15.42
9.30
Return on average tangible common equity * (1)
15.32
12.80
16.59
10.08
Adjusted return on average assets * (1)
1.45
1.22
1.08
Adjusted return on average stockholders' equity * (1)
15.08
12.04
15.43
10.50
Adjusted return on average tangible common equity * (1)
16.18
13.03
11.40
* Annualized measure.
58
Comparison of the Three Months Ended September 30, 2021 to the Three Months Ended September 30, 2020
For the three months ended September 30, 2021, net income was $13.7 million increasing by $3.2 million, or 29.8%, when compared to net income for the three months ended September 30, 2020. Net income increased primarily due to the following:
Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended September 30, 2020
For the nine months ended September 30, 2021, net income was $42.7 million increasing by $18.5 million, or 76.3%, when compared to net income for the nine months ended September 30, 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.
59
The following tables set forth average balances, average yields and costs, and certain other information for the three and nine months ended September 30, 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.
September 30, 2020
Yield/Cost *
2,135,476
26,176
2,277,826
25,660
Securities
1,180,513
5,735
1.93
831,120
4,499
2.15
Deposits with banks
513,158
0.15
274,022
0.09
2.00
2.29
Total interest-earning assets
3,831,886
3,385,466
(26,470)
(30,221)
Noninterest-earning assets
159,635
157,446
3,965,051
3,512,691
1,020,216
0.05
888,941
510,183
479,314
0.08
608,436
0.03
493,278
275,224
0.42
306,154
0.76
2,414,059
2,167,687
49,923
0.06
51,686
326
0.46
1,196
0.47
39,285
11,976
4.87
37,688
3.76
37,621
3.89
Total interest-bearing liabilities
2,541,281
2,270,166
1,016,384
846,808
Noninterest-bearing liabilities
26,523
40,421
3,584,188
3,157,395
380,863
355,296
Net interest income/Net interest margin (1)
Tax-equivalent adjustment (2)
508
495
Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) (2) (3)
Net interest rate spread (4)
3.11
3.31
Net interest-earning assets (5)
1,290,605
1,115,300
Ratio of interest-earning assets to interest-bearing liabilities
1.51
1.49
Cost of total deposits
60
2,217,463
77,738
2,228,145
79,144
1,102,808
15,706
1.90
740,834
2.39
432,971
0.12
283,730
0.41
2,655
1.95
2,473
3,755,897
3,255,182
(29,069)
(26,288)
157,287
156,121
3,884,115
3,385,015
1,012,557
853,775
498,441
473,647
0.17
584,226
467,482
0.04
286,685
0.48
321,905
0.90
2,381,909
0.10
2,116,809
47,827
49,183
0.43
1,333
0.19
39,265
4.80
4,021
37,671
3.79
37,605
4.30
2,507,093
2,208,951
976,884
780,826
30,205
47,426
3,514,182
3,037,203
369,933
347,812
1,514
1,441
3.54
1,248,804
1,046,231
1.50
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
22,324
4.14
23,715
67,096
4.04
73,939
4.43
Loan fees (excluding PPP loans)
631
904
2,609
2,847
0.18
PPP loan fees
3,017
0.56
1,727
Accretion of acquired loan discounts
204
165
567
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
2.31
2.78
3.03
Contractual interest on securities
7,387
0.77
5,972
0.70
20,911
0.75
16,558
0.68
Contractual interest on deposits with banks
0.02
0.01
0.31
0.27
Securities amortization, net
(1,652)
(0.17)
(1,473)
(5,205)
(0.19)
(3,298)
(0.14)
106
Total interest income
Interest expense:
Contractual interest on deposits
561
1,812
3,463
0.14
Contractual interest on other interest-bearing liabilities
694
404
2,088
1,140
145
424
0.20
Tax equivalent adjustment (1)
Net interest income (tax equivalent) (1) (2)
62
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:
(1,663)
516
(1,028)
(1,406)
1,735
1,236
5,545
(3,099)
2,446
76
320
(808)
(488)
149
1,728
1,877
5,490
(4,941)
549
Interest-bearing liabilities:
(11)
(250)
(163)
(359)
(329)
(54)
(242)
(296)
(217)
(928)
(1,145)
(257)
(279)
(66)
(1,593)
(1,659)
(17)
1,264
1,262
(140)
1,198
(1,752)
(554)
Change in net interest income
(155)
1,844
4,292
(3,189)
Net interest income for the three months ended September 30, 2021, was $30.7 million, increasing $1.8 million, or 6.4%, from the three months ended September 30, 2020. The increase is primarily attributable to an increase in PPP loan fees recognized as loan interest income which totaled $3.0 million and $0.9 million during the three months ended September 30, 2021 and 2020, respectively.
Net interest margin decreased to 3.18% for the three months ended September 30, 2021 compared to 3.39% for the three months ended September 30, 2020. The decrease was primarily attributable to a decline in the average yield on earnings assets and increased balances being held in cash and lower-yielding securities.
Net interest income for the nine months ended September 30, 2021, was $89.5 million, increasing $1.1 million, or 1.2%, from the nine months ended September 30, 2020. Declines in benchmark interest rates drove lower yields on interest-earning assets. These declines were more than offset by a substantial increase in interest-earning asset balances, driven by PPP loan originations and federal economic stimulus payments received by our retail customers, and an increase in PPP loan fees recognized as loan interest income. PPP loans fees recognized as loan interest income totaled $7.6 million and $1.7 million during the nine months ended September 30, 2021 and 2020, respectively.
Net interest margin decreased to 3.19% for the nine months ended September 30, 2021, compared to 3.63% for the nine months ended September 30, 2020. The decrease was primarily attributable to the decline in the average yield on earning assets and increased balances being held in cash and lower-yielding securities.
Additionally, the $40 million of subordinated notes issued during the third quarter of 2020 added downward pressure to net interest income and net interest margin in subsequent periods. However, the proceeds from the issuance 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
3.25
4.03
June 30
3.14
3.51
September 30
December 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 as 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 accounting for net charge-offs (recoveries).
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 return to pre-pandemic levels.
The Company recorded a negative provision for loan losses of $1.7 million during the three months ended September 30, 2021, compared to a provision for loan losses of $2.2 million during the three months ended September 30, 2020. The negative provision was primarily due to a $0.9 million decrease in specific reserves on loans individually evaluated for impairment. Additionally, improvements in qualitative factors resulted in a $0.7 million decrease in required reserve, primarily reflecting the shrinking impact of the COVID-19 pandemic on our borrowers.
The Company recorded a negative provision for loan losses of $7.2 million during the nine months ended September 30, 2021, compared to a provision for loan losses of $10.1 million during the nine months ended September 30, 2020. The negative provision was primarily due to a $3.4 million decrease in specific reserves on loans individually evaluated for impairment. Additionally, improvement in qualitative factors resulted in a $3.0 million decrease in required reserve, primarily reflecting the shrinking impact of the COVID-19 pandemic on our borrowers, an improved economic environment, and improved asset quality metrics.
Noninterest Income
The following table sets forth the major categories of noninterest income for the periods indicated:
$ Change
363
1,280
(96)
390
1,046
(80)
4,372
(1,927)
(936)
71
(41)
(673)
(405)
(1,660)
4,610
Total noninterest income for the three months ended September 30, 2021, was $8.4 million, a decrease of $1.7 million, or 16.5%, from the three months ended September 30, 2020. Noninterest income decreased primarily due to the following:
Total noninterest income for the nine months ended September 30, 2021, was $28.0 million, an increase of $4.6 million, or 19.7%, from the nine months ended September 30, 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:
(607)
(1,164)
(166)
(1,878)
(68)
335
193
(260)
(53)
(128)
287
(50)
(194)
301
351
(318)
(2,426)
Total noninterest expense for the three months ended September 30, 2021, was $22.2 million, a decrease of $0.3 million, or 1.4%, from the three months ended September 30, 2020. Noninterest expense decreased primarily due to the following:
Total noninterest expense for the nine months ended September 30, 2021, was $66.9 million, a decrease of $2.4 million, or 3.5%, from the nine months ended September 30, 2020. Noninterest expense decreased primarily due to the following:
68
Income Taxes
We recorded income tax expense of $4.9 million, or 26.3% effective tax rate, during the three months ended September 30, 2021, compared to $3.7 million, or 25.9% effective tax rate, during the three months ended September 30, 2020. The effective tax rate increased primarily due to tax exempt interest income making up a smaller portion of pre-tax income during the three months ended September 30, 2021 compared to the three months ended September 30, 2020.
We recorded income tax expense of $15.2 million, or 26.3% effective tax rate, during the nine months ended September 30, 2021, compared to $8.2 million, or 25.3% effective tax rate, during the nine months ended September 30, 2020. The effective tax rate increased primarily due to tax exempt interest income making up a smaller portion of pre-tax income during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.
FINANCIAL CONDITION
% Change
Consolidated Balance Sheet Information
51.0
(26,651)
(2.9)
250,335
366.0
(6,131)
(41.7)
(99,194)
(4.4)
Less: allowance for loan losses
(6,977)
(21.9)
(92,217)
(4.2)
(799)
(28.6)
104,197
106,553
(2,356)
(2.2)
281,659
7.7
9.2
4.9
0.1
(24,597)
(49.7)
266,755
8.1
Total stockholders' equity
14,904
4.1
Total liabilities and stockholders' equity
Tangible assets (1)
3,922,607
3,640,149
282,458
7.8
Tangible common equity (1)
353,202
337,499
15,703
4.7
Core deposits (1)
3,395,237
3,103,847
291,390
9.4
Book value per share
13.86
13.25
Tangible book value per share (1)
12.92
12.29
Shares of common stock outstanding
Balance Sheet Ratios
Loan to deposit ratio
62.81
71.78
Core deposits to total deposits (1)
99.29
99.15
Stockholders' equity to total assets
9.59
9.93
Tangible common equity to tangible assets (1)
9.00
9.27
Total assets were $3.95 billion at September 30, 2021, an increase of $281.7 million, or 7.7%, from December 31, 2020. Significant changes in our consolidated balance sheet include the following:
Loan Portfolio
The following table sets forth the composition of the loan portfolio, excluding loans held-for-sale, by type of loan.
Percent
12.2
17.5
10.7
9.9
9.5
27.0
23.2
10.0
10.5
10.8
13.7
6.1
5.3
100.0
Loans, before allowance for loan losses (originated) (1)
2,057,276
95.8
2,126,323
94.6
Loans, before allowance for loan losses (acquired) (1)
90,536
4.2
120,683
5.4
PPP loans (included above)
Loans, before allowance for loan losses were $2.15 billion at September 30, 2021, a decrease of $99.2 million, or 4.4%, from December 31, 2020. PPP loans decreased $103.7 million, with forgiveness far exceeding the $104.7 million of round 2 PPP loan originations during the nine months ended September 30, 2021. Total loans, before allowance for loan losses, net of PPP loans, increased $4.5 million, or 0.2%, from December 31, 2020. Additionally, during the third quarter of 2021, $39.0 million of new loans, primarily commercial real estate – non-owner occupied, were funded in partnership with NXT Bank prior to the closing of the acquisition.
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
128,530
117,747
15,486
104,906
89,887
32,613
2,312
21,164
122,858
55,268
3,806
64,233
353,074
161,992
35,054
116,964
63,227
134,488
86,263
11,051
489
39,660
125,784
78,866
50,302
25,508
20,064
71,974
13,681
553,543
1,032,641
490,477
71,151
The following table summarizes loans maturing after one year, segregated into variable and fixed interest rates.
Variable Interest Rates
Repricing
Predetermined
(Fixed)
9,077
324
9,401
123,832
133,233
9,847
4,865
14,712
110,100
124,812
29,353
20,618
49,971
131,961
181,932
68,226
21,378
89,604
426,023
515,627
18,663
3,688
22,351
157,840
180,191
47,535
47,621
50,182
97,803
95,916
14,659
110,575
144,377
254,952
39,828
4,602
44,430
61,289
105,719
318,445
70,220
388,665
1,205,604
1,594,269
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 on which management can no longer estimate future cash flows.
72
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
5,528
9,960
Total nonperforming assets
12,843
14,128
NONPERFORMING ASSETS (Originated) (2)
4,051
2,908
Past due 90 days or more, still accruing
Total nonperforming loans (originated)
4,090
2,929
511
674
Total nonperforming assets (originated)
3,603
NONPERFORMING ASSETS (Acquired) (2)
1,438
7,031
Total nonperforming loans (acquired)
6,804
3,494
Total nonperforming assets (acquired)
8,242
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
1.16
1.42
Allowance for loan losses to nonperforming loans
449.73
319.66
Nonperforming loans to loans, before allowance for loan losses
0.26
0.44
Nonperforming assets to total assets
0.33
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets
0.60
0.63
CREDIT QUALITY RATIOS (Originated) (2)
CREDIT QUALITY RATIOS (Acquired) (2)
1.59
5.83
8.47
8.48
Total nonperforming assets were $12.8 million at September 30, 2021, a decrease of $1.3 million, or 9.1%, from December 31, 2020. Our level of nonperforming assets has remained low in recent years, representing only 0.33% of total assets as of September 30, 2021 and 0.39% of total assets as of December 31, 2020. We believe our continuous credit monitoring and collection efforts have resulted in lower levels of nonperforming assets, while also recognizing that favorable economic conditions prior to the COVID-19 pandemic and substantial federal economic stimulus during the pandemic have also contributed to these lower levels.
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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.
296
1,586
6,491
1,297
1,354
236
454
Total accrual troubled debt restructurings
3,359
8,595
127
134
Total nonaccrual troubled debt restructurings
311
355
Total troubled debt restructurings
3,670
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. The $5.3 million decrease, or 59.0%, from December 31, 2021 was primarily due to the pay down of one relationship by $3.6 million.
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 September 30, 2021 and December 31, 2020, our risk classifications of loans were as follows:
Pass-watch
Pass-watch loans decreased $59.2 million, or 28.4% from December 31, 2020 to September 30, 2021. Additionally, substandard loans decreased $8.8 million, or 10.4%, from December 31, 2020 to September 30, 2021. These improvements were primarily driven by improving economic conditions, which resulted in both risk rating upgrades and paydowns. Additionally, the transfer of one larger loan to foreclosed assets further contributed to the decrease in substandard loans.
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
(243)
257
(747)
Balance, end of period
Net charge-offs (recoveries)
(21)
243
747
Net charge-offs (recoveries) - (originated) (1)
(116)
Net charge-offs (recoveries) - (acquired) (1)
95
393
592
Average loans, before allowance for loan losses
Average loans, before allowance for loan losses (originated) (1)
2,041,049
2,140,376
2,110,837
2,080,668
Average loans, before allowance for loan losses (acquired) (1)
94,427
137,450
106,626
147,477
Net charge-offs (recoveries) to average loans, before allowance for loan losses *
(0.02)
Net charge-offs (recoveries) to average loans, before allowance for loan losses (originated) * (1)
(0.04)
Net charge-offs (recoveries) to average loans, before allowance for loan losses (acquired) * (1)
0.40
0.49
0.54
The following table summarizes net charge-offs (recoveries) to average loans, before allowance for loan losses, by loan category.
364
1,112
(401)
(19)
(172)
(270)
(189)
(49)
289,372
391,480
363,497
362,542
236,444
230,402
226,096
223,608
192,419
227,543
200,857
230,613
554,279
521,038
548,752
536,907
212,980
189,573
221,986
188,770
214,159
252,779
213,761
242,518
302,214
343,990
309,095
324,441
133,609
121,021
133,419
118,746
0.37
(0.23)
(0.27)
(0.10)
(0.11)
(0.01)
0.25
The net charge-offs (recoveries) to average total loans before allowance for loan losses ratio has remained low for several years. We believe our continuous credit monitoring and collection efforts have resulted in lower levels of loan losses, while also recognizing that favorable economic conditions prior to the COVID-19 pandemic and substantial federal economic stimulus during the pandemic have also contributed to reduced loan losses.
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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 principal, liquidity needs, expected returns, cash flow requirements 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 and nine months ended September 30, 2021 and 2020.
Portfolio Maturities and Yields
The composition and maturities of the debt securities portfolio as of September 30, 2021, are summarized in the following table. 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.
4,524
2.20
12,753
2.67
3.26
15,808
2.79
1.31
14,228
2.58
20,430
2.85
51,946
2.68
55,001
2.71
9,947
0.87
4,986
1.89
5,000
1.10
9,986
51,528
2.21
12,110
3.61
63,638
2.48
7,160
26,232
3,198
29,430
2.73
8,464
3.65
108,317
2.32
20,308
2.77
128,625
49,996
91,119
1.70
7,341
1.63
98,460
134,493
1.78
3.43
137,604
1.82
42,461
8,484
1.62
50,945
84,314
1.46
179,964
1.74
264,278
33,957
3.93
436,340
1.88
198,900
1.76
635,240
1.84
29,517
1.39
96,477
4.26
96,868
122,740
1.32
13,581
2.09
136,321
1.40
40,225
82,495
122,720
1.85
2,000
290,959
96,467
1.96
387,426
1.68
1.66
142,487
1.64
313,918
2.03
1.60
1.91
194,437
1.83
1.81
430,656
3.57
79
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 *
29.6
28.1
20.0
29.8
29.5
14.8
14.9
15.9
6.4
17.7
16.3
23.3
Total non-maturity deposits
3,155,219
92.0
2,708,341
89.8
16.5
8.0
10.2
(10.1)
3,430,443
3,014,495
13.8
29.1
26.9
25.1
30.2
18.6
16.4
5.2
17.4
16.1
25.0
3,072,108
91.5
2,575,730
88.9
19.3
8.5
11.1
(10.9)
3,358,793
2,897,635
The average balances of non-maturity deposits increased 16.5% from the three months ended September 30, 2020 to the three months ended September 30, 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 10.1% decline in the average balances of time deposits, which resulted in a 13.8% increase in average balances of total deposits from the three months ended September 30, 2020 to the three months ended September 30, 2021.
The average balances of non-maturity deposits increased 19.3% from the nine months ended September 30, 2020 to the nine months ended September 30, 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 10.9% decline in the average balances of time deposits, which resulted in a 15.9% increase in average balances of total deposits from the nine months ended September 30, 2020 to the nine months ended September 30, 2021.
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The following table sets forth time deposits by remaining maturity as of September 30, 2021:
3 Months or
Over 3 through
Over 6 through
Over
Less
6 Months
12 Months
Time deposits:
Amounts less than $100,000
39,839
36,289
56,553
50,838
183,519
Amounts of $100,000 but less than $250,000
16,658
12,644
17,726
16,896
63,924
Amounts of $250,000 or more
8,814
6,722
6,096
2,687
24,319
Total time deposits
65,311
55,655
80,375
70,421
As of September 30, 2021 and December 31, 2020, the Bank’s uninsured deposits, including related accrued interest, were estimated to be $713.2 million and $573.8 million, respectively.
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 our daily cash flow needs, 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, the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits, and regulatory capital requirements.
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 available through 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 September 30, 2021 was $320.1 million.
As of September 30, 2021, management believed adequate liquidity existed to meet all projected cash flow obligations of the Bank. As of September 30, 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 September 30, 2021, HBT Financial, Inc. had cash and cash equivalents of $25.5 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 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 and nine months ended September 30, 2021, the Bank did not pay a dividend to the Company. During the three and nine months ended September 30, 2020, the Bank paid $6.7 million and $17.6 million in dividends to the Company, respectively.
The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, interest payments on the subordinated notes and junior subordinated debentures, and shareholder distributions in the form of dividends and stock repurchases. During the three months ended September 30, 2021 and 2020, holding company operating expenses consisted of interest expense of $0.8 million and $0.5 million, respectively, and other operating expenses of $1.3 million and $0.6 million, respectively. During the nine months ended September 30, 2021 and 2020, holding company operating expenses consisted of interest expense of $2.5 million and $1.4 million, respectively, and other operating expenses of $2.6 million and $2.0 million, respectively. As of September 30, 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 September 30, 2021, management believed adequate liquidity existed to meet all projected cash flow obligations of the Company. As of September 30, 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 September 30, 2021 and December 31, 2020, the capital conservation buffer requirement was 2.5% of risk-weighted assets.
As of September 30, 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.
82
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)
8.50
7.00
N/A Not applicable.
Cash Dividends
The below table summarizes the cash dividends paid by quarter for the nine months ended September 30, 2021 and the year ended December 31, 2020.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Regular
4,116
4,105
4,101
12,322
Restricted stock unit dividend equivalent
Total cash dividends
4,124
12,372
4,119
4,118
16,474
4,130
4,129
16,518
During the first, second, and third quarters of 2021 and each quarter of 2020, the Company announced quarterly cash dividends of $0.15 per share.
Stock Repurchase Program
Under the Company’s stock repurchase program, the Company repurchased 20,625 shares of its common stock at a weighted average price of $16.66 during the three months ended September 30, 2021 and 143,103 shares of its common stock at a weighted average price of $16.24 during the nine months ended September 30, 2021. Repurchases were conducted in compliance with Rule 10b-18 and in compliance with Regulation M under the Securities Exchange Act of 1934, as amended. 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 September 30, 2021, the Company had $12.7 million remaining under the current stock repurchase authorization.
83
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, commitments to sell loans, and interest rate swaps. 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 September 30, 2021 and December 31, 2020, there were no reserves for unfunded commitments. For additional information, see “Note 19 – 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 States 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 those 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 closely 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)
85
Tangible Common Equity to Tangible Assets
Core Deposits
Originated Loans and Acquired Loans
Reconciliation of Non-GAAP Financial Measure - Adjusted Net Income and Adjusted Return on Average Assets
Adjustments:
Acquisition expenses
(380)
(537)
Branch closure expenses
(644)
(748)
Charges related to termination of certain employee benefit plans
(1,457)
Total adjustments
(984)
140
(4,404)
Tax effect of adjustments
220
(143)
1,255
Less adjustments after tax effect
(764)
(192)
(3,149)
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)
(69)
Numerator for adjusted earnings per share - basic and diluted
14,452
10,727
42,599
27,283
Adjusted earnings per share - Basic
Adjusted earnings per share - Diluted
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
21,915
22,180
66,066
68,364
Operating revenue
39,107
38,923
117,518
111,805
Operating revenue (tax-equivalent basis) (1)
39,615
39,418
119,032
113,246
Efficiency ratio (tax equivalent basis) (1)
88
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
2,152
3,284
3,589
Average tangible common equity
355,091
328,392
343,899
320,603
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
89
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 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
100,561
23.9
24,819
22.4
40,406
38.3
+300
80,493
19.2
19,053
17.2
31,610
29.9
+200
51,531
12.3
12,865
11.6
21,926
20.8
+100
9,067
2.2
5,970
11,153
10.6
Flat
-100
33,200
(4,177)
(3.8)
(7,029)
(6.7)
81,406
21.1
27,461
23.8
44,487
42.1
50,943
13.2
21,149
18.3
34,815
32.9
11,166
2.9
14,272
12.4
24,197
22.9
(26,976)
(7.0)
6,851
5.9
12,350
11.7
29,295
7.6
(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 September 30, 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 September 30, 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 third quarter of 2021, all of which were conducted in compliance with Rule 10b-18 and Regulation M under the Securities Exchange Act of 1934, as amended:
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)
July 1 - 31, 2021
10,576
16.92
12,841
August 1 - 31, 2021
10,049
16.39
12,677
September 1 - 30, 2021
20,625
16.66
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.
November 5, 2021
By:
/s/ Matthew J. Doherty
Matthew J. Doherty
Chief Financial Officer
(on behalf of the registrant and as principal financial officer)