Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-39085
HBT Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware
37-1117216
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
401 North Hershey Rd
Bloomington, Illinois 61704
(888) 897-2276
(Address of principal executive offices,including zip code)
(Registrant’s telephone number,including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
HBT
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 27, 2022, there were 28,920,011 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 (Loss)
5
Consolidated Statement of Changes in Stockholders’ Equity
6
Consolidated Statements of Cash Flows
7
Notes to Consolidated Financial Statements
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
47
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
76
Item 4.
Controls and Procedures
77
PART II. OTHER INFORMATION
78
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
79
Item 6.
Exhibits
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report are forward-looking statements. Forward-looking statements may include statements relating to our plans, strategies and expectations, the economic impact of the COVID-19 pandemic and our future financial results, near-term loan growth, net interest margin, mortgage banking profits, wealth management fees, expenses, asset quality, capital levels, continued earnings, and liquidity. Forward-looking statements are generally identifiable by use of the words "believe," "may," "will," "should," "could," "expect," "estimate," "intend," "anticipate," "project," "plan" or similar expressions. Forward-looking statements are frequently based on assumptions that may or may not materialize and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or prospects include, but are not limited to:
1
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HBT FINANCIAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(Unaudited)
March 31,
December 31,
2022
2021
ASSETS
Cash and due from banks
$
30,761
23,387
Interest-bearing deposits with banks
328,218
385,881
Cash and cash equivalents
358,979
409,268
Interest-bearing time deposits with banks
487
490
Debt securities available-for-sale, at fair value
933,922
942,168
Debt securities held-to-maturity (fair value of $416,603 in 2022 and $336,027 in 2021)
438,054
336,185
Equity securities with readily determinable fair value
3,256
3,443
Equity securities with no readily determinable fair value
1,927
Restricted stock, at cost
2,739
Loans held for sale
1,777
4,942
Loans, before allowance for loan losses
2,487,785
2,499,689
Allowance for loan losses
(24,508)
(23,936)
Loans, net of allowance for loan losses
2,463,277
2,475,753
Bank owned life insurance
7,433
7,393
Bank premises and equipment, net
52,005
52,483
Bank premises held for sale
1,081
1,452
Foreclosed assets
3,043
3,278
Goodwill
29,322
Core deposit intangible assets, net
1,698
1,943
Mortgage servicing rights, at fair value
9,723
7,994
Investments in unconsolidated subsidiaries
1,165
Accrued interest receivable
13,527
14,901
Other assets
25,550
17,408
Total assets
4,348,965
4,314,254
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing
1,069,231
1,087,659
Interest-bearing
2,746,838
2,650,526
Total deposits
3,816,069
3,738,185
Securities sold under agreements to repurchase
50,834
61,256
Subordinated notes
39,336
39,316
Junior subordinated debentures issued to capital trusts
37,731
37,714
Other liabilities
21,840
25,902
Total liabilities
3,965,810
3,902,373
COMMITMENTS AND CONTINGENCIES (Note 14)
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 29,308,491 at 2022 and 29,276,547 at 2021; shares outstanding of 28,967,943 at 2022 and 28,986,061 at 2021
293
Surplus
221,735
220,891
Retained earnings
203,076
194,132
Accumulated other comprehensive income (loss)
(36,100)
1,471
Treasury stock at cost, 340,548 shares at 2022 and 290,486 at 2021
(5,849)
(4,906)
Total stockholders’ equity
383,155
411,881
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements (Unaudited)
HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable
26,806
25,134
Federally tax exempt
662
610
Securities:
4,649
3,633
1,040
1,136
Interest-bearing deposits in bank
159
80
Other interest and dividend income
19
13
Total interest and dividend income
33,335
30,606
INTEREST EXPENSE
Deposits
569
644
Borrowings
470
358
355
Total interest expense
1,407
1,477
Net interest income
31,928
29,129
PROVISION FOR LOAN LOSSES
(584)
(3,405)
Net interest income after provision for loan losses
32,512
32,534
NONINTEREST INCOME
Card income
2,404
2,258
Wealth management fees
2,289
1,972
Service charges on deposit accounts
1,652
1,297
Mortgage servicing
658
685
Mortgage servicing rights fair value adjustment
1,729
1,695
Gains on sale of mortgage loans
587
2,100
Gains (losses) on securities
(187)
40
Gains (losses) on foreclosed assets
(76)
Gains (losses) on other assets
193
Income on bank owned life insurance
Other noninterest income
638
836
Total noninterest income
10,043
10,808
NONINTEREST EXPENSE
Salaries
12,992
12,596
Employee benefits
2,499
1,722
Occupancy of bank premises
2,060
1,938
Furniture and equipment
552
623
Data processing
1,653
1,688
Marketing and customer relations
851
565
Amortization of intangible assets
245
289
FDIC insurance
288
240
Loan collection and servicing
157
365
132
143
Other noninterest expense
2,728
2,375
Total noninterest expense
24,157
22,544
INCOME BEFORE INCOME TAX EXPENSE
18,398
20,798
INCOME TAX EXPENSE
4,794
5,553
NET INCOME
13,604
15,245
EARNINGS PER SHARE - BASIC
0.47
0.55
EARNINGS PER SHARE - DILUTED
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
28,986,593
27,430,912
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
OTHER COMPREHENSIVE LOSS
Unrealized losses on debt securities available-for-sale
(53,422)
(23,074)
Reclassification adjustment for amortization of net unrealized losses on debt securities transferred to held-to-maturity
181
32
Unrealized gains on derivative instruments
594
219
Reclassification adjustment for net settlements on derivative instruments
96
99
Total other comprehensive loss, before tax
(52,551)
(22,724)
Income tax benefit
(14,980)
(6,477)
Total other comprehensive loss
(37,571)
(16,247)
TOTAL COMPREHENSIVE LOSS
(23,967)
(1,002)
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, December 31, 2021
28,986,061
Net income
Other comprehensive loss
Stock-based compensation
901
Issuance of common stock upon vesting of restricted stock units, net of tax withholdings
31,944
(57)
Repurchase of common stock
(50,062)
(943)
Cash dividends and dividend equivalents ($0.16 per share)
(4,660)
Balance, March 31, 2022
28,967,943
Balance, December 31, 2020
27,457,306
275
190,875
154,614
18,153
363,917
129
Issuance of common stock upon vesting of restricted stock units
20,225
(95,462)
(1,514)
Cash dividends and dividend equivalents ($0.15 per share)
(4,124)
Balance, March 31, 2021
27,382,069
191,004
165,735
1,906
357,406
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
763
774
Provision for loan losses
Net amortization of debt securities
1,763
1,732
Deferred income tax expense
566
Net accretion of discount and deferred loan fees on loans
(1,608)
(2,562)
Net unrealized loss (gain) on equity securities
187
(40)
Net loss on disposals of bank premises and equipment
Net gain on sales of bank premises held for sale
(197)
Net (gain) loss on sales of foreclosed assets
(105)
Write-down of foreclosed assets
65
73
Amortization of intangibles
Increase in mortgage servicing rights
(1,729)
(1,695)
Amortization of discount and issuance costs on subordinated notes and debentures
37
36
Mortgage loans originated for sale
(20,440)
(71,835)
Proceeds from sale of mortgage loans
24,192
75,766
Net gain on sale of mortgage loans
(587)
(2,100)
Increase in cash surrender value of bank owned life insurance
Decrease in accrued interest receivable
1,374
1,537
Decrease in other assets
1,521
875
Decrease (increase) in other liabilities
1,379
(9,032)
Net cash provided by operating activities
21,311
6,475
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits with banks
Proceeds from paydowns, maturities, and calls of debt securities
41,117
59,641
Purchase of securities
(189,744)
(142,980)
Net decrease (increase) in loans
14,649
(21,482)
Purchases of bank premises and equipment
(289)
(418)
Proceeds from sales of bank premises held for sale
568
Proceeds from sales of foreclosed assets
294
15
Net cash used in investing activities
(133,402)
(105,224)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
77,884
225,432
Net decrease in repurchase agreements
(10,422)
(3,760)
Taxes paid related to the vesting of restricted stock units
Cash dividends and dividend equivalents paid
Net cash provided by financing activities
61,802
216,034
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(50,289)
117,285
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
312,451
CASH AND CASH EQUIVALENTS AT END OF PERIOD
429,736
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest
1,890
2,077
Cash paid for income taxes
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Transfers of loans to foreclosed assets
671
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ACCOUNTING POLICIES
Basis of Presentation
HBT Financial, Inc. (“HBT Financial” or the “Company”) is headquartered in Bloomington, Illinois and is the holding company for Heartland Bank and Trust Company (“Heartland Bank” or the “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 and Eastern Iowa. Additionally, the Company is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory agencies.
The unaudited consolidated financial statements, including the notes thereto, have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 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 for the year ended December 31, 2021, filed with the SEC on March 11, 2022.
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 may remain an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, which is December 31, 2024, (2) the last day of the fiscal year in which the Company has $1.07 billion or more in annual revenues, (3) the date on which the Company is deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) or (4) the date on which the Company has, during the previous three year period, issued, publicly or privately, more than $1.0 billion in non-convertible debt securities. 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.
Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with GAAP. 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 and fair value of assets acquired and liabilities assumed in business combinations.
Segment Reporting
The Company’s operations consist of one reportable segment. The Company’s chief operating decision maker evaluates the operations of the Company using consolidated information for purposes of allocating resources and assessing performance.
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 has formed an implementation team to assess the impact that ASU 2016-13 will have on the Company’s consolidated financial statements. For the majority of loans evaluated on a pooled basis, the Company anticipates using a discounted cash flow method which considers instrument level cash flows adjusted for, among other factors, prepayment speeds, probability of default, and loss given default. The Company also anticipates using regression analysis of historical internal and peer data to determine which variables are best suited to be economic variables utilized when modeling lifetime probability of default and loss given default.
The ultimate impact to the Company’s financial condition and results of operations of ASU 2016-13, at both adoption and each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, the composition of our loan and securities portfolios, along with other management judgments.
10
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, 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. ASU 2020-04 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.
NOTE 2 – ACQUISITIONS
NXT Bancorporation, Inc.
On October 1, 2021, HBT Financial acquired 100% of the issued and outstanding common stock of NXT Bancorporation, Inc. (“NXT”), the holding company for NXT Bank, pursuant to an Agreement and Plan of Merger dated June 7, 2021. Under the Agreement and Plan of Merger, NXT merged with and into HBT Financial, with HBT Financial as the surviving entity, on October 1, 2021. Additionally, NXT Bank was merged with and into Heartland Bank, with Heartland Bank as the surviving entity, in December 2021.
At the effective time of the merger, each share of NXT was converted into the right to receive 67.6783 shares of HBT Financial common stock, cash in lieu of fractional shares, and $400 in cash. There were 1,799,016 shares of HBT Financial common stock issued at the effective time of the acquisition with an aggregate market value of $29.3 million, based on the closing stock price of $16.27 on October 1, 2021. This transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the date of acquisition. Goodwill of $5.7 million was recorded in the acquisition, which reflects expected synergies from combining the operations of HBT Financial and NXT, and is nondeductible for tax purposes.
The acquisition of NXT provides an opportunity to utilize Heartland Bank’s existing excess liquidity to replace NXT Bank’s higher-cost funding. Additionally, Heartland Bank’s broader range of products and services, as well as a greater ability to meet larger borrowing needs, provides an opportunity to expand NXT Bank customer relationships.
11
The fair value of the assets acquired and liabilities assumed from NXT on the acquisition date were as follows (dollars in thousands):
Fair Value
Assets acquired:
5,862
739
Debt securities
18,295
43
Restricted stock
796
Loans
194,576
7,352
Bank premises and equipment
3,667
Core deposit intangible assets
199
Mortgage servicing rights
370
886
1,340
Total assets acquired
234,125
Liabilities assumed:
181,586
4,080
FHLB advances
12,625
1,633
Total liabilities assumed
199,924
Net assets acquired
34,201
Consideration paid:
Cash
10,633
Common stock
29,270
Total consideration paid
39,903
5,702
The following table presents the acquired non-impaired loans as of the acquisition date (dollars in thousands):
Gross contractual amounts receivable
196,104
Estimate of contractual cash flows not expected to be collected
1,045
There were no loans acquired with deteriorated credit quality from NXT.
12
The following table provides the pro forma information for the results of operations for the three months ended March 31, 2021, as if the acquisition had occurred on January 1, 2020. The pro forma results combine the historical results of NXT into HBT Financial’s consolidated statements of income, including the impact of certain acquisition accounting adjustments, which include loan discount accretion, intangible assets amortization, deposit premium amortization, and borrowing premium amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2020. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, provision for loan losses, expense efficiencies or asset dispositions. The acquisition-related expenses that have been recognized are included in net income in the following table.
Pro Forma
Three Months Ended
March 31, 2021
Total revenues (net interest income and noninterest income)
42,543
15,970
Earnings per share - basic
Earnings per share - diluted
NOTE 3 – SECURITIES
The carrying balances of the securities were as follows:
Debt securities available-for-sale
Debt securities held-to-maturity
Total securities
1,377,159
1,283,723
There were no sales of securities during the three months ended March 31, 2022 and 2021. Gains (losses) on securities were as follows during the three months ended March 31:
Net realized gains (losses) on sales
Net unrealized gains (losses) on equity securities:
Readily determinable fair value
No readily determinable fair value
On March 31, 2022, 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:
March 31, 2022
June 30, 2021
Amortized
Cost
U.S. government agency
78,841
71,048
7,593
7,323
Mortgage-backed:
Agency residential
8,175
7,651
8,776
8,536
Agency commercial
27,834
25,432
99,271
99,275
118,792
113,861
114,850
104,131
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.
14
Debt Securities
The amortized cost and fair values of debt securities, with gross unrealized gains and losses, are as follows:
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Available-for-sale:
U.S. Treasury
169,966
(7,329)
162,637
51,182
16
(1,181)
50,017
Municipal
290,714
603
(15,753)
275,564
244,721
604
(7,797)
237,528
156,806
124
(7,619)
149,311
Corporate
59,428
657
(1,220)
58,865
Total available-for-sale
972,817
2,004
(40,899)
Held-to-maturity:
83,407
(722)
82,685
14,251
350
14,601
27,100
(947)
26,160
313,296
254
(20,393)
293,157
Total held-to-maturity
611
(22,062)
416,603
Total debt securities
1,410,871
2,615
(62,961)
1,350,525
December 31, 2021
109,002
328
(354)
108,976
129,269
1,303
(2,467)
128,105
293,837
6,144
(2,904)
297,077
178,236
2,149
(919)
179,466
164,875
1,234
(2,048)
164,061
63,141
1,638
(296)
64,483
938,360
12,796
(8,988)
12,349
42
(51)
12,340
15,666
809
16,475
20,555
196
(102)
20,649
287,615
1,749
(2,801)
286,563
2,796
(2,954)
336,027
1,274,545
15,592
(11,942)
1,278,195
As of March 31, 2022 and December 31, 2021, the Bank had debt securities with a carrying value of $304.9 million and $353.3 million, 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 46% of the municipal portfolio consists of debt securities issued by municipalities located in Illinois as of March 31, 2022. Approximately 94% of such debt securities were general obligation issues as of March 31, 2022.
The amortized cost and fair value of debt securities by contractual maturity, as of March 31, 2022, 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
26,200
26,286
2,136
2,161
Due after 1 year through 5 years
191,896
187,331
14,726
14,663
Due after 5 years through 10 years
268,930
253,700
54,808
54,474
Due after 10 years
84,264
79,766
25,988
The following tables present gross unrealized losses and fair value of debt securities, aggregated by category and length of time that individual debt securities have been in a continuous unrealized loss position, as of March 31, 2022 and December 31, 2021:
Investments in a Continuous Unrealized Loss Position
Less than 12 Months
12 Months or More
UnrealizedLoss
42,715
(9,031)
157,069
(6,722)
53,718
210,787
(7,647)
191,824
(150)
3,931
195,755
(5,579)
108,665
(2,040)
24,031
132,696
(450)
14,550
(770)
4,190
18,740
(31,217)
677,460
(9,682)
85,870
763,330
11,636
17,789
(20,148)
255,033
(245)
2,363
257,396
(21,817)
284,458
286,821
(53,034)
961,918
(9,927)
88,233
1,050,151
68,410
(2,183)
80,219
(284)
5,578
85,797
(2,018)
89,424
(886)
17,327
106,751
(851)
91,703
(68)
4,305
96,008
(1,921)
113,111
(127)
6,443
119,554
(7)
2,737
4,671
7,408
(7,334)
445,604
(1,654)
38,324
483,928
4,949
14,932
(2,673)
174,428
(128)
2,776
177,204
(2,826)
194,309
197,085
(10,160)
639,913
(1,782)
41,100
681,013
17
As of March 31, 2022, there were 75 debt securities in an unrealized loss position for a period of twelve months or more, and 465 debt securities in an unrealized loss position for a period of less than twelve months. These unrealized losses are primarily a result of fluctuations in market interest rates. In analyzing an issuer’s financial condition, management considers whether the debt securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management believes that all declines in value of these debt securities are deemed to be temporary.
Equity Securities
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
3,142
2,092
Cumulative net unrealized gains (losses)
114
(165)
Carrying value
301
As of March 31, 2022 and December 31, 2021, 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.
18
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Major categories of loans are summarized as follows:
Commercial and industrial
291,909
286,946
Agricultural and farmland
232,528
247,796
Commercial real estate - owner occupied
237,000
234,544
Commercial real estate - non-owner occupied
687,617
684,023
Multi-family
243,447
263,911
Construction and land development
320,030
298,048
One-to-four family residential
327,791
327,837
Municipal, consumer, and other
147,463
156,584
Paycheck Protection Program (PPP) loans (included above)
16,184
28,404
392
913
171
Total PPP loans
16,576
29,488
The following tables detail activity in the allowance for loan losses for the three months ended March 31:
Commercial
Municipal,
Agricultural
Real Estate
Construction
One-to-four
Consumer,
and
Owner
Non-owner
and Land
Family
Three Months Ended March 31, 2022
Industrial
Farmland
Occupied
Multi-Family
Development
Residential
Allowance for loan losses:
2,440
845
1,840
8,145
1,263
4,914
1,311
3,178
23,936
(653)
(3)
(429)
(1,396)
91
(421)
120
2,107
Charge-offs
(5)
(2)
(134)
Recoveries
709
100
265
154
62
1,290
2,491
842
1,511
7,014
1,354
4,493
1,583
5,220
24,508
Consumer
Three Months Ended March 31, 2021
3,929
793
3,141
11,251
1,957
4,232
1,801
4,734
31,838
(1,802)
72
(426)
133
(316)
(198)
(940)
(72)
(123)
(195)
90
89
521
2,420
865
2,715
11,330
2,090
4,006
1,573
3,760
28,759
The following tables present the recorded investments in loans and the allowance for loan losses by category:
Loan balances:
Collectively evaluated for impairment
270,193
231,551
218,324
645,060
242,249
316,799
312,978
134,474
2,371,628
Individually evaluated for impairment
21,579
234
13,384
30,196
2,010
9,046
12,960
89,409
Acquired with deteriorated credit quality
137
743
5,292
12,361
1,198
1,221
5,767
29
26,748
2,328
1,261
1,351
4,488
1,423
1,316
17,199
163
221
2,821
3,903
7,265
44
272,064
247,021
216,794
641,555
262,701
293,548
314,807
143,510
2,392,000
14,744
12,332
29,575
2,018
6,897
13,041
78,619
138
5,418
12,893
1,210
2,482
6,133
33
29,070
2,253
1,480
5,138
1,259
4,895
1,099
1,302
18,271
327
2,999
210
1,875
5,598
67
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:
282
2,416
14,736
14,720
678
634
8,478
8,455
26,590
26,507
With no related allowance:
21,339
21,297
11,186
10,968
15,550
15,476
2,110
9,711
8,412
4,564
4,505
64,694
62,902
Total loans individually evaluated for impairment:
21,621
13,602
30,286
10,389
13,042
91,284
21
303
3,013
14,912
14,893
1,421
1,314
8,523
8,498
28,172
28,021
14,452
14,441
9,534
9,319
14,755
14,682
2,112
7,129
5,583
4,603
4,543
52,597
50,598
12,547
29,667
8,550
13,126
80,769
22
The following table presents the average recorded investment and interest income recognized for loans individually evaluated for impairment by category of loans:
Average
Interest
Income
Recognized
292
2,266
31
168
2,425
3,244
41
14,854
186
20,361
208
2,248
27
647
2,644
23
8,509
39
8,802
26,727
267
39,733
372
19,498
200
1,068
236
383
11,028
106
9,600
122
15,495
198
5,665
68
876
2,016
1,764
26
8,728
57
6,981
49
4,544
4,746
61,545
31,083
317
19,790
204
3,334
45
551
13,453
139
12,844
30,349
384
26,026
276
4,012
53
9,375
9,625
13,053
60
13,548
88,272
871
70,816
689
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
291,812
93
236,898
102
687,446
319,432
518
325,648
484
25
1,634
147,292
118
2,484,503
788
2,461
374
247,772
24
234,441
103
683,029
823
297,465
64
519
325,780
1,642
156,297
214
2,495,258
1,620
48
2,763
The following tables present total loans by category based on their assigned risk ratings determined by management:
Pass
Pass-Watch
Substandard
Doubtful
265,441
4,889
212,526
19,112
890
199,248
25,096
12,656
631,602
22,977
33,038
238,491
4,956
293,294
24,726
311,074
6,932
9,785
134,300
203
2,285,976
108,891
92,918
267,088
5,114
221,898
25,213
198,862
24,098
11,584
619,212
32,372
32,439
241,362
22,549
268,556
27,474
308,951
11,221
7,665
143,299
244
2,269,228
148,285
82,176
There were no troubled debt restructurings during the three months ended March 31, 2022 or 2021.
Of the troubled debt restructurings entered into during the last 12 months, there were none which had subsequent payment defaults during the three months ended March 31, 2022 or 2021. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due as to interest or principal or were on nonaccrual status subsequent to restructuring.
As of March 31, 2022 and December 31, 2021, the Company had $3.4 million and $3.5 million 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 made prior to December 31, 2021 to borrowers experiencing financial hardship due to the COVID-19 pandemic generally do not need to be accounted for as a troubled debt restructuring. As of March 31, 2022 and December 31, 2021, the Company had loans that were granted a payment modification due to a COVID-19 related financial hardship and had not returned to regular payments were $0.2 million and $0.2 million, 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.
As of March 31, 2022 and December 31, 2021, the Company pledged loans totaling $576.0 million and $567.0 million, respectively, to the Federal Home Loan Bank of Chicago (“FHLB”) to secure available FHLB advance borrowing capacity.
Changes in the accretable yield for loans acquired with deteriorated credit quality were as follows:
Beginning balance
413
1,397
Reclassification from non-accretable difference
117
74
Accretion income
(46)
(133)
Ending balance
1,338
NOTE 5 – LOAN SERVICING
Mortgage loans serviced for others, which are not included in the accompanying consolidated balance sheets, amounted to $1.02 billion and $1.04 billion as of March 31, 2022 and December 31, 2021, respectively. Activity in mortgage servicing rights is as follows:
5,934
Capitalized servicing rights
397
Fair value adjustment:
Attributable to payments and principal reductions
(307)
(467)
Attributable to changes in valuation inputs and assumptions
1,865
1,765
Total fair value adjustment
1,558
1,298
7,629
NOTE 6 – FORECLOSED ASSETS
Foreclosed assets activity is as follows:
4,168
Transfers from loans
Proceeds from sales
(294)
(15)
Net gain (loss) on sales
105
Direct write-downs
(65)
(73)
4,748
Gains (losses) on foreclosed assets includes the following:
There were no foreclosed one-to-four family residential real estate properties held as of March 31, 2022. The carrying value of foreclosed one-to-four family residential real estate properties held as of December 31, 2021 was $0.2 million. As of March 31, 2022, there was 1 one-to-four family residential real estate loan in the process of foreclosure totaling $18 thousand. As of December 31, 2021, there were 4 one-to-four family residential real estate loans in the process of foreclosure totaling $0.1 million.
NOTE 7 – DEPOSITS
The Company’s deposits are summarized below:
Noninterest-bearing deposits
Interest-bearing deposits:
Interest-bearing demand
1,167,058
1,105,949
Money market
597,464
583,198
Savings
687,147
633,171
Time
295,169
328,208
Total interest-bearing deposits
Money market deposits include $4.2 million and $4.2 million of brokered deposits as of March 31, 2022 and December 31, 2021, respectively. Money market deposits also include $7.7 million and $6.9 million of reciprocal transaction deposits as of March 31, 2022 and December 31, 2021, respectively. Time deposits include $1.2 million and $0.9 million of reciprocal time deposits as of March 31, 2022, and December 31, 2021, respectively.
The aggregate amounts of time deposits in denominations of $250 thousand or more amounted to $35.0 million and $59.5 million as of March 31, 2022 and December 31, 2021, respectively. The aggregate amounts of time deposits in denominations of $100 thousand or more amounted to $104.7 million and $133.1 million as of March 31, 2022 and December 31, 2021, respectively.
The components of interest expense on deposits are as follows:
142
121
50
256
Total interest expense on deposits
28
NOTE 8 – 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 assets
7,000
Fair value recorded in other liabilities
10,000
(10)
17,000
(680)
As of March 31, 2022, the interest rate swap agreements designated as cash flow hedges had contractual maturities between 2024 and 2025. As of March 31, 2022 and December 31, 2021, the Company had cash pledged and held on deposit at counterparties of $0.2 million and $0.8 million, respectively.
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 (loss) to income
other comprehensive income (loss)
Designated as cash flow hedges:
Junior subordinated debentures interest expense
(96)
(99)
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
77,730
2,848
112,041
8,622
Interest rate swaps with a financial institution counterparty
37,007
1,078
3,880
75
Total fair value recorded in other assets
114,737
3,926
115,921
8,697
Fair value recorded in other liabilities:
(1,078)
(75)
(2,848)
(8,622)
Total fair value recorded in other liabilities
(3,926)
(8,697)
As of March 31, 2022, the interest rate swap agreements not designated as hedging instruments had contractual maturities between 2022 and 2042. As of March 31, 2022 and December 31, 2021, the carrying value of debt securities pledged and held in safekeeping at a financial institution counterparty were $1.1 million and $7.5 million, respectively.
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
5,413
7,564
Gross losses
(5,413)
(7,564)
Net gains (losses)
30
NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the activity and accumulated balances for components of other comprehensive income (loss):
Unrealized Gains (Losses)
on Debt Securities
Derivatives
5,736
(3,514)
(751)
Transfer from available-for-sale to held-to-maturity
7,664
(7,664)
Other comprehensive income (loss) before reclassifications
(52,828)
277
Other comprehensive income (loss), before tax
690
Income tax expense (benefit)
(15,228)
51
197
Other comprehensive income (loss), after tax
(38,194)
130
493
(24,794)
(11,048)
(258)
19,578
(118)
(1,307)
3,890
(3,890)
(22,855)
131
318
(6,577)
(16,497)
227
6,971
(3,985)
(1,080)
Reclassifications 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.
Reclassifications 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.
Reclassifications 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 8 for additional information.
NOTE 10 – 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 and performance restricted stock units.
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Earnings allocated to participating securities
(17)
(31)
Numerator for earnings per share - basic and diluted
13,587
15,214
Denominator:
Weighted average common shares outstanding
Dilutive effect of outstanding restricted stock units
43,646
2,489
Weighted average common shares outstanding, including all dilutive potential shares
29,030,239
27,433,401
Earnings per share - Basic
Earnings per share - Diluted
NOTE 11 – 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
608
Performance restricted stock units
Total awards classified as equity
Stock appreciation rights
(23)
Total stock-based compensation expense
878
259
In February 2022, all outstanding restricted stock unit and performance restricted stock unit agreements were modified to address treatment upon retirement. In the event of retirement, if the retirement eligibility requirements are met, then 100% of unvested restricted stock units and performance restricted stock units will continue to vest in accordance with the originally established vesting schedule. The retirement modification resulted in the acceleration of $0.6 million of expense, although total compensation costs related to the modified agreements remained the same.
Restricted Stock Units
A restricted stock unit grants a participant the right to receive one share of the Company’s 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.
During the three months ended March 31, 2022 and 2021, the total grant date fair value of the restricted stock units granted was $0.9 million and $0.7 million, respectively, based on the grant date closing prices. The total intrinsic value of restricted stock that vested during the three months ended March 31, 2022 and 2021 was $0.7 million and $0.3 million, respectively.
The following is a summary of restricted stock unit activity:
Weighted
Restricted
Grant Date
Stock Units
109,244
17.27
71,000
18.98
Granted
46,312
19.11
46,347
15.53
Vested
(34,925)
17.26
(20,225)
18.86
Forfeited
120,631
17.98
97,122
17.36
As of March 31, 2022, unrecognized compensation cost related to the non-vested restricted stock units was $1.6 million. This cost is expected to be recognized over the weighted average remaining service period of 2.1 years.
34
Performance Restricted Stock Units
A performance restricted stock unit is similar to a restricted stock unit, except that the number of shares of the Company’s common stock awarded is based on a performance condition and the completion of the requisite service period. The number of shares of the Company’s common stock that may be earned ranges from 0% to 150% of the number of performance restricted stock units granted. 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. Changes in the performance condition probability assessment result in cumulative catch-up adjustments to the compensation cost recognized. Dividend equivalents on performance restricted stock units, which are accrued until vested, are classified as dividends charged to retained earnings.
During the three months ended March 31, 2022 and 2021, the total fair value of the performance restricted stock units granted was $0.5 million and $0.4 million, respectively, based on the grant date closing prices and an assessment of the probable outcome of the performance condition on the grant date.
The following is a summary of performance restricted stock unit activity:
Three months ended March 31,
Performance
38,344
15.72
23,723
19.14
28,697
62,067
17.02
As of March 31, 2022, unrecognized compensation cost related to non-vested performance restricted stock units was $0.7 million, based on the current assessment of the probable outcome of the performance conditions. This cost is expected to be recognized over the weighted average remaining service period of 1.9 years.
35
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:
StockAppreciationRights
WeightedAverageGrant DateAssigned Value
97,920
16.32
105,570
Exercised
(6,120)
Expired
(1,530)
91,800
104,040
A further summary of stock appreciation rights as of March 31, 2022, is as follows:
Weighted Average
Remaining
Grant Date Assigned Values
Exercisable
Contractual Term
$ 16.32
79,560
7.0
years
As of March 31, 2022, unrecognized compensation cost related to non-vested stock appreciation rights was $46 thousand.
As of March 31, 2022 and December 31, 2021, the liability recorded for outstanding stock appreciation rights was $0.4 million and $0.5 million, 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
2.37
%
1.40
Expected volatility
35.83
35.52
Expected life (in years)
7.4
7.7
Expected dividend yield
3.52
3.20
As of March 31, 2022, the liability recorded for previously exercised stock appreciation rights was $0.5 million, which will be paid in two remaining annual installments. As of December 31, 2021, the liability recorded for previously exercised stock appreciation rights was $0.8 million.
NOTE 12 – REGULATORY MATTERS
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. Additionally, 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.
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 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 debt securities, in the computation of regulatory capital. Prompt corrective action provisions are not applicable to bank holding companies.
Additionally, the Company and the Bank must maintain a “capital conservation buffer” to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. As of March 31, 2022 and December 31, 2021, the capital conservation buffer was 2.5%of risk-weighted assets.
As of March 31, 2022, 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 the Company (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.
488,974
16.86
231,959
8.00
N/A
Heartland Bank and Trust Company
462,254
15.95
231,789
289,736
10.00
Tier 1 Capital (to Risk Weighted Assets)
425,130
14.66
173,969
6.00
437,746
15.11
173,842
Common Equity Tier 1 Capital (to Risk Weighted Assets)
388,564
13.40
130,477
4.50
130,381
188,329
6.50
Tier 1 Capital (to Average Assets)
9.83
172,907
4.00
10.13
172,789
215,987
5.00
479,320
16.88
227,115
452,162
15.94
226,950
283,688
416,068
170,336
428,226
15.09
170,213
379,519
13.37
127,752
127,659
184,397
9.84
169,171
169,070
211,337
38
NOTE 13 – 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 11, 2022. There were no transfers between levels during the three months ended March 31, 2022 and 2021. 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
3,946
Derivative financial liabilities
3,936
9,377
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, 2021 to March 31, 2022.
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% (8.6%)
Discount rate
9.0% to 11.0% (9.0%)
7.0% to 88.9% (11.7%)
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
19,242
22,423
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.
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.
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.
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
Level 3
Loans, net
2,476,472
2,494,686
Financial liabilities:
Time deposits
291,367
327,779
40,546
41,602
Junior subordinated debentures
33,683
33,640
Accrued interest payable
560
1,043
The Company estimated the fair value of lending related commitments as described in Note 14 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 14 – 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
602,158
609,947
Standby letters of credit
13,669
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.
46
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to HBT Financial, Inc. and its subsidiaries.
The following is management’s discussion and analysis of the financial condition as of March 31, 2022 (unaudited), as compared with December 31, 2021, and the results of operations for the three months ended March 31, 2022 and 2021 (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, 2021, filed with the SEC on March 11, 2022. Results of operations for the three months ended March 31, 2022 and 2021, are not necessarily indicative of results to be attained for any other period.
OVERVIEW
HBT Financial, Inc., headquartered in Bloomington, Illinois, is the holding company for Heartland Bank and Trust Company, and has banking roots that can be traced back to 1920. We provide a comprehensive suite of business, commercial, wealth management, and retail banking products and services to businesses, families, and local governments throughout Central and Northeastern Illinois and Eastern Iowa. As of March 31, 2022, the Company had total assets of $4.3 billion, loans held for investment of $2.5 billion, and total deposits of $3.8 billion.
Market Area
We currently operate 61 branch locations in Central and Northeastern Illinois and Eastern Iowa. We hold a leading deposit share in many of our Central Illinois markets, 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 geographic region.
Total loans
Illinois by metropolitan and micropolitan statistical areas
Bloomington-Normal
528,985
527,161
Champaign-Urbana
196,468
191,646
Chicago
1,189,454
1,196,605
Lincoln
80,646
87,153
Ottawa-Peru
95,140
101,117
Peoria
119,104
123,143
Total Illinois
2,209,797
2,226,825
Iowa
277,988
272,864
895,160
887,587
220,924
203,899
1,278,691
1,237,486
209,766
203,098
418,026
407,156
626,192
610,155
3,648,759
3,549,381
167,310
188,804
NXT Bancorporation, Inc. Acquisition
On October 1, 2021, the Company completed its acquisition of NXT Bancorporation, Inc. (“NXT”), the holding company for NXT Bank. The acquisition expanded the Company’s footprint into Eastern Iowa with four locations that began operating as branches of Heartland Bank following the merger and system conversion of NXT Bank into Heartland Bank in December 2021. After considering business combination accounting adjustments, NXT added total assets of $234.1 million, total loans of $194.6 million, and total deposits of $181.6 million.
Cash consideration of $10.6 million and stock consideration of approximately 1.8 million shares of HBT common stock resulted in aggregate consideration of $39.9 million. Goodwill of $5.7 million was recorded in the acquisition.
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, as well as a greater ability to meet larger borrowing needs, provides an opportunity to expand NXT Bank customer relationships.
The Company did not incur expenses related to the acquisition of NXT during the three months ended March 31, 2022 or 2021.
Paycheck Protection Program Loans
During 2021 and 2020, we funded a total of $290.1 million of Paycheck Protection Program (“PPP”) loans. The vast majority of those loans have received full forgiveness, and we continue to process forgiveness applications.
The following table summarizes outstanding PPP loans as of March 31, 2022:
Round 1
Round 2
PPP loan balance, before net deferred origination fees
17,323
17,329
Net deferred origination fees
(753)
PPP loan balance
16,570
Recognition of net deferred origination fees is accelerated upon loan forgiveness or repayment prior to contractual maturity. During the three months ended March 31, 2022 and 2021, we recognized $0.7 million and $2.2 million, respectively, of net deferred origination fees on PPP loans as taxable loan interest income.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Economic Conditions
The Company's business and financial performance are affected by economic conditions generally in the U.S. 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 U.S. and the communities that we serve. While the economic outlook has generally improved relative to 2020 and 2021, there remains uncertainty surrounding the longer lasting impact on specific industries and potential surges in COVID-19 infections with new virus variants. As a result, the businesses we serve may be adversely impacted and the ability of our customers to fulfill their contractual obligations to us may deteriorate.
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 (“FRB”) 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 FRB’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 FRB’s actions. Our net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur. Generally, we expect increases in market interest rates will increase our net interest income and net interest margin in future periods, while decreases in market interest rates may decrease our net interest income and net interest margin 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 and credit review processes are strengths that allow 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 and the impact of COVID-19 in our markets.
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 and 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 Bank Secrecy Act 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.
FACTORS AFFECTING COMPARABILITY OF FINANCIAL RESULTS
JOBS Act Accounting Election
We qualify as an “emerging growth company” under the JOBS Act. The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. The Company may remain an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, which is December 31, 2024, (2) the last day of the fiscal year in which the Company has $1.07 billion or more in annual revenues, (3) the date on which the Company is deemed to be a “large accelerated filer” under the Exchange Act or (4) the date on which the Company has, during the previous three year period, issued, publicly or privately, more than $1.0 billion in non-convertible debt securities. 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.
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
Income tax expense
Adjusted net income (1)
12,227
14,033
Net interest income (tax-equivalent basis) (1) (2)
32,457
29,632
Share and Per Share Information
Adjusted earnings per share - Diluted (1)
0.42
0.51
Weighted average shares of common stock outstanding
Summary Ratios
Net interest margin *
3.08
3.25
Net interest margin (tax-equivalent basis) * (1) (2)
3.13
3.30
Yield on loans *
4.44
4.57
Yield on interest-earning assets *
3.22
3.41
Cost of interest-bearing liabilities *
0.20
0.25
Cost of total deposits *
0.06
0.08
Efficiency ratio
56.97
55.73
Efficiency ratio (tax-equivalent basis) (1) (2)
56.26
55.03
Return on average assets *
1.27
1.64
Return on average stockholders' equity *
13.58
17.01
Return on average tangible common equity * (1)
14.71
18.33
Adjusted return on average assets * (1)
1.14
1.51
Adjusted return on average stockholders' equity * (1)
12.20
15.65
Adjusted return on average tangible common equity * (1)
13.22
* Annualized measure.
Comparison of the Three Months Ended March 31, 2022 to the Three Months Ended March 31, 2021
For the three months ended March 31, 2022, net income was $13.6 million decreasing by $1.6 million, or 10.8%, when compared to net income for the three months ended March 31, 2021. Notable changes include 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.
52
The following tables set forth average balances, average yields and costs, and certain other information for the three months ended March 31, 2022 and 2021. 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.
Yield/Cost *
2,507,006
27,468
2,284,159
25,744
Securities
1,321,918
5,689
1.75
1,004,877
4,769
1.92
Deposits with banks
370,130
0.17
345,915
0.09
2.80
2,498
2.04
Total interest-earning assets
4,201,793
3,637,449
(24,099)
(31,856)
Noninterest-earning assets
165,752
155,622
4,343,446
3,761,215
1,143,829
0.05
997,720
598,271
482,385
0.07
649,563
0.03
541,896
310,675
0.33
294,172
2,702,338
2,316,173
0.11
53,054
46,348
500
0.71
0.44
39,325
4.84
39,245
4.85
37,721
3.85
37,655
3.83
Total interest-bearing liabilities
2,832,938
2,439,921
1,077,917
920,514
Noninterest-bearing liabilities
26,302
37,223
3,937,157
3,397,658
406,289
363,557
Net interest income/Net interest margin (1)
Tax-equivalent adjustment (2)
529
503
Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) (2) (3)
Net interest rate spread (4)
3.02
3.16
Net interest-earning assets (5)
1,368,855
1,197,528
Ratio of interest-earning assets to interest-bearing liabilities
1.48
1.49
Cost of total deposits
The following table sets forth the components of loan interest income, which includes contractual interest on loans, loan fees, and accretion of acquired loan discounts.
Yield
Contribution *
Contractual interest
25,454
4.11
22,683
4.02
Loan fees (excluding PPP loans)
1,155
0.19
776
0.14
PPP loan fees
0.12
2,226
0.40
Accretion of acquired loan discounts
0.02
59
0.01
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
2.46
2.53
Contractual interest on securities
7,452
0.72
6,501
Contractual interest on deposits with banks
Securities amortization, net
(1,763)
(0.17)
(1,732)
(0.20)
Total interest income
Interest expense:
Contractual interest on deposits
641
Contractual interest on other interest-bearing liabilities
705
698
61
0.16
Tax equivalent adjustment (1)
Net interest income (tax equivalent) (1) (2)
54
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:
2,458
(734)
1,724
1,396
(476)
920
3,861
(1,132)
2,729
Interest-bearing liabilities:
(162)
(141)
70
(145)
(1)
(144)
(70)
Change in net interest income
3,787
(988)
2,799
Net interest income for the three months ended March 31, 2022, was $31.9 million, increasing $2.8 million, or 9.6%, from the three months ended March 31, 2021. The increase is primarily attributable to higher average loan and securities balances. These higher average balances more than offset a $1.5 million decrease in PPP loan fees recognized as loan interest income.
Net interest margin decreased to 3.08% for the three months ended March 31, 2022 compared to 3.25% for the three months ended March 31, 2021. The decrease was primarily attributable to lower PPP loan fees recognized as loan interest income which contributed 7 and 25 basis points to net interest margin during the three months ended March 31, 2022 and 2021, respectively.
The quarterly net interest margins were as follows:
Three months ended:
March 31
June 30
3.14
September 30
3.18
December 31
3.17
55
In March 2020, the Federal Open Markets Committee (“FOMC”), in response to the economic downturn caused by the COVID-19 pandemic, lowered the target range for the federal funds rate to 0 to 25 basis points and announced the Federal Reserve would substantially increase its Treasury and agency mortgage-backed securities holdings. This resulted in a historically low interest rate environment which lasted through the rest of 2020 and into 2021, putting downward pressure on our net interest margin.
In 2021, the FOMC began to taper the pace of its security purchases, and, in March 2022, the FOMC raised the target range for the federal funds rate to 25 to 50 basis points and indicated it expects to begin reducing the Federal Reserve’s security holdings at a future meeting. As a result, market rates have risen from historic lows which we expect will lead to improvements in our net interest margin, excluding impacts of PPP loan fees and loan discount accretion. In general, we believe that increases in market interest rates will lead to improved net interest margins while decreases in market interest rates 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).
Credit losses in our loan portfolio are highly dependent on the economic conditions in the communities that we serve. The general deterioration in economic conditions initially caused by the COVID-19 pandemic adversely affected the communities that we serve beginning in 2020. As a result, our allowance for loan losses initially increased at the onset of the COVID-19 pandemic, remained elevated during the remainder of 2020, and then gradually returned to near pre-pandemic levels during 2021 as economic conditions improved in our market areas. Potential deterioration of economic conditions, whether due to the COVID-19 pandemic or other factors, may lead to higher credit losses and adversely impact our financial condition and results of operations.
The Company recorded a negative provision for loan losses of $0.6 million during the three months ended March 31, 2022, compared to a negative provision for loan losses of $3.4 million during the three months ended March 31, 2021. The negative provision during the three months ended March 31, 2022 was primarily due to net recoveries of $1.2 million and improvements in qualitative factors which resulted in a $1.1 million decrease in required reserves, primarily reflecting improved economic conditions. Partially offsetting these improvements was a $1.7 million increase in specific reserves on loans individually evaluated for impairment.
56
Noninterest Income
The following table sets forth the major categories of noninterest income for the periods indicated:
$ Change
146
(27)
(1,513)
(227)
116
192
(765)
Total noninterest income for the three months ended March 31, 2022, was $10.0 million, a decrease of $0.8 million, or 7.1%, from the three months ended March 31, 2021. Notable changes in noninterest income include the following:
Noninterest Expense
The following table sets forth the major categories of noninterest expense for the periods indicated:
396
777
(71)
(35)
286
(44)
(208)
(11)
353
1,613
Total noninterest expense for the three months ended March 31, 2022, was $24.2 million, an increase of $1.6 million, or 7.2%, from the three months ended March 31, 2021. Notable changes in noninterest income include the following:
Income Taxes
We recorded income tax expense of $4.8 million, or 26.1% effective tax rate, during the three months ended March 31, 2022, compared to $5.6 million, or 26.7% effective tax rate, during the three months ended March 31, 2021. The effective tax rate decreased slightly primarily due to tax exempt income making up a larger portion of pre-tax income during the three months ended March 31, 2022 compared to the three months ended March 31, 2021.
58
FINANCIAL CONDITION
% Change
Consolidated Balance Sheet Information
(12.3)
(8,246)
(0.9)
101,869
30.3
(3,165)
(64.0)
(11,904)
(0.5)
Less: allowance for loan losses
572
2.4
(12,476)
(12.6)
121,936
114,673
7,263
6.3
34,711
0.8
2.1
(17.0)
0.1
(4,062)
(15.7)
63,437
1.6
Total stockholders' equity
(28,726)
(7.0)
Total liabilities and stockholders' equity
Tangible assets (1)
4,317,945
4,282,989
34,956
Tangible common equity (1)
352,135
380,616
(28,481)
(7.5)
Core deposits (1)
3,776,857
3,674,435
102,422
2.8
Book value per share
13.23
14.21
Tangible book value per share (1)
12.16
13.13
Shares of common stock outstanding
Balance Sheet Ratios
Loan to deposit ratio
65.19
66.87
Core deposits to total deposits (1)
98.97
98.29
Stockholders' equity to total assets
8.81
9.55
Tangible common equity to tangible assets (1)
8.16
8.89
Total assets were $4.35 billion at March 31, 2022, an increase of $34.7 million, or 0.8%, from December 31, 2021. Notable 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
11.7
11.5
9.4
9.9
9.5
27.6
27.4
9.8
10.5
12.9
11.9
13.2
13.1
5.9
100.0
PPP loans (included above)
0.7
1.2
Loans, before allowance for loan losses were $2.49 billion at March 31, 2022, a decrease of $11.9 million, or 0.5%, from December 31, 2021, primarily due to ongoing forgiveness of PPP loans which decreased by $12.9 million. Additionally, new loan production was impacted by seasonally lighter demand in first quarter of 2022, project delays due to higher input costs and interest rates, and an increasingly competitive loan pricing environment in our markets.
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
191,789
79,653
20,467
93,158
95,380
41,176
2,814
26,255
143,757
63,228
80,835
416,712
189,536
534
23,249
154,012
66,186
185,802
116,931
16,932
68,381
120,482
82,063
56,865
39,895
16,895
69,201
21,472
709,364
1,143,822
548,789
85,810
The following table summarizes loans maturing after one year, segregated into variable and fixed interest rates.
Variable Interest Rates
Repricing
Predetermined
Variable
(Fixed)
3,960
291
4,251
95,869
100,120
8,538
5,700
14,238
125,132
139,370
32,220
19,451
51,671
159,074
210,745
65,991
21,606
87,597
519,185
606,782
24,372
3,237
27,609
192,589
220,198
72,400
72,480
61,748
134,228
70,080
21,451
91,531
167,879
259,410
34,790
4,393
39,183
68,385
107,568
312,351
76,209
388,560
1,389,861
1,778,421
Nonperforming Assets
Nonperforming loans consist of all loans 90 days or more past due 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.
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
2,469
2,779
Total nonperforming assets
5,512
6,057
CREDIT QUALITY RATIOS
Allowance for loan losses to loans, before allowance for loan losses
0.99
0.96
Allowance for loan losses to nonaccrual loans
995.86
866.30
Allowance for loan losses to nonperforming loans
992.63
861.32
Nonaccrual loans to loans, before allowance for loan losses
0.10
Nonperforming loans to loans, before allowance for loan losses
Nonperforming assets to total assets
0.13
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets
0.22
0.24
Total nonperforming assets were $5.5 million at March 31, 2022, decreasing slightly since December 31, 2021. Our level of nonperforming assets has remained low in recent years, representing only 0.13% and 0.14% of total assets as of March 31, 2022 and December 31, 2021, respectively. 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.
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.
Accruing
1,671
1,258
1,278
352
360
Total troubled debt restructurings
3,437
3,512
TDRs have remained a small portion of our loan portfolio as loan modifications to borrowers with deteriorating financial condition are generally offered only as part of an overall workout strategy to minimize losses to the Company.
Risk Classification of Loans
Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as pass-watch, substandard, doubtful, or loss.
A pass-watch loan is still considered a "pass" credit and is not a classified or criticized asset, but is a reflection of a borrower who exhibits credit weaknesses or downward trends warranting close attention and increased monitoring. These potential weaknesses may result in deterioration of the repayment prospects for the loan. No loss of principal or interest is expected, and the borrower does not pose sufficient risk to warrant classification.
A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized as probable that the borrower will not pay principal and interest in accordance with the contractual terms.
An asset classified as doubtful has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted; such balances are promptly charged-off as required by applicable federal regulations.
As of March 31, 2022 and December 31, 2021, our risk classifications of loans were as follows:
Pass-watch
Pass-watch loans decreased $39.4 million, or 26.6% and substandard loans increased $10.7 million, or 13.1%, from December 31, 2021 to March 31, 2022. The aggregate balance of loans in these two risk classifications decreased $28.7 million during the quarter ended March 31, 2022. This overall improvement was primarily driven by improving economic conditions, which resulted in both risk rating upgrades and paydowns.
63
Net Charge-offs and Recoveries
The following table summarizes net charge-offs (recoveries) to average loans, before allowance for loan losses, by loan category.
Net charge-offs (recoveries)
(704)
(293)
(100)
(265)
(90)
(152)
(1,156)
(326)
Average loans, before allowance for loan losses
306,471
419,163
232,225
212,327
224,763
208,071
703,988
553,074
246,771
232,502
315,207
216,404
330,167
316,419
147,414
126,199
Net charge-offs (recoveries) to average loans, before allowance for loan losses *
(0.93)
(0.28)
(0.18)
(0.15)
(0.01)
(0.19)
0.04
0.18
(0.06)
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.
The Company’s investment policy emphasizes safety of the principal, liquidity needs, expected returns, cash flow targets and consistency with our interest rate risk management strategy. The composition and maturities of the debt securities portfolio as of March 31, 2022, 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.
3,053
7,660
2.67
3.61
9,796
2.88
247
1.73
4,995
2.35
15,487
2.97
31,442
2.52
33,578
2.59
110,289
1.34
17,379
1.94
5,000
1.10
22,379
57,247
2.21
9,726
3.60
66,973
2.41
12,181
37,002
2.36
8,331
2.72
45,333
2.42
3.55
241,079
1.85
23,057
2.74
264,136
1.93
59,677
1.46
30,750
2.29
52,419
83,169
1.69
143,543
1.74
2,389
3.51
145,932
1.77
86,388
2.10
8,438
1.62
94,826
2.06
75,869
1.59
227,161
1.53
303,030
1.54
34,960
431,187
1.96
290,407
721,594
1.78
1.39
82,264
1.89
145,905
1.86
18,662
164,567
1.88
38,940
1.63
77,804
116,744
1.82
2,000
269,109
122,454
1.83
391,563
1.38
134,589
1.61
1.90
3.59
304,965
1.98
1.91
271,821
1.81
1.66
470,102
1.71
1.68
SOURCES OF FUNDS
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 digital banking services to solidify deposit relationships.
The following table sets forth the distribution of average deposits, by account type:
Change in
Percent of
Total Deposits
Average Cost *
28.5
17.1
30.8
14.6
15.8
14.9
24.0
17.2
16.7
19.9
Total non-maturity deposits
3,469,580
91.8
2,942,515
90.9
17.9
8.2
9.1
5.6
3,780,255
3,236,687
16.8
The average balances of non-maturity deposits increased 17.9% from the three months ended March 31, 2021 to the three months ended March 31, 2022, with the increase primarily attributable to federal economic stimulus, in the form of PPP loan proceeds received by commercial customers and received by retail customers, and the NXT acquisition which added $139.4 million of non-maturity deposits on October 1, 2021. Time deposits increased as well, but by a smaller percentage, primarily due to $42.1 million of time deposits acquired from NXT, partially offset by continued run-off of higher cost time deposits.
The following table sets forth time deposits by remaining maturity as of March 31, 2022:
3 Months or
Over 3 through
Over 6 through
Over
Less
6 Months
12 Months
Time deposits:
Amounts less than $100,000
44,059
35,713
57,581
53,091
190,444
Amounts of $100,000 but less than $250,000
16,388
13,299
19,882
20,183
69,752
Amounts of $250,000 or more
6,186
6,743
18,798
3,246
34,973
Total time deposits
66,633
55,755
96,261
76,520
As of March 31, 2022 and December 31, 2021, the Bank’s uninsured deposits, including related accrued interest, were estimated to be $817.0 million and $845.7 million, respectively.
66
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 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 March 31, 2022 was $356.7 million.
As of March 31, 2022, management believed adequate liquidity existed to meet all projected cash flow obligations of the Bank. As of March 31, 2022, the Bank had no material commitments for capital expenditures.
Holding Company Liquidity
The Company is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity. As of March 31, 2022, HBT Financial, Inc. had cash and cash equivalents of $24.4 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 months ended March 31, 2022, the Bank paid $6.0 million in dividends to the Company. During the three months ended March 31, 2021, the Bank did not pay a dividend to the Company.
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 March 31, 2022 and 2021, holding company operating expenses consisted of interest expense of $0.8 million and $0.8 million, respectively, and other operating expenses of $1.5 million and $0.6 million, respectively. Additionally, the Company paid $4.7 million and $4.1 million of dividends to stockholders during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, management was not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on the Company’s liquidity.
As of March 31, 2022, management believed adequate liquidity existed to meet all projected cash flow obligations of the Company. As of March 31, 2022, the Company had no material commitments for capital expenditures.
CAPITAL RESOURCES
The overall objectives of capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. The Company seeks to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.
Regulatory Capital Requirements
The Company and Bank are each subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company and the Bank.
In addition to meeting minimum capital requirements, the Company and the Bank must also maintain a “capital conservation buffer” to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. As of March 31, 2022 and December 31, 2021, the capital conservation buffer requirement was 2.5% of risk-weighted assets.
As of March 31, 2022 and December 31, 2021, the Company and the Bank met all capital adequacy requirements to which they were subject. As of those dates, the Bank was “well capitalized” under the regulatory prompt corrective action provisions.
The following table sets forth actual capital ratios of the Company and the Bank for the dates indicated, as well as the minimum ratios for capital adequacy purposes with the capital conservation buffer, and the minimum ratios to be well capitalized under regulatory prompt corrective action provisions.
For Capital
To Be Well
Adequacy Purposes
Capitalized Under
With Capital
Prompt Corrective
Conversation Buffer (1)
Action Provisions (2)
10.50
8.50
7.00
N/A Not applicable.
As of March 31, 2022, 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 capital resources.
Cash Dividends
During 2021, the Company paid quarterly cash dividends of $0.15 per share. On January 25, 2022, the Company announced an increase of $0.01 and paid a $0.16 per share dividend during the first quarter of 2022.
Stock Repurchase Program
Under the Company’s stock repurchase program, the Company repurchased 50,062 shares of its common stock at a weighted average price of $18.84 during the three months ended March 31, 2022. Repurchases were conducted in compliance with Rule 10b-18 and in compliance with Regulation M under the Exchange Act. 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 January 1, 2023. As of March 31, 2022, the Company had $14.1 million remaining under the current stock repurchase authorization.
OFF-BALANCE SHEET ARRANGEMENTS
As a financial services provider, 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 March 31, 2022 and December 31, 2021, there were no reserves for unfunded commitments. For additional information, see “Note 14 – Commitments and Contingencies” to the consolidated financial statements.
69
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has established various accounting policies that govern the application of GAAP 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 for the year ended December 31, 2021, filed with the SEC on March 11, 2022. 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 for the year ended December 31, 2021, filed with the SEC on March 11, 2022.
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)
71
Tangible Common Equity to Tangible Assets
Core Deposits
Reconciliation of Non-GAAP Financial Measure - Adjusted Net Income and Adjusted Return on Average Assets
Adjustments:
Gains (losses) on sales of closed branch premises
Total adjustments
1,926
Tax effect of adjustments
(549)
(483)
Less adjustments after tax effect
1,377
1,212
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)
(28)
Numerator for adjusted earnings per share - basic and diluted
12,212
14,005
Adjusted earnings per share - Basic
Adjusted earnings per share - Diluted
Reconciliation of Non-GAAP Financial Measure – Net Interest Income and 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
23,912
22,255
Operating revenue
41,971
39,937
Operating revenue (tax-equivalent basis) (1)
42,500
40,440
Efficiency ratio (tax equivalent basis) (1)
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
23,620
1,844
2,686
Average tangible common equity
375,123
337,251
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
59,512
Less: brokered deposits
4,239
4,238
Core deposits
Core deposits to total deposits
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
Our most significant form of market risk is interest rate risk inherent in the normal course of lending and deposit-taking activities. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. 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 Company’s 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 (“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 and parallel 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
162,050
27.5
31,482
23.4
46,250
33.3
+300
139,709
23.7
24,103
36,249
26.1
+200
128,225
21.8
20,398
15.2
29,293
21.1
+100
60,508
10.3
8,246
6.1
13,102
Flat
-100
(57,405)
(9.7)
(6,326)
(4.7)
(11,888)
(8.6)
92,106
19.7
23,230
18.7
38,485
31.7
76,708
16.4
17,938
14.5
30,487
25.1
51,627
11.1
12,154
17.6
12,453
2.7
5,818
4.7
11,062
34,852
7.5
(4,098)
(3.3)
(7,746)
(6.4)
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 change the actual impact on EVE and net interest income.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The EVE and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the EVE and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Credit Risk
Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Our loan policy documents underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the borrower, industry, and product levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent loan review process that assesses compliance with loan policy, compliance with loan documentation standards, accuracy of the risk rating and overall credit quality of the loan portfolio.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022, the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2022, 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, financial condition, 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 for the year ended December 31, 2021, filed with the SEC on March 11, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
On December 14, 2021, 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 January 1, 2023 with the timing of purchases and number of shares repurchased dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements, and market conditions. The Company is not obligated to purchase any shares under the stock repurchase program, and the stock repurchase program may be suspended or discontinued at any time without notice.
The following table sets forth information about the Company’s purchases of its common stock during the first quarter of 2022, all of which were conducted in compliance with Rule 10b-18 and Regulation M under the Exchange Act:
Total Number of Shares
Approximate Dollar Value of
Total Number
Purchased as Part of
Shares That May Yet be Purchased
of Shares
Price Paid
Publicly Announced
Under the Plans or Programs
Period
Purchased
Per Share
Plans or Programs
(in thousands)
January 1 - 31, 2022
4,306
18.68
14,920
February 1 - 28, 2022
13,983
18.81
14,657
March 1 - 31, 2022
31,773
18.87
14,057
50,062
18.84
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No.
Description
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 *
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.2 *
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350.
101.INS
iXBRL Instance Document.
101.SCH
iXBRL Taxonomy Extension Schema Document.
101.CAL
iXBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
iXBRL Taxonomy Extension Label Linkbase Document.
101.PRE
iXBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF
iXBRL Taxonomy Extension Definition Linkbase Document.
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101).
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HBT FINANCIAL, INC.
May 6, 2022
By:
/s/ Matthew J. Doherty
Matthew J. Doherty
Chief Financial Officer
(on behalf of the registrant and as principal financial officer)