Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 2, 2022, there were 28,752,626 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
8
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
52
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
86
Item 4.
Controls and Procedures
87
PART II. OTHER INFORMATION
88
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
89
Item 5.
Other Information
Item 6.
Exhibits
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report are forward-looking statements. Forward-looking statements may include statements relating to our plans, strategies and expectations, the economic impact of the COVID-19 pandemic and our future financial results, near-term loan growth, net interest margin, mortgage banking profits, wealth management fees, expenses, asset quality, capital levels, continued earnings, and liquidity. Forward-looking statements are generally identifiable by use of the words "believe," "may," "will," "should," "could," "expect," "estimate," "intend," "anticipate," "project," "plan" or similar expressions. Forward-looking statements are frequently based on assumptions that may or may not materialize and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or prospects include, but are not limited to:
1
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made. We do not undertake any obligation to update any forward-looking statement in the future, or to reflect circumstances and events that occur after the date on which the forward-looking statement was made.
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HBT FINANCIAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(Unaudited)
September 30,
December 31,
2022
2021
ASSETS
Cash and due from banks
$
22,169
23,387
Interest-bearing deposits with banks
56,046
385,881
Cash and cash equivalents
78,215
409,268
Interest-bearing time deposits with banks
—
490
Debt securities available-for-sale, at fair value
853,740
942,168
Debt securities held-to-maturity (fair value of $481,692 in 2022 and $336,027 in 2021)
546,694
336,185
Equity securities with readily determinable fair value
2,996
3,443
Equity securities with no readily determinable fair value
1,977
1,927
Restricted stock, at cost
4,050
2,739
Loans held for sale
2,297
4,942
Loans, before allowance for loan losses
2,579,928
2,499,689
Allowance for loan losses
(25,060)
(23,936)
Loans, net of allowance for loan losses
2,554,868
2,475,753
Bank owned life insurance
7,515
7,393
Bank premises and equipment, net
50,854
52,483
Bank premises held for sale
281
1,452
Foreclosed assets
2,637
3,278
Goodwill
29,322
Core deposit intangible assets, net
1,210
1,943
Mortgage servicing rights, at fair value
10,440
7,994
Investments in unconsolidated subsidiaries
1,165
Accrued interest receivable
16,881
14,901
Other assets
48,182
17,408
Total assets
4,213,324
4,314,254
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing
1,017,710
1,087,659
Interest-bearing
2,625,733
2,650,526
Total deposits
3,643,443
3,738,185
Securities sold under agreements to repurchase
48,130
61,256
Federal Home Loan Bank advances
60,000
Subordinated notes
39,376
39,316
Junior subordinated debentures issued to capital trusts
37,763
37,714
Other liabilities
25,539
25,902
Total liabilities
3,854,251
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 28,752,626 at 2022 and 28,986,061 at 2021
293
Surplus
222,436
220,891
Retained earnings
223,495
194,132
Accumulated other comprehensive income (loss)
(77,462)
1,471
Treasury stock at cost, 555,865 shares at 2022 and 290,486 at 2021
(9,689)
(4,906)
Total stockholders’ equity
359,073
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 September 30,
Nine Months Ended September 30,
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable
29,855
25,604
84,504
76,016
Federally tax exempt
842
572
2,183
1,722
Securities:
6,635
4,632
16,947
12,323
1,207
1,103
3,385
3,383
Interest-bearing deposits in bank
458
190
1,037
385
Other interest and dividend income
17
14
50
39
Total interest and dividend income
39,014
32,115
108,106
93,868
INTEREST EXPENSE
Deposits
587
564
1,662
1,821
9
26
23
Borrowings
85
470
1,409
473
357
1,231
1,069
Total interest expense
1,624
1,400
4,415
4,324
Net interest income
37,390
30,715
103,691
89,544
PROVISION FOR LOAN LOSSES
386
(1,667)
(53)
(7,234)
Net interest income after provision for loan losses
37,004
32,382
103,744
96,778
NONINTEREST INCOME
Card income
2,569
2,509
7,687
7,216
Wealth management fees
2,059
2,036
6,670
6,013
Service charges on deposit accounts
1,677
5,371
4,364
Mortgage servicing
697
699
2,016
2,095
Mortgage servicing rights fair value adjustment
351
40
2,446
1,425
Gains on sale of mortgage loans
354
1,257
1,267
4,919
Unrealized gains (losses) on equity securities
(107)
28
(447)
74
Gains (losses) on foreclosed assets
(225)
(14)
(192)
126
Gains (losses) on other assets
(31)
(672)
119
(719)
Income on bank owned life insurance
41
122
Other noninterest income
599
832
1,769
2,461
Total noninterest income
8,234
8,392
26,828
27,974
NONINTEREST EXPENSE
Salaries
12,752
11,835
38,489
36,486
Employee benefits
1,771
1,455
6,199
4,549
Occupancy of bank premises
1,979
1,610
5,780
5,011
Furniture and equipment
668
657
1,843
1,883
Data processing
1,631
1,767
5,274
5,176
Marketing and customer relations
880
883
2,936
2,291
Amortization of intangible assets
243
252
733
799
FDIC insurance
302
279
888
763
Loan collection and servicing
336
400
771
1,098
97
242
260
704
Other noninterest expense
3,339
2,787
8,824
8,105
Total noninterest expense
23,998
22,167
71,997
66,865
INCOME BEFORE INCOME TAX EXPENSE
21,240
18,607
58,575
57,887
INCOME TAX EXPENSE
5,613
4,892
15,259
15,210
NET INCOME
15,627
13,715
43,316
42,677
EARNINGS PER SHARE - BASIC
0.54
0.50
1.50
1.56
EARNINGS PER SHARE - DILUTED
1.49
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
28,787,662
27,340,926
28,887,757
27,377,809
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
OTHER COMPREHENSIVE LOSS
Unrealized losses on debt securities available-for-sale
(35,358)
(5,676)
(112,931)
(19,950)
Reclassification adjustment for amortization of net unrealized losses on debt securities transferred to held-to-maturity
504
195
1,234
426
Unrealized gains (losses) on derivative instruments
374
(8)
1,117
173
Reclassification adjustment for net settlements on derivative instruments
105
177
306
Total other comprehensive loss, before tax
(34,466)
(5,384)
(110,403)
(19,045)
Income tax benefit
(9,824)
(1,535)
(31,470)
(5,429)
Total other comprehensive loss
(24,642)
(3,849)
(78,933)
(13,616)
TOTAL COMPREHENSIVE (LOSS) INCOME
(9,015)
9,866
(35,617)
29,061
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Common Stock
Other
Total
Shares
Retained
Comprehensive
Treasury
Stockholders’
Outstanding
Amount
Earnings
Income (Loss)
Stock
Equity
Balance, June 30, 2022
28,831,197
222,087
212,506
(52,820)
(8,257)
373,809
Net income
Other comprehensive loss
Stock-based compensation
349
Repurchase of common stock
(78,571)
(1,432)
Cash dividends and dividend equivalents ($0.16 per share)
(4,638)
Balance, September 30, 2022
28,752,626
Balance, June 30, 2021
27,355,053
275
191,185
175,328
8,386
(1,980)
373,194
228
(20,625)
(343)
Cash dividends and dividend equivalents ($0.15 per share)
(4,124)
Balance, September 30, 2021
27,334,428
191,413
184,919
4,537
(2,323)
378,821
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
Balance, December 31, 2021
28,986,061
1,602
Issuance of common stock upon vesting of restricted stock units, net of tax withholdings
31,944
(57)
(265,379)
(4,783)
Cash dividends and dividend equivalents ($0.48 per share)
(13,953)
Balance, December 31, 2020
27,457,306
190,875
154,614
18,153
363,917
538
Issuance of common stock upon vesting of restricted stock units
20,225
(143,103)
Cash dividends and dividend equivalents ($0.45 per share)
(12,372)
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
2,296
Provision for loan losses
Net amortization of debt securities
5,337
5,205
Deferred income tax (benefit) expense
(245)
2,409
Net accretion of discount and deferred loan fees on loans
(4,320)
(9,529)
Net unrealized loss (gain) on equity securities
447
(74)
Net loss on disposals of bank premises and equipment
33
Net gain on sales of bank premises held for sale
(187)
Impairment losses on bank premises held for sale
61
652
Net gain on sales of foreclosed assets
(118)
(321)
Write-down of foreclosed assets
310
Amortization of intangibles
Increase in mortgage servicing rights
(2,446)
(1,425)
Amortization of discount and issuance costs on subordinated notes and debentures
109
Amortization of premium on interest-bearing time deposits with banks
Amortization of premium on time deposits
(164)
Mortgage loans originated for sale
(50,467)
(152,036)
Proceeds from sale of mortgage loans
54,379
163,086
Net gain on sale of mortgage loans
(1,267)
(4,919)
Increase in cash surrender value of bank owned life insurance
(122)
(Increase) decrease in accrued interest receivable
879
Decrease in other assets
289
1,639
Increase (decrease) in other liabilities
1,583
(18,284)
Net cash provided by operating activities
49,106
26,696
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of interest-bearing time deposits with banks
485
Proceeds from paydowns, maturities, and calls of debt securities
129,629
149,659
Purchase of securities
(368,794)
(398,387)
Net (increase) decrease in loans
(74,769)
104,376
Purchase of restricted stock
(1,311)
(241)
Purchases of bank premises and equipment
(683)
(773)
Proceeds from sales of bank premises and equipment
Proceeds from sales of bank premises held for sale
1,297
Proceeds from sales of foreclosed assets
476
Net cash used in investing activities
(313,662)
(143,766)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in deposits
(94,578)
289,022
Net (decrease) increase in repurchase agreements
(13,126)
2,221
Net increase in Federal Home Loan Bank advances
Taxes paid related to the vesting of restricted stock units
Cash dividends and dividend equivalents paid
Net cash (used in) provided by financing activities
(66,497)
276,548
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(331,053)
159,478
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
312,451
CASH AND CASH EQUIVALENTS AT END OF PERIOD
471,929
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest
4,851
4,992
Cash paid for income taxes
13,805
17,295
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Transfers of loans to foreclosed assets
27
4,856
Sales of foreclosed assets through loan origination
Transfers of bank premises and equipment to bank premises held for sale
1,345
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ACCOUNTING POLICIES
Basis of Presentation
HBT Financial, Inc. (“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 (“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 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.
11
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
Town and Country Financial Corporation
On August 23, 2022, HBT Financial and Town and Country Financial Corporation (“Town and Country”), the holding company for Town and Country Bank, jointly announced the signing of a merger agreement pursuant to which HBT Financial will acquire Town and Country and Town and Country Bank. The acquisition will further enhance HBT Financial’s footprint in Central Illinois and expand HBT Financial’s footprint into metro-east St. Louis.
Under the terms of the merger agreement, total consideration consists of approximately 3.4 million shares of HBT Financial’s common stock and $38.0 million in cash. Town and Country shareholders may elect to receive either (i) 1.9010 shares of HBT Financial’s common stock for each share of Town and Country, or (ii) $35.66 per share in cash, or (iii) a combination of cash and stock consideration, subject to adjustment and to the election and proration provisions in the merger agreement. Based upon the closing price of HBT Financial common stock of $18.76 on August 22, 2022, the implied per share purchase price is $35.66 with an aggregate transaction value of approximately $101.4 million. Upon closing of the transaction, shareholders of Town and Country are expected to hold approximately 10.5% of HBT Financial’s outstanding common stock.
The transaction is expected to close in the first quarter of 2023, subject to customary closing conditions, approval of Town and Country’s shareholders, and regulatory approvals.
During the three months ended September 30, 2022, HBT Financial incurred $0.5 million in pre-tax acquisition expenses related to the planned acquisition of Town and Country, comprised of legal and professional fees included in other noninterest expense in the consolidated statements of income.
12
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 provided an opportunity to utilize Heartland Bank’s excess liquidity at the time of acquisition 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, has provided an opportunity to expand NXT Bank’s customer relationships.
During the three and nine months ended September 30, 2021, HBT Financial incurred $0.4 million and $0.5 million, respectively, in pre-tax acquisition expenses related to the acquisition of NXT, comprised primarily of professional fees and data processing expense. These expenses are reflected in noninterest expense on the consolidated statements of income. There were no acquisition expenses related to the acquisition of NXT during the three and nine months ended September 30, 2022.
13
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.
The following table provides the pro forma information for the results of operations for the three and nine months ended September 30, 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
Nine Months Ended
September 30, 2021
Total revenues (net interest income and noninterest income)
41,296
124,460
14,093
44,285
Earnings per share - basic
0.48
1.52
Earnings per share - diluted
1.51
15
NOTE 3 – SECURITIES
Debt Securities
The amortized cost and fair values of debt securities, with gross unrealized gains and losses, are as follows:
September 30, 2022
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Available-for-sale:
U.S. Treasury
169,895
(16,323)
153,572
U.S. government agency
61,428
(4,406)
57,023
Municipal
279,711
(37,804)
241,911
Mortgage-backed:
Agency residential
223,738
20
(18,851)
204,907
Agency commercial
154,677
(17,302)
137,376
Corporate
62,695
16
(3,760)
58,951
Total available-for-sale
952,144
42
(98,446)
Held-to-maturity:
88,418
(10,342)
78,076
42,844
(1,357)
41,537
105,330
(6,491)
98,839
310,102
(46,862)
263,240
Total held-to-maturity
(65,052)
481,692
Total debt securities
1,498,838
92
(163,498)
1,335,432
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
(2,048)
164,061
63,141
1,638
(296)
64,483
938,360
12,796
(8,988)
12,349
(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
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
March 31, 2021
Amortized
Cost
78,841
71,048
7,593
7,323
8,175
7,651
8,776
8,536
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.
As of September 30, 2022 and December 31, 2021, the Bank had debt securities with a carrying value of $413.4 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 49% of the municipal portfolio consists of debt securities issued by municipalities located in Illinois as of September 30, 2022. Approximately 81% of such debt securities were general obligation issues as of September 30, 2022.
The amortized cost and fair value of debt securities by contractual maturity, as of September 30, 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
12,575
12,506
2,492
2,494
Due after 1 year through 5 years
235,438
220,181
25,934
24,801
Due after 5 years through 10 years
250,903
216,108
79,440
71,686
Due after 10 years
74,813
62,662
23,396
20,632
The following tables present gross unrealized losses and fair value of debt securities, aggregated by category and length of time that individual debt securities have been in a continuous unrealized loss position, as of September 30, 2022 and December 31, 2021:
Investments in a Continuous Unrealized Loss Position
Less than 12 Months
12 Months or More
UnrealizedLoss
(15,245)
144,691
(1,078)
8,881
(3,831)
51,799
(575)
3,394
55,193
(16,557)
157,183
(21,247)
82,613
239,796
(15,072)
176,467
(3,779)
24,808
201,275
(9,292)
89,378
(8,010)
45,474
134,852
(2,527)
53,213
(1,233)
3,730
56,943
(62,524)
672,731
(35,922)
168,900
841,631
(2,316)
20,176
(8,026)
57,900
35,066
(6,320)
97,876
(171)
963
(24,304)
150,113
(22,558)
113,127
(34,297)
303,231
(30,755)
171,990
475,221
(96,821)
975,962
(66,677)
340,890
1,316,852
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
(289)
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
18
As of September 30, 2022, there were 183 debt securities in an unrealized loss position for a period of twelve months or more, and 641 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.
There were no sales of debt securities during the three and nine months ended September 30, 2022 and 2021.
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
2,142
Cumulative net unrealized losses
(146)
(165)
Carrying value
2,092
Cumulative net unrealized gains (losses)
301
As of September 30, 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.
19
There were no sales of equity securities during the three and nine months ended September 30, 2022 and 2021. Unrealized gains (losses) on equity securities were as follows during the three and nine months ended September 30, 2022:
Readily determinable fair value
No readily determinable fair value
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Major categories of loans are summarized as follows:
Commercial and industrial
240,671
286,946
Agricultural and farmland
245,234
247,796
Commercial real estate - owner occupied
226,524
234,544
Commercial real estate - non-owner occupied
718,089
684,023
Multi-family
260,630
263,911
Construction and land development
364,290
298,048
One-to-four family residential
328,667
327,837
Municipal, consumer, and other
195,823
156,584
Paycheck Protection Program (PPP) loans (included above)
65
28,404
913
171
Total PPP loans
29,488
The following tables detail activity in the allowance for loan losses for the three and nine months ended September 30:
Commercial
Municipal,
Agricultural
Real Estate
Construction
One-to-four
Consumer,
and
Owner
Non-owner
and Land
Family
Three Months Ended September 30, 2022
Industrial
Farmland
Occupied
Multi-Family
Development
Residential
Allowance for loan losses:
2,981
924
1,224
6,611
1,375
4,059
1,696
5,864
24,734
(83)
(65)
268
(52)
316
(78)
66
Charge-offs
(17)
(18)
(222)
Recoveries
60
91
162
2,984
841
1,160
6,882
1,323
4,376
1,660
5,834
25,060
Three Months Ended September 30, 2021
2,717
781
1,946
9,825
2,009
3,924
1,520
3,785
26,507
(26)
(395)
(710)
(228)
413
(499)
(384)
(135)
(48)
(95)
(278)
114
135
299
2,858
755
1,551
9,121
1,781
4,338
1,108
3,349
24,861
Nine Months Ended September 30, 2022
2,440
845
1,840
8,145
1,263
4,914
1,311
3,178
23,936
(189)
(4)
(781)
(1,536)
(539)
93
2,843
(22)
(67)
(426)
(515)
101
273
323
239
1,692
Consumer
Nine Months Ended September 30, 2021
3,929
793
3,141
11,251
1,957
4,232
1,801
4,734
31,838
(1,062)
(38)
(1,590)
(2,149)
(176)
(742)
(1,313)
(430)
(161)
(875)
421
270
210
212
1,132
21
The following tables present the recorded investments in loans and the allowance for loan losses by category:
Loan balances:
Collectively evaluated for impairment
237,839
244,236
210,461
675,121
260,060
361,305
315,209
183,181
2,487,412
Individually evaluated for impairment
2,702
11,607
31,553
2,007
8,427
12,622
69,303
Acquired with deteriorated credit quality
130
613
4,456
11,415
570
978
5,031
23,213
2,826
930
4,416
1,320
4,374
1,619
2,342
18,668
158
208
2,465
3,492
6,362
22
30
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
2,482
6,133
29,070
2,253
1,480
5,138
1,259
4,895
1,099
1,302
18,271
187
327
2,999
1,875
5,598
67
The following tables present loans individually evaluated for impairment by category of loans:
Unpaid
Principal
Recorded
Related
Balance
Investment
Allowance
With an allowance recorded:
256
734
14,359
14,348
350
340
8,223
8,201
23,922
23,879
With no related allowance:
2,460
11,030
10,873
17,284
17,205
2,107
9,403
8,087
4,455
4,421
47,124
45,424
Total loans individually evaluated for impairment:
2,716
11,764
31,643
9,753
12,678
71,046
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
24
The following tables present the average recorded investment and interest income recognized for loans individually evaluated for impairment by category of loans:
Average
Interest
Income
Recognized
258
1,925
3,192
45
185
15,136
194
1,827
8,254
8,641
24,041
269
30,721
3,894
7,137
115
425
11,651
141
6,551
81
17,220
369
15,283
2,010
57
2,439
8,119
99
5,713
4,457
44
4,635
47,776
756
42,143
4,152
46
9,062
12,390
152
9,743
31,661
554
30,419
295
8,468
7,540
63
12,711
110
13,276
71,817
1,025
72,864
693
25
272
2,025
84
55
3,060
132
14,631
556
17,001
741
513
2,209
64
8,368
151
8,722
25,081
786
33,868
1,029
12,793
397
5,222
205
305
384
11,524
388
16,894
907
8,880
580
2,012
2,060
8,341
240
6,427
142
4,493
98
4,695
56,362
2,143
35,464
13,065
410
7,247
494
12,821
443
10,276
405
31,525
1,463
25,881
838
2,801
54
8,854
251
8,636
206
12,861
249
13,417
184
81,443
2,929
69,332
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
240,391
191
226,424
100
717,085
1,004
362,367
1,429
325,926
1,159
1,560
195,651
113
59
2,573,708
2,992
3,206
247,772
234,441
103
683,029
823
297,465
519
325,780
383
32
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
229,239
8,730
230,636
13,601
997
202,250
13,465
10,809
673,481
10,336
34,272
255,665
4,965
361,954
329
313,608
6,074
8,985
182,902
298
12,623
2,449,735
57,798
72,395
267,088
5,114
221,898
25,213
685
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 new troubled debt restructurings during the three and nine months ended September 30, 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 and nine months ended September 30, 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 September 30, 2022 and December 31, 2021, the Company had $3.1 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 September 30, 2022, the Company had no loans that were granted a payment modification due to a COVID-19 related financial hardship which had not returned to regular payments. As of December 31, 2021, the Company had $0.2 million of loans that were granted a payment modification due to a COVID-19 related financial hardship and had not returned to regular payments. Substantially all modifications were in the form of a three-month interest-only period or a one-month payment deferral. Some borrowers received more than one loan payment modification.
As of September 30, 2022 and December 31, 2021, the Company pledged loans totaling $824.9 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
537
1,350
1,397
Reclassification from non-accretable difference
283
280
500
433
Accretion income
(58)
(86)
(151)
(286)
Ending balance
762
1,544
NOTE 5 – LOAN SERVICING
Mortgage loans serviced for others, which are not included in the accompanying consolidated balance sheets, amounted to $976.1 million and $1.04 billion as of September 30, 2022 and December 31, 2021, respectively. Activity in mortgage servicing rights is as follows:
10,089
7,319
5,934
Capitalized servicing rights
144
241
451
994
Fair value adjustment:
Attributable to payments and principal reductions
(362)
(451)
(1,048)
(1,408)
Attributable to changes in valuation inputs and assumptions
569
250
3,043
1,839
Total fair value adjustment
207
(201)
1,995
431
7,359
29
NOTE 6 – FORECLOSED ASSETS
Foreclosed assets activity is as follows:
2,891
7,757
4,168
Transfers from loans
Proceeds from sales
(29)
(476)
(1,583)
Sales through loan origination
(252)
Net gain on sales
108
118
321
Direct write-downs
(310)
(195)
7,315
Gains (losses) on foreclosed assets includes the following:
There were no foreclosed one-to-four family residential real estate properties held as of September 30, 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 September 30, 2022, there were 4 one-to-four family residential real estate loans in the process of foreclosure totaling $0.4 million. 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
1,131,284
1,105,949
Money market
584,202
583,198
Savings
641,139
633,171
Time
269,108
328,208
Total interest-bearing deposits
Money market deposits include $4.2 million of brokered deposits as of December 31, 2021. There were no brokered deposits as of September 30, 2022. Money market deposits also include $5.7 million and $6.9 million of reciprocal transaction deposits as of September 30, 2022 and December 31, 2021, respectively. Time deposits include $0.7 million and $0.9 million of reciprocal time deposits as of September 30, 2022, and December 31, 2021, respectively.
The aggregate amounts of time deposits in denominations of $250 thousand or more amounted to $25.8 million and $59.5 million as of September 30, 2022 and December 31, 2021, respectively. The aggregate amounts of time deposits in denominations of $100 thousand or more amounted to $89.9 million and $133.1 million as of September 30, 2022 and December 31, 2021, respectively.
The components of interest expense on deposits are as follows:
129
430
373
203
96
434
53
155
291
643
1,034
Total interest expense on deposits
31
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
17,000
614
Fair value recorded in other liabilities
(680)
As of September 30, 2022, the interest rate swap agreements designated as cash flow hedges had contractual maturities between 2024 and 2025. As of September 30, 2022, counterparties had cash pledged and held on deposit by the Company of $0.6 million. As of December 31, 2021, the Company had cash pledged and held on deposit at counterparties of $0.8 million.
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
Designated as cash flow hedges:
Junior subordinated debentures interest expense
(105)
(177)
(306)
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 interest rate 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
112,041
8,622
Interest rate swaps with a financial institution counterparty
109,468
7,431
3,880
75
Total fair value recorded in other assets
115,921
8,697
Fair value recorded in other liabilities:
(7,431)
(75)
(8,622)
Total fair value recorded in other liabilities
(8,697)
As of September 30, 2022, the interest rate swap agreements not designated as hedging instruments had contractual maturities between 2022 and 2042. As of December 31, 2021, the carrying value of debt securities pledged and held in safekeeping at a financial institution counterparty was $7.5 million.
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
5,209
15,303
12,281
Gross losses
(5,209)
(1,843)
(15,303)
(12,281)
Net gains (losses)
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
(42,061)
(10,656)
(103)
Other comprehensive income (loss) before reclassifications
(34,984)
518
Other comprehensive income (loss), before tax
Income tax expense (benefit)
(10,079)
111
Other comprehensive income (loss), after tax
(25,279)
360
277
(67,340)
(10,296)
174
13,260
(3,840)
(1,034)
Other comprehensive loss before reclassifications
(5,684)
300
Income tax expense
(1,618)
56
(4,058)
139
70
9,202
(3,701)
(964)
34
5,736
(3,514)
(751)
Transfer from available-for-sale to held-to-maturity
7,664
(7,664)
(111,814)
1,411
1,294
(32,191)
352
(80,740)
882
925
19,578
(1,307)
3,887
(3,887)
(19,777)
732
479
(5,687)
136
(14,263)
304
343
Reclassifications from accumulated other comprehensive income (loss) for unrealized gains (losses) on debt securities available-for-sale are included in gains (losses) on sales of 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.
35
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
(25)
(81)
Numerator for earnings per share - basic and diluted
15,610
13,690
43,265
42,596
Denominator:
Weighted average common shares outstanding
Dilutive effect of outstanding restricted stock units
72,643
13,921
56,761
11,412
Weighted average common shares outstanding, including all dilutive potential shares
28,860,305
27,354,847
28,944,518
27,389,221
Earnings per share - Basic
Earnings per share - Diluted
36
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
230
153
1,072
415
Performance restricted stock units
530
123
Total awards classified as equity
Stock appreciation rights
51
(87)
Total stock-based compensation expense
1,637
581
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, and 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.
37
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 nine months ended September 30, 2022 and 2021, the total grant date fair value of the restricted stock units granted was $0.9 million and $0.8 million, respectively, based on the grant date closing prices. The total intrinsic value of restricted stock that vested during the nine months ended September 30, 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
120,631
17.98
99,597
17.37
Granted
Vested
Forfeited
(1,328)
18.35
119,303
109,244
17.27
71,000
18.98
46,312
19.11
50,347
15.72
(34,925)
17.26
(20,225)
18.86
(1,525)
18.11
As of September 30, 2022, unrecognized compensation cost related to the non-vested restricted stock units was $1.1 million. This cost is expected to be recognized over the weighted average remaining service period of 1.7 years.
38
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 nine months ended September 30, 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:
Performance
62,067
17.02
28,697
15.53
Nine months ended September 30,
38,344
23,723
19.14
As of September 30, 2022, unrecognized compensation cost related to non-vested performance restricted stock units was $0.5 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 1.7 years.
Stock Appreciation Rights
A stock appreciation right grants a participant the right to receive an amount of cash, the value of which equals the appreciation in the Company’s stock price between the grant date and the exercise date. Stock appreciation rights are classified as liabilities. The liability is based on an option-pricing model used to estimate the fair value of the stock appreciation rights. Compensation cost for non-vested stock appreciation rights is recognized on a straight line basis over the service period of the entire award. The non-vested stock appreciation rights vest in four equal annual installments beginning on the first anniversary of the grant date.
The following is a summary of stock appreciation rights activity:
StockAppreciationRightsOutstanding
WeightedAverageGrant DateAssigned Value
91,800
16.32
97,920
Exercised
Expired
StockAppreciationRights
105,570
(6,120)
(1,530)
A further summary of stock appreciation rights as of September 30, 2022, is as follows:
Weighted Average
Remaining
Grant Date Assigned Values
Exercisable
Contractual Term
$ 16.32
85,680
6.5
years
As of September 30, 2022, unrecognized compensation cost related to non-vested stock appreciation rights was $33 thousand.
As of September 30, 2022 and December 31, 2021, the liability recorded for outstanding stock appreciation rights was $0.5 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
3.97
%
1.40
Expected volatility
36.17
35.52
Expected life (in years)
6.9
7.7
Expected dividend yield
3.53
3.20
As of September 30, 2022, the liability recorded for previously exercised stock appreciation rights was $0.5 million, which will be paid in two remaining annual installments in 2023 and 2024. 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 September 30, 2022 and December 31, 2021, the capital conservation buffer was 2.5% of risk-weighted assets.
As of September 30, 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.
507,277
16.34
248,395
8.00
N/A
Heartland Bank and Trust Company
484,065
15.60
248,216
310,271
10.00
Tier 1 Capital (to Risk Weighted Assets)
442,841
14.26
186,296
6.00
459,005
14.79
186,162
Common Equity Tier 1 Capital (to Risk Weighted Assets)
406,243
13.08
139,722
4.50
139,622
201,676
6.50
Tier 1 Capital (to Average Assets)
10.44
169,611
4.00
10.83
169,515
211,894
5.00
479,320
16.88
227,115
452,162
15.94
226,950
283,688
416,068
14.66
170,336
428,226
15.09
170,213
379,519
13.37
127,752
127,659
184,397
9.84
169,171
10.13
169,070
211,337
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 for the year ended December 31, 2021, filed with the SEC on March 11, 2022. There were no transfers between levels during the three and nine months ended September 30, 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
8,045
Derivative financial liabilities
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 September 30, 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 (loss). 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 (loss). 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)
5.5% to 59.7% (8.2%)
Discount rate
9.0% to 11.5% (9.3%)
7.0% to 88.9% (11.7%)
9.0% to 11.0% (9.0%)
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as there is evidence of impairment or a change in the amount of previously recognized impairment.
The following tables present the balances of the assets measured at fair value on a nonrecurring basis:
Collateral-dependent impaired loans
17,517
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.
47
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
Debt securities held-to-maturity
Level 2
Level 3
Loans, net
2,548,050
2,494,686
Financial liabilities:
Time deposits
260,220
327,779
37,667
41,602
Junior subordinated debentures
36,210
33,640
Accrued interest payable
607
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.
49
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
667,788
609,947
Standby letters of credit
16,918
12,960
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
In the normal course of business, the Company, or its subsidiaries, are involved in various legal proceedings. In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company's consolidated financial statements.
DeBaere, et al v. Heartland Bank and Trust Company
The Bank is a defendant in a purported class action lawsuit filed in June 2020, in the Circuit Court of Cook County, Illinois, DeBaere, et al v. Heartland Bank and Trust Company. The plaintiff, a customer of the Bank, alleges that the Bank breached its contract with the plaintiff by (1) charging multiple insufficient funds fees or overdraft fees on a single customer-initiated transaction, and (2) charging overdraft fees for transactions that were authorized on a positive account balance, but when settled, settled into a negative balance.
The Bank intends to vigorously defend the lawsuit. The Company does not believe a loss is probable at this time, as that term is used in assessing loss contingencies. Accordingly, consistent with the authoritative guidance in the evaluation of contingencies, an accrual related to this matter has not been recorded. However, an unfavorable outcome is reasonably possible, and the Company would not characterize the chance of any loss as “remote.” Given the early stage of this case, the Company cannot yet offer an opinion on the estimated range of any possible loss, in the event of an unfavorable opinion.
Miller, et al v. State Bank of Lincoln and Heartland Bank and Trust Company
The Bank is a defendant in a purported class action lawsuit filed in May 2020, in the Circuit Court of Logan County, Illinois, Miller, et al v. State Bank of Lincoln and the Bank. The plaintiff, a customer of State Bank of Lincoln, which previously merged with the Bank, alleges that the Bank breached its contract with the plaintiff by charging multiple insufficient funds fees or overdraft fees on a single customer-initiated transaction.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to HBT Financial, Inc. and its subsidiaries.
The following is management’s discussion and analysis of the financial condition as of September 30, 2022 (unaudited), as compared with December 31, 2021, and the results of operations for the three and nine months ended September 30, 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 and nine months ended September 30, 2022 and 2021 are not necessarily indicative of results to be attained for the year ended December 31, 2022 or 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 September 30, 2022, the Company had total assets of $4.2 billion, loans held for investment of $2.6 billion, and total deposits of $3.6 billion.
Market Area
We currently operate 58 full-service branches. 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 our loan and deposit balances by geographic region.
Total loans
Illinois by metropolitan and micropolitan statistical areas
Bloomington-Normal
495,896
527,161
Champaign-Urbana
217,792
191,646
Chicago
1,272,588
1,196,605
Lincoln
79,564
87,153
Ottawa-Peru
90,418
101,117
Peoria
124,094
123,143
Total Illinois
2,280,352
2,226,825
Iowa
299,576
272,864
851,612
887,587
218,068
203,899
1,257,235
1,237,486
187,056
203,098
383,932
407,156
606,430
610,155
3,504,333
3,549,381
139,110
188,804
Pending Town and Country Acquisition
On August 23, 2022, HBT Financial and Town and Country Financial Corporation (“Town and Country”), the holding company for Town and Country Bank, jointly announced the signing of a merger agreement pursuant to which HBT Financial will acquire Town and Country and Town and Country Bank. The acquisition will further enhance HBT Financial’s footprint in Central Illinois and expand HBT Financial’s footprint into metro-east St. Louis. The acquisition is expected to close in the first quarter of 2023, subject to Town and Country shareholder approval, regulatory approvals, and other customary closing conditions. During the three months ended September 30, 2022, HBT Financial incurred $0.5 million in pre-tax acquisition expenses related to the planned acquisition of Town and Country, comprised of legal and professional fees included in other noninterest expense in the consolidated statements of income.
NXT Bancorporation, Inc. Acquisition
On October 1, 2021, HBT Financial completed its acquisition of NXT Bancorporation, Inc. (“NXT”), the holding company for NXT Bank. The acquisition expanded HBT Financial’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 Financial 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 HBT Financial’s existing excess liquidity to replace NXT’s higher cost funding. Additionally, our broader range of products and services and greater ability to meet larger borrowing needs provides an opportunity to expand NXT customer relationships.
We did not incur expenses related to the acquisition of NXT during the three and nine months ended September 30, 2022. We incurred the following pre-tax acquisition expenses related to the acquisition of NXT during the three and nine months ended September 30, 2021:
150
157
Legal fees and other noninterest expense
225
375
Total NXT acquisition-related expenses
380
Branch Rationalization Plan
In April 2021, the Company made plans to close or consolidate six branches. One branch was consolidated during the second quarter of 2021, and the remaining five branches were closed during the third quarter of 2021. The Company estimated annual pre-tax cost savings, net of associated revenue impacts, related to the branch rationalization plan to be approximately $1.1 million.
The Company incurred the following pre-tax branch closure expenses during the three and nine months ended September 30, 2021:
(648)
(682)
(5)
Total branch closure costs
644
748
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 outstanding PPP loans totaled $0.1 million as of September 30, 2022.
Income recognition for the fees collected at origination, net of associated origination costs, is deferred and recognized over the loan term on a level yield basis. Recognition of net deferred origination fees is accelerated upon loan forgiveness or repayment prior to contractual maturity. Net deferred origination fees on PPP loans recognized as taxable loan interest income totaled $0.1 million and $3.0 million during the three months ended September 30, 2022 and 2021, respectively, and $1.5 million and $7.6 million during the nine months ended September 30, 2022 and 2021, respectively.
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 (including the effect of inflationary pressures and supply chain constraints), 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 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, FinTechs 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
Adjusted net income (1)
15,856
14,479
41,919
42,680
Net interest income (tax-equivalent basis) (1) (2)
38,064
31,223
105,492
91,058
Share and Per Share Information
Adjusted earnings per share - Diluted (1)
0.55
0.53
1.45
Weighted average shares of common stock outstanding
Summary Ratios
Net interest margin *
3.65
3.18
3.36
3.19
Net interest margin (tax-equivalent basis) * (1) (2)
3.72
3.23
3.41
3.24
Yield on loans *
4.91
4.86
4.66
4.69
Yield on interest-earning assets *
3.81
3.33
3.50
3.34
Cost of interest-bearing liabilities *
0.23
0.22
0.21
Cost of total deposits *
0.06
0.07
Efficiency ratio
52.07
56.04
54.60
56.22
Efficiency ratio (tax-equivalent basis) (1) (2)
51.31
55.32
53.86
55.50
Return on average assets *
1.47
1.37
1.35
Return on average stockholders' equity *
16.27
14.29
14.91
15.42
Return on average tangible common equity * (1)
17.70
15.32
16.20
16.59
Adjusted return on average assets * (1)
1.31
Adjusted return on average stockholders' equity * (1)
16.51
15.08
14.43
15.43
Adjusted return on average tangible common equity * (1)
17.96
16.18
15.67
* Annualized measure.
Comparison of the Three Months Ended September 30, 2022 to the Three Months Ended September 30, 2021
For the three months ended September 30, 2022, net income was $15.6 million, increasing by $1.9 million, or 13.9%, when compared to net income for the three months ended September 30, 2021. Notable changes include the following:
Comparison of the Nine Months Ended September 30, 2022 to the Nine Months Ended September 30, 2021
For the nine months ended September 30, 2022, net income was $43.3 million, increasing by $0.6 million, or 1.5%, when compared to net income for the nine months ended September 30, 2021. Notable changes include the following:
Net Interest Income
Net interest income equals the excess of interest income on interest earning assets (including discount accretion on acquired loans plus certain loan fees) 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.
58
The following tables set forth average balances, average yields and costs, and certain other information for the three and nine months ended September 30, 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 *
2,481,920
30,697
2,135,476
26,176
Securities
1,470,092
7,842
2.12
1,180,513
5,735
1.93
Deposits with banks
105,030
1.73
513,158
0.15
2.25
2.00
Total interest-earning assets
4,059,978
3,831,886
(24,717)
(26,470)
Noninterest-earning assets
173,461
159,635
4,208,722
3,965,051
1,137,072
0.05
1,020,216
577,388
0.14
510,183
649,752
0.03
608,436
271,870
0.27
275,224
0.42
2,636,082
0.09
2,414,059
50,427
49,923
11,967
2.80
326
0.46
39,365
4.73
39,285
4.74
37,755
4.97
37,688
3.76
Total interest-bearing liabilities
2,775,596
2,541,281
1,031,407
1,016,384
Noninterest-bearing liabilities
20,736
26,523
3,827,739
3,584,188
380,983
380,863
Net interest income/Net interest margin (1)
Tax-equivalent adjustment (2)
674
508
Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) (2) (3)
Net interest rate spread (4)
3.58
3.11
Net interest-earning assets (5)
1,284,382
1,290,605
Ratio of interest-earning assets to interest-bearing liabilities
1.46
Cost of total deposits
2,485,501
86,687
2,217,463
77,738
1,405,245
20,332
1,102,808
15,706
1.90
237,646
0.58
432,971
0.12
2,829
2.36
2,655
1.95
4,131,221
3,755,897
(24,467)
(29,069)
172,243
157,287
4,278,997
3,884,115
1,146,635
1,012,557
585,815
0.10
498,441
653,659
584,226
289,000
0.30
286,685
2,675,109
0.08
2,381,909
51,503
47,827
4,344
2.67
0.43
39,345
4.79
39,265
4.80
37,738
4.36
37,671
3.79
2,808,039
2,507,093
1,060,566
976,884
21,883
30,205
3,890,488
3,514,182
388,509
369,933
1,514
3.29
1,323,182
1,248,804
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
29,308
22,324
4.14
81,195
67,096
4.04
Loan fees (excluding PPP loans)
1,030
0.16
631
3,309
0.18
2,609
PPP loan fees
106
0.02
3,017
0.56
1,487
7,604
Accretion of acquired loan discounts
253
0.04
204
696
429
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, net securities amortization, 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
2.86
2.31
2.63
2.39
Contractual interest on securities
9,570
0.94
7,387
0.77
25,669
0.83
20,911
0.75
Contractual interest on deposits with banks
0.01
0.11
0.31
Securities amortization, net
(1,728)
(0.17)
(1,652)
(5,337)
(5,205)
(0.19)
Total interest income
Interest expense:
Contractual interest on deposits
624
561
1,817
1,812
Contractual interest on other interest-bearing liabilities
985
694
2,467
2,088
145
131
424
Tax equivalent adjustment (1)
Net interest income (tax equivalent) (1) (2)
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 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:
4,283
238
4,521
9,350
(401)
8,949
1,506
601
4,372
254
4,626
(262)
(244)
896
5,528
1,371
6,899
13,481
757
14,238
Interest-bearing liabilities:
107
(100)
(104)
(399)
(391)
(159)
73
(1)
(3)
116
160
121
224
192
(101)
Change in net interest income
5,425
1,250
6,675
13,289
858
14,147
Net interest income for the three months ended September 30, 2022, was $37.4 million, increasing $6.7 million, or 21.7%, from the three months ended September 30, 2021. The increase is primarily attributable to higher average balances of interest-earnings assets following the NXT acquisition and a more favorable asset mix. These balance changes, as well as higher yields on interest-earning assets driven by recent increases in benchmark interest rates, more than offset a $2.9 million decrease in PPP loan fees recognized as loan interest income.
Net interest margin increased to 3.65% for the three months ended September 30, 2022 compared to 3.18% for the three months ended September 30, 2021. The increase was primarily attributable to a more favorable mix of interest-earnings assets as well as higher yields on interest-earning assets. Additionally, the contribution of PPP loan fees to net interest margin decreased to 1 basis point during the three months ended September 30, 2022 from 31 basis points during the three months ended September 30, 2021. This decrease was more than offset by an increase in contractual interest on loans, driven by recent increases in benchmark interest rates.
62
Net interest income for the nine months ended September 30, 2022, was $103.7 million, increasing $14.1 million, or 15.8%, from the nine months ended September 30, 2021. The increase is primarily attributable to higher average balances of interest-earning assets following the NXT acquisition and a more favorable asset mix. These balances changes more than offset a $6.1 million decrease in PPP loan fees recognized as loan interest income.
Net interest margin increased to 3.36% for the nine months ended September 30, 2022 compared to 3.19% for the nine months ended September 30, 2021. The contribution of PPP loans to net interest margin decreased to 5 basis points during the nine months ended September 30, 2022 from 27 basis points during the nine months ended September 30, 2021. This decrease was more than offset by an increase in contractual interest on loans, driven by recent increases in benchmark interest rates.
The quarterly net interest margins were as follows:
Three months ended:
March 31
3.08
3.25
June 30
3.14
September 30
December 31
3.17
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 0.25% and announced the FRB 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. Since March 2022, the FOMC has raised the target range for the federal funds rate several times, setting the target range for the federal funds rate to 3.75% to 4.00% at the November 2022 meeting, and indicated that the FRB will continue reducing its security holdings. Additionally, the FOMC indicated that it will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments in determining the pace of future increases in the target range.
As a result of these developments, market interest rates have risen which has led to improvements in our net interest margin. 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. Additionally, these recent increases in market interest rates have increased competition for deposits. As a result, we expect deposit costs to increase during the rest of 2022 and deposits balances may decrease and be replaced by higher cost funding sources, such as FHLB advances, brokered deposits, or other wholesale funding. Although funding costs are expected to increase during the remainder of 2022, such increased funding costs should be more than offset by continued increases in interest-earning asset yields resulting from the higher market interest rates.
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 provision for loan losses of $0.4 million during the three months ended September 30, 2022, compared to a negative provision for loan losses of $1.7 million during the three months ended September 30, 2021. The provision during the three months ended September 30, 2022 was primarily due to a $128.1 million increase in loans, resulting in a $1.1 million increase in general reserves. Mostly offsetting this increase was a $0.7 million decrease in specific reserves on loans individually evaluated for impairment.
The Company recorded a negative provision for loan losses of $0.1 million during the nine months ended September 30, 2022, compared to a negative provision for loan losses of $7.2 million during the nine months ended September 30, 2021. During the nine months ended September 30, 2022, net recoveries of $1.2 million were mostly offset by a $1.1 million increase in required reserves, which included a $0.8 million increase in specific reserves on loans individually evaluated for impairment.
Noninterest Income
The following table sets forth the major categories of noninterest income for the periods indicated:
$ Change
471
1,007
(2)
(79)
311
1,021
(903)
(3,652)
(521)
(211)
(318)
641
(233)
(692)
(158)
(1,146)
Total noninterest income for the three months ended September 30, 2022, was $8.2 million, a decrease of $0.2 million, or 1.9%, from the three months ended September 30, 2021. Notable changes in noninterest income include the following:
Total noninterest income for the nine months ended September 30, 2022, was $26.8 million, a decrease of $1.1 million, or 4.1%, from the nine months ended September 30, 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:
917
2,003
1,650
769
(40)
(136)
645
(9)
(66)
125
(64)
(327)
(145)
(444)
552
719
1,831
5,132
Total noninterest expense for the three months ended September 30, 2022, was $24.0 million, an increase of $1.8 million, or 8.3%, from the three months ended September 30, 2021. Notable changes in noninterest expense include the following:
Total noninterest expense for the nine months ended September 30, 2022, was $72.0 million, an increase of $5.1 million, or 7.7%, from the nine months ended September 30, 2021. Notable changes in noninterest expense include the following:
Income Taxes
During the three months ended September 30, 2022 and 2021, we recorded income tax expense of $5.6 million and $4.9 million, respectively, with the effective tax rates remaining nearly unchanged at 26.4% and 26.3%, respectively.
We recorded income tax expense of $15.3 million, or a 26.1% effective tax rate, during the nine months ended September 30, 2022, compared to $15.2 million, or a 26.3% effective tax rate, during the nine months ended September 30, 2021. The slight decrease in effective tax rate was primarily due to lower overall state income taxes.
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FINANCIAL CONDITION
% Change
Consolidated Balance Sheet Information
(80.9)
(88,428)
(9.4)
210,509
62.6
(2,645)
(53.5)
80,239
3.2
Less: allowance for loan losses
1,124
4.7
79,115
(733)
(37.7)
146,978
114,673
32,305
28.2
(100,930)
(2.3)
(94,742)
(2.5)
(21.4)
NM
0.2
0.1
(363)
(1.4)
(48,122)
(1.2)
Total stockholders' equity
(52,808)
(12.8)
Total liabilities and stockholders' equity
Tangible assets (1)
4,182,792
4,282,989
(100,197)
Tangible common equity (1)
328,541
380,616
(52,075)
(13.7)
Core deposits (1)
3,617,614
3,674,435
(56,821)
(1.5)
Book value per share
12.49
14.21
Tangible book value per share (1)
11.43
13.13
Shares of common stock outstanding
Balance Sheet Ratios
Loan to deposit ratio
70.81
66.87
Core deposits to total deposits (1)
99.29
98.29
Stockholders' equity to total assets
8.52
9.55
Tangible common equity to tangible assets (1)
7.85
8.89
NM Not meaningful
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Total assets were $4.21 billion at September 30, 2022, a decrease of $100.9 million, or 2.3%, 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
9.4
11.5
9.5
9.9
8.8
27.8
27.4
10.1
10.5
14.1
11.9
12.7
13.1
7.6
6.3
100.0
PPP loans (included above)
1.1
1.2
Loans, before allowance for loan losses were $2.58 billion at September 30, 2022, an increase of $80.2 million, or 3.2%, from December 31, 2021, with growth in most of our geographic markets that was partially offset by a $29.4 million decrease due to forgiveness of PPP loans. Additionally, we saw a slower pace of prepayments, beginning in the third quarter of 2022, as a result of recent increases in interest rates.
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
148,942
74,439
17,290
102,255
94,534
45,160
3,285
15,409
142,469
65,635
3,011
80,362
433,608
203,610
509
22,742
169,870
68,018
179,018
169,457
15,585
77,530
110,074
79,327
61,736
85,266
18,681
70,953
20,923
711,524
1,213,132
565,578
89,694
The following table summarizes loans maturing after one year, segregated into variable and fixed interest rates.
Variable Interest Rates
Repricing
Predetermined
Variable
(Fixed)
11,999
12,018
79,711
91,729
7,602
5,917
13,519
129,460
142,979
33,033
18,964
51,997
159,118
211,115
69,743
14,891
84,634
553,093
637,727
25,774
26,205
211,683
237,888
86,059
86,117
99,155
185,272
63,235
23,618
86,853
164,284
251,137
31,375
11,845
43,220
67,337
110,557
328,820
75,743
404,563
1,463,841
1,868,404
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.
71
The following table 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
2,779
Total nonperforming assets
5,843
6,057
CREDIT QUALITY RATIOS
Allowance for loan losses to loans, before allowance for loan losses
0.97
0.96
Allowance for loan losses to nonaccrual loans
781.66
866.30
Allowance for loan losses to nonperforming loans
861.32
Nonaccrual loans to loans, before allowance for loan losses
Nonperforming loans to loans, before allowance for loan losses
Nonperforming assets to total assets
Nonperforming assets to loans, before allowance for loan losses, and foreclosed assets
0.24
Total nonperforming assets were $5.8 million at September 30, 2022, decreasing slightly since December 31, 2021. Our level of nonperforming assets has remained low in recent years, representing only 0.14% of total assets at both September 30, 2022 and December 31, 2021. 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
1,532
1,671
1,225
1,278
Total troubled debt restructurings
3,059
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.
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Risk Classification of Loans
Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as pass-watch, substandard, doubtful, or loss.
A pass-watch loan is still considered a "pass" credit and is not a classified or criticized asset, but is a reflection of a borrower who exhibits credit weaknesses or downward trends warranting close attention and increased monitoring. These potential weaknesses may result in deterioration of the repayment prospects for the loan. No loss of principal or interest is expected, and the borrower does not pose sufficient risk to warrant classification.
A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized as probable that the borrower will not pay principal and interest in accordance with the contractual terms.
An asset classified as doubtful has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted; such balances are promptly charged-off as required by applicable federal regulations.
As of September 30, 2022 and December 31, 2021, our risk classifications of loans were as follows:
Pass-watch
Pass-watch loans decreased $90.5 million, or 61.0%, and substandard loans decreased $9.8 million, or 11.9%, from December 31, 2021 to September 30, 2022. This overall improvement was primarily driven by better economic conditions, relative to 2021, which resulted in both risk rating upgrades and paydowns.
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)
(6)
(273)
(19)
(270)
(42)
(256)
(49)
(21)
(1,177)
(257)
Average loans, before allowance for loan losses
233,046
289,372
271,136
363,497
235,273
236,444
232,762
226,096
212,997
192,419
220,463
200,857
675,086
554,279
687,024
548,752
265,690
212,980
254,836
221,986
348,958
214,159
329,781
213,761
327,272
302,214
328,199
309,095
183,598
133,609
161,300
133,419
Net charge-offs (recoveries) to average loans, before allowance for loan losses *
(0.36)
(0.06)
(0.05)
(0.11)
(0.10)
(0.02)
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 September 30, 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.
2,005
5,575
2.74
3.56
8,067
2.99
134
2.09
2,994
2.24
4,995
2.58
15,703
2.26
18,195
2.44
119,734
1.33
40,920
2.55
10,000
2.18
50,920
2.48
15,934
73,834
2.34
13,673
2.32
8,389
1.62
22,062
2.06
36,833
11,563
3.07
48,396
2.45
16,884
4.29
285,944
45,886
331,830
50,161
18,503
59,640
2.46
78,143
2.41
143,423
1.74
19,800
3.35
163,223
1.94
78,677
2.10
3,964
3.51
82,641
2.17
73,171
234,337
1.75
307,508
1.72
38,816
402,751
317,741
720,492
18,778
2.71
72,813
1.88
4,618
77,431
1.98
131,254
2.42
92,977
3.61
224,231
2.92
41,679
2.01
64,202
105,881
1.97
2,000
247,746
2.21
180,575
428,321
2.51
1.38
2.38
149,846
1.87
322,555
2.07
2.30
3.45
329,068
1.89
1.84
464,779
1.85
3.98
2.37
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 *
28.1
29.6
1.5
31.0
29.8
15.8
14.9
13.2
17.7
6.8
Total non-maturity deposits
3,395,619
92.6
3,155,219
92.0
7.4
8.0
3,667,489
3,430,443
28.4
29.1
8.6
30.7
30.2
15.7
14.8
17.5
17.4
3,446,675
92.3
3,072,108
91.5
12.2
8.5
0.8
3,735,675
3,358,793
11.2
The average balances of non-maturity deposits increased 7.6% from the three months ended September 30, 2021 to the three months ended September 30, 2022, with the increase primarily attributable to the NXT acquisition which added $139.4 million of non-maturity deposits on October 1, 2021. Time deposits decreased slightly due to continued run-off of higher cost time deposits which were mostly offset by the addition of $42.1 million of time deposits acquired from NXT.
Recent increases in market interest rates have increased competition for deposits. As a result, we expect deposit costs to increase during the rest of 2022 and deposits balances may decrease. Additionally, outgoing deposits may be replaced by higher cost funding sources, such as FHLB advances, brokered deposits, or other wholesale funding.
The average balances of non-maturity deposits increased 12.2% from the nine months ended September 30, 2021 to the nine months ended September 30, 2022, with the increase primarily attributable to higher balances maintained by deposit customers following the receipt of federal economic stimulus, in the form of PPP loan proceeds by commercial customers and direct payments received by retail customers, although this trend began to reverse in the second quarter of 2022. Additionally, the NXT acquisition added $139.4 million of non-maturity deposits on October 1, 2021. Time deposits increased slightly due to the addition of $42.1 million of time deposits acquired from NXT which were mostly offset by the continued run-off of higher cost time deposits.
76
The following table sets forth time deposits by remaining maturity as of September 30, 2022:
3 Months or
Over 3 through
Over 6 through
Over
Less
6 Months
12 Months
Time deposits:
Amounts less than $100,000
38,274
34,853
51,659
54,376
179,162
Amounts of $100,000 or more but less than $250,000
13,524
11,564
19,639
19,390
64,117
Amounts of $250,000 or more
9,190
4,766
7,175
4,698
25,829
Total time deposits
60,988
51,183
78,473
78,464
As of September 30, 2022 and December 31, 2021, the Bank’s uninsured deposits, including related accrued interest, were estimated to be $772.0 million and $845.7 million, respectively.
LIQUIDITY
Bank Liquidity
The overall objective of bank liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. The Bank manages liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.
The Bank continuously monitors its liquidity positions to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. The Bank manages its liquidity position to meet our daily cash flow needs, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives. The Bank also monitors liquidity requirements in light of interest rate trends, changes in the economy, the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits, and regulatory capital requirements.
As part of the Bank’s liquidity management strategy, the Bank is also focused on minimizing costs of liquidity and attempts to decrease these costs by promoting noninterest bearing and low-cost deposits and replacing higher cost funding including time deposits and borrowed funds. While the Bank does not control the types of deposit instruments our clients choose, those choices can be influenced with the rates and the deposit specials offered.
Additional sources of liquidity include unpledged securities, federal funds purchased, and borrowings from the 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 remaining credit available to the Bank from the FHLB at September 30, 2022 was $330.6 million.
As of September 30, 2022, management believed the current liquidity and available sources of liquidity are adequate to meet all of the reasonably foreseeable short-term and intermediate-term demands of the Bank. As of September 30, 2022, the Bank had no material commitments for capital expenditures.
77
Holding Company Liquidity
The Holding Company, or HBT Financial, Inc. on an unconsolidated basis, is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity. As of September 30, 2022, the Holding Company had cash and cash equivalents of $22.7 million.
The Holding 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 Holding 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 Holding Company’s ability to meet its ongoing short-term cash obligations. During the three and nine months ended September 30, 2022, the Bank paid $6.0 million and $18.0 million in dividends to the Holding Company, respectively. During the three and nine months ended September 30, 2021, the Bank did not pay a dividend to the Holding Company.
The liquidity needs of the Holding Company on an unconsolidated basis consist primarily of operating expenses, interest payments on the subordinated notes and junior subordinated debentures, and shareholder distributions in the form of dividends and stock repurchases. During the three months ended September 30, 2022 and 2021, holding company operating expenses consisted of interest expense of $0.9 million and $0.8 million, respectively, and other operating expenses of $1.4 million and $1.3 million, respectively. During the nine months ended September 30, 2022 and 2021, holding company operating expenses consisted of interest expense of $2.6 million and $2.5 million, respectively, and other operating expenses of $4.0 million and $2.6 million, respectively.
Additionally, the Holding Company paid $4.6 million and $4.1 million of dividends to stockholders during the three months ended September 30, 2022 and 2021, respectively, and paid $14.0 million and $12.4 million of dividends to stockholders during the nine months ended September 30, 2022 and 2021, respectively. As of September 30, 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 Holding Company’s liquidity.
As of September 30, 2022, management believed the current liquidity and available sources of liquidity are adequate to meet all of the reasonably foreseeable short-term and intermediate-term demands of the Holding Company. As of September 30, 2022, the Holding 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.
78
In addition to meeting minimum capital requirements, the Company and the Bank must also maintain a “capital conservation buffer” to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. As of September 30, 2022 and December 31, 2021, the capital conservation buffer requirement was 2.5% of risk-weighted assets.
As of September 30, 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 as of 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 September 30, 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, second, and third quarters of 2022.
Stock Repurchase Program
Under the Company’s stock repurchase program, the Company repurchased 78,571 shares of its common stock at a weighted average price of $18.22 during the three months ended September 30, 2022. The stock repurchase program has been paused until completion of the vote of Town and Country’s shareholders on the merger. 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 September 30, 2022, the Company had $10.2 million remaining under the current stock repurchase authorization.
79
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 September 30, 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.
CRITICAL ACCOUNTING ESTIMATES
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. The following accounting estimate could be deemed critical:
Allowance for Loan losses
The allowance for loan losses (“allowance”) is an estimate of loan losses inherent in the Company’s loan portfolio. The allowance represents amounts that have been established to recognize incurred credit losses in the loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements. The allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to maintain the adequacy of the total allowance. Loan losses are charged off against the allowance when the Company determines the loan balance to be uncollectible. Cash received on previously charged off amounts is recorded as a recovery to the allowance.
The allowance consists of two primary components, general reserves and specific reserves related to impaired loans. General reserves cover non-impaired loans, or loans collectively evaluated for impairment, and are based on historical losses adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 16-quarter period. Qualitative factor adjustments primarily consider current economic metrics, such as national and regional unemployment rates, and current credit quality metrics of each portfolio segment, such as past due and risk rating percentages, relative to historical levels. These qualitative factor adjustments are inherently subjective.
Specific reserves cover impaired loans, or loans individually evaluated for impairment, and are primarily measured based on the fair value of collateral. Adjustments to the fair value of collateral are made for anticipated selling costs. A specific reserve may be zero if the fair value of collateral on the measurement date is greater than the carrying balance of the impaired loan. Additionally, the present value of expected future cash flows discounted at the original contractual interest rate may also be used, when practical.
While the Company uses the best information available to make evaluations, future adjustments to the allowance for loan losses may become necessary if conditions change substantially from the conditions used in previous evaluations. Determinations as to the risk classification of loans and the amount of the allowance for loan losses are subject to review by regulatory agencies, which can require that the Company establish additional loss allowances.
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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)
Tangible Common Equity to Tangible Assets
Core Deposits
82
Reconciliation of Non-GAAP Financial Measure - Adjusted Net Income and Adjusted Return on Average Assets
Adjustments:
Acquisition expenses
(462)
(380)
(537)
Branch closure expenses
(644)
(748)
Gains (losses) on sales of closed branch premises
Total adjustments
(149)
(984)
2,125
140
Tax effect of adjustments
(80)
220
(728)
(143)
Less adjustments after tax effect
(229)
(764)
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)
(27)
Numerator for adjusted earnings per share - basic and diluted
15,839
41,870
42,599
Adjusted earnings per share - Basic
Adjusted earnings per share - Diluted
83
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
23,755
21,915
71,264
66,066
Operating revenue
45,624
39,107
130,519
117,518
Operating revenue (tax-equivalent basis) (1)
46,298
39,615
132,320
119,032
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 – Return on Average Tangible Common Equity, Adjusted Return on Average Stockholders’ Equity, and Adjusted Return on Average Tangible Common Equity
Average Tangible Common Equity
23,620
1,356
2,152
1,597
2,414
Average tangible common equity
350,305
355,091
357,590
343,899
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
4,238
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
100,521
18,090
10.8
30,453
16.9
+300
92,248
11.7
14,152
8.4
24,407
13.5
+200
73,526
9.3
9,817
5.9
17,334
9.6
+100
44,161
5.6
5,115
3.0
9,293
5.1
-100
(70,856)
(9.0)
(8,801)
(5.2)
(13,809)
(7.6)
-200
(168,345)
(21.3)
(20,005)
(11.9)
(31,410)
(17.4)
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
9.8
21,339
17.6
12,453
2.7
5,818
11,062
9.1
34,852
7.5
(4,098)
(3.3)
(7,746)
(6.4)
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, which could change the actual impact on EVE and net interest income. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the EVE and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Credit Risk
Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Our loan policy documents underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the borrower, industry, and product levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent loan review process that assesses compliance with loan policy, compliance with loan documentation standards, accuracy of the risk rating and overall credit quality of the loan portfolio.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 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 September 30, 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 stock repurchase program has been paused until completion of the vote of Town and Country’s shareholders on the merger.
The following table sets forth information about the Company’s purchases of its common stock during the third 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)
July 1 - 31, 2022
24,828
17.71
11,209
August 1 - 31, 2022
39,842
18.63
10,467
September 1 - 30, 2022
13,901
10,217
78,571
18.22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No.
Description
2.1 *
Agreement and Plan of Merger between HBT Financial, Inc., HB-T&C Merger, Inc. and Town and Country Financial Corporation dated August 23, 2022 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the Commission on August 23, 2022).
10.1 §
Employment Agreement, effective October 1, 2022, by and among HBT Financial, Inc., Heartland Bank and Trust Company and Peter Chapman (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on August 18, 2022).
10.2 §
Transition Agreement by and among HBT Financial, Inc., Heartland Bank and Trust Company and Matthew J. Doherty, dated as of August 17, 2022 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission on August 18, 2022).
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).
*
Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the SEC upon request; provided, however, that the parties may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any document so furnished.
**
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, except to the extent the Company specifically incorporates it by reference.
§
A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HBT FINANCIAL, INC.
November 8, 2022
By:
/s/ Matthew J. Doherty
Matthew J. Doherty
Chief Financial Officer
(on behalf of the registrant and as principal financial officer)
90