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 June 30, 2023
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 July 24, 2023, there were 31,846,236 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
60
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
91
Item 4.
Controls and Procedures
92
PART II. OTHER INFORMATION
93
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
94
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)
June 30,
December 31,
2023
2022
ASSETS
Cash and due from banks
$
28,044
18,970
Interest-bearing deposits with banks
81,764
95,189
Cash and cash equivalents
109,808
114,159
Debt securities available-for-sale, at fair value (allowance for credit losses of $800 at 2023)
822,788
843,524
Debt securities held-to-maturity (fair value of $469,921 at 2023 and $478,801 at 2022)
533,231
541,600
Equity securities with readily determinable fair value
3,152
3,029
Equity securities with no readily determinable fair value
2,275
1,977
Restricted stock, at cost
11,345
7,965
Loans held for sale
8,829
615
Loans, before allowance for credit losses
3,244,655
2,620,253
Allowance for credit losses
(37,814)
(25,333)
Loans, net of allowance for credit losses
3,206,841
2,594,920
Bank owned life insurance
23,594
7,557
Bank premises and equipment, net
65,029
50,469
Bank premises held for sale
35
235
Foreclosed assets
3,080
3,030
Goodwill
59,876
29,322
Intangible assets, net
22,122
1,070
Mortgage servicing rights, at fair value
20,133
10,147
Investments in unconsolidated subsidiaries
1,614
1,165
Accrued interest receivable
19,900
19,506
Other assets
62,158
56,444
Total assets
4,975,810
4,286,734
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing
1,125,823
994,954
Interest-bearing
3,038,700
2,592,070
Total deposits
4,164,523
3,587,024
Securities sold under agreements to repurchase
38,729
43,081
Federal Home Loan Bank advances
177,572
160,000
Subordinated notes
39,435
39,395
Junior subordinated debentures issued to capital trusts
52,760
37,780
Other liabilities
51,939
45,822
Total liabilities
4,524,958
3,913,102
COMMITMENTS AND CONTINGENCIES (Note 15)
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 32,730,698 at 2023 and 29,308,491 at 2022; shares outstanding of 31,865,868 at 2023 and 28,752,626 at 2022
327
293
Surplus
294,875
222,783
Retained earnings
241,777
232,004
Accumulated other comprehensive income (loss)
(70,662)
(71,759)
Treasury stock at cost, 864,830 shares at 2023 and 555,865 at 2022
(15,465)
(9,689)
Total stockholders’ equity
450,852
373,632
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 June 30,
Six Months Ended June 30,
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable
47,149
27,843
89,308
54,649
Federally tax exempt
1,040
679
1,992
1,341
Securities:
6,518
5,663
13,134
10,312
1,162
1,138
2,359
2,178
Interest-bearing deposits in bank
781
420
1,520
579
Other interest and dividend income
118
14
234
33
Total interest and dividend income
56,768
35,757
108,547
69,092
INTEREST EXPENSE
Deposits
4,323
506
6,697
1,075
34
72
17
Borrowings
2,189
3,486
469
939
881
400
1,644
758
Total interest expense
7,896
1,384
12,838
2,791
Net interest income
48,872
34,373
95,709
66,301
PROVISION FOR CREDIT LOSSES
(230)
145
5,980
(439)
Net interest income after provision for credit losses
49,102
34,228
89,729
66,740
NONINTEREST INCOME
Card income
2,905
2,714
5,563
5,118
Wealth management fees
2,279
2,322
4,617
4,611
Service charges on deposit accounts
1,919
1,792
3,790
3,444
Mortgage servicing
1,254
661
2,353
1,319
Mortgage servicing rights fair value adjustment
141
366
(483)
2,095
Gains on sale of mortgage loans
373
326
649
913
Realized gains (losses) on sales of securities
(1,007)
Unrealized gains (losses) on equity securities
7
(153)
(15)
(340)
Gains (losses) on foreclosed assets
(97)
(7)
(107)
Gains (losses) on other assets
109
(43)
150
Income on bank owned life insurance
147
41
262
81
Other noninterest income
877
532
1,620
1,170
Total noninterest income
9,914
8,551
17,351
18,594
NONINTEREST EXPENSE
Salaries
16,660
12,936
36,071
25,737
Employee benefits
2,707
1,984
5,042
4,428
Occupancy of bank premises
2,785
1,741
4,887
3,801
Furniture and equipment
809
623
1,468
1,175
Data processing
2,883
1,990
7,206
3,643
Marketing and customer relations
1,359
1,205
2,195
2,056
Amortization of intangible assets
720
245
1,230
490
FDIC insurance
630
298
1,193
586
Loan collection and servicing
348
278
626
435
97
31
158
163
Other noninterest expense
4,975
2,511
9,830
5,485
Total noninterest expense
33,973
23,842
69,906
47,999
INCOME BEFORE INCOME TAX EXPENSE
25,043
18,937
37,174
37,335
INCOME TAX EXPENSE
6,570
4,852
9,493
9,646
NET INCOME
18,473
14,085
27,681
27,689
EARNINGS PER SHARE - BASIC
0.58
0.49
0.88
0.96
EARNINGS PER SHARE - DILUTED
0.95
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
31,980,133
28,891,202
31,481,439
28,938,634
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized (losses) on debt securities available-for-sale
(12,638)
(24,151)
(1,195)
(77,573)
Reclassification adjustment for losses on securities available-for-sale realized in income
200
1,807
Reclassification adjustment for amortization of net unrealized losses on debt securities transferred to held-to-maturity
475
549
965
730
Unrealized gains on derivative instruments
201
149
161
743
Reclassification adjustment for net settlements on derivative instruments
(109)
67
(203)
Total other comprehensive (loss) income, before tax
(11,871)
(23,386)
1,535
(75,937)
Income tax (benefit) expense
(3,384)
(6,666)
438
(21,646)
Total other comprehensive (loss) income
(8,487)
(16,720)
1,097
(54,291)
TOTAL COMPREHENSIVE INCOME (LOSS)
9,986
(2,635)
28,778
(26,602)
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, March 31, 2023
32,095,370
294,441
228,782
(62,175)
(11,277)
450,098
Net income
Other comprehensive loss
Stock-based compensation
434
Repurchase of common stock
(229,502)
(4,188)
Cash dividends and dividend equivalents ($0.17 per share)
(5,478)
Balance, June 30, 2023
31,865,868
Balance, March 31, 2022
28,967,943
221,735
203,076
(36,100)
(5,849)
383,155
352
(136,746)
(2,408)
Cash dividends and dividend equivalents ($0.16 per share)
(4,655)
Balance, June 30, 2022
28,831,197
222,087
212,506
(52,820)
(8,257)
373,809
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
Balance, December 31, 2022
28,752,626
Cumulative effect of change in accounting principle (ASU 2016-13)
(6,922)
Other comprehensive income
951
Issuance of common stock upon vesting of restricted stock units, net of tax withholdings
43,607
(181)
Issuance of common stock in Town and Country acquisition
3,378,600
71,322
71,356
(308,965)
(5,776)
Cash dividends and dividend equivalents ($0.34 per share)
(10,986)
Balance, December 31, 2021
28,986,061
220,891
194,132
1,471
(4,906)
411,881
1,253
31,944
(57)
(186,808)
(3,351)
Cash dividends and dividend equivalents ($0.32 per share)
(9,315)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
1,609
1,532
Provision for credit losses
Net amortization of debt securities
2,999
3,609
Deferred income tax expense
802
Net accretion of discount and deferred loan fees on loans
(3,378)
(3,263)
Net realized loss on sales of securities
1,007
Net unrealized loss on equity securities
15
340
Net (gain) loss on disposals of bank premises and equipment
(32)
Net gain on sales of bank premises held for sale
(75)
(187)
Impairment losses on bank premises held for sale
23
Net gain on sales of foreclosed assets
(68)
(98)
Write-down of foreclosed assets
175
65
Amortization of intangibles
Decrease (increase) in mortgage servicing rights
483
(2,095)
Amortization of discount and issuance costs on subordinated notes and debentures
71
73
Amortization of premium on Federal Home Loan Bank advances
172
Amortization of premium on interest-bearing time deposits with banks
Amortization of discount on time deposits
(239)
(126)
Mortgage loans originated for sale
(35,682)
(38,091)
Proceeds from sale of mortgage loans
29,729
38,634
Net gain on sale of mortgage loans
(649)
(913)
Increase in cash surrender value of bank owned life insurance
(255)
(81)
Decrease in accrued interest receivable
2,719
638
Decrease in other assets
4,864
1,827
Decrease in other liabilities
(3,978)
(245)
Net cash provided by operating activities
36,131
30,795
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of interest-bearing time deposits with banks
249
485
Proceeds from sales of securities available-for-sale
145,844
Proceeds from paydowns, maturities, and calls of debt securities
50,540
74,703
Purchase of securities
(2,985)
(349,769)
Purchase of loans
(36,964)
Net decrease in loans
51,609
52,336
Purchase of restricted stock
(11,622)
(74)
Proceeds from redemption of restricted stock
11,064
Purchases of bank premises and equipment
(1,495)
(496)
Proceeds from sales of bank premises and equipment
151
Proceeds from sales of bank premises held for sale
310
1,297
Proceeds from sales of foreclosed assets
284
447
Net cash paid for acquisition of Town and Country
(14,454)
Net cash provided by (used in) investing activities
192,531
(221,071)
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits
(142,679)
(36,073)
Net decrease in repurchase agreements
(4,352)
(10,165)
Net decrease in Federal Home Loan Bank advances
(69,039)
Taxes paid related to the vesting of restricted stock units
Cash dividends and dividend equivalents paid
Net cash used in financing activities
(233,013)
(58,961)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(4,351)
(249,237)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
409,268
CASH AND CASH EQUIVALENTS AT END OF PERIOD
160,031
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest
11,815
2,860
Cash paid for income taxes
8,997
7,845
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Transfers of loans to foreclosed assets
170
27
Transfers of bank premises and equipment to bank premises held for sale
9
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 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 U.S. (“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, 2022, filed with the SEC on March 8, 2023.
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 $1.235 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 credit 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.
Impact of Recently Adopted Accounting Standards
On January 1, 2023, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended, which replaces the incurred loss methodology with an expected loss methodology, commonly referred to as the current expected credit losses (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and debt securities held-to-maturity. It also applies to off-balance sheet credit exposures not accounted for as insurance, such as loan commitments and letters of credit. In addition, Accounting Standards Codification (“ASC”) 326 made changes to the accounting for debt securities available-for-sale. One such change is to require credit losses be presented as an allowance rather than as a write-down on debt securities available-for-sale management does not intend to sell or believes that it is more likely than not they will be required to sell.
11
The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after December 31, 2022 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net decrease to retained earnings of $6.9 million as of January 1, 2023 for the cumulative effect of adopting ASC 326. The following table illustrates the impact of ASC 326 on the allowance for credit losses:
January 1, 2023
Pre-ASC 326
Impact of
As Reported
Adoption
ASC 326 Adoption
under ASC 326
Assets:
Allowance for credit losses on loans
Commercial and industrial
3,279
(822)
2,457
Commercial real estate - owner occupied
587
1,780
Commercial real estate - non-owner occupied
6,721
501
7,222
Construction and land development
4,223
1,969
6,192
Multi-family
1,472
85
1,557
One-to-four family residential
1,759
797
2,556
Agricultural and farmland
796
1,567
2,363
Municipal, consumer, and other
5,890
2,299
8,189
25,333
6,983
32,316
Liabilities:
Allowance for credit losses on unfunded commitments
2,899
The Company also adopted ASC 326 using the prospective transition approach for purchase credit deteriorated (“PCD”) financial assets that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with ASC 326, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.2 million to the allowance for credit losses. The remaining noncredit discount will be accreted into interest income at the effective interest rate as of January 1, 2023.
On January 1, 2023, the Company also adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the recognition and measurement guidance for troubled debt restructurings (“TDRs”) by creditors in ASC 310-40. This ASU also enhances disclosure requirements for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity will apply refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or a continuation of an existing loan. Additionally, the amendments in ASU 2022-02 require a public business entity to disclosure current-period gross write-offs by year of origination for financing receivables and net investments in leases in the existing vintage disclosures. This standard did not have a material impact on the Company’s consolidated results of operations or financial position.
12
Recent Accounting Pronouncements
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value and that contractual sale restrictions cannot be recognized and measured as a separate unit of account. The amendments in this update are effective for years beginning after December 15, 2023, including interim periods within those years. This standard is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging – Portfolio Layer Method. ASU 2022-01 replaces the current last-of-layer hedge accounting method with an expanded portfolio layer method that permits multiple hedged layers of a single closed portfolio. The scope of the portfolio layer method is also expanded to include non-prepayable financial assets. ASU 2022-01 also provides additional guidance on the accounting for and disclosure of hedge basis adjustments that are applicable to the portfolio layer method, and specifies how hedge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. Amendments related to hedge basis adjustments which are included in this standard apply on a modified retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings on the initial application date. Amendments related to hedge basis adjustments which are included in this standard apply on a modified retrospective basis by means of a cumulative-effect adjustment to the opening balance of retained earnings on the initial application date. Amendments related to disclosure which are included in this standard may be applied on a prospective basis from the initial application date, or on a retrospective basis to each prior period presented after the date of adoption of the amendments in ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update are effective for years beginning after December 15, 2023, including interim periods within those years. Early adoption is permitted. 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, 2024. The Company is currently evaluating the effect that this standard will have on the consolidated results of operations and financial position.
13
NOTE 2 – ACQUISITIONS
Town and Country Financial Corporation
On February 1, 2023, HBT Financial acquired 100% of the issued and outstanding common stock of Town and Country Financial Corporation (“Town and Country”), the holding company for Town and Country Bank, pursuant to an Agreement and Plan of Merger dated August 23, 2022. Under the Agreement and Plan of Merger, Town and Country merged with and into HBT Financial, with HBT Financial as the surviving entity, immediately followed by the merger of Town and Country Bank with and into Heartland Bank, with Heartland Bank as the surviving entity.
At the effective time of the merger, each share of Town and Country was converted into the right to receive, subject to the election and proration procedures as provided in the Merger Agreement, one of the following: (i) 1.9010 shares of HBT Financial’s common stock, or (ii) $35.66 in cash, or (iii) a combination of cash and HBT Financial common stock. Total consideration consisted of 3,378,600 shares of HBT Financial’s common stock and $38.0 million in cash. In lieu of fractional shares, holders of Town and Country common stock received cash. Based upon the closing price of HBT Financial common stock of $21.12 on February 1, 2023, the aggregate transaction value was approximately $109.4 million.
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. Fair values are subject to refinement for up to one year after the closing date of February 1, 2023. Goodwill of $30.6 million was recorded in the acquisition, which reflects expected synergies from combining the operations of HBT Financial and Town and Country, and is nondeductible for tax purposes.
The acquisition of Town and Country further enhanced HBT Financial’s footprint in Central Illinois, and expanded our footprint into metro-east St. Louis. During the three and six months ended June 30, 2023, HBT Financial incurred the following expenses related to the acquisition of Town and Country:
Three Months Ended June 30, 2023
Six Months Ended June 30, 2023
5,924
66
3,584
39
176
2,031
24
125
Legal fees and other noninterest expense
211
1,964
627
7,767
Total acquisition-related expenses
13,691
There were no expenses related to the acquisition of Town and Country during the three and six months ended June 30, 2022.
The fair value of the assets acquired and liabilities assumed from Town and Country on the acquisition date of February 1, 2023 were as follows (dollars in thousands):
Fair Value
Assets acquired:
23,542
Interest-bearing time deposits with banks
Debt securities
167,869
Equity securities
90
Restricted stock
2,822
1,612
635,376
(1,247)
634,129
15,782
Bank premises and equipment
14,828
271
Intangible assets
22,282
Mortgage servicing rights
10,469
449
3,113
8,061
Total assets acquired
905,568
Liabilities assumed:
720,417
FHLB advances
86,439
Junior subordinated debentures
14,949
4,965
Total liabilities assumed
826,770
Net assets acquired
78,798
Consideration paid:
Cash
37,996
Common stock
Total consideration paid
109,352
30,554
Of the loans acquired, there were $89.8 million which exhibited more-than-insignificant credit deterioration on the acquisition date. The following table provides a summary of these PCD loans at acquisition (dollars in thousands):
Unpaid principal balance
89,822
Allowance for credit losses at acquisition
Non-credit discount
(2,218)
Purchase price
86,357
Additionally, subsequent to the Town and Country acquisition, HBT Financial recognized an allowance for credit losses on non-PCD loans of $5.2 million and an allowance for credit losses on unfunded commitments of $0.7 million through an increase to the provision for credit losses.
The following table provides the pro forma information for the results of operations for the three and six months ended June 30, 2023 and 2022, as if the acquisition of Town and Country had occurred on January 1, 2022. The pro forma results combine the historical results of Town and Country 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, 2022. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, provision for credit 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
Total revenues (net interest income and noninterest income)
58,786
53,431
116,556
107,943
18,185
16,833
28,200
36,190
Earnings per share - basic
0.57
0.55
0.89
1.17
Earnings per share - diluted
16
NOTE 3 – SECURITIES
Debt Securities
The amortized cost and fair values of debt securities, with gross unrealized gains and losses and allowance for credit losses, are as follows:
June 30, 2023
Amortized Cost
GrossUnrealizedGains
GrossUnrealizedLosses
Allowance for Credit Losses
Available-for-sale:
U.S. Treasury
169,788
(14,648)
155,140
U.S. government agency
56,833
(4,409)
52,424
Municipal
273,263
18
(29,226)
244,055
Mortgage-backed:
Agency residential
208,470
(18,920)
189,550
Agency commercial
147,922
(17,039)
130,886
Corporate
57,632
(6,099)
(800)
50,733
Total available-for-sale
913,908
21
(90,341)
Gross Unrealized Gains
Gross Unrealized Losses
Held-to-maturity:
88,436
(9,615)
78,821
39,756
(422)
39,481
100,685
(7,003)
93,682
304,354
(46,417)
257,937
Total held-to-maturity
(63,457)
469,921
December 31, 2022
AmortizedCost
169,860
(15,345)
154,515
59,291
(4,134)
55,157
275,972
46
(32,189)
243,829
213,676
(18,240)
195,441
150,060
(17,172)
132,888
65,597
55
(3,958)
61,694
934,456
106
(91,038)
88,424
(9,728)
78,696
42,167
195
(314)
42,048
102,728
(6,470)
96,258
308,281
(46,482)
261,799
(62,994)
478,801
On March 31, 2022, 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
Amortized
Cost
78,841
71,048
8,175
7,651
27,834
25,432
114,850
104,131
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 June 30, 2023 and December 31, 2022, the Bank had debt securities with a carrying value of $449.6 million and $332.6 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 amortized cost and fair value of debt securities by contractual maturity, as of June 30, 2023, 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
34,603
33,740
2,451
2,454
Due after 1 year through 5 years
230,246
215,388
27,401
26,424
Due after 5 years through 10 years
236,936
204,230
92,657
84,186
Due after 10 years
55,731
48,994
5,683
5,238
The following table presents gross unrealized losses and fair value of debt securities available-for-sale that do not have an associated allowance for credit losses as of June 30, 2023, aggregated by category and length of time that individual debt securities have been in a continuous unrealized loss position:
Investments in a Continuous Unrealized Loss Position
Less than 12 Months
12 Months or More
UnrealizedLoss
(270)
7,973
(4,139)
44,451
(723)
47,645
(28,503)
192,219
239,864
(1,305)
36,555
(17,615)
152,961
189,516
(345)
13,093
(16,694)
117,701
130,794
(1,994)
17,752
(3,928)
31,957
(5,922)
49,709
(4,637)
123,018
(85,527)
694,429
(90,164)
817,447
19
The following table presents 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 December 31, 2022:
(8,401)
92,445
(6,944)
62,070
(2,980)
47,370
(1,154)
7,787
(10,906)
149,261
(21,283)
87,794
237,055
(8,332)
127,288
(9,908)
65,692
192,980
(4,764)
62,672
(12,408)
70,216
(2,594)
52,190
(1,364)
5,600
57,790
(37,977)
531,226
(53,061)
299,159
830,385
(1,754)
15,751
(7,974)
62,945
23,433
(4,039)
78,452
(2,431)
17,806
(16,716)
103,298
(29,766)
158,501
(22,823)
220,934
(40,171)
239,252
460,186
Total debt securities
(60,800)
752,160
(93,232)
538,411
(154,032)
1,290,571
As of June 30, 2023, there were 587 debt securities in an unrealized loss position for a period of twelve months or more, and 350 debt securities in an unrealized loss position for a period of less than twelve months.
U.S. Treasury, U.S. government agency, and agency mortgage-backed securities are considered to have no risk of credit loss as they are either explicitly or implicitly guaranteed by the U.S. government. The changes in fair value in these portfolios are considered to be primarily driven by changes in market interest rates and other non-credit risks, such as prepayment and liquidity risks.
Municipal securities include approximately 81% general obligation bonds as of June 30, 2023, which have a very low historical default rate due to issuers generally having taxing authority to service the debt. The remainder of the municipal securities are also of high credit quality with ratings of A+/A1 or better. The Company evaluates credit risk through monitoring credit ratings and reviews of available financial data. The changes in fair value in these portfolios are considered to be primarily driven by changes in market interest rates and other non-credit risks, such as call and liquidity risks. The estimated allowance for credit losses for the municipal debt securities held-to-maturity was deemed insignificant.
Corporate securities include investment grade corporate and bank subordinated debt securities. The Company evaluates credit risk through monitoring credit ratings, reviews of available financial data, and sector trends. An $0.8 million allowance for credit losses was recorded as of June 30, 2023, related to one bank subordinated debt security and reflected heightened potential credit risk following the recent failures of other banks. The related provision for credit losses were $0.2 million and $0.6 million during the three and six months ended June 30, 2023, respectively. For the other corporate securities, the changes in fair value in these portfolios are considered to be primarily driven by changes in market interest rates and other non-credit risks, such as call and liquidity risks.
20
As of June 30, 2023, the Company did not intend to sell the debt securities that are in an unrealized or unrecognized loss position, and it was more likely than not that the Company would recover the amortized cost prior to being required to sell the debt securities.
Accrued interest on debt securities totaled $6.1 million as of June 30, 2023 and is excluded from the estimate of credit losses.
Sales of debt securities were as follows during the three and six months ended June 30:
Proceeds from sales
Gross realized gains
Gross realized losses
Subsequent to June 30, 2023, the Company recognized $0.8 million of net losses on the sale of $39.4 million of debt securities.
Equity Securities
Equity securities with readily determinable fair values are measured at fair value with changes in fair value recognized in unrealized gains (losses) on equity 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
2,578
Cumulative net unrealized gains (losses)
(303)
Carrying value
2,142
(113)
(165)
As of June 30, 2023, the cumulative net unrealized losses on equity securities with no readily determinable fair value reflect impairments of $0.1 million and downward adjustments based on observable price changes of an identical investment of $0.2 million. As of December 31, 2022, 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 upward adjustments based on observable price changes to equity securities with no readily determinable fair value.
There were no sales of equity securities during the three and six months ended June 30, 2023 and 2022. Unrealized gains (losses) on equity securities were as follows during the three and six months ended June 30, 2023 and 2022:
Readily determinable fair value
123
No readily determinable fair value
(138)
NOTE 4 – LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES
Major categories of loans are summarized as follows:
385,768
266,757
303,522
218,503
882,598
713,202
335,262
360,824
375,536
287,865
482,442
338,253
259,858
237,746
219,669
197,103
As of June 30, 2023 and December 31, 2022, commercial and industrial loans include $22 thousand and $28 thousand Paycheck Protection Program (“PPP”) loans, respectively.
Management estimates the allowance for credit losses using relevant available information from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The discounted cash flow method is used to estimate expected credit losses for all loan categories, except for consumer loans where the weighted average remaining maturity method is utilized.
22
At June 30, 2023, the economic forecast used by management anticipates a mild recession starting in 2024, with the unemployment rate increasing and GDP growth slowing and then shrinking over the next 4 quarters considered in the forecast period. After the forecast period, the Company reverts to long-term averages over a 4-quarter reversion period. Additionally, management may make qualitative adjustments to the loss estimates, as necessary, to reflect other factors that influence credit losses.
The following tables detail activity in the allowance for credit losses for the three and six months ended June 30:
Commercial
Municipal,
Real Estate
Construction
One-to-four
Agricultural
Consumer,
and
Owner
Non-owner
and Land
Family
Industrial
Occupied
Development
Multi-Family
Residential
Farmland
Beginning balance
2,932
2,535
7,840
7,574
2,151
4,165
2,674
8,905
38,776
791
(175)
(466)
(1,745)
452
(121)
252
(1,080)
Charge-offs
(4)
(179)
Recoveries
164
37
76
297
Ending balance
3,735
2,362
7,538
5,834
2,603
4,077
2,607
9,058
37,814
Three Months Ended June 30, 2022
2,491
1,511
7,014
4,493
1,354
1,583
842
5,220
24,508
Provision for loan losses
450
(287)
(408)
(434)
51
82
670
(47)
(112)
(159)
40
86
240
2,981
1,224
6,611
4,059
1,375
1,696
924
5,864
24,734
Adoption of ASC 326
PCD allowance established in acquisition
69
127
239
68
492
1,247
1,178
444
(161)
(606)
978
960
237
991
4,021
(3)
(26)
(292)
(321)
238
95
551
Six Months Ended June 30, 2022
2,440
1,840
8,145
4,914
1,263
1,311
845
3,178
23,936
(716)
(1,804)
(855)
112
171
79
2,777
(5)
(49)
(293)
749
100
270
263
148
1,530
Gross charge-offs, further sorted by origination year, were as follows during the three and six months ended June 30, 2023:
Gross Charge-Offs for the Three Months Ended June 30, 2023
Revolving
Loans
Term Loans by Origination Year
Converted
2021
2020
2019
Prior
to Term
54
179
Gross Charge-Offs for the Six Months Ended June 30, 2023
25
26
135
74
292
77
321
The following tables present loans and the related allowance for credit losses by category:
Loan balances:
Collectively evaluated for impairment
385,594
303,271
868,421
335,024
374,578
476,326
203,767
3,206,839
Individually evaluated for impairment
174
251
14,177
958
6,116
15,902
37,816
Allowance for credit losses:
3,730
2,350
6,280
3,705
5,656
32,765
1,258
372
3,402
5,049
261,833
203,558
671,663
359,892
287,298
325,621
233,118
184,579
2,527,562
4,818
11,366
30,509
8,399
4,033
12,508
71,715
Acquired with deteriorated credit quality
3,579
11,030
850
567
4,233
595
20,976
Allowance for loan losses:
3,121
1,008
4,332
4,221
1,470
1,709
2,327
18,984
168
2,388
44
3,562
6,320
29
The following table presents collateral dependent loans, by the primary collateral type, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans:
Allowance
Primary Collateral Type
for Credit
Vehicles
Losses
15,826
45
37,566
219
Accrued interest on loans totaled $13.7 million as of June 30, 2023 and is excluded from the estimate of credit losses.
Pre-ASC 326 Adoption Impaired Loan Disclosures
The following table presents loans individually evaluated for impairment by category of loans:
Unpaid
Principal
Recorded
Related
Balance
Investment
With an allowance recorded:
268
254
635
610
14,269
14,261
569
524
8,152
8,131
23,893
23,780
With no related allowance:
4,564
10,912
10,756
16,327
16,248
9,181
7,875
4,440
4,410
4,377
49,926
47,935
Total loans individually evaluated for impairment:
4,832
11,547
30,596
9,750
12,562
73,819
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
267
745
14,603
185
548
8,344
24,507
250
15,156
156
11,887
17,947
2,012
8,181
84
4,480
59,915
783
15,423
160
12,632
152
32,550
525
8,729
88
12,824
84,422
1,033
28
280
1,580
14,728
371
597
8,426
25,611
517
17,316
356
11,460
247
16,728
538
2,014
48
8,453
244
4,511
60,726
1,387
17,596
364
13,040
291
31,456
909
9,050
12,937
139
86,337
1,904
Changes in the accretable yield for loans acquired with deteriorated credit quality were as follows:
484
413
Reclassification from non-accretable difference
217
Accretion income
(93)
537
Past Due and Nonaccrual Status
Past due status is based on the contractual terms of the loan. 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.
The following tables present loans by category based on current payment and accrual status:
Accruing Interest
30 - 89 Days
90+ Days
Current
Past Due
Nonaccrual
385,504
303,145
126
882,208
390
374,488
475,473
1,522
5,447
259,730
128
219,335
257
3,234,907
2,213
7,534
266,521
218,242
187
713,031
360,763
61
287,854
335,576
894
1,638
237,727
196,892
157
53
2,616,606
1,346
146
2,155
30
The following table presents nonaccrual loans with and without a related allowance for credit losses:
With
With No
Allowance for
Credit Losses
177
129
5,318
550
6,984
Credit Quality Indicators
The Company assigns a risk rating to all loans and periodically performs detailed internal reviews of all such loans that are part of relationships with over $750,000 in total exposure to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to review by the Company’s regulators, external loan review, and internal loan review. During the internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which the borrowers operate and the fair values of collateral securing the loans. The risk rating is reviewed annually, at a minimum, and on an as needed basis depending on the specific circumstances of the loan. These credit quality indicators are used to assign a risk rating to each individual loan. Risk ratings are grouped into four major categories, defined as follows:
Pass – a pass loan is a credit with no existing or known potential weaknesses deserving of management’s close attention.
Pass-Watch – 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.
Substandard – 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.
Doubtful – a doubtful loan 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.
The following tables present loans by category based on their assigned risk ratings determined by management:
Pass
Pass-Watch
Substandard
Doubtful
378,223
3,900
3,645
281,115
11,660
10,747
825,108
33,361
24,129
329,877
5,055
330
349,513
24,749
1,274
461,525
7,654
13,263
251,388
5,142
3,328
201,708
1,921
16,040
3,078,457
93,442
72,756
255,309
6,630
198,546
10,105
9,852
652,691
27,282
33,229
358,215
2,527
283,682
4,183
323,632
5,907
8,714
223,114
10,004
4,628
184,299
296
2,479,488
66,934
73,831
32
Risk ratings of loans, further sorted by origination year, are as follows as of June 30, 2023:
69,081
63,617
27,992
31,141
6,418
10,665
166,040
3,269
117
934
535
825
581
697
101
49
617
2,827
69,203
64,652
31,722
7,243
10,925
167,238
6,793
19,573
63,767
61,278
59,353
34,394
35,565
7,185
672
2,365
2,773
358
2,747
1,795
950
1,688
3,430
673
3,200
1,494
20,245
67,820
67,481
59,973
40,560
9,629
53,549
260,402
264,052
98,430
86,880
48,439
9,567
3,789
7,475
7,379
3,870
13,734
11,774
2,515
9,469
66,081
260,529
271,527
98,503
96,774
61,778
23,301
4,105
82,321
154,790
68,926
5,676
3,284
1,791
7,868
5,221
2,867
1,183
837
317
82,477
157,657
2,120
9,051
6,071
35,047
79,926
105,151
58,069
34,925
29,929
5,954
512
7,273
8,833
59
5,558
343
315
489
470
37,721
87,199
105,466
66,902
35,473
35,957
6,297
521
69,055
90,014
88,637
69,356
23,957
57,917
57,698
4,891
1,011
1,164
572
713
2,909
295
320
415
2,490
857
1,045
823
4,461
3,147
70,481
93,174
90,658
70,973
25,493
65,287
58,018
8,358
24,392
40,120
39,227
40,052
9,319
9,194
86,766
2,318
1,691
96
1,021
404
3,312
25,217
41,811
39,339
44,385
9,464
10,154
87,170
Municipal, Consumer, and other
31,397
70,574
28,952
15,154
1,793
45,049
8,787
1,855
15,861
31,429
70,688
28,985
15,174
1,839
62,765
Total by Risk Rating
384,415
823,210
684,215
377,231
200,970
238,549
349,865
20,002
6,213
15,820
11,534
11,339
11,868
17,170
17,490
2,008
12,226
4,500
4,625
4,738
4,546
33,827
2,136
6,158
402,854
843,530
700,374
393,308
217,384
289,546
369,491
28,168
Modifications and Troubled Debt Restructurings
There were no loan modifications to borrowers in financial distress during the three and six months ended June 30, 2023.
There were no new troubled debt restructurings during the three and six months ended June 30, 2022. As of December 31, 2022, the Company had $3.0 million of troubled debt restructurings.
Pledged Loans
As of June 30, 2023 and December 31, 2022, the Company pledged loans totaling $1.04 billion and $892.1 million, respectively, to the Federal Home Loan Bank of Chicago (“FHLB”) to secure available FHLB advance borrowing capacity.
NOTE 5 – LOAN SERVICING
Mortgage loans serviced for others, which are not included in the accompanying consolidated balance sheets, amounted to $1.72 billion and $955.8 million as of June 30, 2023 and December 31, 2022, respectively. Activity in mortgage servicing rights is as follows:
19,992
9,723
7,994
Acquired
Capitalized servicing rights
136
299
307
Fair value adjustment:
Attributable to payments and principal reductions
(559)
(379)
(990)
(686)
Attributable to changes in valuation inputs and assumptions
530
609
208
2,474
Total fair value adjustment
(29)
230
(782)
1,788
10,089
NOTE 6 – FORECLOSED ASSETS
Foreclosed assets activity is as follows:
3,356
3,043
3,278
Transfers from loans
(244)
(284)
(447)
Net gain (loss) on sales
98
Direct write-downs
(145)
(65)
2,891
Gains (losses) on foreclosed assets includes the following:
The carrying value of foreclosed one-to-four family residential real estate properties held was $0.2 million and $20 thousand as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, there were 16 one-to-four family residential real estate loans in the process of foreclosure totaling $1.4 million. As of December 31, 2022, there were 4 one-to-four family residential real estate loans in the process of foreclosure totaling $0.2 million.
NOTE 7 – DEPOSITS
The Company’s deposits are summarized below:
Noninterest-bearing deposits
Interest-bearing deposits:
Interest-bearing demand
1,181,187
1,139,150
Money market
730,652
555,425
Savings
657,506
634,527
Time
469,355
262,968
Total interest-bearing deposits
Money market account deposits included $50.0 million and time deposits included $1.0 million of brokered deposits as of June 30, 2023. There were no brokered deposits as of December 31, 2022. Interest-bearing demand deposits included $41.6 million of reciprocal transaction deposits as of June 30, 2023. Money market deposits included $11.7 million and $1.7 million of reciprocal transaction deposits as of June 30, 2023 and December 31, 2022, respectively. Time deposits included $38.8 million and $1.6 million of reciprocal time deposits as of June 30, 2023, and December 31, 2022, respectively.
The aggregate amounts of time deposits in denominations of $250 thousand or more amounted to $78.7 million and $27.2 million as of June 30, 2023 and December 31, 2022, respectively. The aggregate amounts of time deposits in denominations of $100 thousand or more amounted to $236.8 million and $92.6 million as of June 30, 2023 and December 31, 2022, respectively.
The components of interest expense on deposits are as follows:
683
144
1,141
286
1,516
110
231
189
52
367
102
1,935
2,738
456
Total interest expense on deposits
36
NOTE 8 – JUNIOR SUBORDINATED DEBENTURES ISSUED TO CAPITAL TRUSTS
Eight subsidiary business trusts of the Company have issued floating rate capital securities (“capital securities”) which are guaranteed by the Company. Three of these (Town and Country Statutory Trust II, Town and Country Statutory Trust III, and West Plains Investors Statutory Trust I) were acquired by the Company as part of its acquisition of Town and Country.
The Company owns all of the outstanding stock of the subsidiary business trusts. The trusts used the proceeds from the issuance of their capital securities to buy floating rate junior subordinated deferrable interest debentures (“junior subordinated debentures”) issued by the Company. These junior subordinated debentures are the only assets of the trusts and the interest payments from the junior subordinated debentures finance the distributions paid on the capital securities. The junior subordinated debentures are unsecured and rank junior and subordinate in the right of payment to all senior debt of the Company.
In accordance with GAAP, the trusts are not consolidated in the Company’s financial statements.
The face values and carrying values of the junior subordinated debentures are summarized as follows:
Carrying Value
Face Value
Heartland Bancorp, Inc. Capital Trust B
10,310
Heartland Bancorp, Inc. Capital Trust C
Heartland Bancorp, Inc. Capital Trust D
5,155
FFBI Capital Trust I
7,217
National Bancorp Statutory Trust I
5,773
4,821
4,788
Town and Country Statutory Trust II
4,124
4,415
Town and Country Statutory Trust III
7,732
7,572
West Plains Investors Statutory Trust I
3,093
2,960
53,714
The interest rates on the junior subordinated debentures are variable, reset quarterly, and are equal to the three-month LIBOR, as determined on the LIBOR Determination Date immediately preceding the Distribution Payment Date specific to each junior subordinated debenture, plus a fixed percentage. Beginning in July 2023, the three-month LIBOR index was replaced by the three-month term SOFR index plus a spread adjustment.
The interest rates and maturities of the junior subordinated debentures are summarized as follows:
Interest Rate at
Variable
Maturity
Interest Rate
Date
LIBOR plus
2.75
%
8.01
6.83
April 6, 2034
1.53
7.08
6.30
June 15, 2037
1.35
6.90
6.12
September 15, 2037
2.80
8.06
6.88
2.90
8.45
7.67
December 15, 2037
2.79
8.30
N/A
March 17, 2034
1.68
7.23
March 22, 2037
1.45
7.00
The distribution rate payable on the debentures is cumulative and payable quarterly in arrears. The Company has the right, subject to events of default, to defer payments of interest on the junior subordinated debentures at any time by extending the interest payment period for a period not exceeding 20 quarterly periods with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the junior subordinated debentures. The capital securities are subject to mandatory redemption upon payment of the junior subordinated debentures and carry an interest rate identical to that of the related debenture. The junior subordinated debentures maturity dates may be shortened if certain conditions are met, or at any time within 90 days following the occurrence and continuation of certain changes in either tax treatment or the capital treatment of the junior subordinated debentures or the capital securities. If the junior subordinated debentures are redeemed before they mature, the redemption price will be the principal amount plus any accrued but unpaid interest. The Company has the right to terminate each Capital Trust and cause the junior subordinated debentures to be distributed to the holders of the capital securities in liquidation of such trusts.
Under current banking regulations, bank holding companies are allowed to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier 1) capital elements, net of goodwill and other intangible assets less any associated deferred tax liability. As of June 30, 2023 and 2022, 100% of the trust preferred securities qualified as Tier 1 capital under the final rule adopted in March 2005.
38
NOTE 9 – 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
629
As of June 30, 2023, the interest rate swap agreements designated as cash flow hedges had contractual maturities between 2024 and 2025. As of June 30, 2023 and December 31, 2022, counterparties had cash pledged and held on deposit by the Company of $0.6 million and $0.6 million, respectively.
The effect of interest rate swap agreements designated as cash flow hedges on the consolidated statements of income are summarized as follows:
Location of gross gain (loss) reclassified
Amounts of gross gain (loss)
from accumulated other
reclassified from accumulated
comprehensive income (loss) to income
other comprehensive income (loss)
Three Months Ended
Six Months Ended
Designated as cash flow hedges:
Junior subordinated debentures interest expense
(67)
203
(163)
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
Interest rate swaps with a financial institution counterparty
105,954
8,053
106,995
6,981
Total fair value recorded in other assets
Fair value recorded in other liabilities:
(8,053)
(6,981)
Total fair value recorded in other liabilities
As of June 30, 2023, the interest rate swap agreements not designated as hedging instruments had contractual maturities between 2023 and 2035.
The effect of interest rate contracts not designated as hedging instruments recognized in other noninterest income on the consolidated statements of income are summarized as follows:
Not designated as hedging instruments:
Gross gains
1,703
4,681
10,094
Gross losses
(1,703)
(4,681)
(4,440)
(10,094)
Net gains (losses)
NOTE 10 – 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
(52,668)
(9,596)
89
Other comprehensive income (loss) before reclassifications
(12,437)
566
Other comprehensive income (loss), before tax
(12,438)
Income tax expense (benefit)
(3,546)
Other comprehensive income (loss), after tax
(8,892)
(61,560)
(9,256)
154
(24,794)
(11,048)
(258)
(24,002)
616
216
(6,884)
(17,267)
392
155
(42,061)
(10,656)
(103)
(61,998)
(9,946)
(1,034)
2,569
612
(42)
275
(11)
690
(31)
5,736
(3,514)
(751)
Transfer from available-for-sale to held-to-maturity
7,664
(7,664)
(76,830)
893
906
(22,112)
258
(55,461)
522
648
Reclassifications from accumulated other comprehensive income (loss) for unrealized gains (losses) on debt securities available-for-sale are included in either gains (losses) on sales of securities or provision for credit losses 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 9 for additional information.
42
NOTE 11 – EARNINGS PER SHARE
The Company has granted certain restricted stock units that contain non-forfeitable rights to dividend equivalents. Such restricted stock units are considered participating securities. As such, we have included these restricted stock units in the calculation of basic earnings per share and calculate basic earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.
Diluted earnings per share is computed using the treasury stock method and reflects the potential dilution from the Company’s outstanding restricted stock units and performance restricted stock units.
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Earnings allocated to participating securities
(17)
(16)
(34)
Numerator for earnings per share - basic and diluted
18,462
14,068
27,665
27,655
Denominator:
Weighted average common shares outstanding
Dilutive effect of outstanding restricted stock units
99,850
53,674
84,981
48,688
Weighted average common shares outstanding, including all dilutive potential shares
32,079,983
28,944,876
31,566,420
28,987,322
Earnings per share - Basic
Earnings per share - Diluted
43
NOTE 12 – 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
594
Performance restricted stock units
357
411
Total awards classified as equity
Stock appreciation rights
(46)
Total stock-based compensation expense
387
359
905
1,237
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.
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 six months ended June 30, 2023 and 2022, the total grant date fair value of the restricted stock units granted was $1.0 million and $0.9 million, respectively, based on the grant date closing prices. The total intrinsic value of restricted stock that vested during the six months ended June 30, 2023 and 2022 was $1.1 million and $0.7 million, respectively.
The following is a summary of restricted stock unit activity:
Weighted
Restricted
Grant Date
Stock Units
129,422
19.58
120,631
17.98
Granted
Vested
Forfeited
139,986
18.01
109,244
17.27
41,847
22.72
46,312
19.11
(51,693)
17.91
(34,925)
17.26
(718)
16.58
As of June 30, 2023, unrecognized compensation cost related to the non-vested restricted stock units was $1.6 million. This cost is expected to be recognized over the weighted average remaining service period of 1.8 years.
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 six months ended June 30, 2023 and 2022, the total fair value of the performance restricted stock units granted was $0.4 million and $0.5 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
79,097
18.25
62,067
17.02
Six months ended June 30,
38,344
15.72
17,030
23,723
19.14
As of June 30, 2023, 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
73,440
16.32
91,800
Exercised
Expired
StockAppreciationRights
97,920
(6,120)
A further summary of stock appreciation rights as of June 30, 2023, is as follows:
Weighted Average
Remaining
Grant Date Assigned Values
Exercisable
Contractual Term
$ 16.32
67,320
6.2
years
As of June 30, 2023, unrecognized compensation cost related to non-vested stock appreciation rights was $6 thousand.
47
As of June 30, 2023 and December 31, 2022, the liability recorded for outstanding stock appreciation rights was $0.4 million and $0.5 million, respectively. The Company used an option pricing model to value the stock appreciation rights, using the assumptions in the following table. Expected volatility is derived from the historical volatility of the Company’s stock price and a selected peer group of industry-related companies.
Risk-free interest rate
4.06
3.95
Expected volatility
37.35
36.54
Expected life (in years)
6.7
Expected dividend yield
3.69
3.27
As of June 30, 2023, the liability recorded for previously exercised stock appreciation rights was $0.2 million, which will be paid in one remaining annual installment in 2024. As of December 31, 2022, the liability recorded for previously exercised stock appreciation rights was $0.5 million.
NOTE 13 – 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 June 30, 2023 and December 31, 2022, the capital conservation buffer was 2.5% of risk-weighted assets.
As of June 30, 2023, 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.
575,030
15.03
306,067
8.00
Heartland Bank and Trust Company
566,196
14.82
305,541
381,926
10.00
Tier 1 Capital (to Risk Weighted Assets)
501,898
13.12
229,551
6.00
532,499
13.94
229,156
Common Equity Tier 1 Capital (to Risk Weighted Assets)
450,752
11.78
172,163
4.50
171,867
248,252
6.50
Tier 1 Capital (to Average Assets)
10.07
199,442
4.00
10.69
199,201
249,001
5.00
516,556
16.27
254,052
489,316
15.43
253,643
317,054
451,828
14.23
190,539
463,983
14.63
190,233
415,213
13.07
142,904
142,674
206,085
10.48
172,427
10.78
172,240
215,300
NOTE 14 – 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, 2022, filed with the SEC on March 8, 2023. There were no transfers between levels during the three and six months ended June 30, 2023 and 2022. 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
8,640
Derivative financial liabilities
7,610
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, 2022 to June 30, 2023.
50
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)
6.8% to 39.4% (8.0%)
Discount rate
9.0% to 23.4% (9.6%)
5.3% to 59.7% (8.2%)
9.0% to 11.7% (9.3%)
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as there is evidence of impairment or a change in the amount of previously recognized impairment.
The following tables present the balances of the assets measured at fair value on a nonrecurring basis:
Collateral-dependent loans
32,767
17,460
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 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 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 Loans, Bank Premises Held for Sale, and Foreclosed Assets
The estimated fair value of collateral-dependent 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 loans, bank premises held for sale, and foreclosed assets are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or a similar evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals or a similar evaluation of the collateral underlying collateral-dependent loans and foreclosed assets are obtained at the time a loan is first considered impaired or a loan is transferred to foreclosed assets. Appraisals or a similar evaluation of bank premises held for sale are obtained when first classified as held for sale. Appraisals or similar evaluations are obtained subsequently as deemed necessary by management but at least annually on foreclosed assets and bank premises held for sale. Appraisals are reviewed for accuracy and consistency by management. Appraisals are performed by individuals selected from the list of approved appraisers maintained by management. The appraised values are reduced by estimated costs to sell. These discounts and estimates are developed by management by comparison to historical results.
The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements (dollars in thousands):
FairValue
ValuationTechnique
Range (Weighted Average)
Appraisal of collateral
Appraisal adjustments
Not meaningful
Appraisal
7% (7%)
Other Fair Value Methods
The following methods and assumptions were used by the Company in estimating fair value disclosures of its other financial instruments. There were no changes in the methods and significant assumptions used to estimate the fair value of these financial instruments.
Cash and Cash Equivalents
The carrying amounts of these financial instruments approximate their fair values.
Restricted Stock
The carrying amount of FHLB stock approximates fair value based on the redemption provisions of the FHLB.
The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the marketplace. Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type such as commercial and industrial, agricultural and farmland, commercial real estate - owner occupied, commercial real estate - non-owner occupied, multi-family, construction and land development, one-to-four family residential, and municipal, consumer, and other. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate.
Investments in Unconsolidated Subsidiaries
The fair values of the Company’s investments in unconsolidated subsidiaries are presumed to approximate carrying amounts.
Time Deposits
Fair values of certificates of deposit with stated maturities have been estimated using the present value of estimated future cash flows discounted at rates currently offered for similar instruments. Time deposits also include public funds time deposits.
Securities Sold Under Agreements to Repurchase
The fair values of repurchase agreements with variable interest rates are presumed to approximate their recorded carrying amounts.
Subordinated Notes
The fair values of subordinated notes are estimated using discounted cash flow analyses based on rates observed on recent debt issuances by other financial institutions.
Junior Subordinated Debentures
The fair values of subordinated debentures are estimated using discounted cash flow analyses based on rates observed on recent debt issuances by other financial institutions.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument.
The following table provides summary information on the carrying amounts and estimated fair values of the Company’s financial instruments:
Hierarchy
Carrying
Estimated
Level
Financial assets:
Level 1
Debt securities held-to-maturity
Level 2
Level 3
Loans, net
3,143,481
2,566,930
Financial liabilities:
Time deposits
457,327
253,619
32,481
37,205
41,993
37,030
Accrued interest payable
2,386
1,363
The Company estimated the fair value of lending related commitments as described in Note 15 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.
56
NOTE 15 – 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
860,390
756,885
Standby letters of credit
19,053
17,785
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.
Allowance for Credit Losses on Unfunded Commitments
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by the Company. The allowance for credit losses on unfunded commitments is included in other liabilities on the consolidated balance sheets and is adjusted through a charge to provision for credit loss expense on the consolidated statements of income. The allowance for credit losses on unfunded commitments estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance for credit losses on unfunded commitments was $4.1 million as of June 30, 2023.
57
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.
PLB Investments LLC, John Kuehner, and A.S. Palmer Investments LLC v. Heartland Bank and Trust Company and PNC Bank N.A., In the United States District Court for the Northern District of Illinois, Case No. 1:20-cv-1023 (“Class Action”); and Melanie E. Damian, As Receiver of Today’s Growth Consultant, Inc. (dba The Income Store) v. Heartland Bank and Trust Company and PNC Bank N.A., In the United States District Court for the Northern District of Illinois, Case No. 1:20-cv-7819 (“Receiver’s Action”)
The Bank was a defendant in the purported Class Action lawsuit that was filed on February 12, 2020, in the U.S. District Court for the Northern District of Illinois. The plaintiffs in the Class Action alleged that the Bank negligently enabled and facilitated a fraudulent, Ponzi-like scheme perpetrated by Today’s Growth Consultant, Inc. (dba The Income Store) (“TGC”). Additionally, the Receiver for TGC filed the Receiver’s Action on December 30, 2020, in the U.S. District Court for the Northern District of Illinois, with similar allegations.
On February 20, 2023, the Bank reached an agreement in principle to settle both the Class Action and Receiver’s Action in which the Bank would make one-time cash payments totaling $13.0 million, without admitting fault, to release the Bank from further liability and claims in both the Class Action and Receiver’s Action.
Pursuant to the agreement in principle, the parties would settle and dismiss the Class Action and Receiver’s Action and seek the entry of bar orders from the U.S. District Court for the Northern District of Illinois (the “Court”) prohibiting any continued or future claims against the Bank and its related parties relating to the Class Action and the Receiver’s Action, whether asserted to date or not. If definitive settlement agreements, including the bar orders described in the preceding sentence, are approved by the Court and are not subject to appeal, the Bank will make one-time cash payments totaling $13.0 million.
Definitive settlement agreements reflecting the terms of the agreement in principle have been executed and notice to TGC’s investor claimants have been delivered. Motions for final, non-appealable approvals of the settlement agreements and for entry of a bar order were granted and are pending entry of final written order by the Court (“Final Written Order”). The Class Action has been voluntarily dismissed.
The proposed settlements do not include any admission of liability or wrongdoing by the Bank, and the Bank expressly denies any liability or wrongdoing with respect to any matter alleged in the Class Action and Receiver’s Action. The Bank agreed in principle to the settlements to avoid the cost, risks and distraction of continued litigation. The Company believes the settlements are in the best interests of the Company and its shareholders.
Accordingly, the Bank had a $13.0 million accrual related to these matters as of June 30, 2023 and December 31, 2022. The Bank’s insurer has agreed to reimburse $7.4 million of the settlement payment which was recorded as an insurance recovery receivable as of June 30, 2023 and December 31, 2022. The estimated net settlement amount of $5.6 million was included in other noninterest expense in the consolidated statements of income during the fourth quarter of 2022. The settlement payments will be made within two weeks of the date of the Final Written Order of the Court.
58
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. 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.
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. 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.
On May 15, 2023, the Bank reached an agreement in principle to settle both the DeBaere, et al and Miller, et al cases in which the Bank would make one-time cash payments totaling $3.4 million, without admitting fault, to release the Bank from further liability and claims in both the cases. If the proposed settlement agreements are approved by the Court and are not subject to appeal, the Bank will make one-time cash payments totaling $3.4 million.
The proposed settlements do not include any admission of liability or wrongdoing by the Bank, and the Bank expressly denies any liability or wrongdoing with respect to any matter alleged in the DeBaere, et al and Miller, et al cases. The Bank has agreed in principle to the settlements to avoid the cost, risks and distraction of continued litigation. The Company believes the proposed settlements are in the best interests of the Company and its shareholders.
Accordingly, the Bank had in the aggregate a $3.4 million and $2.6 million accrual related to these matters as of June 30, 2023 and December 31, 2022, respectively. An initial $2.6 million accrual was recognized in other noninterest expense during the fourth quarter of 2022, reflecting management’s best estimate at that time, and an additional $0.8 million accrual was recognized in other noninterest expense during the second quarter of 2023 following the agreement in principle to settle both the DeBaere, et al and Miller, et al cases.
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 June 30, 2023 (unaudited), as compared with December 31, 2022, and the results of operations for the three and six months ended June 30, 2023 and 2022 (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, 2022, filed with the SEC on March 8, 2023. Results of operations for the three and six months ended June 30, 2023 and 2022 are not necessarily indicative of results to be attained for the year ended December 31, 2023 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 Illinois and Eastern Iowa. As of June 30, 2023, the Company had total assets of $5.0 billion, loans held for investment of $3.2 billion, and total deposits of $4.2 billion.
Market Area
As of June 30, 2023, our branch network included 67 full-service branch locations throughout Illinois and Eastern Iowa. We hold a leading deposit share in many of our Central Illinois markets, which we define as a top three deposit share rank, providing the foundation for our strong deposit base. The stability provided by this low-cost funding is a key driver of our strong track record of financial performance. Below is a summary of our loan and deposit balances by geographic region:
Central
1,642,456
2,862,138
1,024,015
2,239,030
Chicago MSA
1,305,872
1,186,925
1,294,327
1,216,423
Illinois
2,948,328
4,049,063
2,318,342
3,455,453
Iowa
296,327
115,460
301,911
131,571
Town and Country Acquisition
On February 1, 2023, HBT Financial completed its acquisition of Town and Country, the holding company for Town and Country Bank. The acquisition of Town and Country further enhanced HBT Financial’s footprint in Central Illinois and expanded our footprint into metro-east St. Louis. At the time of acquisition, Town and Country Bank operated 10 full-service branch locations which began operating as branches of Heartland Bank. The core system conversion was successfully completed in April 2023. After considering business combination accounting adjustments, Town and Country added total assets of $906 million, total loans held for investment of $635 million, and total deposits of $720 million.
Total consideration consisted of 3.4 million shares of HBT Financial’s common stock and $38.0 million in cash. Based upon the closing price of HBT Financial common stock of $21.12 on February 1, 2023, the aggregate consideration was approximately $109.4 million. Goodwill of $30.6 million was recorded in the acquisition. Acquisition-related expenses were $0.6 million and $13.7 million for the three and six months ended June 30, 2023, respectively, which includes the recognition of an allowance for credit losses on non-PCD loans of $5.2 million and an allowance for credit losses on unfunded commitments of $0.7 million through provision for credit losses during the first quarter of 2023.
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.
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 significant competitive pressure on loan rates and terms, as well as deposit pricing, 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 accelerated this transition, and in-person branch traffic is not expected to return to pre-pandemic levels. Additionally, widespread adoption of faster payment and instant payment technologies could require us to substantially increase our expenditures on technology infrastructure, increase our regulatory compliance costs, and adversely impact the stability of our deposit base. 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 $1.235 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.
62
RESULTS OF OPERATIONS
Overview of Recent Financial Results
The following table presents selected financial results and measures:
(dollars in thousands, except per share amounts)
Income before income tax expense
Income tax expense
Adjusted net income (1)
18,772
13,836
38,631
26,063
Net interest income (tax-equivalent basis) (1) (2)
49,587
34,971
97,126
67,428
Share and Per Share Information
Adjusted earnings per share - Diluted (1)
0.48
1.22
0.90
Weighted average shares of common stock outstanding
Summary Ratios
Net interest margin *
4.16
3.34
4.18
3.21
Net interest margin (tax-equivalent basis) * (1) (2)
4.22
3.39
4.24
3.26
Yield on loans *
5.97
4.64
5.89
4.54
Yield on interest-earning assets *
4.83
3.47
4.74
Cost of interest-bearing liabilities *
0.20
0.80
Cost of total deposits *
0.41
0.05
0.33
0.06
Cost of funds *
0.71
0.14
0.59
Efficiency ratio
56.57
54.97
60.74
55.96
Efficiency ratio (tax-equivalent basis) (1) (2)
55.89
54.22
59.99
55.23
Return on average assets *
1.49
1.32
1.15
1.29
Return on average stockholders' equity *
16.30
14.92
12.73
Return on average tangible common equity * (1)
19.91
16.25
15.31
15.45
Adjusted return on average assets * (1)
1.51
1.60
Adjusted return on average stockholders' equity * (1)
16.57
14.66
17.77
13.40
Adjusted return on average tangible common equity * (1)
20.23
15.96
21.36
14.55
* Annualized measure.
63
Comparison of the Three Months Ended June 30, 2023 to the Three Months Ended June 30, 2022
For the three months ended June 30, 2023, net income was $18.5 million, increasing by $4.4 million, or 31.2%, when compared to net income for the three months ended June 30, 2022. Notable changes include the following:
Comparison of the Six Months Ended June 30, 2023 to the Six Months Ended June 30, 2022
For the six months ended June 30, 2023, net income was $27.7 million, nearly unchanged when compared to net income for the six months ended June 30, 2022. 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.
64
The following tables set forth average balances, average yields and costs, and certain other information for the three and six months ended June 30, 2023 and 2022. 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.
June 30, 2022
Yield/Cost *
3,238,774
48,189
2,467,851
28,522
Securities
1,384,180
7,680
2.23
1,422,096
6,801
1.92
Deposits with banks
84,366
3.71
240,692
0.70
8,577
5.52
2,809
2.07
Total interest-earning assets
4,715,897
4,133,448
(39,484)
(24,579)
Noninterest-earning assets
299,622
177,433
4,976,035
4,286,302
1,224,285
0.22
1,159,077
675,530
582,016
0.08
687,014
0.11
661,661
0.03
447,146
1.74
284,880
0.28
3,033,975
2,687,634
34,170
0.40
51,057
0.07
173,040
5.07
440
1.34
39,424
4.78
39,346
4.79
52,752
6.70
37,738
4.26
Total interest-bearing liabilities
3,333,361
2,816,215
1,145,089
1,072,883
Noninterest-bearing liabilities
43,080
18,673
4,521,530
3,907,771
454,505
378,531
Net interest income/Net interest margin (1)
Tax-equivalent adjustment (2)
715
598
Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) (2) (3)
Net interest rate spread (4)
3.88
Net interest-earning assets (5)
1,382,536
1,317,233
Ratio of interest-earning assets to interest-bearing liabilities
1.41
1.47
Cost of total deposits
Cost of funds
3,126,173
91,300
2,487,320
55,990
1,397,821
15,493
2.24
1,372,284
12,490
1.84
88,343
305,053
0.38
8,004
2,775
2.43
4,620,341
4,167,432
(36,410)
(24,340)
287,314
171,624
4,871,245
4,314,716
1,227,447
0.19
1,151,495
655,182
0.75
590,098
698,375
655,645
402,212
1.37
297,706
0.31
2,983,216
0.45
2,694,944
36,879
0.39
52,050
143,632
4.89
1.01
39,414
4.81
39,335
4.82
50,183
6.61
37,730
4.05
3,253,324
2,824,529
1,133,292
1,075,387
46,181
22,466
4,432,797
3,922,382
438,448
392,334
1,417
1,127
3.94
3.14
1,367,017
1,342,903
1.42
1.48
The following table sets forth the components of loan interest income and their contributions to the total loan yield.
Yield
Contribution *
Contractual interest
45,897
5.69
25,738
4.20
86,873
5.60
50,480
4.10
Loan fees (excluding PPP loans)
1,184
0.15
1,124
0.18
2,290
PPP loan fees
642
0.10
1,381
Accretion of acquired loan discounts
0.12
323
1,821
443
0.04
Nonaccrual interest recoveries
0.01
695
0.02
1,407
Total loan interest income
The following table sets forth the components of net interest income and their contributions to the net interest margin.
Net Interest
Margin
Interest income:
Contractual interest on loans
3.90
2.50
3.79
2.44
0.09
0.65
0.66
0.68
0.60
Total interest income
Interest expense:
0.37
0.29
Other interest-bearing liabilities
3,573
0.30
878
6,141
0.27
1,716
0.67
0.13
0.56
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:
10,243
9,424
19,667
16,363
18,947
35,310
(185)
1,064
879
236
2,767
3,003
(427)
788
361
(680)
1,621
941
104
114
87
9,689
11,322
21,011
16,033
23,422
39,455
Interest-bearing liabilities:
539
835
855
1,385
1,406
2,191
2,220
137
265
1,564
1,735
210
2,072
2,282
3,614
3,817
266
5,356
5,622
(6)
2,173
2,188
3,440
3,484
(1)
(2)
197
481
305
886
2,570
3,942
6,512
4,007
6,040
10,047
Change in net interest income
7,119
7,380
14,499
12,026
17,382
29,408
Net interest income for the three months ended June 30, 2023 was $48.9 million, increasing $14.5 million, or 42.2%, from the three months ended June 30, 2022. The increase is primarily attributable to higher yields on interest-earning assets and the increase in average interest-earning assets following the Town and Country merger.
Net interest margin increased to 4.16% for the three months ended June 30, 2023, compared to 3.34% for the three months ended June 30, 2022. The increase was primarily attributable to higher yields on interest-earning assets which were partially offset by increased funding costs, driven by significant increases in market rates since early 2022. Additionally, the contribution of acquired loan discount accretion to net interest margin increased to 9 basis points during the three months ended June 30, 2023, from 3 basis points during the three months ended June 30, 2022.
Net interest income for the six months ended June 30, 2023 was $95.7 million, increasing $29.4 million, or 44.4%, from the six months ended June 30, 2022. The increase is primarily attributable to higher yields on interest-earning assets and the increase in average interest-earning assets following the Town and Country merger.
Net interest margin increased to 4.18% for the six months ended June 30, 2023, compared to 3.21% for the six months ended June 30, 2022. The increase was primarily attributable to higher yields on interest-earning assets which were partially offset by increased funding costs, driven by significant increases in market rates since early 2022. Additionally, the contribution of acquired loan discount accretion to net interest margin increased to 8 basis points during the six months ended June 30, 2023, from 2 basis points during the six months ended June 30, 2022.
The quarterly net interest margins were as follows:
Three months ended:
March 31
3.08
June 30
September 30
3.65
December 31
In March 2022, the Federal Open Markets Committee (“FOMC”) raised the target range for the federal funds rate to 0.25% to 0.50%, the first rate hike since December 2018. 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 5.25% to 5.50% at the July 2023 meeting.
As a result, market interest rates have also risen since March 2022 which has led to improvements in our net interest margin compared to the first half of 2022. These increases in market interest rates have also increased competition for deposits. As a result, deposit and funding costs have increased during 2023 compared to such costs in 2022, and we expect such costs to continue to increase during the remainder of 2023. Additionally, core deposits balances may decrease and be replaced by higher cost funding sources, such as FHLB advances, brokered deposits, or other wholesale funding.
Provision for Credit Losses
The following table sets forth the components of provision for credit losses for the periods indicated:
Unfunded lending-related commitments
650
1,159
800
Total provision for credit losses
The Company recorded a negative provision for credit losses of $0.2 million for the second quarter of 2023. The negative provision for credit losses primarily reflects a $1.1 million decrease in specific reserves on individually evaluated loans; a $1.1 million increase in required reserves driven by growth of the loan portfolio and unfunded commitments; a $0.4 million decrease in required reserves resulting from changes in economic factors; a $0.2 million increase in reserves on debt securities available-for-sale, related to one bank subordinated debt security; and net recoveries of $0.1 million.
In connection with the Town and Country merger, we recognized an allowance for credit losses on non-PCD loans of $5.2 million and an allowance for credit losses on unfunded commitments of $0.7 million. Excluding the impact of the Town and Country merger, the remaining provision for credit losses primarily reflects a $1.3 million decrease in specific reserves on individually evaluated loans; the establishment of an allowance for credit losses of $0.8 million on debt securities available-for-sale, related to one bank subordinated debt security; and net recoveries of $0.2 million.
Credit losses are highly dependent on current and forecast economic conditions. Potential deterioration of economic conditions may lead to higher credit losses and adversely impact our financial condition and results of operations. The economic forecasts utilized in estimating the allowance for credit losses on loans and related unfunded commitments include the unemployment rate and changes in GDP as macroeconomic variables, although other economic metrics are considered on a qualitative basis.
70
Noninterest Income
The following table sets forth the major categories of noninterest income for the periods indicated:
$ Change
191
445
346
593
1,034
(225)
(2,578)
(264)
325
(90)
(140)
(41)
181
345
(1,243)
Total noninterest income for the three months ended June 30, 2023, was $9.9 million, an increase of $1.4 million, or 15.9%, from the three months ended June 30, 2022. Notable changes in noninterest income include the following:
Total noninterest income for the six months ended June 30, 2023, was $17.4 million, a decrease of $1.2 million, or 6.7%, from the six months ended June 30, 2022. 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:
3,724
10,334
723
614
1,044
1,086
186
3,563
740
332
607
2,464
4,345
10,131
21,907
Total noninterest expense for the three months ended June 30, 2023, was $34.0 million, an increase of $10.1 million, or 42.5%, from the three months ended June 30, 2022. Notable changes in noninterest expense include the following:
Total noninterest expense for the six months ended June 30, 2023, was $69.9 million, an increase of $21.9 million, or 45.6%, from the six months ended June 30, 2022. Notable changes in noninterest expense include the following:
Income Taxes
During the three months ended June 30, 2023 and 2022, we recorded income tax expense of $6.6 million, or an effective tax rate of 26.2%, and $4.9 million, or an effective tax rate of 25.6%, respectively. During the six months ended June 30, 2023 and 2022, we recorded income tax expense of $9.5 million, or an effective tax rate of 25.5%, and $9.6 million, or an effective tax rate of 25.8%, respectively. The fluctuations in effective tax rate are primarily attributable to changes in the proportion of federally tax-exempt interest income to pre-tax income.
FINANCIAL CONDITION
% Change
Consolidated Balance Sheet Information
(3.8)
Debt securities available-for-sale, at fair value
(20,736)
(2.5)
(8,369)
(1.5)
8,214
1,335.6
624,402
23.8
Less: allowance for credit losses
12,481
49.3
611,921
23.6
104.2
21,052
1,967.5
212,315
161,524
50,791
31.4
689,076
16.1
577,499
(10.1)
17,572
11.0
0.1
14,980
39.7
6,117
13.3
611,856
15.6
Total stockholders' equity
77,220
20.7
Total liabilities and stockholders' equity
Tangible assets (1)
4,893,812
4,256,342
637,470
15.0
Tangible common equity (1)
368,854
343,240
25,614
7.5
Core deposits (1)
4,034,808
3,559,866
474,942
Book value per share
14.15
12.99
Tangible book value per share (1)
11.58
11.94
Shares of common stock outstanding
Balance Sheet Ratios
Loan to deposit ratio
77.91
73.05
Core deposits to total deposits (1)
96.89
99.24
Stockholders' equity to total assets
9.06
8.72
Tangible common equity to tangible assets (1)
7.54
75
Total assets were $4.98 billion at June 30, 2023, an increase of $689.1 million, or 16.1%, from December 31, 2022. Notable changes in our consolidated balance sheet include the following:
Loan Portfolio
The following table sets forth the composition of the loan portfolio, excluding loans held-for-sale, by type of loan.
Percent
11.9
10.2
9.3
8.3
27.2
10.3
13.8
11.6
14.9
12.9
8.0
9.1
6.8
100.0
Loans, before allowance for credit losses were $3.24 billion at June 30, 2023, an increase of $624.4 million, or 23.8%, from December 31, 2022. Excluding the impact of the Town and Country merger, total loans decreased $11.0 million, or 0.4%, with the following notable changes:
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
206,062
138,801
40,905
32,912
151,057
110,797
8,756
96,725
527,267
252,561
6,045
167,645
142,462
25,078
30,947
257,063
85,539
1,987
55,774
183,771
126,342
116,555
106,704
107,859
41,354
3,941
70,928
50,744
71,949
26,048
767,697
1,559,024
754,525
163,409
The following table summarizes loans maturing after one year, segregated into variable and fixed interest rates.
Variable Interest Rates
Repricing
Predetermined
(Fixed)
41,994
8,143
50,137
129,569
179,706
33,518
42,792
76,310
194,300
270,610
134,249
32,502
166,751
619,122
785,873
71,605
2,116
73,721
93,896
167,617
42,397
42,323
84,720
259,869
344,589
85,803
67,667
153,470
273,198
426,668
6,699
11,205
17,904
135,250
153,154
21,311
19,017
40,328
108,413
148,741
437,576
225,765
663,341
1,813,617
2,476,958
Nonperforming Assets
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
7,535
2,156
Total nonperforming assets
10,615
5,186
Nonperforming loans that are wholly or partially guaranteed by the U.S. Government
2,332
133
CREDIT QUALITY RATIOS
Allowance for credit losses to loans, before allowance for credit losses
0.97
Allowance for credit losses to nonaccrual loans
501.91
1,175.55
Allowance for credit losses to nonperforming loans
501.84
1,175.00
Nonaccrual loans to loans, before allowance for credit losses
0.23
Nonperforming loans to loans, before allowance for credit losses
Nonperforming assets to total assets
0.21
Nonperforming assets to loans, before allowance for credit losses, and foreclosed assets
Total nonperforming assets were $10.6 million at June 30, 2023, increasing by $5.4 million since December 31, 2022. The increase was primarily attributable to the Town and Country merger which added $3.8 million in nonaccrual loans and $0.3 million of foreclosed assets.
Risk Classification of Loans
Our risk classifications of loans were as follows:
Pass-watch
Pass-watch loans increased $26.5 million, or 39.6%, and substandard loans decreased $1.1 million, or 1.5%, from December 31, 2022 to June 30, 2023. The Town and Country merger which added $10.3 million in pass-watch loans and $17.6 million in substandard loans. Additionally, a $12.4 million substandard relationship in the commercial real estate – non-owner occupied category paid off during the second quarter of 2023.
78
Net Charge-offs and Recoveries
The following table summarizes net charge-offs (recoveries) to average loans, before allowance for credit losses, by loan category.
Net charge-offs (recoveries)
(12)
(40)
(744)
(100)
(164)
(238)
(8)
(33)
(62)
(69)
(214)
99
(118)
(1,237)
Average loans, before allowance for credit losses
361,312
274,696
343,461
290,496
301,707
223,757
289,036
224,257
890,857
682,317
852,990
693,092
359,332
324,806
369,449
320,033
362,038
251,840
351,727
249,319
486,759
327,191
461,007
328,671
251,050
230,755
239,206
231,486
225,719
152,489
219,297
149,966
Net charge-offs (recoveries) to average loans, before allowance for credit losses *
(0.01)
(0.06)
(0.02)
(0.52)
(0.09)
(0.07)
(0.08)
(0.03)
(0.13)
(0.10)
The net charge-offs (recoveries) to average total loans before allowance for credit 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 June 30, 2023, 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.
30,094
1.56
4,509
2.40
3.72
6,960
2.87
4.14
8.11
34,630
1.67
37,081
1.80
99,526
1.27
42,381
2.67
10,000
2.18
52,381
2.57
66,433
2.04
17,401
3.13
83,834
2.27
13,344
2.85
8,312
1.62
21,656
2.38
57,690
1.96
18,818
2.56
76,508
2.11
21,906
4.86
301,280
2.10
54,531
2.53
355,811
2.16
40,168
14,452
75,340
89,792
148,590
1.79
17,317
3.46
165,907
78,234
3,662
3.51
81,896
49,298
1.70
238,939
288,237
1.89
33,726
364,468
2.05
335,258
2.15
699,726
3,096
2.83
53,731
1.85
2,587
56,318
116,872
2.91
88,711
3.66
205,583
3.24
40,927
2.29
46,597
2.03
87,524
2,000
213,530
2.54
140,991
3.10
354,521
2.76
1.38
2.48
145,269
1.87
3.33
313,019
2.06
2.60
3.49
309,155
2.89
1.98
452,276
1.97
4.42
2.45
1,447,139
80
SOURCES OF FUNDS
Management continues to focus on growing deposits through the Company’s relationship-driven banking philosophy and community-focused marketing programs. 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 *
27.4
28.5
29.3
30.8
5.6
16.2
15.5
16.4
17.6
3.8
Total non-maturity deposits
3,731,918
89.3
0.26
3,475,637
92.4
7.4
10.7
7.6
57.0
4,179,064
3,760,517
11.1
27.5
5.4
29.8
30.5
6.6
15.9
15.7
17.0
17.4
6.5
3,714,296
90.2
3,472,625
92.1
7.0
9.8
7.9
35.1
4,116,508
3,770,331
9.2
The increase in average deposits balances in 2023 compared to 2022 are primarily attributable to the Town and Country merger which added $576.8 million of non-maturity deposits and $143.6 million in time deposits on February 1, 2023. Recent increases in market interest rates have increased competition for deposits. As a result, we expect deposit costs to increase during 2023, relative to 2022, and core deposits balances may decrease. Additionally, outgoing core deposits may be replaced by higher cost funding sources, such as FHLB advances, brokered deposits, or other wholesale funding.
The following table sets forth time deposits by remaining maturity as of June 30, 2023:
3 Months or
Over 3 through
Over 6 through
Over
Less
6 Months
12 Months
Time deposits:
Amounts less than $100,000
37,353
46,284
81,220
67,736
232,593
Amounts of $100,000 or more but less than $250,000
31,538
36,291
54,412
35,816
158,057
Amounts of $250,000 or more
9,036
23,485
32,569
13,615
78,705
Total time deposits
77,927
106,060
168,201
117,167
As of June 30, 2023 and December 31, 2022, the Bank’s uninsured deposits were estimated to be $824.1 million and $739.0 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. 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, borrowings from the FHLB and FRB, and brokered deposits. 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.
As of June 30, 2023, 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 June 30, 2023, the Bank had no material commitments for capital expenditures.
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 June 30, 2023, the Holding Company had cash and cash equivalents of $6.2 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 months ended June 30, 2023 and 2022, the Bank paid $15.0 million and $6.0 million in dividends to the Holding Company, respectively. During the six months ended June 30, 2023 and 2022, the Bank paid $40.0 million and $12.0 million in dividends to the Holding Company, respectively.
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 June 30, 2023 and 2022, holding company operating expenses consisted of interest expense of $1.4 million and $0.9 million, respectively, and other operating expenses of $1.2 million and $1.0 million, respectively. During the six months ended June 30, 2023 and 2022, holding company operating expenses consisted of interest expense of $2.6 million and $1.7 million, respectively, and other operating expenses of $3.4 million and $2.5 million, respectively.
Additionally, the Holding Company paid $5.5 million and $4.7 million of dividends to stockholders during the three months ended June 30, 2023 and 2022, respectively, and paid $11.0 million and $9.3 million of dividends to stockholders during the six months ended June 30, 2023 and 2022, respectively. The Holding Company also paid $38.0 million in cash consideration in the acquisition of Town and Country during the first quarter of 2023.
As of June 30, 2023, 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 June 30, 2023, 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 June 30, 2023, 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.
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 June 30, 2023 and December 31, 2022, the capital conservation buffer requirement was 2.5% of risk-weighted assets.
As of June 30, 2023 and December 31, 2022, 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.
83
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
N/A Not applicable.
As of June 30, 2023, 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 2022, the Company paid quarterly cash dividends of $0.16 per share. On January 24, 2023, the Company announced an increase of $0.01 and paid a $0.17 per share dividend during the first and second quarters of 2023.
Stock Repurchase Program
Under the Company’s stock repurchase program, the Company repurchased 229,502 shares of its common stock at a weighted average price of $18.07 during the three months ended June 30, 2023. 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, 2024. As of June 30, 2023, the Company had $9.3 million remaining under the current stock repurchase authorization.
OFF-BALANCE SHEET ARRANGEMENTS
As a financial services provider, the Bank routinely is a party to various financial instruments with off-balance sheet risks, such as commitments to extend credit, standby letters of credit, unused lines of credit, commitments to sell loans, and interest rate swaps. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process afforded to loans originated by the Bank. For additional information, see “Note 15 – 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 estimates could be deemed critical:
The allowance for credit losses reflects an estimate of lifetime expected credit losses. Measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is established through a provision for credit losses which is charged to expense. Additions to the allowance for credit losses are expected to maintain the adequacy of the total allowance for credit losses. Loan losses are charged off against the allowance for credit losses 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 for credit losses.
Management uses the discounted cash flow method to estimate expected credit losses for all loan categories, except for consumer loans where the weighted average remaining maturity method is utilized. The Company uses regression analysis of historical internal and peer data to determine which macroeconomic variables are most closely correlated with credit losses, such as the unemployment rate and changes in GDP. Management leverages economic projections from a reputable third party to inform its economic forecasts with a reversion to historical averages for periods beyond a reasonable and supportable forecast period.
Nonaccrual loans and loans which do not share risk characteristics with other loans in the pool are individually evaluated to determine expected credit losses.
The allowance for credit losses on unfunded commitments is estimated in the same manner as the associated loans adjusted for anticipated funding rate.
Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair value on the acquisition date. Estimating such fair values may require highly subjective assumptions or the use of a valuation specialist. In the Town and Country acquisition, the fair value for loans was most significant estimate and relatively small changes in assumptions used in this estimate could result in a materially different conclusion.
The fair value for loans was based on a discounted cash flow methodology that considered credit loss and prepayment expectations, market interest rates and other market factors, such as liquidity, from the perspective of a market participant. Loan cash flows were generated on an individual loan basis. The probability of default, loss given default, exposure at default, and prepayment assumptions are key factors in this analysis.
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
Reconciliation of Non-GAAP Financial Measure - Adjusted Net Income and Adjusted Return on Average Assets
Adjustments:
Acquisition expenses (1)
(627)
(13,691)
Gains (losses) on sales of closed branch premises
(18)
Total adjustments
(411)
(15,106)
2,274
Tax effect of adjustments
(99)
4,156
(648)
Less adjustments after tax effect
(299)
(10,950)
1,626
Adjusted net income
Average assets
Adjusted return on average assets *
Includes recognition of an allowance for credit losses on non-PCD loans of $5.2 million and an allowance for credit losses on unfunded commitments of $0.7 million in connection with the Town and Country merger during the first quarter of 2023.
Reconciliation of Non-GAAP Financial Measure - Adjusted Earnings Per Share
Earnings allocated to participating securities (1)
(10)
(23)
Numerator for adjusted earnings per share - basic and diluted
18,762
13,819
38,608
26,031
Adjusted earnings per share - Basic
1.23
Adjusted earnings per share - Diluted
Reconciliation of Non-GAAP Financial Measure – Net Interest Income and Net Interest Margin (Tax Equivalent Basis)
Net interest income (tax equivalent basis)
Tax-equivalent adjustment (1)
Net interest income (tax equivalent basis) (1)
Net interest margin (tax equivalent basis)
Tax-equivalent adjustment * (1)
Net interest margin (tax equivalent basis) * (1)
Average interest-earning assets
Reconciliation of Non-GAAP Financial Measure - Efficiency Ratio (Tax Equivalent Basis)
Efficiency ratio (tax equivalent basis)
Less: amortization of intangible assets
Adjusted noninterest expense
33,253
23,597
68,676
47,509
Operating revenue
42,924
113,060
84,895
Operating revenue (tax-equivalent basis) (1)
59,501
43,522
114,477
86,022
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: 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
54,643
22,520
1,597
19,097
1,720
Average tangible common equity
372,109
347,612
364,708
361,292
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
27,158
Less: brokered deposits
51,010
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
Increase (Decrease)
Estimated Net Interest Income
Change in Interest Rates (basis points)
in EVE
Year 1
Year 2
+300
3.0
4.5
7.7
+200
3.1
2.6
5.0
+100
2.0
0.6
2.1
-100
(3.4)
(4.3)
(5.9)
-200
(8.2)
(7.3)
(10.8)
-300
(14.0)
(15.7)
6.9
10.5
8.7
4.8
5.3
2.5
4.2
(7.9)
(4.0)
(19.5)
(9.6)
(13.6)
(27.0)
(14.7)
(20.5)
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 June 30, 2023, 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 June 30, 2023, 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, 2022, filed with the SEC on March 8, 2023.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
On December 20, 2022, 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, 2024 with the timing of purchases and number of shares repurchased dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements, and market conditions. The Company is not obligated to purchase any shares under the stock repurchase program, and the stock repurchase program may be suspended or discontinued at any time without notice.
The following table sets forth information about the Company’s purchases of its common stock during the second quarter of 2023:
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)
April 1 - 30, 2023
56,242
18.96
12,351
May 1 - 31, 2023
104,469
17.38
10,536
June 1 - 30, 2023
68,791
18.38
9,271
229,502
18.07
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
During the fiscal quarter ended June 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule10b5-1(c) or any non-Rule 10b5-1 trading arrangement.
ITEM 6. EXHIBITS
Exhibit No.
Description
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 *
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.2 *
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350.
101.INS
iXBRL Instance Document.
101.SCH
iXBRL Taxonomy Extension Schema Document.
101.CAL
iXBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
iXBRL Taxonomy Extension Label Linkbase Document.
101.PRE
iXBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF
iXBRL Taxonomy Extension Definition Linkbase Document.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101).
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent the Company specifically incorporates it by reference.
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.
August 2, 2023
By:
/s/ Peter R. Chapman
Peter R. Chapman
Chief Financial Officer
(on behalf of the registrant and as principal financial officer)