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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
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
(State or other jurisdiction of
incorporation or organization)
401 North Hershey Road
Bloomington, Illinois 61704
(Address of principal executive offices,
including zip code)
37‑1117216
(I.R.S. Employer
Identification No.)
(888) 897‑2276
(Registrant’s telephone number,
including area code)
Title of each class
Common Stock, par value $0.01 per share
Trading Symbol(s)
HBT
Name of each exchange on which registered
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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
Non-accelerated filer
Emerging growth company
☐
☒
☒
Accelerated filer
Smaller reporting 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 March 27, 2020, there were 27,457,306 shares outstanding of the registrant’s common stock, $0.01 par value.
Items 10, 11, 12, 13 and 14 of Part III incorporate information by reference from the definitive Proxy Statement for the 2020 Annual Meeting of Stockholders
of HBT Financial, Inc. to be filed within 120 days of December 31, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
HBT Financial, Inc.
PART I.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10‑K Summary
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K are forward-looking statements. Forward-looking
statements may include statements relating to our future plans, strategies and expectations, as well as our future revenues,
expenses, earnings, losses, financial performance, financial condition, asset quality metrics and future prospects. 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:
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our asset quality and any loan charge-offs;
the composition of our loan portfolio;
time and effort necessary to resolve nonperforming assets;
environmental liability associated with our lending activities;
the effects of the current low interest rate environment or changes in interest rates on our net interest income, net
interest margin, our investments, and our loan originations, and our modeling estimates relating to interest rate
changes;
our access to sources of liquidity and capital to address our liquidity needs;
our inability to receive dividends from our Banks, pay dividends to our common stockholders or satisfy obligations as
they become due;
the effects of problems encountered by other financial institutions;
our ability to achieve organic loan and deposit growth and the composition of such growth;
our ability to attract and retain skilled employees or changes in our management personnel;
any failure or interruption of our information and communications systems;
our ability to identify and address cybersecurity risks;
the effects of the failure of any component of our business infrastructure provided by a third party;
our ability to keep pace with technological changes;
our ability to successfully develop and commercialize new or enhanced products and services;
current and future business, economic and market conditions in the United States generally or in Illinois in particular;
the geographic concentration of our operations in the State of Illinois;
our ability to effectively compete with other financial services companies and the effects of competition in the financial
services industry on our business;
our ability to attract and retain customer deposits;
our ability to maintain our Banks’ reputations;
severe weather, natural disasters, pandemics, acts of war or terrorism or other external events;
the effects of the coronavirus pandemic;
possible impairment of our goodwill and other intangible assets;
the impact of, and changes in applicable laws, regulations and accounting standards and policies;
our prior status as an S Corp;
possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments,
agencies, central banks and similar organizations;
the effectiveness of our risk management and internal disclosure controls and procedures;
·
· market perceptions associated with certain aspects of our business;
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the one-time and incremental costs of operating as a standalone public company;
our ability to meet our obligations as a public company, including our obligations under Section 404 of Sarbanes-
Oxley; and
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·
damage to our reputation from any of the factors described above, in Part I, Item 1A “Risk Factors”, Part II, Item 7
"Management’s Discussion and Analysis of Financial Condition and Results of Operations", or elsewhere in this
Annual Report on Form 10‑K.
These risks and uncertainties, as well as the factors discussed in Part I, Item 1A "Risk Factors," 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.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
HBT Financial, Inc. (the “Company”), a Delaware corporation incorporated in 1982, is a bank holding company headquartered
in Bloomington, Illinois that has elected to be regulated as a financial holding company. As of December 31, 2019, we had
total assets of $3.2 billion, loans held for investment of $2.2 billion, total deposits of $2.8 billion and stockholders' equity of
$333 million. Through our two bank subsidiaries, Heartland Bank and Trust Company (“Heartland Bank”) and State Bank of
Lincoln (collectively referred to as the “Banks”), we provide a comprehensive suite of business, commercial and retail banking
products and services to individuals, businesses, and municipal entities throughout Central and Northeastern Illinois. The
Company’s common stock is traded on the Nasdaq exchange under the symbol “HBT.”
The roots of our Company can be traced back 100 years to 1920 when M.B. Drake, the grandfather of our current Chairman
and CEO, Fred Drake, helped found a community bank in Cornland, Illinois. The Drake family operated several banks
throughout Central Illinois, and eventually, in 1982, George Drake (M.B.'s son and Fred's father) incorporated the Company
as one of the first multi-bank holding companies in Illinois. Since that time, we have grown both organically and through the
successful integration of more than a dozen community bank acquisitions.
The foundation for our success has been built upon a steadfast commitment to our core operating principles:
·
Prioritize safety and soundness. We engage in safe and sound banking practices that preserve the asset quality of
our balance sheet and protect our deposit base.
· Maintain strong profitability. We have produced consistently strong earnings – before, during, and since the 2008-
2009 financial crisis.
·
·
Continue disciplined growth. We have a strong track record of organic and acquisitive growth with our seasoned
senior management team.
Uphold our Midwestern values. We convey the values of the Midwest through hard work, perseverance and doing
the right things. We serve our customers well; provide employment, challenges and rewards for our staff; and
generate good returns for our stockholders.
PRODUCTS AND SERVICES
Our products and services are primarily deposit, lending, and ancillary products that offer a broad range of options to meet
the needs of individuals, businesses, and municipal entities. We continue to enhance our digital banking suite of products so
that all consumer and commercial customers can do their banking at their convenience, through their channels of choice.
Additionally, we provide traditional trust and investment services, farmland management and farmland sales through our
Wealth Management division.
Lending Products and Services
We offer a broad range of lending products with a focus on regulatory commercial real estate ("CRE"), which includes non-
owner occupied CRE, construction and land development (“C&D”) and multi-family; commercial and industrial ("C&I") and
owner-occupied CRE; agricultural and farmland; and one-to-four family residential loans. We also provide municipal,
consumer and other loans.
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We have a strong credit culture that is conservative, favors asset quality first, and balances local lenders' knowledge of their
marketplace with a strong centralized credit process. We maintain a well-diversified portfolio of loans and control
concentrations related to loan types and specific industries or businesses.
Regulatory CRE
We provide financing for a wide variety of property types including multi-family, senior living, retail, warehouse,
manufacturing, office, and hotel/motel. Our C&D portfolio includes both ground up construction projects and renovation
projects in addition to some developed and undeveloped land. We focus on borrowers with successful backgrounds in
owning, managing, and developing real estate projects.
C&I and Owner-occupied CRE
We make loans to a wide variety of businesses with no material concentration in any one industry. C&I loans primarily include
loans for working capital and equipment needs to small and mid-sized businesses in the communities that we serve. Owner-
occupied CRE primarily includes amortizing first mortgage loans on properties occupied by our C&I customers. We focus on
small and middle market businesses in the communities that we serve.
Agriculture and Farmland
With our roots in smaller communities throughout Central Illinois, we have a long history of financing agriculture production
and land. We originate loans to agriculture producers for input costs, equipment and land. Most of our agriculture loans are to
family farms growing corn and soybeans.
One-to-Four Family Residential
These loans include both owner-occupied and non-owner occupied one-to-four family homes and condominiums. They
consist of first mortgage amortizing loans, second mortgage amortizing loans and home equity lines of credit. These loans
primarily consist of loans originated by our lenders through our branch network on properties in the communities that we
serve.
Deposit Products and Services
We offer traditional bank deposit account services as well as digital banking services tailored to meet the needs of today's
deposit consumers. Our deposit accounts consist of noninterest-bearing demand deposits, interest-bearing transaction
accounts, money market accounts, savings accounts, certificates of deposits, HSA, and IRA accounts. Our digital banking
services include online banking, mobile banking, digital payments, and personal financial management tools. We also provide
commercial checking accounts and related services such as treasury management.
Wealth Management
Our wealth management division provides financial planning to individuals, trusts and estates; trustee and custodial services;
investment management; corporate retirement plan consulting and administration; and retail brokerage services. Further, our
agriculture services department operates under our wealth management division and provides farm management services
and brokers farmland sales and crop insurance throughout our markets.
Residential Mortgage Origination and Servicing
We originate one-to-four family residential mortgage loans and generally sell those loans in the secondary market. Loans are
originated by our mortgage lenders within our branch network. To a lesser extent, we purchase loans originated by other
banks that are in turn sold into the secondary market. We sell conventional
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loans to both Freddie Mac and Fannie Mae and retain the servicing for substantially all those loans. We also originated FHA,
VA and Rural Development loans, which are typically sold servicing released.
MARKET AREA
We currently operate 61 full-service and three limited-service branch locations across 18 counties in Central and
Northeastern Illinois, including the Chicago metropolitan market. We hold a leading deposit market share in many of our
markets in Central Illinois, which we define as a top three deposit share rank, providing the foundation for our strong deposit
base. The stability provided by this low-cost funding is a key driver of our strong track record of financial performance. Our
long history of providing relationship-based, personal banking services; the successful integration of several strategic in-
market acquisitions; and a relatively small presence of money center and super-regional banks in our mid-sized markets has
enabled us to maintain meaningful market share in these markets.
Our management team believes our diverse footprint in both urban and rural markets positions us well relative to our
competition in terms of access to both high quality, stable funding sources and a wealth of loan growth opportunities in
attractive markets. We consider ourselves to be well positioned to meet the needs of commercial and retail customers
through our branch network, comprehensive suite of banking and wealth management products, and our commitment to
high-touch customer service.
BUSINESS STRATEGY
We intend to pursue the following strategies that we believe will continue to drive growth while maintaining our high levels of
asset quality and profitability:
Preserve Strong Ties to our Communities
Our community banking approach stems from our Midwestern values—hard work; perseverance; and doing the right things
for our customers, staff, stockholders and communities. Our senior management team lives and works in the communities we
serve, and our commitment to delivering banking products and services that support the needs of our target customers
enables us to preserve and grow share in our markets. The quality of our comprehensive suite of products and services
coupled with our relationship-based approach to banking contribute meaningfully to our growth and success.
Deploy Excess Deposit Funding into Loan Growth Opportunities
Our strong market share in our core mid-sized markets provide a stable source of attractive funding. Our management
believes our scale in these mid-sized markets and the relative scarcity of money center banking institutions operating in them
creates a highly defensible market position whereby we can continue to maintain our funding cost advantage relative to our
peer groups. We believe the Chicago MSA provides significant opportunities for loan growth. Many competitors in this market
are money center or super-regional banks, and we believe our responsive, local decision-making provides a competitive
advantage over these larger, more bureaucratic institutions. Further, we expect to continue to benefit from continued market
disruption in the Chicago MSA, caused by recent significant bank acquisitions, by acquiring talent and customers
experiencing displacement.
Maintain a Prudent Approach to Credit Underwriting
Robust underwriting and pricing standards have been a hallmark of the Company and continue to serve as a central tenet of
our banking strategy even as we grow our loan portfolio in newer markets. We intend to prudently deploy our excess funding
and liquidity into assets that optimize risk-adjusted returns and maintain peer-leading net interest margin with minimal losses.
Further, we believe our history of maintaining strong asset quality and minimal levels of problem assets even through the
Great Recession confirms the effectiveness of our strong credit underwriting.
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Pursue Strategic Acquisitions
Our management team has a history of successfully integrating strategic acquisitions over several decades. We believe this
track record will position the Company to be an attractive acquirer for many potential partners. We continue to
opportunistically seek acquisitions that are either located within our market footprint, in adjacent markets or provide a new
growth opportunity that is strategically and financially compelling and consistent with our culture.
EMPLOYEES
At December 31, 2019, we had 747 full-time equivalent employees. Our employees are not represented by a collective
bargaining unit and we consider our working relationship with our employees to be good.
COMPETITION
Our profitability and growth are affected by the highly competitive nature of the financial services industry. We compete with
community banks in all of our markets and, to a lesser extent, with money center banks, primarily in the Chicago MSA.
Additionally, we compete with non-bank financial services companies and other financial institutions operating within the
areas we serve.
Our competition for loans comes principally from commercial banks, savings banks, mortgage banking companies, the U.S.
Government, credit unions, leasing companies, insurance companies, real estate conduits and other companies that provide
financial services to businesses and individuals.
Our most direct competition for deposits has historically come from commercial banks and credit unions. We face increasing
competition for deposits from online financial institutions and non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies.
We seek to meet this competition by emphasizing personalized service and efficient decision-making tailored to individual
needs. We do not rely on any individual, group, or entity for a material portion of our loans or our deposits.
We continue to see increased competitive pressures on loan rates and terms and increased competition for deposits.
Continued loan pricing pressure may affect our financial results in the future.
COMPANY WEBSITE
The Company maintains a website at ir.hbtfinancial.com. The contents of this website are not a part of this report. All periodic
and current reports of the Company and amendments to these reports filed with the Securities and Exchange Commission
(“SEC”) can be accessed, free of charge, through this website and at www.sec.gov as soon as reasonably practicable after
these materials are filed with the SEC.
INITIAL PUBLIC OFFERING
On October 11, 2019, we priced our initial public offering (the “IPO”). In the IPO, we issued and sold 9,429,794 shares of
common stock and received proceeds, net of offering costs, of approximately $138 million. The proceeds were used to fund a
$170 million special dividend, or $9.43 per share, to stockholders of record prior to the initial public offering.
SUPERVISION AND REGULATION
We and our subsidiaries, including Heartland Bank and State Bank of Lincoln, are subject to extensive supervision, regulation
and examination under federal and state banking laws, which impose a comprehensive system of supervision, regulation and
enforcement on our operations. We are also subject to the disclosure
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and regulatory requirements of the Securities Act of 1933, as amended (the “Securities Act”) and the Exchange Act of 1934
(the “Exchange Act”), both as administered by the SEC, as well as the corporate governance rules that apply to companies
with securities listed on the Nasdaq.
Banking laws, regulations and policies are continually under review by Congress, state legislatures and federal and state
regulatory agencies. In addition, federal and state bank regulatory agencies may issue policy statements, interpretive letters
and similar written guidance applicable to us and our subsidiaries. This regulatory framework has a significant effect on our
growth and financial performance and is intended primarily for the protection of bank depositors, bank customers, the Deposit
Insurance Fund (the “DIF”), and the U.S. banking and financial system and financial markets as a whole, and not for the
protection of our stockholders and creditors.
Both the scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in
response to the global financial crisis of 2008, as well as other factors such as technological and market changes. Regulatory
enforcement and fines have also increased across the banking and financial services sector. Many of these changes have
occurred as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) and its
implementing regulations, most of which are now in place. While the regulatory environment has entered a period of tailoring
and rebalancing of the post financial crisis framework, we expect that our business will remain subject to extensive regulation
and supervision.
The following discussion describes certain elements of the comprehensive bank regulatory framework applicable to us, which
descriptions are qualified in their entirety by reference to the subject laws, regulations and written guidance. This discussion
is not intended to describe all laws and regulations applicable to us, the Banks and our other subsidiaries.
General
We are a bank holding company under the Bank Holding Company Act of 1956 (the “BHCA”), subject to supervision and
regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). We have elected to be
regulated as a financial holding company, although we currently do not conduct any non-banking activities or have any non-
bank subsidiaries. Each of Heartland Bank and State Bank of Lincoln is chartered as a commercial bank under the laws of
Illinois with its deposits insured by the Federal Deposit Insurance Corporation (“FDIC”) and is not a member of the Federal
Reserve System. Consequently, the primary banking regulators of each of the Banks are the FDIC and the Illinois
Department of Financial and Professional Regulations (the “IDFPR”). As the owner of Illinois-chartered banks, we also are
subject to the supervision of the IDFPR.
We and our Banks are subject to regular examination by our respective banking regulators, which result in examination
reports and ratings that can impact the conduct and growth of our operations. Examination results and many related
supervisory matters are confidential. These examinations consider compliance with applicable banking laws and regulations,
capital levels, asset quality and risk, ability and performance of management, earnings, liquidity, and various other factors.
The banking agencies generally have broad discretion to impose restrictions and limitations on the operations of a bank or
bank holding company if they determine that the financial condition, capital resources, asset quality, earnings prospects,
management, liquidity or other aspects of a banking organization's operations are unsatisfactory, unsafe, unsound or fail to
comply with applicable law, or are otherwise inconsistent with laws and regulations or with the supervisory policies of the
agency. Further, the banking agencies have great flexibility and powers to undertake enforcement actions against bank
holding companies, banks, and their respective officers, directors and institution-affiliated parties, including the power to
impose a capital plan and capital directive, impose nonpublic supervisory agreements, issue cease and desist orders, impose
civil money penalties, appoint a conservator or receiver or the termination of deposit insurance.
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Federal law requires us, as a bank holding company, to act as a source of financial and managerial strength to our Banks.
Under this requirement, we are expected to commit resources to support the Banks, even if we may not be in a financial
position to provide such resources or if it may not be in our stockholders' or creditors' best interests to do so. In the event of
our bankruptcy, any commitment by us to a banking agency to maintain the capital of our Banks will be assumed by the
bankruptcy trustee and entitled to priority of payment.
Permitted Activities
In general, the BHCA limits the business of bank holding companies to banking, managing or controlling banks and other
activities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto.
Bank holding companies that qualify and elect to be treated as "financial holding companies" may engage in a broader range
of additional activities than bank holding companies, may obtain regulatory approval for certain proposed acquisitions or
mergers more quickly and, in certain circumstances, may complete acquisitions without prior regulatory approval. In
particular, financial holding companies may engage in activities that are (i) financial in nature or incidental to such financial
activities or (ii) complementary to a financial activity and do not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally.
The Federal Reserve has the power to order a bank holding company or any of its subsidiaries to terminate any activity or to
terminate ownerships or control of any subsidiary if the Federal Reserve has reasonable grounds to believe that continuing
such activity, ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank
subsidiary of the bank holding company.
As Illinois-chartered commercial banks, each of our Banks' business is generally limited to activities permitted by Illinois law
and applicable federal laws. Under the Illinois Banking Act, our Banks generally may engage in all usual banking activities,
including accepting deposits, making commercial and consumer loans and buying and selling certain investment securities.
However, Illinois law also imposes restrictions on the activities of our Banks which are intended to promote their safety and
soundness. For example, our Banks are restricted under the Illinois Banking Act from investing in certain types of investment
securities and are generally limited in the amount that each can lend to a single borrower or invest in securities issued by a
single issuer.
Acquisitions and Branching
The BHCA, Section 18(c) of the Federal Deposit Insurance Act (the "Bank Merger Act"), the Illinois Banking Act, the Illinois
Bank Holding Company Act and other federal and state statutes regulate acquisitions of banks and bank holding companies.
Federal law permits state and national banks to merge with banks in other states, subject to applicable regulatory approvals,
deposit concentration limits, and any state law limitations requiring the merging bank to have been in existence for a
minimum period of time (not to exceed five years). We must obtain the prior approval of the Federal Reserve before (i)
acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company, if after such
acquisition, we will directly or indirectly own or control 5% or more of any class of voting shares of the institution, (ii) acquiring
all or substantially all of the assets of any bank or bank holding company (other than directly through the Banks) or (iii)
merging or consolidating with any other bank holding company. Under the Bank Merger Act, the prior approval of the FDIC is
required for either of our Banks to merge with another bank or purchase all or substantially all of the assets or assume any of
the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, banking
agencies consider, among other things, the competitive effect and public benefits of the transactions, the capital position and
managerial resources of the combined organization, the risks to the stability of the U.S. banking or financial system, the
applicant's performance record under the CRA, the applicant's compliance with fair housing and other consumer protection
laws and the effectiveness of all organizations involved in combating money laundering activities. In addition, failure to
implement or maintain adequate compliance programs could cause bank regulators not to approve an application in
connection with an acquisition, or to prohibit any further acquisition activity of a bank or bank holding company, whether or
not approval is required.
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Illinois state-chartered banks have the authority under Illinois law to establish branches anywhere in the State of Illinois,
subject to receipt of all required regulatory approvals. Under federal law, the Banks may, with the approval of the FDIC, open
a branch in any state if the law of that state would permit a state bank chartered in that state to establish the branch.
Acquisitions of Control of the Company
Acquisitions of our voting stock above certain thresholds are subject to prior regulatory notice or approval under federal
banking laws, including the BHCA and the Change in Bank Control Act of 1978 (the “CBCA”). Under the CBCA, a person or
entity generally must provide prior notice to the Federal Reserve before acquiring the power to vote 10% or more of our
outstanding common stock. Investors should be aware of these requirements when acquiring shares in our stock. In addition,
under the Illinois Banking Act, any acquisition of our stock that results in a change in control of the Company would require
prior approval of the IDFPR.
Dividends, Share Repurchases and Redemptions
We are a legal entity separate and distinct from our subsidiaries and, because substantially all of our net income comes from
the Banks, our ability to pay dividends or repurchase or redeem shares depends upon our receipt of dividends or other
distributions from the Banks. There are limitations on the payment of dividends by the Banks to the Company, as well as by
the Company to its stockholders, under applicable banking laws and regulations.
Federal banking agencies are authorized to determine, under certain circumstances relating to the financial condition of a
bank holding company or a bank, that the payment of dividends would be an unsafe or unsound practice and to prohibit
payment thereof. In particular, the banking agencies have stated that paying dividends that deplete a banking organization's
capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should
generally pay dividends only out of current operating earnings. Under the Basel III Capital Rules, the Company and the
Banks must maintain the applicable Capital Conservation Buffer to avoid becoming subject to restrictions on capital
distributions, including dividends. For more information on these financial measures at the Company, Heartland Bank, and
State Bank of Lincoln, see Note 18 to our audited consolidated financial statements included in Item 8, "Financial Statements
and Supplementary Data," of this Form 10‑K.
In addition, Federal Reserve policy provides that bank holding companies, such as the Company, should generally pay
dividends to stockholders only if (i) the organization's net income available to common stockholders over the past year has
been sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial condition and (iii) the organization will continue to meet
minimum capital adequacy ratios. The policy also provides that a bank holding company should inform the Federal Reserve
reasonably in advance of declaring or paying a dividend that exceeds earnings for the period for which the dividend is being
paid or that could result in a material adverse change to the bank holding company's capital structure. In addition, the Federal
Reserve could prohibit or limit the payment of dividends by a bank holding company if it determines that payment of the
dividend would constitute an unsafe or unsound practice.
As an Illinois-chartered bank, each Bank, may pay dividends without the approval of its banking regulators only if it meets
applicable regulatory capital requirements before and after the payment of the dividends and total dividends do not exceed
an amount equal to the accumulated retained earnings of the Bank after giving effect to any unrecognized losses and bad
debts. For the purpose of determining the amount of dividends that an Illinois bank may pay, bad debts are defined as debts
upon which interest is past due and unpaid for a period of six months or more unless such debts are well secured and in the
process of collection.
Further, under the BHCA, we may be required to provide the Federal Reserve with prior written notice of any purchase or
redemption of our outstanding equity securities if the gross consideration for the purchase or redemption, when combined
with the net consideration paid for all such purchases or redemptions during the
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preceding twelve months, is equal to 10% or more of our consolidated net worth. The Federal Reserve may disapprove such
a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate
any law, regulation, Federal Reserve order, or any condition imposed by or written agreement with the Federal Reserve. This
prior notice requirement does not apply to any bank holding company that meets certain well-capitalized and well-managed
standards and is not subject to any unresolved supervisory issues.
Regulatory Capital Requirements
The Federal Reserve monitors our capital adequacy on a consolidated basis, and the FDIC and the IDFPR monitor the
capital adequacy of our Banks. The Company and the Banks are required to maintain minimum capital ratios, as well as a
capital conservation buffer, pursuant to final rules approved by federal bank regulators (the "Basel III Capital Rules") based
on the Basel III framework set forth by the Basel Committee on Banking Supervision (the "Basel Committee") as well as
certain provisions of the Dodd-Frank Act.
Under the Basel III Capital Rules, the Company and the Banks are required to have minimum capital ratios of (i) Common
Equity Tier 1 (“CET1”) capital to risk-weighted assets of at least 4.5%, (ii) Tier 1 capital to risk-weighted assets of at least
6.0%, (iii) total capital to risk-weighted assets of at least 8.0%, and (iv) Tier 1 capital to average assets (known as the
“leverage ratio”) of at least 4.0%.
In addition to meeting the minimum capital requirements, the Company and the Banks must also maintain the required capital
conservation buffer to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus
payments to management. The capital conservation buffer is calculated as a ratio of CET1 capital to risk-weighted assets,
and it effectively increases the required minimum risk-based capital ratios.
The capital conservation buffer requirement became fully phased-in on January 1, 2019 and is now 2.5%. Therefore, the
minimum capital requirements the Company and the Banks must satisfy to avoid limitations on capital distributions and
certain discretionary bonus payments (i.e., the required minimum capital ratios plus the capital conservation buffer) were
(i) CET1 capital to risk-weighted assets of at least 7.0%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and
(iii) total capital to risk-weighted assets of at least 10.5%. The leverage ratio is not impacted by the capital conservation
buffer.
Well-Capitalized Requirements
The ratios described above are minimum standards in order for banking organizations to be considered “adequately
capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that
end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels
in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for
exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for
expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher
capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking
organizations. The Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate
account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities,
securities trading activities, or significant or anticipated growth.
In order to be considered well capitalized, the Banks must maintain minimum capital ratios of (i) CET1 capital to risk-weighted
assets of at least 6.5%, (ii) Tier 1 capital to risk-weighted assets of at least 8.0%, (iii) total capital to risk-weighted assets of at
least 10.0%, and (iv) leverage ratio of at least 5.0%. A banking institution may be considered well-capitalized while remaining
out of compliance with the capital conservation buffer.
Failure to be well-capitalized or to meet minimum capital requirements could result in certain mandatory and possible
additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our operations or
financial condition. Failure to be well-capitalized or to meet minimum capital requirements
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could also result in restrictions on the Company's or the Banks' ability to pay dividends or otherwise distribute capital or to
receive regulatory approval of applications.
Community Bank Leverage Ratio
Pursuant to the Regulatory Relief Act, banks and bank holding companies with assets of less than $10 billion and that are not
determined to be ineligible by their primary federal regulator due to their risk profile (a "Qualifying Community Bank") may
choose to satisfy their regulatory capital requirements by maintaining a certain "community bank leverage ratio," which is
equal to tangible equity capital divided by average total consolidated assets. Under the final rule, effective January 1, 2020, a
Qualifying Community Bank with a community bank leverage ratio that exceeds 9.0% would be considered to be "well-
capitalized" and to have met generally applicable leverage and risk-based capital requirements. The community bank
leverage ratio framework is an optional framework that is designed to reduce burden by removing the requirements for
calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework.
We have not elected to be subject to the Community Bank Leverage Ratio.
Prompt Corrective Action Framework
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Improvement Act") requires the banking
agencies to take prompt corrective action with respect to banks that fall below minimum capital standards, and prohibits any
bank from making any capital distribution that would cause it to be undercapitalized. Banks that are not adequately
capitalized may be subject to a variety of supervisory actions, including restrictions on growth, investment activities, capital
distributions and affiliate transactions, and will be required to submit a capital restoration plan which, to be accepted by the
banking agencies, must be guaranteed in part by any company having control of the institution. The FDIC Improvement Act
also provides for enhanced supervisory authority with respect to banks that fall below minimum capital standards, including
greater authority for the appointment of a conservator or receiver for critically undercapitalized institutions. Acting as a
conservator or receiver, the FDIC would have broad powers to transfer any assets or liabilities of the institution without the
approval of the institution's creditors or stockholders. Banks that are less than well-capitalized are also subject to restrictions
under the Federal Deposit Insurance Act (the "FDI Act") relating to accepting and renewing brokered deposits, as well as
deposit rate restrictions.
Under the Basel III Capital Rules, a bank qualifies as (i) "well capitalized" if it has a total risk-based capital ratio of 10% or
greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8% or greater and a Leverage Ratio of 5%
or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific
capital level for any capital measure; (ii) "adequately capitalized" if it has a total risk-based capital ratio of 8% or greater, a
CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a Leverage Ratio of 4% or greater
and is not "well capitalized"; (iii) "undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a CET1 capital
ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6% or a Leverage Ratio of less than 4%; (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio of less than 6%, a CET1 capital ratio less than 3%, a Tier 1 risk-
based capital ratio of less than 4% or a Leverage Ratio of less than 3%; and (v) "critically undercapitalized" if its tangible
equity is equal to or less than 2% of average quarterly tangible assets.
Management believes that as of December 31, 2019, each of our Banks qualified as “well capitalized”.
Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve's Regulation W impose qualitative standards and
quantitative limitations upon certain transactions between FDIC-insured banks, such as the Banks, and its affiliates, including
between a bank and its holding company. Transactions covered by these provisions include a loan or extension of credit to
an affiliate, a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal
Reserve) from an affiliate, derivative transactions that create a credit exposure to an affiliate, securities borrowing and lending
transactions with an
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affiliate, the acceptance of securities issued by an affiliate as collateral for a loan, and the issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate. All such transactions with any one affiliate cannot exceed 10% of the
bank's total capital, and all such transactions with all affiliates cannot exceed 20% of the bank's total capital. However, if the
transaction is a loan or other extension of credit that is fully secured by cash or other prescribed and limited types of collateral
in a segregated, earmarked deposit account, it will not be counted for purposes of the 10% and 20% thresholds. In addition,
such transactions must be on terms that are at least as favorable to the bank as those that it could obtain in a comparable
transaction with a non-affiliate.
The Federal Reserve's Regulation O also places similar restrictions on loans and other extensions of credit by FDIC-insured
banks, such as the Banks, to their directors, executive officers and principal stockholders, as well as to entities controlled by
such persons. Among other things, extensions of credit to such insiders are required to be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for
comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the
normal risk of non-repayment or present other unfavorable features and may not exceed certain limitations on the amount of
credit extended to such persons individually and in the aggregate.
Safety and Soundness Standards
The FDIA requires the FDIC, together with the other banking agencies, to prescribe standards of safety and soundness, by
regulations or guidelines, relating generally to operations and management, asset growth, asset quality, earnings, stock
valuation, and compensation. In addition, the banking agencies have adopted a set of guidelines prescribing safety and
soundness standards pursuant to the FDIC Improvements Act which establish general standards relating to internal controls,
risk management and information systems, internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, and compensation, fees and benefits. In general, the guidelines require appropriate systems and
practices to identify and manage specified risks and exposures. The guidelines prohibit excessive compensation as an
unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee, director or principal stockholder.
In addition, the banking agencies adopted regulations that authorize, but do not require, the agencies to order an institution
that has been given notice that it is not satisfying the safety and soundness guidelines to submit a compliance plan. If after
being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an
accepted compliance plan, the banking agency must issue an order directing action to correct the deficiency and may issue
an order directing other actions of the types to which an undercapitalized institution is subject under the "prompt corrective
action" provisions of the FDIA described above. If an institution fails to comply with such an order, the banking agency may
seek to enforce its order in judicial proceedings and to impose civil money penalties. The banking agencies have also
adopted guidelines for asset quality and earning standards. State-chartered banks, including the Banks, may also be subject
to a state's statutes, regulations and guidelines relating to safety and soundness.
Source of Strength
The Company is required to serve as a source of financial and managerial strength to the Banks and, under appropriate
conditions, to commit resources to support the Banks. This support may be required by the Federal Reserve at times when
we might otherwise determine not to provide it or when doing so is not otherwise in the interests of the Company or our
stockholders or creditors. The Federal Reserve may require a bank holding company to make capital injections into a
troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices if the
bank holding company fails to commit resources to such a subsidiary bank or if it undertakes actions that the Federal
Reserve believes might jeopardize the bank holding company's ability to commit resources to such subsidiary bank.
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Under these requirements, the Company may in the future be required to provide financial assistance to the Banks should
they experience financial distress. Capital loans by the Company to the Banks would be subordinate in right of payment to
deposits and certain other debts of the Banks. In the event of the Company's bankruptcy, any commitment by the Company
to a federal bank regulatory agency to maintain the capital of the Banks would be assumed by the bankruptcy trustee and
entitled to a priority of payment.
Deposit Insurance, Depositor Preference and Assessments
The deposits of the Banks are insured by the DIF up to the standard maximum deposit insurance amount of $250,000 per
depositor. Deposit insurance may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the FDIC. If contested, such terminations can only occur following judicial review through
the federal courts.
In the event of the liquidation or other resolution of a bank, the claims of depositors of the bank, including the claims of the
FDIC as subrogee of insured depositors and certain claims for administrative expenses of the FDIC as a receiver, will have
priority in payment ahead of unsecured non-deposit creditors, including depositors whose deposits are payable only outside
of the United States and the parent bank holding company with respect to any extensions of credit made to such bank. In
addition, under the FDI Act a bank that is commonly controlled with another bank generally shall be liable for losses incurred,
or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled bank, or for
any assistance provided by the FDIC to such commonly controlled bank.
Our Banks must pay deposit insurance assessments to the FDIC based on average total assets minus average tangible
equity, among other factors. As institutions with less than $10 billion in total assets, the assessments for each of our Banks
are based on the level of risk it poses to the FDIC's deposit insurance fund. Pursuant to changes adopted by the FDIC that
were effective July 1, 2016, the initial base rate for deposit insurance is between three and 30 basis points. Total base
assessments after possible adjustments now range between 1.5 and 40 basis points. For established smaller institutions, like
Heartland Bank and State Bank of Lincoln, supervisory ratings are used to calculate a total base assessment rate, along with
an initial base assessment rate, an unsecured debt adjustment (which can be positive or negative), and a brokered deposit
adjustment. The Dodd-Frank Act also set a new minimum deposit insurance fund reserve ratio of 1.35% of estimated insured
deposits but 2020, which was surpassed ahead of schedule in 2018.
In addition to the amounts paid for FDIC deposit insurance described above, all Illinois state-chartered banks are required to
pay supervisory assessments to the IDFPR to fund the operations of that agency. The amount of the assessment is
calculated on the basis of our Banks' total assets.
Consumer Financial Protection
We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our
customers. These laws include the Equal Credit Opportunity Act (“ECOA”), the Fair Credit Reporting Act, the Truth in Lending
Act (“TILA”), the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home
Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices
Act, the Fair Credit Reporting Act, the Service Members Civil Relief Act, the Right to Financial Privacy Act, the Telephone
Consumer Protection Act, the CAN-SPAM Act, and these laws’ respective state-law counterparts, as well as state usury laws
and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require
disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in
credit transactions, regulate the use of credit report information, provide financial privacy protections, restrict our ability to
raise interest rates on extensions of credit and subject us to substantial regulatory oversight. Violations of applicable
consumer protection laws can result in significant potential liability from litigation brought by customers, including actual
damages, restitution and attorneys’ fees. Federal banking regulators, state attorneys general and state and local consumer
protection agencies may also seek to enforce consumer
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protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights,
action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to
comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval
for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if
approval is not required.
The Dodd-Frank Act created an independent federal agency, the Consumer Financial Protection Bureau (the “CFPB”), which
has broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including the
ability to require reimbursements and other payments to customers for alleged legal violations. The CFPB has the authority to
impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices.
The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data and
promote the availability of financial services to underserved consumers and communities. The CFPB has broad rulemaking
authority for a wide range of consumer financial laws that apply to all banks including TILA, ECOA and the authority to
prohibit "unfair, deceptive, or abusive" acts and practices. The review of products and practices to prevent such acts and
practices is a continuing focus of the CFPB, and of the banking agencies more broadly.
The CFPB also has exclusive supervisory and examination authority and primary enforcement authority with respect to
various federal consumer financial laws and regulations for insured depository institutions with $10 billion or more in total
assets. Because the Banks currently each have less than $10 billion in total assets, the Banks are not subject to the
examination and supervisory authority of the CFPB, but are nevertheless required to comply with various federal consumer
financial laws and regulations, including laws and regulations implemented by the CFPB. The FDIC is primarily responsible
for examining the Banks' compliance with federal consumer financial laws and regulations, including CFPB regulations. The
CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as our Banks, to
support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and
detecting risks to consumers and financial markets.
Residential Mortgage Lending
As required by the Dodd-Frank Act, the CFPB issued a series of final rules in January 2013 amending Regulation Z,
implementing TILA, which requires mortgage lenders to make a reasonable and good faith determination, based on verified
and documented information, that a consumer applying for a residential mortgage loan has a reasonable ability to repay the
loan according to its terms. These final rules prohibit creditors from extending residential mortgage loans without regard for
the consumer's ability to repay and add restrictions and requirements to residential mortgage origination and servicing
practices. In addition, these rules restrict the imposition of prepayment penalties and restrict compensation practices relating
to residential mortgage loan origination. Mortgage lenders are required to determine consumers' ability-to-repay in one of two
ways. The first alternative requires the mortgage lender to consider eight underwriting factors when making the credit
decision. Alternatively, the mortgage lender can originate "qualified mortgages," which are entitled to a presumption that the
creditor making the loan satisfied the ability to repay requirements. In general, a qualified mortgage is a residential mortgage
loan that does not have certain high risk features, such as negative amortization, interest-only payments, balloon payments,
or a term exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed
3% of the total loan amount and the borrower's total debt-to-income ratio must be no higher than 43% (subject to certain
limited exceptions for loans eligible for purchase, guarantee or insurance by a government sponsored enterprise or a federal
agency).
Privacy
The federal banking regulators have adopted rules limiting the ability of banks and other financial institutions to disclose non-
public information about consumers to unaffiliated third parties. These limitations require disclosure of privacy policies to
consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to an
unaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial
companies and conveyed to outside vendors.
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Data privacy and data security are areas of increasing state legislative focus. Some state laws also protect the privacy of
information of state residents and require adequate security for such data, and certain state laws may, in some
circumstances, require the Banks to notify affected individuals of security breaches of computer databases that contain their
personal information. These laws may also require the Banks to notify law enforcement, regulators or consumer reporting
agencies in the event of a data breach, as well as businesses and governmental agencies that own data.
Cybersecurity
In March 2015, the banking agencies issued two related statements regarding cybersecurity. One statement indicates that
financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk
management processes also address the risk posed by compromised customer credentials, including security measures to
reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates
that a financial institution's management is expected to maintain sufficient business continuity planning processes to ensure
the rapid recovery, resumption and maintenance of the institution's operations after a cyber-attack involving destructive
malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business
operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall
victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory
sanctions, including financial penalties.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations
and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and
technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to
monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent
threats. Notwithstanding the strength of our defensive measures, the threat from cyberattacks is severe, attacks are
sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to-date we
have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity
attacks, our systems and those of our customers and third party service providers are under constant threat and it is possible
that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected
to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due
to the expanding use of internet banking, mobile banking and other technology-based products and services by us and our
customers.
In late 2017, the SEC announced that it plans to issue guidelines governing the manner in which public companies report
cybersecurity breaches to investors. Any SEC guidelines would be in addition to notification and disclosure requirements
under state and federal banking law and regulations.
Lending Standards Guidance and Concentrations in Commercial Real Estate
The federal banking agencies have adopted uniform regulations prescribing standards for extensions of credit that are
secured by liens or interests in real estate or made for the purpose of financing permanent improvements to real estate.
Under these regulations, all insured depository institutions, such as the Banks, must adopt and maintain written policies
establishing appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are
made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must
reflect consideration of the federal bank regulators' Interagency Guidelines for Real Estate Lending Policies.
Also,
December 2015, the federal banking regulators released a statement entitled “Interagency Statement on Prudent Risk Management f
Commercial Real Estate Lending” (the “CRE Guidance”). In the CRE Guidance, the federal banking regulators (i) expressed
concerns with institutions that ease commercial
in
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real estate underwriting standards, (ii) directed financial institutions to maintain underwriting discipline and exercise risk
management practices to identify, measure and monitor lending risks, and (iii) indicated that they will continue to pay special
attention to commercial real estate lending activities and concentrations going forward. The federal banking regulators
previously issued guidance in December 2006, entitled “Interagency Guidance on Concentrations in Commercial Real Estate
Lending, Sound Risk Management Practices”, which stated that an institution is potentially exposed to significant commercial
real estate concentration risk, and should employ enhanced risk management practices, where (1) total commercial real
estate loans represent 300% or more of its total capital and (2) the outstanding balance of such institution’s commercial real
estate loan portfolio has increased by 50% or more during the prior 36 months.
Leveraged Lending Guidance
In March 2013, the banking agencies jointly issued guidance on leveraged lending, which updates and replaces the guidance
for leveraged finance activities issued by the banking agencies in April 2001. The revised leveraged lending guidance
describes regulatory expectations for the sound risk management of leveraged lending activities, including the importance for
institutions to maintain (i) a credit limit and concentration framework consistent with the institution's risk appetite, (ii)
underwriting standards that define acceptable leverage levels, (iii) strong pipeline management policies and procedures and
(iv) guidelines for conducting periodic portfolio and pipeline stress tests.
Community Reinvestment Act
Under the Community Reinvestment Act (“CRA”), which the FDIC and the other banking regulators have indicated will be
significantly updated and revised, each of our Banks has an affirmative and continuing obligation, consistent with safe and
sound operations, to help meet the credit needs of the market areas where it operates, which includes providing credit to low-
and moderate-income individuals and communities.
In connection with its examination of our Banks, the FDIC is required to assess each bank's compliance with the CRA. The
CRA requires the appropriate federal banking agency to take an insured depository institution's CRA record into account
when evaluating certain applications filed by us or either of our Banks, including applications for charters, branch openings or
relocations and applications to acquire, merge or consolidate with another bank or bank holding company. The CRA also
requires that all institutions publicly disclose their CRA ratings. Each of our Banks received a rating of "satisfactory" in its
most recently completed CRA examination, during late-2017 for Heartland Bank and mid-2017 for State Bank of Lincoln.
Federal Home Loan Bank Membership
The Banks are members of the FHLB System, an organization created under the Federal Home Loan Bank Act of 1932 to
serve as a central credit facility for its members through eleven U.S. government-sponsored banks, including the FHLB of
Chicago. The FHLB of Chicago makes loans to member banks in the form of advances, all of which are required to be fully
collateralized, as determined by the FHLB of Chicago. In the event that a member financial institution fails, the right of the
FHLB of Chicago to seek repayment of funds loaned to that institution will take priority (a super lien) over the rights of all
other creditors. To qualify for membership in the FHLB System the Banks are required to hold a certain amount of common
stock in one of the Federal Home Loan banks, in order to be eligible to borrow funds from such Federal Home Loan bank
under the FHLB System's advance program. There is no secondary market for the FHLB of Chicago 's common stock, but
additional purchases from, or repurchases by, the FHLB of Chicago may occur under prescribed circumstances. Specifically,
the board of directors of the FHLB of Chicago can increase the minimum investment requirements in the event it has
concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the
minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency.
Because the extent of any obligation to increase the level of investment in the FHLB of Chicago depends entirely upon the
occurrence of future events, we are unable to determine the extent of future required potential payments to the FHLB of
Chicago at this time.
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Anti-Money Laundering and Similar Regulations
A major focus of governmental policy on banks and other financial institutions in recent years has been combating money
laundering and terrorist financing. The Bank Secrecy Act (“BSA”) and the USA PATRIOT Act of 2001 impose significant
obligations on banks and other financial institutions to detect and deter money laundering and terrorist financing. Banks and
other financial institutions are required to establish compliance programs designed to implement BSA requirements that
include, among other things: verifying customer identification, reporting certain large cash transactions, responding to
requests for information by law enforcement, and monitoring, investigating and reporting suspicious transactions or activity.
The Treasury's Office of Foreign Assets Control enforces economic and trade sanctions based on U.S. foreign policy and
national security goals against entities such as targeted foreign countries, terrorists, international narcotics traffickers, and
those engaged in the proliferation of weapons of mass destruction. The banking agencies routinely examine banks for
compliance with these obligations, and failure of a bank to maintain and implement adequate programs to combat money
laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and
reputational consequences for the bank and its bank holding company, including the ability to engage in merger or acquisition
transactions. The banking agencies have imposed cease and desist orders and significant civil money penalties against
banks found to be violating these obligations and have, in some cases, brought criminal actions against some bank and bank
holding companies for these types of violations.
Incentive Compensation
The federal banking agencies have issued joint guidance on incentive compensation designed to ensure that the incentive
compensation policies of banking organizations, such as the Company and the Banks, do not encourage imprudent risk
taking and are consistent with the safety and soundness of the organization. In addition, the Dodd-Frank Act requires the
federal banking agencies and the SEC to issue regulations or guidelines requiring covered financial institutions, including the
Company and the Banks, to prohibit incentive-based payment arrangements that encourage inappropriate risks by providing
compensation that is excessive or that could lead to material financial loss to the institution. A proposed rule was issued in
2016. Also pursuant to the Dodd-Frank Act, in 2015, the SEC proposed rules that would direct stock exchanges to require
listed companies to implement clawback policies to recover incentive-based compensation from current or former executive
officers in the event of certain financial restatements and would also require companies to disclose their clawback policies
and their actions under those policies.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state
legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in
those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or
change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or
regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could affect the
regulatory structure under which we operate and may significantly increase our costs, impede the efficiency of our internal
business processes, require us to increase our regulatory capital or modify our business strategy, or limit our ability to pursue
business opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be
adversely affected, perhaps materially, as a result.
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ITEM 1A. RISK FACTORS
The material risks and uncertainties that management believes affect us are described below. You should carefully consider
these risks, together with all of the information included herein. Any of the following risks, as well as risks that we do not know
or currently deem immaterial, could have a material adverse effect on our business, financial condition or results of
operations.
LENDING AND CREDIT RISKS
We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
Our business depends on our ability to successfully measure and manage credit risk. As a lender, we are exposed to the risk
that the principal of, or interest on, a loan will not be repaid timely or at all or that the value of any collateral supporting a loan
will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the period of time
over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and
industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a borrower is
affected by many factors including local market conditions and general economic conditions. If the overall economic climate
in the U.S., generally, or our market areas, specifically, experiences material disruption, our borrowers may experience
difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of
nonperforming loans, charge-offs and delinquencies could rise and require significant additional provisions for credit losses.
Additional factors related to the credit quality of commercial loans include the quality of the management of the business and
the borrower’s ability both to properly evaluate changes in the supply and demand characteristics affecting its market for
products and services and to effectively respond to those changes. Additional factors related to the credit quality of
commercial real estate loans include tenant vacancy rates and the quality of management of the property.
Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit
approval, review and administrative practices may not adequately reduce credit risk, and our credit administration personnel,
policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and
the quality of the loan portfolio. A failure to effectively measure and limit the credit risk associated with our loan portfolio may
result in loan defaults, foreclosures and additional charge-offs, and may necessitate that we significantly increase our
allowance for credit losses, each of which could adversely affect our net income. As a result, our inability to successfully
manage credit risk could have an adverse effect on our business, financial condition and results of operations.
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.
We establish our allowance for loan losses and maintain it at a level that management considers adequate to absorb
probable loan losses based on an analysis of our portfolio and market environment. The allowance for loan losses represents
our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available
to us. The allowance contains provisions for probable losses that have been identified relating to specific borrowing
relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically
identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are
determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an
evaluation of current economic conditions in our market areas. The actual amount of loan losses is affected by changes in
economic, operating and other conditions within our markets, which may be beyond our control, and such losses may exceed
current estimates.
Although management believes that the allowance for loan losses is adequate to absorb losses on existing loans that may
become uncollectible, we may be required to take additional provisions for loan losses in the
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future to further supplement the allowance for loan losses, either due to management’s decision to do so or because our
banking regulators require us to do so. Our bank regulatory agencies will periodically review our allowance for loan losses
and the value attributed to nonaccrual loans or to real estate acquired through foreclosure and may require us to adjust our
determination of the value for these items. These adjustments may adversely affect our business, financial condition and
results of operations.
The majority of our loan portfolio consists of commercial and regulatory CRE loans, which have a higher degree of
risk than other types of loans.
Commercial and regulatory CRE loans are often larger and involve greater risks than other types of lending. Because
payments on such loans are often dependent on the successful operation or development of the property or business
involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate
market or the general business climate and economy. Accordingly, a downturn in the real estate market and a challenging
business and economic environment may increase our risk related to commercial loans, particularly commercial real estate
loans. Unlike residential mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment
from their employment and other income and which are secured by real property whose value tends to be more easily
ascertainable, commercial loans typically are made on the basis of the borrowers’ ability to make repayment from the cash
flow of the commercial venture. Our operating commercial loans are primarily made based on the identified cash flow of the
borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable,
inventory and equipment. Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability to
repay the loan may be impaired. Due to the larger average size of each commercial loan as compared with other loans such
as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of
commercial loans could have a material adverse impact on our financial condition and results of operations.
The small to midsized businesses to which we lend may have fewer resources to weather adverse business
developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect
our results of operations and financial condition.
We target our business development and marketing strategy primarily to serve the banking and financial services needs of
small to midsized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing
capacity than larger entities, can have less access to capital sources and loan facilities, frequently have smaller market
shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to
expand or compete, and may experience substantial volatility in operating results, any of which may impair a borrower’s
ability to repay a loan. In addition, the success of a small and medium-sized business often depends on the management
talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of
these people could have a material adverse impact on the business and its ability to repay its loan. If general economic
conditions negatively impact the markets in which we operate or any of our borrowers otherwise are affected by adverse
business developments, our small to medium-sized borrowers may be disproportionately affected and their ability to repay
outstanding loans may be negatively affected, resulting in an adverse effect on our results of operations and financial
condition.
The implementation of the Current Expected Credit Loss accounting standard could require us to increase our
allowance for loan losses and may have a material adverse effect on our financial condition and results of
operations.
The Financial Accounting Standards Board ("FASB") has issued a new accounting standard that will replace the current
approach for establishing allowances for loan and lease losses, which generally considers only past events and current
conditions, with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets,
starting when such assets are first originated or acquired. As an emerging growth company relying on the extended transition
period for new accounting standards, this standard, referred to as
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Current Expected Credit Loss, or CECL, will be effective for us in 2023. The CECL standard will require us to record, at the
time of origination, credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities, as
opposed to the current practice of recording losses when it is probable that a loss event has occurred. The Company is
currently evaluating the impact the CECL standard will have on its accounting. The adoption of the CECL standard will
materially affect how we determine allowance for loan losses ("ALLL") and could require us to significantly increase the
allowance. Moreover, the CECL standard may create more volatility in the level of ALLL and related provision for credit
losses. If we are required to materially increase the level of ALLL for any reason, such increase could adversely affect our
business, financial condition and results of operations.
In addition, from time to time, FASB and the SEC may change other financial accounting and reporting standards, or the
interpretation of those standards, that govern the preparation of the Company’s financial statements. These changes are
beyond the Company’s control, can be difficult to predict, and could materially impact how the Company reports its results of
operations and financial condition.
Real estate construction loans are based upon estimates of costs and values associated with the complete project.
These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.
Real estate construction lending involves additional risks because funds are advanced upon the security of the project, which
is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because
of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the
effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to
complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of
substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to
sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of
the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate
security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project
prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on,
the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to
complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.
The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property,
other real estate owned ("OREO") and other repossessed assets may not accurately describe the fair value of the
asset.
In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However,
an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may
change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this
estimate may not accurately describe the fair value of the real property collateral after the loan is made. As a result, we may
not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In
addition, we rely on appraisals and other valuation techniques to establish the value of our OREO and personal property that
we acquire through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are
inaccurate, our consolidated financial statements may not reflect the correct value of our OREO, and our allowance for loan
losses may not reflect accurate loan impairments. This could have a material adverse effect on our business, financial
condition or results of operations.
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We provide loans and services to the agriculture industry and the health of this industry is impacted by factors
outside our control and the control of our customers.
Our loan portfolio includes loans outstanding to agricultural producers and/or secured by farmland. In addition, our
commercial loan portfolio includes loans to farm implement dealerships, grain elevators and other businesses that provide
products and services to agricultural producers. We also provide farm management advice, engage in farm sale services and
arrange for crop insurance. Our agriculture loans generally consist of (i) real estate loans secured by farmland, (ii) crop input
loans primarily focused on corn and soybeans and (iii) equipment financing for specific agriculture equipment. Decreases in
commodity prices, such as those currently impacting the agriculture industry, may negatively affect both the cash flows of the
borrowers and the value of the collateral supporting such loans, and could decrease the fees from our other agricultural
services. Current tariffs imposed on China and tariffs under consideration for China and other countries are currently putting
downward pressure on commodity prices. Although we attempt to account for the possibility of such commodity price
fluctuations in underwriting, structuring and monitoring our agriculture loans, there is no guarantee that our efforts will be
successful and we may experience increased delinquencies or defaults in this portfolio or be required to increase our
provision for loan losses, which could have an adverse effect on our business, financial condition and results of operations.
Our agricultural loans are dependent on the profitable operation and management of the farmland securing the loan and its
cash flows. The success of our agricultural loans may be affected by many factors outside the control of the borrower,
including:
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·
·
·
·
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adverse weather conditions (such as hail, drought and floods), restrictions on water supply or other conditions
that prevent the planting of a crop or limit crop yields, or that affect crop harvesting;
loss of crops or livestock due to disease or other factors;
declines in the market prices or demand for agricultural products (both domestically and internationally), for any
reason;
increases in production costs (such as the costs of labor, rent, feed, fuel and fertilizer);
adverse changes in interest rates, currency exchange rates, agricultural land values or other factors that may
affect delinquency levels and credit losses on agricultural loans;
the impact of government policies and regulations (including changes in price supports, subsidies, government-
sponsored crop insurance, minimum ethanol content requirements for gasoline, tariffs, trade barriers and health
and environmental regulations);
access to technology and the successful implementation of production technologies; and
changes in the general economy that could affect the availability of off-farm sources of income and prices of real
estate for borrowers.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan portfolio on an
ongoing basis, we may rely on information furnished by or on behalf of customers and counterparties, including financial
statements, credit reports and other financial information. We may also rely on representations of those customers or
counterparties or of other third parties, such as independent auditors, as to the accuracy and completeness of that
information. Reliance on inaccurate, incomplete, fraudulent or misleading financial statements, credit reports or other financial
or business information, or the failure to receive
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such information on a timely basis, could result in loan losses, reputational damage or other effects that could have a material
adverse effect on our business, financial condition or results of operations.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is, and is expected to be, secured by real property and during the ordinary course of
business, we may foreclose on and take title to properties securing certain loans. In addition, we own our branch properties. If
hazardous or toxic substances are found on our foreclosed or branch properties, we may be liable for remediation costs, as
well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may
materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or
more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to
environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could
have a material adverse effect on our financial condition and results of operations.
INTEREST RATE RISKS
Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial
condition and results of operations.
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most
financial institutions, our earnings and cash flows depend to a great extent upon the level of our net interest income, or the
difference between the interest income we earn on loans, investments and other interest-earning assets, and the interest we
pay on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease our
net interest income, because different types of assets and liabilities may react differently, and at different times, to market
interest rate changes. When interest-bearing liabilities mature or reprice more quickly, or to a greater degree than interest-
earning assets in a period, an increase in interest rates could reduce net interest income. Similarly, when interest-earning
assets mature or reprice more quickly, or to a greater degree than interest-bearing liabilities, falling interest rates could
reduce net interest income.
Additionally, an increase in interest rates may, among other things, reduce the demand for loans, increase the cost of deposit
and wholesale funding, reduce our ability to originate loans and decrease loan repayment rates. A decrease in the general
level of interest rates may, among other things, increase prepayments on our loan and securities portfolios and result in a
decrease in our net yield on interest-earning assets that exceeds any decrease on our cost of funds, negatively impacting our
results. Although our asset-liability management strategy is designed to control and mitigate exposure to the risks related to
changes in market interest rates, those rates are affected by many factors outside of our control, including governmental
monetary policies, inflation, deflation, recession, changes in unemployment, the money supply, international disorder and
instability in domestic and foreign financial markets. In March 2020, the Federal Open Markets Committee lowered the
Federal Funds target rates twice, for a combined decrease of 150 basis points in response to market volatility related to the
COVID-19 (coronavirus) outbreak. As a result of these decreases, and if the Federal Open Markets Committee further lowers
Federal Fund target rates, our net interest income, financial condition and results of operations could be adversely affected.
We may seek to mitigate our interest rate risk by entering into interest rate swaps and other interest rate derivative contracts
from time to time with counterparties. Our hedging strategies rely on assumptions and projections regarding interest rates,
asset levels and general market factors and subject us to counterparty risk. There is no assurance that our interest rate
mitigation strategies will be successful and if our assumptions and projections prove to be incorrect or our hedging strategies
do not adequately mitigate the impact of changes in interest rates, we may incur losses that could adversely affect our
earnings.
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We may be adversely impacted by the transition from the London Interbank Offered Rate ("LIBOR") as a reference
rate.
In 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced that it will stop
compelling banks to submit rates for the calculation of LIBOR after the end of 2021, creating considerable uncertainty
regarding the publication of such rates beyond 2021. There are currently no agreed upon alternative reference rates. The
transition away from LIBOR to alternative reference rates could have a negative impact on the value of, return on, and trading
market for the LIBOR-based loans and securities in our portfolio and an adverse impact on the availability and cost of
hedging instruments and borrowings. In addition, we may incur expenses if we are required to renegotiate the terms of
existing agreements that govern LIBOR-based products as a result of the transition away from LIBOR, and could be subject
to disputes or litigation with counterparties regarding the interpretation and enforceability of provisions in existing LIBOR-
based products regarding fallback language or other related provisions, as the economics of various alternative reference
rates differ from LIBOR. The impact on the valuation, pricing, and operation of our LIBOR-based financial instruments and the
cost of transitioning to the use of alternative reference rates is not yet known and could have an adverse effect on our results
of operations.
The value of the financial instruments we own may decline in the future.
We evaluate our investment securities on at least a quarterly basis, and more frequently when economic and market
conditions warrant such an evaluation, to determine whether any decline in fair value below amortized cost is the result of an
other-than-temporary impairment. The process for determining whether impairment is other-than-temporary usually requires
complex, subjective judgments about the future financial performance of the issuer in order to assess the probability of
receiving all contractual principal and interest payments on the security. Because of changing economic and market
conditions affecting issuers, we may be required to recognize other-than-temporary impairment in future periods, which could
adversely affect our business, results of operations or financial condition.
In addition, an increase in market interest rates may affect the market value of our securities portfolio, potentially reducing
accumulated other comprehensive income and/or earnings.
LIQUIDITY AND FUNDING RISKS
Liquidity risks could affect operations and jeopardize our business, financial condition and results of operations.
Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or
investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important
source of funds consists of our customer deposits. Such deposit balances can decrease when customers perceive alternative
investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank
deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek
wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest
income and net income.
In addition to our deposit base, our liquidity is provided by cash from operations and investment maturities, redemptions and
sales as well as cash flow from loan prepayments and maturing loans that are not renewed. When needed, additional liquidity
is sometimes provided by our ability to borrow from the Federal Reserve Bank of Chicago and the Federal Home Loan Bank
of Chicago (the "FHLB"), through federal funds lines with our correspondent banks, and through other wholesale funding
sources including brokered certificates of deposits or deposits placed with the Certificate of Deposit Account Registry
Service. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are
acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general,
such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services
industry.
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Any decline in available funding could adversely impact our ability to continue to implement our business plan, including
originating loans, investing in securities, meeting our expenses or fulfilling obligations such as repaying our borrowings and
meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial
condition and results of operations.
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need to raise additional capital, in the form of debt or equity securities, in the future to have sufficient capital
resources to meet our commitments and our regulatory requirements, and to fund our business needs and future growth,
particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if
needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control,
and our financial condition. We may not be able to obtain capital on acceptable terms or at all. Any occurrence that may limit
our access to capital, such as a decline in the confidence of debt purchasers, depositors of our Banks or counterparties
participating in the capital markets or other disruption in capital markets, may adversely affect our capital costs and our ability
to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many
other financial institutions are also seeking to raise capital and would then have to compete with those institutions for
investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on
our business, financial condition or results of operations.
We may be adversely affected by changes in the actual or perceived soundness or condition of other financial
institutions.
Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity
management, clearing, counterparty and other relationships. Concerns about, or a default by, one institution could lead to
significant liquidity problems and losses or defaults by other institutions, as the commercial and financial soundness of many
financial institutions is closely related as a result of these credit, trading, clearing and other relationships. Even the perceived
lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or
defaults by various institutions. This systemic risk may adversely affect financial intermediaries with which we interact on a
daily basis or key funding providers such as the FHLBC, any of which could have a material adverse effect on our access to
liquidity or otherwise have a material adverse effect on our business, financial condition or results of operations.
OPERATIONAL RISKS
We may not be able to continue growing our business, particularly if we cannot make acquisitions or increase loans
through organic loan growth, either because of an inability to find suitable acquisition candidates, constrained
capital resources or otherwise.
We anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition growth
strategy because certain of our market areas are comprised of mature, rural communities with limited population growth. A
risk exists, however, that we will not be able to identify suitable additional candidates for acquisitions. In addition, even if
suitable targets are identified, we expect to compete for such businesses with other potential bidders, many of which may
have greater financial resources than we have, which may adversely affect our ability to make acquisitions at attractive
prices. In light of the foregoing, our ability to continue to grow successfully will depend to a significant extent on our capital
resources. It also will depend, in part, upon our ability to attract deposits, identify favorable loan and investment opportunities
and on whether we can continue to fund growth while maintaining cost controls and asset quality, as well on other factors
beyond our control, such as national, regional and local economic conditions and interest rate trends.
Also, as our acquired loan portfolio, which produces higher yields than our originated loans due to loan discount accretion, is
paid down, we expect downward pressure on our income to the extent that the run-off is not replaced with other high-yielding
loans. The accretable yield represents the excess of the net present value of
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expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the
discount accretion. As a result of the foregoing, if we are unable to replace loans in our existing portfolio with comparable
high-yielding loans or a larger volume of loans, we could be adversely affected. We could also be materially and adversely
affected if we choose to pursue riskier higher-yielding loans that fail to perform.
Our strategy of pursuing growth via acquisitions exposes us to financial, execution and operational risks that could
have a material adverse effect on our business, financial position, results of operations and growth prospects.
We have been pursuing a strategy of leveraging our human and financial capital by acquiring other financial institutions in our
target markets, including acquisitions of failed insured depository institutions with the assistance of the FDIC. We continue to
opportunistically seek acquisitions that are either located within our market footprint, in adjacent markets or provide a new
growth opportunity that is strategically and financially compelling and consistent with our culture.
Our acquisition activities could require us to use a substantial amount of cash, other liquid assets, and/or issue debt or
additional equity. In addition to the general risks associated with any growth plans, acquiring other banks, businesses, or
branches involves various risks commonly associated with acquisitions, including, among other things:
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the time and expense associated with identifying and evaluating potential acquisitions and negotiating potential
transactions;
inaccuracies in the estimates and judgments used to evaluate credit, operations, management, and market risks
with respect to the target institution. If the actual results fall short or exceed our estimates, our earnings, capital
and financial condition may be materially and adversely affected;
the ability to finance an acquisition and possible dilution to existing stockholders;
compliance and legal risks associated with acquiring unfamiliar customers, products and services, and branches
in new geographical markets; and
risks associated with integrating the operations and personnel of the acquired business in a manner that permits
growth opportunities and does not materially disrupt existing customer relationships or result in decreased
revenues resulting from any loss of customers.
With respect to the risks particularly associated with the integration of an acquired business, we may encounter a number of
difficulties, such as: (1) customer loss and revenue loss; (2) the loss of key employees; (3) the disruption of its operations and
business; (4) the inability to maintain and increase its competitive presence; (5) possible inconsistencies in standards, control
procedures and policies; and/or (6) unexpected problems with costs, operations, personnel, technology and credit. In addition
to the risks posed by the integration process itself, the focus of management’s attention and effort on integration may result in
a lack of sufficient management attention to other important issues, causing harm to our business. Also, general market and
economic conditions or governmental actions affecting the financial industry generally may inhibit our successful integration
of an acquired business.
Generally, any acquisition of financial institutions, banking centers or other banking assets by us will require approval by, and
cooperation from, a number of governmental regulatory agencies, including the Federal Reserve, the IDFPR, and the FDIC.
Such regulators could deny our applications based on various prescribed criteria or other considerations, which would restrict
our growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be
required to sell banking centers as a condition to receiving regulatory approvals and such a condition may not be acceptable
to us or may reduce the benefit of
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any acquisition. These regulatory approvals and the factors considered in reviewing such applications are described in
greater detail in "Supervision and Regulation—Acquisitions and Branching."
We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection
with acquisitions. Our inability to overcome risks associated with acquisitions could have an adverse effect on our ability to
successfully implement our acquisition growth strategy and grow our business and profitability.
Attractive acquisition opportunities may not be available to us in the future.
While we seek continued organic growth, we anticipate continuing to evaluate merger and acquisition opportunities presented
to us in our core markets and beyond. We expect that other banking and financial companies, many of which have
significantly greater resources, will compete with us to acquire financial services businesses. In addition, the Economic
Growth, Regulatory Relief, and Consumer Protection Act (the "Regulatory Relief Act") and certain proposed implementing
regulations, if adopted, would significantly reduce the regulatory burden of larger bank holding companies. This could cause
certain large bank holding companies to more aggressively pursue expansion, including through acquisitions. This
competition could increase prices for potential acquisitions, which could reduce our potential returns and reduce the
attractiveness of these opportunities to us.
Loss of customer deposits could increase our funding costs.
We rely on bank deposits as a low cost and stable source of funding. We compete with banks and other financial services
companies for deposits. If our competitors raise the rates they pay on deposits, our funding costs may increase, either
because we raise our rates to avoid losing deposits or because we lose deposits and must rely on more expensive sources of
funding. Higher funding costs could reduce our net interest margin and net interest income and could have a material
adverse effect on our business, financial condition, and results of operations.
Our future success will be heavily dependent upon our key management personnel.
Our success depends upon the continued service of our senior management team and upon our ability to attract and retain
qualified financial services personnel. In addition to these executives, we will depend on the services of our other lending
officers and our operational and staff officers. Additionally, our future success and growth will depend upon our ability to
recruit and retain highly skilled employees with strong community relationships and specialized knowledge in the financial
services industry. Competition for qualified employees is intense. In our experience, it can take a significant period of time to
identify and hire personnel with the combination of skills and attributes required in carrying out our strategy. If we lose the
services of our key personnel, or are unable to attract additional qualified personnel, our business, financial condition, results
of operations and cash flows could be materially adversely affected.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-
related incidents could have a material adverse effect on our business, financial condition or results of operations.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related
incidents that may be committed against us or our customers, which may result in financial losses or increased costs to us or
our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches
against our customers, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check
fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and
cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our customers,
denial or degradation of service attacks, and malware or other cyber-attacks. In recent periods, there continues to be a rise in
electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry,
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especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with
industry trends, we have also experienced an increase in attempted electronic fraudulent activity, security breaches and
cybersecurity-related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial
institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and
proprietary corporate information, but also sensitive financial and other personal information of their customers and
employees and subjecting them to potential fraudulent activity. Some of our customers may have been affected by these
breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with
us.
We also face risks related to cyber-attacks and other security breaches in connection with debit card and credit card
transactions that typically involve the transmission of sensitive information regarding our customers through various third
parties, including retailers and payment processors. Some of these parties have in the past been the target of security
breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale
that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could affect us
through no fault of our own. In some cases, we may have exposure and suffer losses for breaches or attacks relating to them,
including costs to replace compromised debit cards and address fraudulent transactions.
Information pertaining to us and our customers is maintained, and transactions are executed, on networks and systems
maintained by us and certain third-party partners, such as our digital banking systems. The secure maintenance and
transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us
and our customers against fraud and security breaches and to maintain our customers’ confidence. Breaches of information
security also may occur through intentional or unintentional acts by those having access to our systems or our customers’ or
counterparties’ confidential information, including employees. In addition, a number of developments could result in a
compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to
protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access
our systems. These developments include increases in criminal activity levels and sophistication, advances in computer
capabilities, new discoveries and vulnerabilities in third-party technologies (including browsers and operating systems).
Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent
security breaches and cyber-attacks and periodically test our security, our or our third-party partners’ inability to anticipate, or
failure to adequately mitigate, breaches of security could result in losses to us or our customers, loss of business and/or
customers, reputational damage, the incurrence of additional expenses, disruption to our business, our inability to grow our
online services or other businesses, additional regulatory scrutiny or penalties, or our exposure to civil litigation and possible
financial liability, any of which could have a material adverse effect on our business, financial condition or results of
operations.
More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of
electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also
cause damage to our reputation as a financial institution. As a result, our business, financial condition or results of operations
could be adversely affected.
We depend on information technology and telecommunications systems of third parties, and any systems failures,
interruptions or data breaches involving these systems could adversely affect our operations and financial
condition.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and
telecommunications systems,
financial
intermediaries. We outsource to third parties many of our major systems, such as digital banking, loan servicing, and deposit
processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on
which any of these systems is based, could interrupt our operations. Because our information technology and
telecommunications systems interface with and depend on third-party
third-party servicers, accounting systems, digital banking platforms and
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systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail
or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our
ability to process loans or gather deposits and provide customer service, compromise our ability to operate effectively, result
in potential noncompliance with applicable laws or regulations, damage our reputation, result in a loss of customer business
and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse
effect on our financial condition and results of operations. In addition, failure of third parties to comply with applicable laws
and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt our operations or
adversely affect our reputation.
It may be difficult for us to replace some of our third-party vendors, particularly vendors providing our core banking, debit card
and credit card services and information services, in a timely manner if they are unwilling or unable to provide us with these
services in the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of
customers. Any such events could have a material adverse effect on our business, financial condition or results of operations.
Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large
number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant
consequences. We also interact with and rely on retailers, for whom we process transactions, as well as financial
counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer
break-ins and other cybersecurity breaches described above or herein, and the cybersecurity measures that they maintain to
mitigate the risk of such activity may be different than our own and may be inadequate.
As a result of financial entities and technology systems becoming more interdependent and complex, a cyber-incident,
information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could
have a material impact on counterparties or other market participants, including ourselves. Although we review business
continuity and backup plans for our vendors and take other safeguards to support our operations, such plans or safeguards
may be inadequate. As a result of the foregoing, our ability to conduct business may be adversely affected by any significant
disruptions to us or to third parties with whom we interact.
Our use of third-party vendors and our other ongoing third-party business relationships is subject to increasing
regulatory requirements and attention.
Our use of third-party vendors for certain information systems is subject to increasingly demanding regulatory requirements
and attention by our federal bank regulators. Regulatory guidance requires us to enhance our due diligence, ongoing
monitoring and control over our third-party vendors and other ongoing third-party business relationships. In certain cases we
may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could
increase our costs. Our regulators may hold us responsible for deficiencies in our oversight and control of our third-party
relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators
conclude that we have not exercised adequate oversight and control over our third-party vendors or other ongoing third-party
business relationships or that such third parties have not performed appropriately, we could be subject to enforcement
actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for
customer remediation, any of which could have a material adverse effect our business, financial condition or results of
operations.
We continually encounter technological change and may have fewer resources than many of our larger competitors
to continue to invest in technological improvements.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-
driven products and services. The effective use of technology increases efficiency and enables financial institutions to better
serve customers and to reduce costs. Our future success will depend, in part,
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upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy
customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors
have substantially greater resources to invest in technological improvements. We also may not be able to effectively
implement new technology-driven products and services or be successful in marketing these products and services to our
customers.
In addition, we expect that new technologies and business processes applicable to the banking industry will continue to
emerge, and these new technologies and business processes may be better than those we currently use. The
implementation of technological changes and upgrades to maintain current systems and integrate new ones may cause
service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with
applicable laws. Because the pace of technological change is high and our industry is intensely competitive, we may not be
able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones
become available. A failure to maintain current technology and business processes could cause disruptions in our operations
or cause our products and services to be less competitive, all of which could have a material adverse effect on our business,
financial condition or results of operations.
New lines of business or new products and services may subject us to additional risks.
From time to time, we may seek to implement new lines of business or offer new products and services within existing lines of
business in our current markets or new markets. There are substantial risks and uncertainties associated with these efforts,
particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or
new products and services, we may invest significant time and resources. Initial timetables for the introduction and
development of new lines of business and/or new products or services may not be achieved, and price and profitability
targets may not prove feasible, which could in turn have a material negative effect on our operating results. Implementing
new products and services also poses compliance and legal risk which, if not fully assessed prior to implementation and
effectively managed thereafter, could expose us to fines and penalties, which depending on how severe, may negatively
impact our reputation and ability to pursue growth opportunities.
EXTERNAL RISKS
Adverse changes in local economic conditions and adverse conditions in an industry on which a local market in
which we do business depends could hurt our business in a material way.
Our financial performance generally, and in particular the ability of our borrowers to pay interest on and repay principal of
outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and
services we offer, is highly dependent upon the business environment in the markets in which we operate and in the United
States as a whole. Unlike larger banks that are more geographically diversified, we provide banking and financial services to
customers primarily in the State of Illinois. The economic conditions in our local markets may be different from, or worse than,
the economic conditions in the United States as a whole. Some elements of the business environment that affect our financial
performance include short-term and long-term interest rates, the prevailing yield curve, inflation and price levels, tax policy,
monetary policy, unemployment and the strength of the domestic economy and the local economy in the markets in which we
operate.
Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our
products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for
loan losses, adverse asset values and an overall material adverse effect on the quality of our loan portfolio. Unfavorable or
uncertain economic and market conditions can be caused by, among other factors, declines in economic growth, business
activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; changes
in inflation or interest rates; increases in real estate and other state and local taxes; high unemployment; natural disasters;
pandemics, such as the COVID-19 (coronavirus) outbreak; severe weather; acts of terrorism or war; or a combination of
these or other factors.
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The State of Illinois has experienced significant financial difficulties, and this could adversely impact certain
borrowers and our business.
The State of Illinois is experiencing significant financial difficulties, including material pension funding shortfalls and large
budget deficits. In addition, the State’s debt ratings have been downgraded. These issues could impact the economic vitality
of the State of Illinois and our customers, and could specifically encourage businesses to relocate, and discourage new
employers from starting or moving businesses to Illinois. These issues could also result in delays in the payment of accounts
receivable owed to borrowers that conduct business with the State of Illinois and Medicaid payments to nursing homes and
other healthcare providers in Illinois and impair their ability to repay their loans when due.
Our business is significantly dependent on the real estate markets in which we operate, as a significant percentage
of our loan portfolio is secured by real estate.
Many of the loans in our portfolio are secured by real estate as a primary or secondary component of collateral, with
substantially all of these real estate loans concentrated in the State of Illinois. Real property values in our market may be
different from, and in some instances worse than, real property values in other markets or in the United States as a whole
and may be affected by a variety of factors outside of our control and the control of our borrowers, including national and local
economic conditions, generally. Cook County, in particular, has experienced volatility in real estate values over the past
decade. Declines in real estate values, including prices for homes and commercial properties, could result in a deterioration
of the credit quality of our borrowers, an increase in the number of loan delinquencies, defaults and charge-offs, and reduced
demand for our products and services, generally. Our CRE loans may have a greater risk of loss than residential mortgage
loans, in part because these loans are generally larger or more complex to underwrite. In particular, real estate construction
and acquisition and development loans have certain risks not present in other types of loans, including risks associated with
construction cost overruns, project completion risk, general contractor credit risk and risks associated with the ultimate sale or
use of the completed construction. In addition, declines in real property values in the states in which we operate could reduce
the value of any collateral we realize following a default on these loans and could adversely affect our ability to continue to
grow our loan portfolio consistent with our underwriting standards. We may have to foreclose on real estate assets if
borrowers default on their loans, in which case we are required to record the related asset to the then fair market value of the
collateral, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and
may affect the capital levels regulators believe are appropriate in light of the ensuing risk profile. Our failure to effectively
mitigate these risks could have a material adverse effect on our business, financial condition or results of operations.
Our future growth and success will depend on our ability to compete effectively in a highly competitive environment.
We face substantial competition in all phases of our operations from a variety of different competitors. Our future growth and
success will depend on our ability to compete effectively in this highly competitive environment. To date, our competitive
strategies have focused on attracting deposits in our local markets and growing our loan portfolio by emphasizing specific
loan products in which we have significant experience and expertise, identifying and targeting markets in which we believe
we can effectively compete with larger institutions and other competitors, and offering highly competitive pricing to borrowers
with appropriate risk profiles. We compete for loans, deposits and other financial services with other commercial banks, credit
unions, brokerage houses, mutual funds, insurance companies, real estate conduits, mortgage brokers and specialized
finance companies. Many of our competitors offer products and services that we do not offer, and some offer loan structures
and have underwriting standards that are not as restrictive as our required loan structures and underwriting standards. Some
larger competitors have substantially greater resources and lending limits, name recognition and market presence that benefit
them in attracting business. In addition, larger competitors may be able to price loans more aggressively than we do, and
because of their larger capital bases, their underwriting practices for smaller loans may be subject to less regulatory scrutiny
than they would be for
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smaller banks. Newer competitors may be more aggressive in pricing their products in order to increase their market share.
Some of the financial institutions and financial services organizations with which we compete are not subject to the extensive
regulations imposed on banks insured by the FDIC and their holding companies. As a result, these nonbank competitors
have certain advantages over us in accessing funding and in providing various financial services. Additionally, technology and
other changes are allowing consumers and businesses to complete financial transactions through alternative methods that
historically have involved banks. For example, the wide acceptance of Internet-based commerce has resulted in a number of
alternative payment processing systems and lending platforms in which banks play only minor roles. Customers can now
maintain funds in prepaid debit cards or digital currencies and pay bills and transfer funds directly without the direct
assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could continue to result in the
loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss
of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material adverse
effect on our business, financial condition and results of operations.
Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may
materially adversely affect our business and the value of our stock.
We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to
conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining
employees who share our core values of being an integral part of the communities we serve, delivering superior service to
our customers and caring about our customers and associates. Maintenance of our reputation depends not only on our
success in maintaining our service-focused culture, but also on our success in identifying and appropriately addressing
issues that may arise in areas such as potential conflicts of interest, anti-money laundering, customer personal information
and privacy issues, employee, customer and other third-party fraud, record-keeping, regulatory investigations, and any
litigation that may arise from the failure or perceived failure of us to comply with legal and regulatory requirements. If our
reputation is negatively affected, by the intentional, inadvertent or unsubstantiated misconduct of our employees, directors,
customers, third parties, or otherwise, our business and, therefore, our operating results and the value of our stock may be
materially adversely affected.
Severe weather, natural disasters, pandemics, acts of war or terrorism or other external events could significantly
impact our business.
Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse external
events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of
our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing
loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The occurrence
of any of these events in the future could have a material adverse effect on our business, financial condition or results of
operations.
Our operations and results of operations will be negatively impacted by the coronavirus pandemic.
Since December 2019, a strain of coronavirus (“COVID-19”) has spread globally including in the areas in which the Company
and its customers operate. The COVID-19 pandemic has caused disruption of regional and global economic activity,
emergency actions by the Federal Reserve and other U.S. governmental authorities, significant declines in interest rates and
equity market valuations, heightened volatility in the financial markets, the shutdown of countries’ borders and directives for
residents within the Company’s primary market area to stay at home or in their place of residence and for certain business to
suspend some or all of their business activities. These actions have affected our operations and are expected to impact our
financial results in 2020. As of the date of this filing, we anticipate that we will take actions to support our customers in a
manner consistent with current guidance provided by Federal banking regulatory authorities. Future developments with
respect to COVID-19 are highly uncertain and cannot be predicted and new information may emerge
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concerning the severity of the outbreak and the actions to contain the outbreak or treat its impact, among others. The extent
to which the COVID-19 outbreak will impact our business, results of operations and financial condition will depend on future
developments, which are highly uncertain and cannot be predicted, including the scope and duration of the outbreak and
additional actions taken by governmental authorities to contain the financial and economic impact of the COVID-19
outbreak. Other national health concerns, including the outbreak of other contagious diseases or pandemics may adversely
affect us in the future.
LEGAL, ACCOUNTING, REGULATORY, AND COMPLIANCE RISKS
Our accounting estimates and risk management processes and controls rely on analytical and forecasting
techniques and models and assumptions, which may not accurately predict future events.
Our accounting policies and methods are fundamental to the manner in which we record and report our financial condition
and results of operations. Our management must exercise judgment in selecting and applying many of these accounting
policies and methods so they comply with GAAP and reflect management’s judgment of the most appropriate manner to
report our financial condition and results of operations. In some cases, management must select the accounting policy or
method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may
result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They require
management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts
could be reported under different conditions or using different assumptions or estimates. Our critical accounting policies
currently include the allowance for loan losses. Because of the uncertainty of estimates involved in these matters, we may be
required to significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the
reserve provided. This could have a material adverse effect on our business, financial condition or results of operations. See
also Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and Part II,
Item 8 “Financial Statements and Supplementary Data”.
Our internal controls, disclosure controls, processes and procedures, and corporate governance policies and procedures are
based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the objectives of the
system are met. Any failure or circumvention of our controls, processes and procedures or failure to comply with regulations
related to controls, processes and procedures could necessitate changes in those controls, processes and procedures, which
may increase our compliance costs, divert management attention from our business or subject us to regulatory actions and
increased regulatory scrutiny. Any of these could have a material adverse effect on our business, financial condition or results
of operations.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require
charges to earnings, which would have a negative impact on our results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in
connection with the purchase. We review goodwill for impairment at least annually, or more frequently if events or changes in
circumstances indicate that the carrying value of the asset might be impaired. Impairment charges, if any, are reflected in our
results of operations in the periods in which they become known. Any future goodwill impairment charge, based on the
current goodwill balance or future goodwill arising out of acquisitions, could have a material adverse effect on our results of
operations.
The accounting for loans acquired in connection with our acquisitions is based on numerous subjective
determinations that may prove to be inaccurate and have a negative impact on our results of operations.
Loans acquired in connection with our acquisitions have been recorded at estimated fair value on their acquisition date
without a carryover of the related allowance for loan losses. In general, the determination of
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estimated fair value of acquired loans requires management to make subjective determinations regarding discount rate,
estimates of losses on defaults, market conditions and other factors that are highly subjective in nature. A risk exists that our
estimate of the fair value of acquired loans will prove to be inaccurate and that we ultimately will not recover the amount at
which we recorded such loans on our balance sheet, which would require us to recognize losses.
Loans acquired in connection with acquisitions that have evidence of credit deterioration since origination and for which it is
probable at the date of acquisition that we will not collect all contractually required principal and interest payments are
accounted for under ASC Topic 310‑30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. These credit-
impaired loans, like non-credit-impaired loans acquired in connection with our acquisitions, have been recorded at estimated
fair value on their acquisition date, based on subjective determinations regarding risk ratings, expected future cash flows and
fair value of the underlying collateral, without a carryover of the related allowance for loan losses. We evaluate these loans
quarterly to assess expected cash flows. Subsequent decreases to the expected cash flows will generally result in a provision
for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior
charges or a reclassification of the difference from non-accretable to accretable with a positive impact on interest income in
future periods. Because the accounting for these loans is based on subjective measures that can change frequently, we may
experience fluctuations in our net interest income and provisions for loan losses attributable to these loans. These
fluctuations could negatively impact our results of operations.
The banking industry is highly regulated, and the regulatory framework, together with any future legislative or
regulatory changes, may have a significant adverse effect on our business, financial condition, results of operations
and future prospects.
As a bank holding company, we and our subsidiaries are subject to extensive examination, supervision and comprehensive
regulation under both federal and state laws and regulations that are intended primarily for the protection of depositors,
customers, the DIF and the overall financial stability of the United States, not for the protection of our stockholders and
creditors. We are subject to regulation and supervision by the Federal Reserve, and our Banks are subject to regulation and
supervision by the FDIC and the IDFPR. The banking laws and regulations applicable to us govern a variety of matters,
including, among other things, the types of business activities in which we and our subsidiaries can engage; permissible
types, amounts and terms of loans and investments we may make; the maximum interest rate that we may charge; the
amount of reserves we must hold against deposits we take; the types of deposits we may accept; maintenance of adequate
capital and liquidity; changes in the control of us and our Banks; restrictions on dividends or other capital distributions; and
establishment of new offices or branches. These requirements may constrain our operations or require us to obtain approval
from our regulators before engaging in certain activities, with no assurance that such approvals may be obtained, either in a
timely manner or at all. Also, the burden imposed by those federal and state regulations may place banks in general,
including the Banks in particular, at a competitive disadvantage compared to their non-bank competitors.
Applicable banking laws, regulations, interpretations, enforcement policies, and accounting principles have been subject to
significant changes in recent years and may be subject to significant future changes. In addition, regulators may elect to alter
standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of
liquidity, certain risk management or other operational practices for bank holding companies in a manner that impacts our
ability to implement our strategy and could affect us in substantial and unpredictable ways. Compliance with existing and any
potential new or changed regulations, as well as regulatory scrutiny, may significantly increase our costs, impede the
efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue
business opportunities in an efficient manner. Our failure to comply with banking laws, regulations and policies, even if the
failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business
activities, fines and other penalties, the commencement of informal or formal enforcement actions against us, and other
negative consequences, including reputational damage, any of which could adversely affect our business, financial condition,
results of operations, capital base and the price of our securities.
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Prior to October 11, 2019, we were treated as an S Corp, and claims of taxing authorities related to our prior status
as an S Corp could harm us.
Effective October 11, 2019, the Company revoked its S Corp status and became a taxable entity (C Corp) that is subject to
U.S. federal income tax. If the unaudited, open tax years in which we were an S Corp are audited by the Internal Revenue
Service (the "IRS") and we are determined not to have qualified for, or to have violated, our S Corp status, we will be
obligated to pay back tax, interest and penalties. The amounts that we would be obligated to pay could include tax on all of
our taxable income while we were an S Corp. Any such claims could result in additional costs to us and could have a material
adverse effect on our results of operations and financial condition.
We could become obligated to make payments to the pre-IPO stockholders for any additional federal, state or local
income taxes assessed against such pre-IPO stockholder for tax periods prior to the completion of the IPO.
Prior to October 11, 2019, we were treated as an S Corp for U.S. federal income tax purposes. Because we had been an S
Corp, our pre-IPO stockholders had been taxed on our income as individuals. Therefore each pre-IPO stockholder has
received certain distributions ("tax distributions") from us that were generally intended to equal the amount of tax such was
required to pay with respect to our income. In connection with the IPO, our S Corp status terminated and we are now subject
to federal and increased state income taxes. In the event of an adjustment to our reported taxable income for periods prior to
termination of our S Corp status, it is possible that each pre-IPO stockholder will be liable for additional income taxes for
those prior periods. Pursuant to the Amended Restated Stockholder Agreement, upon our filing any tax return (amended or
otherwise), in the event of any restatement of our taxable income or pursuant to a determination by, or a settlement with, a
taxing authority, for any period during which we were an S Corp, depending on the nature of the adjustment we may be
required to make a payment to each of the pre-IPO stockholders in an amount equal to such pre-IPO stockholder's
incremental tax liability, which amount may be material. In addition, we agreed to indemnify each pre-IPO stockholder with
respect to unpaid income tax liabilities to the extent that such unpaid income tax liabilities are attributable to an adjustment to
our taxable income for any period after our S Corp status terminates. In both cases, the amount of the payment will be based
on the assumption that such pre-IPO stockholder is taxed at the highest rate applicable to individuals for the relevant periods.
We also agreed to indemnify each pre-IPO stockholder for any interest, penalties, losses, costs or expenses arising out of
any claim under the agreement. However, each pre-IPO stockholder agreed to indemnify us with respect to our unpaid tax
liabilities (including interest and penalties) to the extent that such unpaid tax liabilities are attributable to a decrease in the
shareholder's taxable income for any for tax period and a corresponding increase in the Company's taxable income for any
period.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition
and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the
Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among
the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S.
government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits.
These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank
loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our
business, financial condition and results of operations cannot be predicted.
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We are subject to capital adequacy requirements and may be subject to more stringent capital requirements and, if
we fail to meet these requirements, we will be subject to restrictions on our ability to make capital distributions and
other restrictions.
The regulatory capital rules adopted by the U.S. banking agencies to implement the Basel III regulatory capital framework
developed by the Basel Committee on Banking Supervision (the "Basel III Capital Rules") increased our capital requirements,
including by introducing a Common Equity Tier 1 ("CET1") capital ratio and establishing additional criteria for certain capital
instruments to be considered Additional Tier 1 and Tier 2 capital. For example, trust preferred securities are generally
excluded from being counted as Tier 1 capital under the Basel III Capital Rules, but our trust preferred securities were
grandfathered in as a component of Tier 1 capital because we have less than $15 billion in total consolidated assets. If we
were to pursue sufficient balance sheet growth through acquisitions or mergers, we could lose Tier 1 capital treatment of our
grandfathered trust preferred securities, although such trust preferred securities likely would continue to be included as a
component of Tier 2 capital.
The Basel III Capital Rules require us to maintain a minimum CET1 capital ratio of 4.5%, a minimum total Tier 1 capital ratio
of 6%, a minimum total capital ratio of 8% and a minimum Tier 1 leverage ratio of 4%, and a capital conservation buffer of
greater than 2.5% of risk-weighted assets (the "Capital Conservation Buffer"). The Capital Conservation Buffer began
phasing in on January 1, 2016 at 0.625% and increased each year until January 1, 2019, when it reached its fully phased-in
level of 2.5%. Failure to maintain the Capital Conservation Buffer would result in increasingly stringent restrictions on our
ability to make dividend payments and other capital distributions and to pay discretionary bonuses to our executive officers.
See "Supervision and Regulation—Regulatory Capital Requirements" for more information on the capital adequacy standards
that we must meet and maintain.
While we currently meet the requirements of the Basel III Capital Rules, we may fail to do so in the future and may be unable
to raise additional capital to remediate any capital deficiencies. The failure to meet applicable regulatory capital requirements
could result in one or more of our regulators placing limitations or conditions on our activities or restricting the
commencement of new activities, including our growth initiatives, and could affect customer and investor confidence, our
costs of funds and level of required deposit insurance assessments to the FDIC, our ability to pay dividends on our capital
stock, our ability to make acquisitions, and our business, results of operations and financial conditions generally.
Future legislative or regulatory change could impose higher capital standards on us or the Banks. The Federal Reserve may
also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies
experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the
minimum supervisory levels, without significant reliance on intangible assets.
The Federal Reserve may require us to commit capital resources to support the Banks.
Federal law requires a bank holding company to act as a source of financial and managerial strength to its subsidiary banks,
and to commit resources to support such subsidiary banks. Under the "source of strength" doctrine, the Federal Reserve may
require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding
company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital
injection may be required at times when the Company may not have the resources to provide it and therefore may be
required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary banks are subordinate in right
of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s
bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment
will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of
its note obligations. Thus, any borrowing that must be done by the Company
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to make a required capital injection into one or both of the Banks could be more difficult and expensive to obtain and could
have an adverse effect on our business, financial condition and results of operations.
Our risk management framework may not be effective in mitigating risks and/or losses to us.
Our risk management framework is comprised of various processes, systems and strategies, and is designed to manage the
types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate and compliance. Our
framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our
risk management framework may not be effective under all circumstances or that it will adequately mitigate any risk or loss to
us. If our framework is not effective, we could suffer unexpected losses and our business, financial condition, results of
operations or growth prospects could be materially and adversely affected. We may also be subject to potentially adverse
regulatory consequences.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse
examination findings.
The Federal Reserve (with respect to us) and the FDIC and the IDFPR (with respect to the Banks) periodically examine our
business, including our compliance with applicable laws and regulations. These regulatory agencies have extremely broad
discretion in their interpretation of regulations and laws, and in their interpretation of the quality of our loan portfolio, securities
portfolio and other assets. If, as a result of an examination, a banking agency were to determine that our financial condition,
capital resources, asset quality, lending practices, investment practices, earnings prospects, management, liquidity or other
aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take
a number of different remedial actions as it deems appropriate. These actions include the power to enjoin "unsafe or
unsound" practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an
administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil
money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or
there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or
conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition, results of
operations and growth prospects.
Future consumer legislation or regulation could harm our performance and competitive position.
The Dodd-Frank Act established the CFPB as an independent federal agency that has broad rulemaking authority over
consumer financial products and services for all financial institutions, including deposit products, residential mortgages,
home-equity loans and credit cards. In addition, the CFPB also has exclusive supervisory and examination authority and
primary enforcement authority with respect to various federal consumer financial laws and regulations for insured depository
institutions with more than $10 billion in total consolidated assets. The Banks are not subject to the examination and
supervisory authority of the CFPB because they each have less than $10 billion in total assets but are required to comply with
the rules and regulations issued by the CFPB. The FDIC has the primarily responsible for supervising and examining the
Banks’ compliance with federal consumer financial laws and regulations, including CFPB regulations. See "Supervision and
Regulation—Consumer Financial Protection" for additional information.
In addition to the enactment of the Dodd-Frank Act, various state and local legislative bodies have adopted or have been
considering augmenting their existing framework governing consumers’ rights. Such legislative or regulatory changes to
consumer financial laws and regulations could result in changes to our pricing, practices, products and procedures; increases
in our costs related to regulatory oversight, supervision and examination; or result in remediation efforts and possible
penalties. We may be required to add additional compliance personnel or incur other significant compliance-related expenses
to meet the demands of these consumer protection laws. We cannot predict whether new legislation or regulation will be
enacted and, if enacted, the effect that it would have on our activities, financial condition, or results of operations.
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We are subject to numerous laws and regulations designed to protect consumers, including the Community
Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of
sanctions.
The Community Reinvestment Act of 1977 ("CRA") requires our Banks, consistent with safe and sound operations, to
ascertain and meet the credit needs of their entire communities, including low and moderate income areas. Our Banks’ failure
to comply with the CRA could, among other things, result in the denial or delay of certain corporate applications filed by us or
our Banks, including applications for branch openings or relocations and applications to acquire, merge or consolidate with
another banking institution or holding company. In addition, the Equal Credit Opportunity Act, the Fair Housing Act and other
fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of
Justice, federal banking agencies, and other federal agencies are responsible for enforcing these laws and regulations. A
challenge to an institution’s compliance with fair lending laws and regulations could result in a wide variety of sanctions,
including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on
expansion, and restrictions on entering new business lines. Private parties may also challenge an institution’s performance
under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business,
financial condition, results of operations and growth prospects. See "Supervision and Regulation—Community Reinvestment
Act".
The expanding body of federal, state and local regulations and/or the licensing of loan servicing, collections or other
aspects of our business and our sales of loans to third parties may increase the cost of compliance and the risks of
noncompliance and subject us to litigation.
We service some of our own loans, and loan servicing is subject to extensive regulation by federal, state and local
governmental authorities as well as to various laws and judicial and administrative decisions imposing requirements and
restrictions on those activities. The volume of new or modified laws and regulations has increased in recent years and, in
addition, some individual municipalities have begun to enact laws that restrict loan servicing activities including delaying or
temporarily preventing foreclosures or forcing the modification of certain mortgages. If regulators impose new or more
restrictive requirements, we may incur significant additional costs to comply with such requirements which may adversely
affect us. In addition, were we to be subject to regulatory investigation or regulatory action regarding our loan modification
and foreclosure practices, our financial condition and results of operation could be adversely affected. We have also sold
loans to third parties. In connection with these sales, we, or certain of our subsidiaries, make or have made various
representations and warranties, breaches of which may result in a requirement that we repurchase the loans or otherwise
make whole or provide other remedies to counterparties. These aspects of our business or our failure to comply with
applicable laws and regulations could possibly lead to, among other things, civil and criminal liability, loss of licensure,
damage to our reputation in the industry or with customers, fines and penalties, litigation (including class action lawsuits) and
administrative enforcement actions. Any of these outcomes could materially and adversely affect us.
Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act (the "BSA"), or other laws and regulations could
result in fines or sanctions.
Financial institutions are required under the USA PATRIOT Act of 2001 and the BSA to develop programs to prevent financial
institutions from being used for money-laundering, terrorist financing and other illicit activities. Financial institutions are also
obligated to file suspicious activity reports with the Office of Financial Crimes Enforcement Network ("FinCEN") of the U.S.
Department of the Treasury ("Treasury") if such activities are detected. These rules also require financial institutions to
establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure or
the inability to comply with these regulations could result in fines or penalties, curtailment of expansion opportunities,
intervention or sanctions by regulators and costly litigation or expensive additional controls and systems. In recent years,
several banking institutions have received large fines for non-compliance with these laws and regulations. In addition,
FinCEN has recently imposed new requirements for financial institutions to enhance their Customer Due Diligence programs,
including verifying the identity of beneficial owners of qualifying business customers. We have
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developed policies and continue to augment procedures and systems designed to assist in compliance with these laws and
regulations, but these policies may not be effective to provide such compliance. If we violate these laws and regulations, or
our policies, procedures and systems are deemed deficient, we could face severe consequences, including sanctions, fines,
regulatory actions and reputational consequences. Any of these results could have a material adverse effect on our business,
financial condition, results of operations and growth prospects.
Regulation in the areas of privacy and data security could increase our costs.
We are subject to various regulations related to privacy and data security, and we could be negatively impacted by these
regulations. For example, we are subject to the safeguards guidelines under the Gramm-Leach-Bliley Act ("GLBA"). The
safeguards guidelines require that each financial institution develop, implement and maintain a written, comprehensive
information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the
nature and scope of the financial institution’s activities and the sensitivity of any customer information at issue. Further, there
are various other statutes and regulations relevant to the direct email marketing, debt collection and text-messaging
industries including the Telephone Consumer Protection Act.
In addition to the foregoing enhanced data security requirements, various federal banking regulatory agencies, and all 50
states, the District of Columbia, Puerto Rico and the Virgin Islands, have enacted data security regulations and laws requiring
varying levels of consumer notification in the event of a security breach and/or requirements to disclose to consumers
information collected about them. Also, federal legislators and regulators are increasingly pursuing new guidelines, laws and
regulations that, if adopted, could further restrict how we collect, use, share and secure consumer information, which could
impact some of our current or planned business initiatives. The interpretation of many of these statutes and regulations is
evolving in the courts and administrative agencies and an inability or failure to comply with them may have an adverse impact
on our business.
FDIC deposit insurance assessments may materially increase in the future, which would have an adverse effect on
earnings.
As institutions with deposits insured by the FDIC, the Banks are assessed a quarterly deposit insurance premium. The failure
of banks nationwide during the financial crisis significantly depleted the DIF and reduced the ratio of reserves to insured
deposits. The FDIC adopted a Deposit Insurance Fund Restoration Plan, which required the DIF to attain a 1.35% reserve
ratio by September 30, 2020.
This ratio was attained in the third quarter of 2018. The Banks could be required to pay significantly higher premiums or
additional special assessments if, among other reasons, future bank failures deplete the DIF. This would adversely affect the
Banks’ earnings, thereby reducing its availability of funds to pay dividends to us.
Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines,
penalties, judgments or other requirements resulting in increased expenses or restrictions on our business
activities.
Our business is subject to increased litigation and regulatory enforcement risks due to a number of factors, including the
highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the
financial services industry generally. This focus has only intensified in recent years, with regulators and prosecutors focusing
on a variety of financial institution practices and requirements, including foreclosure practices, compliance with applicable
consumer protection laws, classification of "held for sale" assets and compliance with anti-money laundering statutes, the
BSA and sanctions administered by the Office of Foreign Assets Control of the Treasury.
In the normal course of business, from time to time, we have in the past and may in the future be named as a defendant in
various legal actions, including arbitrations, class actions and other litigation, arising in connection
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with our current and/or prior business activities. Legal actions could include claims for substantial compensatory or punitive
damages or claims for indeterminate amounts of damages. In addition, while the arbitration provisions in certain of our
customer agreements historically have limited our exposure to consumer class action litigation, there can be no assurance
that we will be successful in enforcing our arbitration clause in the future. We may also, from time to time, be the subject of
subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental
agencies regarding our current and/or prior business activities. Any such legal or regulatory actions may subject us to
substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices or
other requirements resulting in increased expenses, diminished income and damage to our reputation. Our involvement in
any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also
cause significant harm to our reputation and divert management attention from the operation of our business. Further, any
settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by
government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin
independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could be material to our
business, results of operations, financial condition and cash flows depending on, among other factors, the level of our
earnings for that period, and could have a material adverse effect on our business, financial condition or results of operations.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Our principal stockholder, Heartland Bancorp, Inc. Voting Trust U/A/D 5/4/2016, has significant influence over us,
and its interests could conflict with those of our other stockholders.
As of December 31, 2019, our principal stockholder, Heartland Bancorp, Inc. Voting Trust U/A/D 5/4/2016 (“the Voting Trust”),
owned approximately 62.7% of the outstanding shares of our common stock and its trustee is our Chairman and Chief
Executive Officer. As a result, the Voting Trust is able to influence matters requiring approval by our stockholders, including
the election of directors and the approval of mergers or other extraordinary transactions. The Voting Trust may also have
interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests.
The concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of the
Company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of
our company and might ultimately affect the market price of our common stock.
The Voting Trust could sell its interest in us to a third-party in a private transaction, which may not lead to your realization of
any change of control premium on shares of our common stock and would subject us to the influence of a presently unknown
third-party.
The ability of the Voting Trust to sell its shares of our common stock privately, with no requirement for a concurrent offer to be
made to acquire all of the shares of our outstanding common stock, could prevent our stockholders from realizing any change
of control premium on shares of our common stock that they own that may accrue to the Voting Trust on its private sale of our
common stock.
Even if the Voting Trust’s ownership of our shares falls below a majority, the Voting Trust may continue to be able to influence
or effectively control out decisions.
We are classified as a "controlled company" for purposes of the Nasdaq Listing Rules and, as a result, we qualify for
certain exemptions from certain corporate governance requirements. You do not have the same protections afforded
to stockholders of companies that are subject to such requirements.
As of the date of this report, the Voting Trust controls a majority of the voting power of our outstanding common stock. As a
result, we are a "controlled company" within the meaning of the corporate governance standards of the Nasdaq Listing Rules.
Under the Nasdaq Listing Rules, a company of which more than 50% of the
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outstanding voting power is held by an individual, group or another company is a "controlled company" and may elect not to
comply with certain stock exchange corporate governance requirements, including:
·
·
·
the requirement that a majority of the board of directors consists of independent directors;
the requirement that nominating and corporate governance matters be decided solely by independent directors; and
the requirement that executive and officer compensation matters be decided solely by independent directors.
As a result, we do not have a majority of independent directors, and our nominating and corporate governance and
compensation functions are not required to be decided solely by independent directors. Accordingly, you will not have the
same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance
requirements.
Our ability to continue to pay dividends to our stockholders is restricted by applicable laws and regulations and by
the ability of our subsidiaries to pay dividends to us.
Holders of our common stock are only entitled to receive such cash dividends as our board, in its sole discretion, may declare
out of funds legally available for such payments. Any decision to declare and pay dividends will be dependent on a variety of
factors, including our financial condition, earnings, legal requirements, our general liquidity needs, and other factors that our
board deems relevant. As a bank holding company, our ability to declare and pay dividends to our stockholders is subject to
certain banking laws, regulations, and policies, including minimum capital requirements and, as a Delaware corporation, we
are subject to certain restrictions on dividends under the DGCL. In addition, we are a separate legal entity, and, accordingly,
our ability to pay dividends depends primarily upon the receipt of dividends or other capital distributions from the Banks. The
ability of the Banks to make distributions or pay dividends to us is subject to their earnings, financial condition, and liquidity
needs, as well as federal and state laws, regulations, and policies applicable to them, which limit the amount our Banks can
pay as dividends or other capital distributions to us. Finally, our ability to pay dividends to our stockholders, or our Banks’
ability to pay dividends or other distributions to us, may be limited by covenants in any financing arrangements that we or our
Banks may enter into in the future. See "Dividend Policy" and "Supervision and Regulation—Dividends and Share
Repurchases."
As a consequence of these various limitations and restrictions, we may not be able to make, or may have to reduce or
eliminate at any time, future dividends on our common stock. Any change in the level of our dividends or the suspension of
the payment thereof could have a material adverse effect on the market price of our common stock.
We cannot guarantee that we will be able to pay dividends to our stockholders, or that either board of directors of our Banks
will be able to or will elect to pay dividends to us, nor can we guarantee the timing or amount of any such dividends actually
paid. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock
for a price greater than that which you paid for it.
Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress
our stock price.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could
adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional
shares. Following the expiration of the 180-day underwriter lock-up agreed to by each of our executive officers and directors
and the trustee of the Voting Trust in connection with our IPO, the shares of our common stock held by these holders may be
sold in accordance with the volume, manner of sale, and other limitations under Rule 144, and holders of
approximately 17,210,400 shares of our common stock will
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have the right to require us to register the sales of their shares under the Securities Act, under the terms of an agreement
between us and the holders of these securities.
In the future, we may also issue securities in connection with acquisitions or investments. The number of shares of our
common stock issued in connection with an acquisition or investment could constitute a material portion of our then-
outstanding shares of our common stock.
We are an “emerging growth company” and may elect to comply with reduced public company reporting
requirements which could make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act. For as long as we continue to be an emerging growth
company, we may choose to take advantage of exemptions from various public company reporting requirements. These
exemptions include, but are not limited to, (i) not being required to comply with the auditor attestation requirements of Section
404 of the Sarbanes-Oxley Act, (ii) reduced disclosure obligations regarding executive compensation in our periodic reports,
proxy statements and registration statements, and (iii) exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We
could be an emerging growth company for up to five years after our IPO, which fifth anniversary will occur in 2024. However,
if certain events occur prior to the end of such five-year period, including if we become a "large accelerated filer," our annual
gross revenue exceeds $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we
would cease to be an emerging growth company prior to the end of such five-year period. We have taken advantage of
certain of the reduced disclosure obligations regarding executive compensation and may elect to take advantage of other
reduced disclosure obligations in future filings. As a result, the information that we provide to holders of our common stock
may be different than you might receive from other public reporting companies in which you hold equity interests. We cannot
predict if investors will find our common stock less attractive as a result of our reliance on these exemptions. If some
investors find our common stock less attractive as a result of any choice we make to reduce disclosure, there may be a less
active trading market for our common stock and the price for our common stock may be more volatile.
Under the JOBS Act, emerging growth companies may also elect to delay adoption of new or revised accounting standards
until such time as those standards apply to private companies. We have elected to use this extended transition period for
complying with new or revised accounting standards and, therefore, we will not be subject to the same new or revised
accounting standards as other public companies.
We recently completed our initial public offering. Fulfilling our public company financial reporting and other
regulatory obligations and our ongoing transition to a standalone public company will be expensive and time
consuming and may strain our resources.
As a public company, we are subject to the reporting requirements of the Exchange Act and are required to implement
specific corporate governance practices and adhere to a variety of reporting requirements under Sarbanes-Oxley and the
related rules and regulations of the SEC, as well as the rules of the Nasdaq. The Exchange Act requires us to file annual,
quarterly and current reports with respect to our business and financial condition. Sarbanes-Oxley requires, among other
things, that we maintain effective disclosure controls and procedures and internal control over financial reporting.
Due to a transition period established by rules of the SEC for new public companies, we are not currently required to make a
formal assessment of the effectiveness of our internal control over financial reporting until the year following our first annual
report is required to be filed with the SEC. Thus, this Annual Report on Form 10-K does not include a report of management’s
assessment regarding internal control over financial reporting or an attestation report of the Company’s independent
registered public accounting firm. We are required to comply with the SEC’s rules implementing Section 302 and 404 of
Sarbanes-Oxley, that require management to certify financial and other information in our quarterly and annual reports.
Though we are required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be
required to make our
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first annual assessment of our internal control over financial reporting pursuant to Section 404 until our 2020 Annual Report
on Form 10-K. Pursuant to the JOBS Act, our independent registered public accounting firm will not be required to attest to
the effectiveness of our internal control over financial reporting until the later of the year following our first annual report
required to be filed with the SEC or the date we are no longer an emerging growth company, which may be up to five full
fiscal years following our initial public offering.
When required, this process will require additional documentation of policies, procedures and systems, further review of that
documentation by our third-party internal auditing staff and internal accounting staff and our outside independent registered
public accounting firm, and additional testing of our internal control over financial reporting by our third-party internal auditing
staff and internal accounting staff and our outside independent registered public accounting firm. This process will involve
considerable time and attention, may strain our internal resources, and will increase our operating costs. We may experience
higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and
thereafter. If our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our
internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial
reports and the market price of our common stock could be negatively affected, and we could become subject to
investigations by the Nasdaq, the SEC or other regulatory authorities, which could require additional financial and
management resources.
If we are not able to implement the requirements of Section 404 of Sarbanes-Oxley in a timely and capable manner, we may
be subject to adverse regulatory consequences and there could be a negative reaction in the financial markets due to a loss
of investor confidence in us and the reliability of our financial statements. This could have a material adverse effect on our
business, financial condition or results of operations.
Our stock price could be volatile and may decline regardless of our operating performance.
The market price for our common stock could be volatile. In addition, the market price of our common stock may fluctuate
significantly in response to various factors, many of which we cannot control. The stock markets have experienced extreme
price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many
companies. If the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence,
the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of
operations. If our stock price declines, we may be exposed to lawsuits that, even if unsuccessful, could be costly to defend
and could divert the attention of management from our business.
Anti-takeover provisions in our charter documents and Delaware law, and the banking laws and regulations to which
we are subject, might discourage or delay acquisition attempts for us that you might consider favorable.
Our restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the
acquisition of the Company more difficult without the approval of our board of directors. These provisions:
·
·
·
authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of
which may be issued without stockholder approval, and which may include super voting, special approval,
dividend or other rights or preferences superior to the rights of the holders of common stock;
prohibit stockholder action by written consent, requiring all stockholder actions be taken at a meeting of our
stockholders, if the Voting Trust ceases to own more than 35% of our outstanding common stock;
provide that the board of directors is expressly authorized to make, alter or repeal our amended and restated
bylaws;
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·
·
establish advance notice requirements for nominations for elections to our board of directors or for proposing
matters that can be acted upon by stockholders at stockholder meetings; and
prohibit stockholders from calling special meetings of stockholders.
These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction
involving a change in control of the Company, even if doing so would benefit our stockholders. These provisions could also
discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to
cause us to take other corporate actions you desire. For a further discussion of these and other such anti-takeover
provisions, see "Description of Capital Stock—Anti-takeover Effects of our Restated Certificate of Incorporation and Amended
and Restated Bylaws."
Furthermore, banking laws impose notice, approval and ongoing regulatory requirements on any stockholder or other party
that seeks to acquire direct or indirect "control," as defined under applicable law, of an FDIC-insured depository institution.
These laws include the BHCA and the CBCA. These laws could, among other things, limit the equity held by certain
stockholders, restrain a stockholder’s ability to influence proxy matters, or prevent an acquisition of the Company, in each
case without first obtaining regulatory approval. See "Supervision and Regulation—Acquisition of Control."
Our restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and
exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could
limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers or
employees.
Our restated certificate of incorporation provides that, subject to limited exceptions, the Court of Chancery of the State of
Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) will be
the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim
of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any
action asserting a claim against us or any of our directors, officers or other employees arising pursuant to any provision of the
DGCL, our certificate of incorporation or our by-laws or (iv) any other action asserting a claim against us or any of our
directors, officers or other employees that is governed by the internal affairs doctrine. Any person or entity purchasing or
otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the
provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder's ability
to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees,
which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find
these provisions of our restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the
specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other
jurisdictions, which could adversely affect our business and financial condition.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our
business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts
publish about us or our business. If we obtain securities or industry analyst coverage and if one or more of the analysts who
covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would
likely decline. If we fail to meet the expectations of analysts for our operating results, our stock price would likely decline. If
one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could
decrease, which could cause our stock price and trading volume to decline.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
HBT Financial and Heartland Bank’s headquarters are located at 401 North Hershey Road, Bloomington, Illinois. State Bank
of Lincoln’s headquarters are located at 508 Broadway, Lincoln, Illinois. The Company owns these headquarters, and it also
owns or leases other facilities, such as banking centers of Heartland Bank and State Bank of Lincoln, for business
operations.
HBT Financial and its subsidiaries own or lease all of the real property and/or buildings on which each respective entity is
located. The Company considers its properties to be suitable and adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
We are sometimes party to legal actions that are routine and incidental to our business. Management, in consultation with
legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse
effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations.
However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business,
including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-
money laundering and anti-terrorism laws, we, like all banking organizations, are subject to heightened legal and regulatory
compliance and litigation risk.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information and Holders of Record
HBT Financial, Inc.’s common stock is listed on the Nasdaq Global Select Market (the “Nasdaq”) under the symbol “HBT.”
As of March 26, 2020, HBT Financial, Inc. had approximately 25 shareholders of record. A substantially greater number of
holders of our common stock are “street name” or beneficial holders, whose shares are held by banks, brokers and other
financial institutions.
Dividends
On January 30, 2020, we announced a quarterly cash dividend of $0.15 per share on our common stock. We expect to
continue our policy of paying quarterly cash dividends. Our board of directors may change or eliminate the payment of future
dividends at its discretion, without notice to our stockholders. Any future determination relating to our dividend policy will be
made at the discretion of our board of directors and will depend on a number of factors, including general and economic
conditions, industry standards, our financial condition and operating results, our available cash and current and anticipated
cash needs, capital requirements, banking regulations, contractual, legal, tax and regulatory restrictions and implications on
the payment of dividends by us to our stockholders or by our subsidiaries to us, and such other factors as our board of
directors may deem relevant.
Stock Performance Graph
The performance graph and table below compares the cumulative total return on the Company’s common stock from
October 11, 2019 (the date of the Company’s initial public offering and listing on the Nasdaq) through December 31, 2019,
with the cumulative total return of: (a) the Russell 2000 Index which reflects a broad equity market index, and (b) the ABA
Nasdaq Community Bank Index which reflects a published industry or line-of-business index. The performance graph and
table assume an initial investment of $100 and reinvestment of dividends. Returns are presented on a total return basis.
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The performance graph and table represent past performance and should not be considered to be an indication of future
performance. The information in the preceding paragraph and the following stock performance graph and table shall not be
deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, other than as provided in
Item 201 of Regulation S-K, or to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically
request that such information be treated as soliciting material or specifically incorporate it by reference into a filing under the
Securities Act or the Exchange Act.
$
October 11,
2019
December 31,
2019
$
100.00
100.00
100.00
118.69
112.33
111.50
Index
HBT Financial, Inc.
Russell 2000 Index
ABA Nasdaq Community Bank Index
Issuer Purchases of Equity Securities
None.
Unregistered Sales of Equity Securities
None.
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ITEM 6.
SELECTED FINANCIAL DATA
Consolidated financial information reflecting a summary of the results of operations and financial condition of the Company
for the years ended December 31, 2019, 2018, 2017 and 2016 is presented in the following table. This summary should be
read in conjunction with the consolidated financial statements, and accompanying notes thereto, and other financial
information included in Item 8, "Financial Statements and Supplementary Data," of this Form 10‑K. A more detailed
discussion and analysis of the factors affecting the Company’s financial condition and results of operations is presented in
Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10‑K.
As of or for the Year Ended December 31,
2019
2018
2017
2016
(dollars in thousands, except per share data)
$
$
$
Statement of Income Information
Total interest and dividend income
Total interest expense
Net interest income
Provision for loan losses
Net income after provision for loan losses
Total noninterest income
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
C Corp equivalent net income
Adjusted C Corp equivalent net income
(2)
(1)
$
$
$
143,735
9,935
133,800
3,404
130,396
32,751
91,026
72,121
5,256
66,865
53,372
57,427
Net interest income (tax-equivalent basis)
(1)
$
136,109
Share and Per Share Information
Earnings per share - Basic and diluted
C Corp equivalent earnings per share - Basic and diluted
Adjusted C Corp equivalent earnings per share - Basic and diluted
(2)
(1)
Book value per share
Tangible book value per share
Closing stock price
(1)
$
$
3.33
2.66
2.86
12.12
11.12
18.99
$
$
$
$
$
137,432
7,990
129,442
5,697
123,745
31,240
90,317
64,668
869
63,799
48,297
50,252
132,103
3.54
2.68
2.78
18.88
17.27
N/A
$
$
$
$
$
127,593
6,595
120,998
3,139
117,859
33,171
94,057
56,973
870
56,103
37,294
39,758
126,525
3.10
2.06
2.20
17.92
16.23
N/A
$
$
$
$
$
127,705
6,604
121,101
6,434
114,667
39,354
94,434
59,587
1,041
58,546
39,249
39,054
126,569
3.24
2.17
2.16
18.05
16.25
N/A
Ending number shares of common stock outstanding
Weighted average number shares of common stock outstanding
27,457,306
20,090,270
18,027,512
18,047,332
18,070,692
18,070,692
18,070,692
18,053,600
Summary Ratios
Net interest margin
Net interest margin (tax-equivalent basis)
Yield on loans
Yield on interest-earning assets
Cost of interest-bearing liabilities
Cost of total deposits
(1)
Efficiency ratio
Efficiency ratio (tax-equivalent basis)
(1)
Return on average assets
Return on average stockholders' equity
Return on average tangible common equity
C Corp equivalent return on average assets
C Corp equivalent return on average stockholders' equity
C Corp equivalent return on average tangible common equity
(2)
(2)
(2)
Adjusted C Corp equivalent return on average assets
Adjusted C Corp equivalent return on average stockholders' equity
Adjusted C Corp equivalent return on average tangible common equity
(1)
(1)
(1)
4.31 %
4.38
5.51
4.63
0.45
0.29
53.80 %
53.06
4.16 %
4.25
5.35
4.42
0.36
0.21
3.83 %
4.01
5.09
4.04
0.29
0.17
55.24 %
54.34
59.77 %
57.70
2.07 %
1.96 %
1.69 %
19.58
21.35
19.32
21.24
16.58
18.29
1.65 %
1.49 %
1.12 %
15.63
17.04
14.63
16.08
11.02
12.16
1.78 %
1.55 %
1.20 %
16.81
18.34
15.22
16.73
11.75
12.96
3.87 %
4.04
5.17
4.08
0.28
0.18
57.49 %
55.60
1.76 %
16.93
18.75
1.18 %
11.35
12.57
1.17 %
11.29
12.51
49
Table of Contents
Balance Sheet Information
Cash and cash equivalents
Securities available-for-sale, at fair value
Securities held-to-maturity
Equity securities
Loans held for sale
Loans, before allowance for loan losses
Allowance for loan losses
Loans, net of allowance for loan losses
Goodwill
Core deposit intangible assets, net
Other assets
Total Assets
Total deposits
Securities sold under agreements to repurchase
Borrowings
Subordinated debentures
Other liabilities
Total Liabilities
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
Loans, before allowance for loan losses (originated)
(1)
Loans, before allowance for loan losses (acquired)
(1)
As of or for the Year Ended December 31,
2019
2018
2017
2016
(dollars in thousands, except per share data)
$
$
$
$
$
283,971
592,404
88,477
4,389
4,531
2,163,826
(22,299)
2,141,527
23,620
4,030
102,154
3,245,103
2,776,855
44,433
—
37,583
53,314
2,912,185
332,918
3,245,103
1,998,496
165,330
$
$
$
$
$
$
186,879
679,526
121,715
3,261
2,800
2,144,257
(20,509)
2,123,748
23,620
5,453
102,567
3,249,569
2,795,970
46,195
—
37,517
29,491
2,909,173
340,396
3,249,569
$
165,683
769,571
129,322
3,203
4,863
2,115,946
(19,765)
2,096,181
$
238,741
687,120
140,254
3,145
7,826
2,106,515
(19,708)
2,086,807
23,620
7,012
113,420
$ 3,312,875
23,620
8,928
120,683
$ 3,317,124
$ 2,855,685
37,838
29,000
37,451
28,985
2,988,959
323,916
$ 3,312,875
$ 2,877,181
39,081
4,000
37,386
33,230
2,990,878
326,246
$ 3,317,124
1,923,859
220,398
$ 1,825,129
290,817
$ 1,689,186
417,329
2,759,095
$ 2,812,855
$ 2,839,109
Core deposits
(1)
$
2,732,101
Credit Quality Ratios
Allowance for loan losses to loans, before allowance for loan losses
Allowance for loan losses to nonperforming loans
Nonperforming loans to loans, before allowance for loan losses
Nonperforming assets to total assets
Nonperforming assets to loans, before allowance for loan losses and foreclosed
assets
Net charge-offs to average loans, before allowance for loan losses
Balance Sheet Ratios
Loan to deposit ratio
Core deposits to total deposits
Stockholders' equity to assets
Tangible common equity to tangible assets
(1)
(1)
Regulatory Capital Ratios (Company)
Total capital (to risk weighted assets)
Tier 1 capital (to risk weighted assets)
Common Equity Tier 1 capital (to risk weighted assets)
Tier 1 capital (to average assets)
1.03 %
0.96 %
0.93 %
117.06
0.88
0.74
1.11
0.07
77.92 %
98.39
10.26
9.49
14.54 %
13.64
12.15
10.38
128.88
0.74
0.78
1.18
0.23
76.69 %
98.68
10.48
9.67
14.99 %
14.17
12.71
10.80
89.43
1.04
1.17
1.81
0.15
74.10 %
98.50
9.78
8.94
14.40 %
13.58
12.09
9.94
0.94 %
88.62
1.06
1.16
1.81
0.23
73.21 %
98.68
9.84
8.94
14.54 %
13.72
12.21
9.93
(1) See “Non-GAAP Financial Information” below for reconciliation of non-GAAP financial measures to their most comparable GAAP financial measures.
(2) Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent provision for income tax for such year.
N/A Not applicable.
50
Table of Contents
SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data is presented in the following tables.
Statement of Income Information
Total interest and dividend income
Total interest expense
Net interest income
Provision for loan losses
Net income after provision for loan losses
Total noninterest income
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per share - Basic
Earnings per share - Diluted
Weighted average number shares of common stock outstanding
C Corp Equivalent Information
Historical income before income tax expense
C Corp equivalent income tax expense
C Corp equivalent net income
(1)
C Corp equivalent earnings per share - Basic
C Corp equivalent earnings per share - Diluted
Statement of Income Information
Total interest and dividend income
Total interest expense
Net interest income
Provision for loan losses
Net income after provision for loan losses
Total noninterest income
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Earnings per share - Basic
Earnings per share - Diluted
Weighted average number shares of common stock outstanding
C Corp Equivalent Information
Historical income before income tax expense
C Corp equivalent income tax expense
C Corp equivalent net income
(1)
C Corp equivalent earnings per share - Basic
C Corp equivalent earnings per share - Diluted
Three Months Ended 2019
December
September
June
March
(dollars in thousands, except per share data)
$
$
$
$
34,600 $
2,324
32,276
138
32,138
10,336
21,950
20,524
4,437
16,087 $
35,636 $
2,495
33,141
684
32,457
7,582
22,303
17,736
299
17,437 $
36,550 $
2,619
33,931
1,806
32,125
7,346
24,561
14,910
305
14,605 $
0.61 $
0.61 $
0.97 $
0.97 $
0.81 $
0.81 $
26,211,282
18,027,512
18,027,512
$
$
$
$
20,524 $
5,436
15,088 $
17,736 $
4,614
13,122 $
14,910 $
3,784
11,126 $
0.58 $
0.58 $
0.73 $
0.73 $
0.62 $
0.62 $
36,949
2,497
34,452
776
33,676
7,487
22,212
18,951
215
18,736
1.04
1.04
18,027,512
18,951
4,915
14,036
0.78
0.78
Three Months Ended 2018
December
September
June
March
(dollars in thousands, except per share data)
$
$
$
$
35,248 $
2,172
33,076
3,906
29,170
6,429
23,440
12,159
239
11,920 $
34,732 $
2,131
32,601
1,238
31,363
8,407
21,937
17,833
241
17,592 $
34,416 $
1,957
32,459
904
31,555
7,511
22,627
16,439
230
16,209 $
0.66 $
0.66 $
0.98 $
0.98 $
0.90 $
0.90 $
18,027,512
18,027,512
18,064,303
$
$
$
$
12,159 $
2,965
9,194 $
17,833 $
4,605
13,228 $
16,439 $
4,128
12,311 $
0.51 $
0.51 $
0.73 $
0.73 $
0.68 $
0.68 $
33,036
1,730
31,306
(351)
31,657
8,893
22,313
18,237
159
18,078
1.00
1.00
18,070,692
18,237
4,673
13,564
0.75
0.75
(1) Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent provision for income tax for such year.
51
Table of Contents
NON-GAAP FINANCIAL INFORMATION
This Annual Report on Form 10‑K contains certain financial information determined by methods other than in accordance with
GAAP. These measures include net interest income (tax-equivalent basis), net interest margin (tax-equivalent basis),
efficiency ratio (tax-equivalent basis), tangible common equity, tangible assets, tangible common equity to tangible assets,
tangible book value per share, originated loans and acquired loans and any ratios derived therefrom, core deposits, core
deposits to total deposits, return on tangible common equity, adjusted C Corp equivalent net income, adjusted C Corp
equivalent earnings per share – basic and diluted, adjusted C Corp equivalent return on average assets, adjusted C Corp
equivalent return on average stockholders’ equity, and adjusted C Corp equivalent return on average tangible common
equity. Our management uses these non-GAAP financial measures, together with the related GAAP financial measures, in its
analysis of our performance and in making business decisions. The tax equivalent adjustment to net interest income
recognizes the income tax savings when comparing taxable and tax-exempt assets and assumes a federal tax rate of 21%
and state income tax rate of 9.50% during the years ended December 31, 2019 and 2018, a federal tax rate of 35% and state
income tax rate of 8.63% for the year ended December 31, 2017, and a federal tax rate of 35% and state income tax rate of
7.75% for the year ended December 31, 2016.
Originated loans and acquired loans along with the related credit quality ratios such as net charge-offs to average loans
(originated and acquired), nonperforming loans to loans, before allowance for loan losses (originated and acquired), and
nonperforming assets to loans, before allowance for loan losses and foreclosed assets (originated and acquired) are non-
GAAP financial measures. Originated loans represent loans initially originated by the Company and acquired loans that were
refinanced using the Company’s underwriting criteria. Acquired loans represent loans originated under the underwriting
criteria used by a bank that was acquired by Heartland Bank or State Bank of Lincoln. We believe these non-GAAP financial
measures provide investors with information regarding the credit quality of loans underwritten using the Company’s policies
and procedures.
Management believes that it is a standard practice in the banking industry to present these non-GAAP financial measures,
and accordingly believes that providing these measures may be useful for peer comparison purposes. These disclosures
should not be viewed as substitutes for the results determined to be in accordance with GAAP; nor are they necessarily
comparable to non-GAAP financial measures that may be presented by other companies. See our reconciliation of non-
GAAP financial measures to their most directly comparable GAAP financial measures below.
52
Table of Contents
Reconciliation of Non-GAAP Financial Measure - Adjusted C Corp equivalent net income, adjusted C Corp
equivalent earnings per share – basic and diluted, and adjusted C Corp equivalent return on average assets
Net income
C Corp equivalent net income
Adjustments:
(2)
Year Ended December 31,
2019
2018
2017
2016
(dollars in thousands, except share and per share data)
$
$
66,865
53,372
$
$
63,799
48,297
$
$
56,103 $
58,546
37,294 $
39,249
(1)
Net earnings (losses) from closed or sold operations, including gains on sale
Charges related to termination of certain employee benefit plans
Impairment losses related to closure of branches
Nonrecurring charge related to an employee benefits policy change
Expenses related to FDIC Indemnification assets and liabilities
Realized gains (losses) on sales of securities
Mortgage servicing rights fair value adjustment
Total adjustments
C Corp equivalent tax effect of adjustments
Less adjustments after C Corp equivalent tax effect
Adjusted C Corp equivalent net income
$
524
(3,796)
—
—
—
—
(2,400)
(5,672)
1,617
(4,055)
57,427
Average assets
$
3,233,386
(822)
—
—
—
—
(2,541)
629
(2,734)
779
(1,955)
50,252
3,247,598
$
$
$
$
1,712
—
(1,936)
(1,336)
(999)
(1,275)
(315)
(4,149)
1,685
(2,464)
39,758 $
1,043
—
—
—
(1,021)
106
197
325
(130)
195
39,054
3,320,239
3,325,483
Return on average assets
C Corp equivalent return on average assets
Adjusted C Corp equivalent return on average assets
(2)
2.07 %
1.65
1.78
1.96 %
1.49
1.55
1.69 %
1.12
1.20
1.76 %
1.18
1.17
Weighted average shares of common stock outstanding
20,090,270
18,047,332
18,070,692
18,053,600
Earnings per share - Basic and Diluted
C Corp equivalent Earnings per share - Basic and Diluted
Adjusted C Corp equivalent earnings per share - Basic and diluted
(2)
$
$
3.33
2.66
2.86
$
3.54
2.68
2.78
3.10 $
2.06
2.20
3.24
2.17
2.16
(1) Closed or sold operations include HB Credit Company, HBT Insurance, and First Community Title Services, Inc.
(2) Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent provision for income tax for such year.
Adjusted C Corp equivalent net income and adjusted C Corp equivalent earnings per share adjust for net earnings (losses)
from closed or sold operations, charges related to termination of certain employee benefit plans, realized gains (losses) on
sales of securities and mortgage servicing rights fair value adjustment. We believe these non-GAAP financial measures
provide investors additional insights into operational performance of the Company. Adjusted C Corp equivalent return on
average assets is calculated by dividing adjusted C Corp equivalent net income for a period by average assets for the period.
53
Table of Contents
Reconciliation of Non-GAAP Financial Measure - Net Interest Margin (Tax Equivalent Basis)
Net interest income (tax equivalent basis)
Net interest income
Tax-equivalent adjustment
Net interest income (tax equivalent basis)
(1)
(1)
Net interest margin (tax equivalent basis)
Net interest margin
Tax-equivalent adjustment
Net interest margin (tax equivalent basis)
(1)
(1)
2019
Year Ended December 31,
2017
2018
(dollars in thousands)
2016
$
$
133,800
2,309
136,109
$
$
129,442
2,661
132,103
$
$
120,998 $
5,527
126,525 $
121,101
5,468
126,569
4.31 %
0.07
4.38 %
4.16 %
0.09
4.25 %
3.83 %
0.18
4.01 %
3.87 %
0.17
4.04 %
Average interest-earning assets
$ 3,105,863
$ 3,109,289
$ 3,157,195 $
3,131,763
(1) On a tax-equivalent basis assuming a federal income tax rate of 21% and a state tax rate of 9.50% during the years ended December 31, 2019 and
2018, a federal tax rate of 35% and state income tax rate of 8.63% for the year ended December 31, 2017, and a federal tax rate of 35% and state
income tax rate of 7.75% for the year ended December 31, 2016.
Net interest income (tax-equivalent basis) and net interest margin (tax-equivalent basis) are non-GAAP financial measures
that adjust for the tax-favored status of net interest income from loans and investments. We believe net interest income (tax-
equivalent basis) and net interest margin (tax-equivalent basis) are the preferred industry measurement of net interest
income, and these non-GAAP financial measures enhance comparability of net interest income arising from taxable and tax-
exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest
income and net interest margin.
Reconciliation of Non-GAAP Financial Measure - Efficiency Ratio (Tax Equivalent Basis)
Efficiency ratio (tax equivalent basis)
Total noninterest expense
Less: amortization of intangible assets
Adjusted noninterest expense
Net interest income
Total noninterest income
Operating revenue
Tax-equivalent adjustment
(1)
Operating revenue (tax-equivalent basis)
(1)
2019
91,026
1,423
89,603
133,800
32,751
166,551
2,309
168,860
$
$
$
$
Year Ended December 31,
2017
2018
(dollars in thousands)
2016
$
$
$
$
90,317
1,559
88,758
129,442
31,240
160,682
2,661
163,343
$
$
$
$
94,057 $
1,916
92,141 $
94,434
2,183
92,251
120,998 $
33,171
154,169
5,527
159,696 $
121,101
39,354
160,455
5,468
165,923
Efficiency ratio
Efficiency ratio (tax equivalent basis)
(1)
53.80 %
53.06
55.24 %
54.34
59.77 %
57.70
57.49 %
55.60
(1) On a tax-equivalent basis assuming a federal income tax rate of 21% and a state tax rate of 9.50% during the years ended December 31, 2019 and
2018, a federal tax rate of 35% and state income tax rate of 8.63% for the year ended December 31, 2017, and a federal tax rate of 35% and state
income tax rate of 7.75% for the year ended December 31, 2016.
Efficiency ratio (tax-equivalent basis) provides a measure of productivity in the banking industry. This ratio is calculated to
measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar
which must be expended to generate that dollar of revenue. We calculate this ratio by dividing adjusted noninterest expense
by the sum of noninterest income and net interest income on a tax equivalent basis.
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Table of Contents
Reconciliation of Non-GAAP Financial Measure - Tangible Common Equity to Tangible Assets and Tangible Book
Value Per Share
December 31, 2019 December 31, 2018 December 31, 2017 December 31, 2016
(dollars in thousands)
Tangible Common Equity
Total stockholders' equity
Less: Goodwill
Less: Core deposit intangible assets, net
Tangible common equity
Tangible Assets
Total assets
Less: Goodwill
Less: Core deposit intangible assets, net
Tangible assets
Total stockholders' equity to total assets
Tangible common equity to tangible assets
Ending number shares of common stock
outstanding
Book value per share
Tangible book value per share
$
$
$
$
$
332,918 $
23,620
4,030
305,268 $
3,245,103 $
23,620
4,030
3,217,453 $
10.26 %
9.49
340,396 $
23,620
5,453
311,323 $
3,249,569 $
23,620
5,453
3,220,496 $
10.48 %
9.67
323,916 $
23,620
7,012
293,284 $
3,312,875 $
23,620
7,012
3,282,243 $
9.78 %
8.94
27,457,306
18,027,512
18,070,692
12.12 $
11.12
18.88 $
17.27
17.92 $
16.23
326,246
23,620
8,928
293,698
3,317,124
23,620
8,928
3,284,576
9.84 %
8.94
18,070,692
18.05
16.25
Tangible book value per share and tangible common equity to tangible assets are non-GAAP financial measures generally
used by investors to evaluate capital adequacy. We calculate: (i) tangible common equity as total stockholders’ equity less
goodwill and other intangible assets; (ii) tangible assets as total assets less goodwill and other intangible assets, (iii) tangible
common equity to tangible assets as the ratio of tangible common equity (as described in clause (i)) to tangible assets (as
described in clause (ii)). The most directly comparable financial measure calculated in accordance with GAAP is total
stockholders’ equity to total assets.
Tangible book value per share is calculated as tangible common equity (as described in the previous paragraph) divided by
shares of common stock outstanding. The most directly comparable financial measure calculated in accordance with GAAP is
book value per share.
We believe that these non-GAAP financial measures are important information useful in comparing our capital adequacy with
the capital adequacy of other banking organizations.
55
Table of Contents
Reconciliation of Non-GAAP Financial Measure – Adjusted C Corp Equivalent Return on Average Stockholders’
Equity and Adjusted C Corp Equivalent Return on Tangible Common Equity
2019
Year Ended December 31,
2018
2017
(dollars in thousands)
2016
Average Tangible Common Equity
Total stockholders' equity
Less: Goodwill
Less: Core deposit intangible assets, net
Average tangible common equity
Net income
C Corp equivalent net income
Adjusted C Corp equivalent net income
(1)
$
$
$
$
$
$
341,544
23,620
4,748
313,176
66,865
53,372
57,427
$
$
$
330,214
23,620
6,256
300,338
63,799
48,297
50,252
$
$
$
338,317
23,620
7,943
306,754
56,103
37,294
39,758
Return on average stockholders' equity
C Corp equivalent return on average stockholders' equity
Adjusted C Corp equivalent return on average stockholders'
equity
(1)
Return on average tangible common equity
C Corp equivalent return on average tangible common equity
Adjusted C Corp equivalent return on average tangible
common equity
(1)
19.58 %
15.63
19.32 %
14.63
16.58 %
11.02
16.81
15.22
11.75
21.35 %
17.04
21.24 %
16.08
18.29 %
12.16
18.34
16.73
12.96
345,895
23,620
10,072
312,203
58,546
39,249
39,054
16.93 %
11.35
11.29
18.75 %
12.57
12.51
(1) Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent provision for income tax for such period.
Adjusted C Corp equivalent return on average stockholders’ equity is a non-GAAP financial measure that is calculated by
dividing adjusted C Corp equivalent net income for a period by average stockholders’ equity for the period. Adjusted C Corp
equivalent return on average tangible common equity is a non-GAAP financial measure that is calculated by dividing adjusted
C Corp equivalent net income for a period by average tangible common equity for the period. We believe that these non-
GAAP financial measures are important information to be provided to investors because investors, our management, and
banking regulators can use the tangible book value to assess our earnings without the effect of our goodwill and core deposit
intangible assets and compare our earnings with the earnings of other banking organizations with significant amounts of
goodwill and/or core deposit intangible assets.
Reconciliation of Non-GAAP Financial Measure - Core Deposits
December 31, 2019
December 31, 2018
December 31, 2017 December 31, 2016
(dollars in thousands)
Core Deposits
Total deposits
Less: time deposits of $250,000 or more
Less: brokered deposits
$
Core deposits
$
2,776,855 $
44,754
—
2,732,101 $
2,795,970 $
36,875
—
2,759,095 $
2,855,685
42,830
—
2,812,855
$
$
2,877,181
38,072
—
2,839,109
Core deposits to total deposits
98.39 %
98.68 %
98.50 %
98.68 %
Core deposits exclude time deposits of $250,000 or more and brokered deposits. We believe this non-GAAP financial
measure provides investors with information regarding the stability of the Company’s sources of funds.
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ITEM 7. 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 consolidated subsidiaries.
Management’s discussion and analysis should be read in conjunction with the following parts of this Annual Report on
Form 10-K: Part I, Item 1 “Business”, Part II, Item 6 “Selected Financial Data”, Part II, Item 7A, “Quantitative and Qualitative
Disclosures About Market Risk”, and Part II, Item 8 “Financial Statements and Supplementary Data”
OVERVIEW
HBT Financial, Inc. is a bank holding company headquartered in Bloomington, Illinois. As of December 31, 2019, the
Company had total assets of $3.2 billion, loans held for investment of $2.2 billion, and total deposits of $2.8 billion. Through
the Company’s two bank subsidiaries, Heartland Bank and State Bank of Lincoln, we provide a comprehensive suite of
business, commercial and retail banking products and services to individuals, businesses, and municipal entities throughout
Central and Northeastern Illinois.
Transaction with Lincoln S.B. Corp
In December 2018, the Company entered into an agreement to exchange 100% of the outstanding stock of Lincoln S.B.
Corp, an Illinois corporation headquartered in Lincoln, Illinois for shares of our Series A common stock (the Lincoln
Acquisition). State Bank of Lincoln was a wholly-owned subsidiary of Lincoln S.B. Corp prior to the consummation of the
Lincoln Acquisition. The Company’s voting ownership and the voting ownership of Lincoln S.B. Corp were considered under
common control on the effective date of the Lincoln Acquisition and for all periods presented in the consolidated financial
statements.
The Lincoln Acquisition was accounted for as a change in reporting entity and, accordingly, as the receiving entity, the
Company recognized the transfer of the assets and liabilities in connection with the Lincoln Acquisition at their carrying
amounts in the accounts of Lincoln S.B. Corp, the transferring entity, on the effective date of the Lincoln Acquisition. The
results of operations are reported as though the exchange of equity interests had occurred at the beginning of the periods
presented. For similar assets and liabilities accounted for using different accounting methods, the carrying amounts have
been retrospectively adjusted to the basis of accounting used by the Company. Significant intra-entity transactions and
accounts have been eliminated in consolidation.
Market Area
We currently operate 61 full-service and three limited-service branch locations across 18 counties in Central and
Northeastern Illinois. We hold a leading deposit share in many of our markets in Central Illinois, which we define as a top
three deposit share rank, providing the foundation for our strong deposit base. The stability provided by this low-cost funding
is a key driver our strong track record of financial performance.
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Below is a summary of the loan and deposit balances by the metropolitan and micropolitan statistical areas in which we
operate.
Loans, before allowance for loan losses
Bloomington-Normal
Champaign-Urbana
Chicago
Lincoln
Ottawa-Peru
Peoria
Loans, before allowance for loan losses
Total deposits
Bloomington-Normal
Champaign-Urbana
Chicago
Lincoln
Ottawa-Peru
Peoria
Total deposits
December 31, 2019 December 31, 2018 December 31, 2017
(dollars in thousands)
$
$
$
$
552,787 $
209,317
1,020,524
107,162
103,665
170,371
2,163,826 $
694,519 $
152,108
911,916
194,784
290,138
533,390
2,776,855 $
588,127 $
208,925
941,028
105,150
110,730
190,297
2,144,257 $
690,899 $
148,839
916,631
255,958
291,694
491,949
2,795,970 $
567,305
226,665
900,357
107,435
109,320
204,864
2,115,946
679,864
159,642
1,000,123
212,948
303,030
500,078
2,855,685
The Bloomington-Normal metropolitan statistical area includes our branches within McLean and De Witt counties. The
Champaign-Urbana metropolitan statistical area includes our branches within Champaign and Ford counties. The Chicago
metropolitan statistical area includes our branches within Cook, DeKalb, Grundy, Kane, Kendall, Lake, and Will counties. The
Lincoln micropolitan statistical area includes our branches within Logan county. The Ottawa-Peru micropolitan statistical area
includes our branches within Bureau and LaSalle counties. The Peoria metropolitan statistical area includes our branches
within Peoria, Marshall, Tazewell, and Woodford counties.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Economic Conditions
Our business and financial performance are affected by the general economic conditions in the United States and more
directly in the Illinois markets where we operate. The significant economic factors that are most relevant to our business and
our financial performance include the general economic conditions, unemployment rates, real estate markets, and interest
rates in the U.S. and in our markets.
Since December 2019, a strain of coronavirus (“COVID-19”) has spread globally including in the areas in which the Company
and its customers operate. The COVID-19 pandemic has caused disruption of regional and global economic activity,
emergency actions by the Federal Reserve and other U.S. governmental authorities, significant declines in interest rates and
equity market valuations, heightened volatility in the financial markets, the shutdown of countries’ borders and directives for
residents within the Company’s primary market area to stay at home or in their place of residence and for certain business to
suspend some or all of their business activities. These actions have affected our operations and are expected to impact our
financial results in 2020. As of the date of this filing, we anticipate that we will take actions to support our customers in a
manner consistent with current guidance provided by Federal banking regulatory authorities. Future developments with
respect to COVID-19 are highly uncertain and cannot be predicted and new information may emerge concerning the severity
of the outbreak and the actions to contain the outbreak or treat its impact, among others. The extent to which the COVID-19
outbreak will impact our business, results of operations and financial condition will depend on future developments, which are
highly uncertain and cannot be predicted, including the scope and duration of the outbreak and additional actions taken by
governmental authorities to contain the financial and economic impact of the COVID-19 outbreak. Other national health
concerns, including the outbreak of other contagious diseases or pandemics may adversely affect us in the future.
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Interest Rates
Net interest income is our primary source of revenue. Net interest income equals the excess of interest income earned on
interest earning assets (including discount accretion on purchased loans plus certain loan fees) over interest expense
incurred on interest-bearing liabilities. The level of interest rates as well as the volume of interest-earning assets and interest-
bearing liabilities both impact net interest income. Net interest income is also influenced by both the pricing and mix of
interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic
conditions, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market interest rates.
The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are
primarily driven by the Federal Reserve Board’s actions. The yields generated by our loans and securities are typically driven
by short-term and long-term interest rates, which are set by the market and, to some degree, by the Federal Reserve Board’s
actions. The level of net interest income is therefore influenced by movements in such interest rates and the pace at which
such movements occur. During 2019, overall market interest rates started to decline. The Federal Open Markets Committee
lowered Federal Funds target rates for the first time in 11 years on July 31, 2019 and then again in September 2019 and
October 2019, for a combined decrease of 75 basis points during 2019. In March 2020, the Federal Open Markets
Committee lowered Federal Funds target rates twice, for a combined decrease of 150 basis points in response to recent
market volatility related to the COVID-19 (coronavirus) outbreak. We expect these rate cuts to continue to put downward
pressure on our net interest margin. In general, we believe that rate increases will lead to improved net interest margins while
rate decreases will result in lower net interest margins.
Credit Trends
We focus on originating loans with appropriate risk / reward profiles. We have a detailed loan policy that guides our overall
loan origination philosophy and a well-established loan approval process that requires experienced credit officers to approve
larger loan relationships. Although we believe our loan approval process and credit review process is a strength that allows
us to maintain a high quality loan portfolio, we recognize that credit trends in the markets in which we operate and in our loan
portfolio can materially impact our financial condition and performance and that these trends are primarily driven by the
economic conditions in our markets.
Competition
Our profitability and growth are affected by the highly competitive nature of the financial services industry. We compete with
community banks in all our markets and, to a lesser extent, with money center banks, primarily in the Chicago MSA.
Additionally, we compete with non-bank financial services companies and other financial institutions operating within the
areas we serve. We compete by emphasizing personalized service and efficient decision-making tailored to individual needs.
We do not rely on any individual, group, or entity for a material portion of our loans or our deposits. We continue to see
increased competitive pressures on loan rates and terms and increased competition for deposits. Continued loan and deposit
pricing pressure may affect our financial results in the future.
Regulatory Environment and Trends
We are subject to extensive regulation and supervision, which continue to evolve as the legal and regulatory framework
governing our operations continues to change. The current operating environment also has heightened supervisory
expectations in areas such as consumer compliance, the BSA and anti-money laundering compliance, risk management and
internal audit. We anticipate that this environment of heightened scrutiny will continue for the industry. As a result of these
heightened expectations, we expect to incur additional costs for additional compliance, risk management and audit personnel
or professional fees associated with advisors and consultants. For additional information, please refer to “Supervision and
Regulation” as well as “Risk Factors – Legal, Accounting, Regulatory and Compliance Risk.”
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Table of Contents
FACTORS AFFECTING COMPARABILITY OF FINANCIAL RESULTS
S Corp Status
Prior to the initial public offering, the Company, with the consent of its then current stockholders, elected to be taxed under
sections of federal and state income tax law as an "S Corporation" which provides that, in lieu of Company income taxes,
except for state replacement taxes, the stockholders separately account for their pro rata shares of the Company’s items of
income, deductions, losses and credits. As a result of this election, no income taxes, other than state replacement taxes, had
been recognized in the accompanying consolidated financial statements prior to October 11, 2019.
Effective October 11, 2019, the Company voluntarily revoked its S Corporation status and became a taxable entity (C
Corporation). As such, any periods prior to October 11, 2019 will only reflect an effective state replacement tax rate. In
connection with the conversion of tax status, the Company recognized a deferred tax asset, and the associated income tax
benefit, of $0.5 million.
The following table illustrates the impact of being taxed as a C Corporation for the years ended December 31:
Year Ended December 31,
2019
2017
(dollars in thousands, except per share amounts)
2018
As Reported
Income before income tax expense
Income tax expense
Net income
Earnings per share - Basic
Earnings per share - Diluted
Effective tax rate
Pro Forma C Corp Equivalent
Historical income before income tax expense
C Corp equivalent income tax expense
C Corp equivalent net income
C Corp equivalent earnings per share - Basic
C Corp equivalent earnings per share - Diluted
$
$
$
$
$
$
$
$
72,121
5,256
66,865
3.33
3.33
$
$
$
$
64,668
869
63,799
3.54
3.54
$
$
$
$
56,973
870
56,103
3.10
3.10
7.3 %
1.3 %
1.5 %
72,121
18,749
53,372
2.66
2.66
$
$
$
$
64,668
16,371
48,297
2.68
2.68
$
$
$
$
56,973
19,679
37,294
2.06
2.06
Effective tax rate
26.0 %
25.3 %
34.5 %
Weighted Average Shares of Common Stock Outstanding
20,090,270
18,047,332
18,070,692
The C Corp equivalent effective rates reflect a federal tax rate of 21% and state income tax rate of 9.5% during the years
ended December 31, 2019 and 2018 and a federal tax rate of 35% and state income tax rate of 8.63% for the year ended
December 31, 2017.
Public Company Costs
Following the completion of the initial public offering, the Company has incurred, and expects to continue to incur, additional
costs associated with operating as a public company, hiring additional personnel, enhancing technology and expanding
capabilities. The Company expects that these costs will include legal, regulatory, accounting, investor relations and other
expenses that were not incurred as a private company. Sarbanes-Oxley and rules adopted by the SEC, the FDIC and
national securities exchanges require public companies to implement specified corporate governance practices that were
inapplicable as a private company.
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Table of Contents
RESULTS OF OPERATIONS
Overview of Recent Financial Results
The following table presents selected financial results and measures as of and for the year ended December 31.
Statement of Income Information
Total interest and dividend income
Total interest expense
Net interest income
Provision for loan losses
Net income after provision for loan losses
Total noninterest income
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
C Corp equivalent net income
Adjusted C Corp equivalent net income
(2)
(1)
Net interest income (tax-equivalent basis)
(2)
Share and Per Share Information
Earnings per share - Basic and diluted
C Corp equivalent earnings per share - Basic and diluted
Adjusted C Corp equivalent earnings per share - Basic and diluted
(1)
(2)
As of or for the Year Ended December 31,
2017
2018
(dollars in thousands, except per share amounts)
2019
143,735 $
9,935
133,800
3,404
130,396
32,751
91,026
72,121
5,256
$
$
$
$
66,865
53,372
57,427
136,109
3.33
2.66
2.86
137,432 $
7,990
129,442
5,697
123,745
31,240
90,317
64,668
869
63,799
48,297
50,252
$
$
127,593
6,595
120,998
3,139
117,859
33,171
94,057
56,973
870
56,103
37,294
39,758
132,103
$
126,525
$
3.54
2.68
2.78
3.10
2.06
2.20
$
$
$
$
$
Ending number shares of common stock outstanding
Weighted average number shares of common stock outstanding
27,457,306
20,090,270
18,027,512
18,047,332
18,070,692
18,070,692
Summary Ratios
Net interest margin
Net interest margin (tax-equivalent basis)
Yield on loans
Yield on interest-earning assets
Cost of interest-bearing liabilities
Cost of total deposits
(2)
Efficiency ratio
Efficiency ratio (tax-equivalent basis)
(2)
Return on average assets
Return on average stockholders' equity
Return on average tangible common equity
(2)
C Corp equivalent return on average assets
C Corp equivalent return on average stockholders' equity
C Corp equivalent return on average tangible common equity
(1)
(1)
(1) (2)
Adjusted C Corp equivalent return on average assets
Adjusted C Corp equivalent return on average stockholders' equity
Adjusted C Corp equivalent return on average tangible common equity
(2)
(2)
(2)
4.31 %
4.38
5.51
4.63
0.45
0.29
53.80 %
53.06
2.07 %
19.58
21.35
1.65 %
15.63
17.04
1.78 %
16.81
18.34
4.16 %
4.25
5.35
4.42
0.36
0.21
55.24 %
54.34
1.96 %
19.32
21.24
1.49 %
14.63
16.08
1.55 %
15.22
16.73
3.83 %
4.01
5.09
4.04
0.29
0.17
59.77 %
57.70
1.69 %
16.58
18.29
1.12 %
11.02
12.16
1.20 %
11.75
12.96
(1) Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent provision for income tax for such period.
(2) See "Non-GAAP Financial Information" in Part II, Item 6 “Selected Financial Data” for reconciliation of non-GAAP measure to their most comparable
GAAP measures.
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Table of Contents
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
For the year ended December 31, 2019, net income was $66.9 million increasing by $3.1 million, or 4.8%, from the year
ended December 31, 2018. Net income increased primarily due to increases in net interest income as a result of increases in
asset yields offset by a smaller increase in the cost of interest-bearing liabilities. Provision for loan losses for the year ended
December 31, 2019 was $2.3 million lower than the provision for the year ended December 31, 2018. The increases in net
interest income were partially offset by a $3.0 million decline in the mortgage servicing rights fair value adjustment and a
charge of $3.8 million associated with the termination of the supplemental executive retirement plan (SERP) included in
employee benefits expense.
Income tax expense increased during the year ended December 31, 2019 as a result of the change in tax status to become a
C Corporation effective October 11, 2019. In connection with the change of tax status, the Company recorded a nonrecurring
income tax benefit of $0.5 million to recognize an initial deferred tax asset of the same amount. The C Corp equivalent net
income increased $5.1 million, or 10.5%, reflecting the improvements in income before income tax expense previously
discussed, partially offset by a slightly higher C Corp equivalent effective tax rate as a result of declines in federally tax-
exempt interest income. See the “Factors Affecting Comparability of Financial Results” section included in this Part II, Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 15 to the consolidated
financial statements for additional information related to the change in tax status.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
For the year ended December 31, 2018, net income was $63.8 million increasing by $7.7 million, or 13.7%, from the year
ended December 31, 2017. Net income increased primarily due to increases in net interest income as a result of increases in
asset yields offset by a smaller increase in the cost of interest-bearing liabilities. Provision for loan losses for the year ended
December 31, 2018 was $2.6 million higher than the provision for the year ended December 31, 2017. A decrease in
noninterest income was more than offset by a larger decrease in noninterest expenses, primarily due to a reduction in branch
operating expense following the closure of 7 branches during the year ended December 31, 2017.
The C Corp equivalent net income increased by $11.0 million, or 29.5%, to $48.3 million for the year ended December 31,
2018 primarily due to the items discussed above and tax rate changes in the Tax Cuts and Jobs Act first effective in 2018.
Net Interest Income
Net interest income equals the excess of interest income (including discount accretion on acquired loans) plus fees earned
on interest earning assets over interest expense incurred on interest-bearing liabilities. Interest rate spread and net interest
margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the
yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin
is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds
the interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and
stockholders’ equity, also support interest-earning assets.
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The following tables sets forth average balances, average yields and costs, and certain other information for the years ended
December 31, 2019, 2018, and 2017. 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, and purchase accounting adjustments that are
accreted or amortized to interest income or expense.
December 31, 2019
Average
Balance
Interest
Yield/Cost
Year Ended
December 31, 2018
Average
Balance
Interest
(dollars in thousands)
Yield/Cost
December 31, 2017
Average
Balance
Interest
Yield/Cost
ASSETS
Loans
Securities
Deposits with banks
Other
Total interest-earning assets
Allowance for loan losses
Noninterest-earning assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing deposits:
Interest-bearing demand
Money market
Savings
Time
Total interest-bearing deposits
Securities sold under agreements to repurchase
Borrowings
Subordinated debentures
Total interest-bearing liabilities
Noninterest-bearing deposits
Noninterest-bearing liabilities
Total liabilities
Stockholders' Equity
Total liabilities and stockholders’ equity
(3)
(2)
Net interest income/Net interest margin
Tax-equivalent adjustment
Net interest income (tax-equivalent basis)/ Net interest margin
(tax-equivalent basis)
Net interest rate spread
Net interest-earning assets
Ratio of interest-earning assets to interest-bearing liabilities
Cost of total deposits
(1) (2)
(4)
(5)
$ 2,178,897 $ 120,142
20,582
2,951
60
3,105,863 $ 143,735
759,479
164,986
2,501
5.51 % $ 2,131,512 $ 114,034
21,613
860,804
2.71
1,717
114,202
1.79
2.41
68
2,771
3,109,289 $ 137,432
4.63 %
5.35 % $ 2,091,863 $ 106,467
19,418
886,077
2.51
1,657
176,199
1.50
2.47
51
3,056
3,157,195 $ 127,593
4.42 %
5.09 %
2.19
0.94
1.69
4.04 %
(21,704)
149,227
$ 3,233,386
$
821,480 $
463,233
430,220
396,560
2,111,493
41,177
351
37,553
2,190,574 $
666,055
35,213
2,891,842
341,544
$ 3,233,386
1,474
1,837
278
4,343
7,932
72
9
1,922
9,935
$ 133,800
2,309
$ 136,109
$
915,289
1.42
(20,046)
158,355
$ 3,247,598
(20,497)
183,541
$ 3,320,239
1,378
685
283
3,541
5,887
48
260
1,795
7,990
0.18 % $
0.40
0.06
1.10
0.38
0.18
2.60
5.12
0.45 %
824,910 $
442,872
433,661
442,569
2,144,012
40,725
14,946
37,487
2,237,170 $
653,885
26,329
2,917,384
330,214
$ 3,247,598
0.17 % $
0.15
0.07
0.80
0.27
0.12
1.74
4.79
0.36 %
808,263 $
479,916
439,844
495,222
2,223,245
40,821
5,788
37,421
2,307,275 $
643,326
31,321
2,981,922
338,317
$ 3,320,239
908
704
293
3,054
4,959
45
66
1,525
6,595
4.31 %
0.07
4.38 %
4.18 %
$
0.29 %
$ 129,442
2,661
$ 132,103
872,119
1.39
4.16 %
0.09
4.25 %
4.06 %
$
0.21 %
$ 120,998
5,527
$ 126,525
849,920
1.37
0.11 %
0.15
0.07
0.62
0.22
0.11
1.14
4.07
0.29 %
3.83 %
0.18
4.01 %
3.75 %
0.17 %
(1) See "Non-GAAP Financial Information" in Part II, Item 6 “Selected Financial Data” for reconciliation of non-GAAP measure to their most comparable
GAAP measures.
(2) On a tax-equivalent basis assuming a federal tax rate of 21% and state income tax rate of 9.5% during the years ended December 31, 2019 and 2018
and a federal tax rate of 35% and state income tax rate of 8.63% for the year ended December 31, 2017.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
(4) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
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The following tables set forth the components of loan interest income. Loan interest income includes contractual interest on
loans, loan fees, accretion of acquired loan discounts and earnings on net cash flow hedges.
2019
Year Ended December 31,
2018
2017
Interest
Yield
Contribution
Interest
Yield
Contribution
Interest
Yield
Contribution
Contractual interest
Loan fees
Accretion of acquired loan discounts
Net cash flow hedge earnings
Total loan interest income
$
$
114,025
3,746
2,255
116
120,142
5.23 % $
0.17
0.10
0.01
5.51 % $
(dollars in thousands)
106,522
3,304
4,033
175
114,034
5.00 % $
0.15
0.19
0.01
5.35 % $
97,879
3,296
5,017
275
106,467
4.68 %
0.16
0.24
0.01
5.09 %
The following tables set forth the components of net interest income. Total interest income consists of contractual interest on
loans, contractual interest on securities, contractual interest on interest-bearing deposits in banks, loan fees, accretion of
acquired loan discounts, securities amortization, net and other interest and dividend income. Total interest expense consists
of contractual interest on deposits, contractual interest on other interest-bearing liabilities and other.
2019
Net Interest
Margin
Interest
Contribution
Interest
Year Ended December 31,
2018
2017
Net Interest
Margin
Contribution
Interest
Net Interest
Margin
Contribution
Interest income:
Contractual interest on loans
Contractual interest on securities
Contractual interest on deposits with banks
Loan fees
Accretion of loan discounts
Securities amortization, net
Other
Total interest income
Interest expense:
Contractual interest on deposits
Contractual interest on other interest-bearing liabilities
Other
Total interest expense
Net interest income
Tax equivalent adjustment
Net interest income (tax equivalent)
(1)
$
$
114,025
24,032
2,951
3,746
2,255
(3,450)
176
143,735
7,934
1,909
92
9,935
133,800
2,309
136,109
3.67 % $
0.77
0.10
0.12
0.07
(0.11)
0.01
4.63
0.26
0.06
—
0.32
4.31
0.07
4.38 % $
106,522
26,658
1,717
3,304
4,033
(5,045)
243
137,432
5,910
2,038
42
7,990
129,442
2,661
132,103
3.42 % $
0.86
0.05
0.11
0.13
(0.16)
0.01
4.42
0.19
0.07
—
0.26
4.16
0.09
4.25 % $
97,879
25,339
1,657
3,296
5,017
(5,921)
326
127,593
5,054
1,462
79
6,595
120,998
5,527
126,525
3.10 %
0.80
0.05
0.11
0.16
(0.19)
0.01
4.04
0.16
0.05
—
0.21
3.83
0.18
4.01 %
(1) See "Non-GAAP Financial Information" in Part II, Item 6 “Selected Financial Data” for reconciliation of non-GAAP measure to their most comparable
GAAP measures.
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Rate/Volume Analysis
The following table sets forth the dollar amount of changes in interest income and interest expense for the major categories
of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning
assets and interest-bearing liabilities with respect to changes attributable to changes in volume (i.e., changes in average
balances multiplied by the prior-period average rate), and changes attributable to rate (i.e., changes in average rate
multiplied by prior-period average balances). For purposes of this table, changes attributable to both volume and rate that
cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, 2019
vs.
Year Ended December 31, 2018
Increase (Decrease) Due to
Volume
Rate
Year Ended December 31, 2018
vs.
Year Ended December 31, 2017
Increase (Decrease) Due to
Total
Volume
(dollars in thousands)
Rate
Total
Interest-earning assets:
Loans
Securities
Deposits with banks
Other
Total interest-earning assets
Interest-earning liabilities:
Interest-bearing deposits:
Interest-bearing demand
Money market
Savings
Time
Total interest-bearing deposits
Securities sold under agreements to repurchase
Borrowings
Subordinated debentures
Total interest-bearing liabilities
Change in net interest income
$
2,573 $
(2,644)
835
(6)
758
3,535 $
1,613
399
(2)
5,545
6,108 $
(1,031)
1,234
(8)
6,303
2,042 $
(677)
(583)
(5)
777
5,525 $
2,872
643
22
9,062
7,567
2,195
60
17
9,839
(6)
56
(2)
(435)
(387)
1
(317)
3
(700)
1,458 $
102
1,096
(3)
1,237
2,432
23
66
124
2,645
2,900 $
96
1,152
(5)
802
2,045
24
(251)
127
1,945
4,358 $
18
(56)
(4)
(326)
(368)
—
96
3
(269)
1,046 $
452
37
(6)
813
1,296
3
98
267
1,664
7,398 $
470
(19)
(10)
487
928
3
194
270
1,395
8,444
$
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Net interest income for the year ended December 31, 2019 increased $4.4 million, or 3.4%, to $133.8 million from $129.4
million for the year ended December 31, 2018. The increase was primarily driven by higher rates in the first half of 2019.
Average rates on loans, securities, and interest-bearing deposits all increased in 2019, but asset yield increases exceeded
deposit cost increases. Organic loan growth also contributed to the increase in net interest income, funded primarily through
decreases in the securities portfolio, shifting our earning asset mix from the securities portfolio to the higher yielding loan
portfolio. Net interest margin increased as well to 4.31% for the year ended December 31, 2019 compared to 4.16% for the
year ended December 31, 2018. The contribution of acquired loan discount accretion to net interest income declined to $2.3
million, or 7 basis points of the net interest margin, for the year ended December 31, 2019 from $4.0 million, or 13 basis
points of the net interest margin, for the year ended December 31, 2018.
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Table of Contents
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Net interest income for the year ended December 31, 2018 increased $8.4 million, or 7.0%, to $129.4 million from $121.0
million for the year ended December 31, 2017. The increase is primarily due to increases in benchmark interest rates, which
drove our loan and securities yields higher, and from organic loan growth, funded primarily through decreases in the
securities portfolio, shifting our earning asset mix from the securities portfolio to the higher yielding loan portfolio. Net interest
margin increased as well to 4.16% for the year ended December 31, 2018 compared to 3.83% for the year ended
December 31, 2017. The contribution of acquired loan discount accretion to net interest income declined to $4.0 million, or 13
basis points of the net interest margin, for the year ended December 31, 2018 from $5.0 million, or 16 basis points of the net
interest margin, for the year ended December 31, 2017.
Net interest income, on a tax equivalent basis, increased $5.6 million to $132.1 million for the year ended December 31, 2018
compared to $126.5 million for the year ended December 31, 2017. Our net interest margin, on a tax equivalent basis,
increased 24 basis points to 4.25% for the year ended December 31, 2018, from 4.01% for 2017. Our average interest-
earning assets decreased $47.9 million to $3.11 billion for the year ended December 31, 2018, from $3.16 billion for the year
ended December 31, 2017, and our average interest-bearing liabilities decreased $70.1 million to $2.24 billion for the year
ended December 31, 2018, from $2.31 billion for the year ended December 31, 2017. Decreases in money market and
higher cost time deposits more than offset an increase interest bearing demand deposits which primarily drove the decrease
in interest bearing liabilities. Interest earning assets, which also decreased, had organic loan growth funded by bigger
decreases in lower yielding deposits with banks and securities. Increases in net interest income, on a tax equivalent basis,
and net interest margin, on a tax equivalent basis, are due primarily to increases in benchmark interest rates which drove our
loan and securities yields higher and from organic loan growth shifting our earning asset mix.
The quarterly net interest margins were as follows:
Three months ended
March 31,
June 30,
September 30,
December 31,
2019
2018
2017
4.44 %
4.36
4.31
4.12
4.01 %
4.14
4.22
4.29
3.74 %
3.76
3.93
3.91
As the chart above illustrates, net interest margin rose during 2017 and 2018, peaked in the first quarter of 2019, and then
declined during the remainder of 2019. During 2019, overall market interest rates started to decline. The Federal Open
Markets Committee lowered Federal Funds target rates for the first time in 11 years on July 31, 2019 and then again in
September 2019 and October 2019, for a combined decrease of 75 basis points during 2019. In March 2020, the Federal
Open Markets Committee lowered Federal Funds target rates twice, for a combined decrease of 150 basis points in response
to recent market volatility related to the COVID-19 (coronavirus) outbreak. We expect these rate cuts to continue to put
downward pressure on our net interest margin.
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Provision for Loan Losses
Provisions for loan losses are charged to operations in order to maintain the allowance for loan losses at a level we consider
necessary to absorb probable incurred credit losses in the loan portfolio. In determining the level of the allowance for loan
losses, management considers past and current loss experience, evaluations of collateral, current economic conditions,
volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of
nonperforming and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may
vary from such estimates as more information becomes available or events change. We assess the allowance for loan losses
on a quarterly basis and make provisions for loan losses in order to maintain the allowance. The provision for loan losses is a
function of the allowance for loan loss methodology we use to determine the appropriate level of the allowance for inherent
loan losses after net charge-offs have been deducted.
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
The provision for loan losses was $3.4 million and $5.7 million for the years ended December 31, 2019 and 2018,
respectively. Net charge-offs to average loans decreased from 0.23% during the year ended December 31, 2018 to 0.07%
during the year ended December 31, 2019, reducing the need to provide for additional allowance for loan losses. The
allowance for loan losses as a percentage of loans increased from 0.96% at December 31, 2018 to 1.03% at December 31,
2019, primarily due to an increase in qualitative factor adjustments applied to certain categories of loans collectively
evaluated for impairment.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
The provision for loan losses was $5.7 million and $3.1 million for the years ended December 31, 2018 and 2017,
respectively. The larger provision in 2018 was primarily related to one long time borrowing relationship. The allowance for
loan losses as a percentage of loans increased slightly from 0.93% at December 31, 2017 to 0.96% at December 31, 2018,
reflecting our relatively stable operating environment and consistent credit quality throughout 2018.
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Table of Contents
Noninterest Income
The following table outlines the amount of and changes to the various noninterest income line items as of the dates indicated.
Card income
Service charges on deposit accounts
Wealth management fees
Mortgage servicing
Mortgage servicing rights fair value adjustment
Gains on sale of mortgage loans
Gains (losses) on securities
Gains (losses) on foreclosed assets
Gains (losses) on other assets
Title insurance activity
Other noninterest income
Total noninterest income
2019
7,765 $
7,870
7,127
3,143
(2,400)
3,092
(5)
940
944
167
4,108
32,751 $
$
$
$ Change
$ Change
Year Ended December 31,
2018
(dollars in thousands)
7,381 $
8,141
7,402
3,261
629
2,872
(2,663)
(1,337)
787
1,207
3,560
31,240 $
384 $
(271)
(275)
(118)
(3,029)
220
2,658
2,277
157
(1,040)
548
1,511 $
2017
6,780
8,170
7,314
3,398
(315)
4,506
(1,275)
282
(2,146)
1,481
4,976
33,171
601 $
(29)
88
(137)
944
(1,634)
(1,388)
(1,619)
2,933
(274)
(1,416)
(1,931) $
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Total noninterest income for the year ended December 31, 2019 increased by $1.5 million, or 4.8%, to $32.8 million from
$31.2 million for the year ended December 31, 2018. The increase is primarily due to a $2.7 million decrease in losses on
securities, as a result of targeted security sales for tax purposes during the year ended December 31, 2018 with no sales of
securities during the year ended December 31, 2019. Gains (losses) on foreclosed assets, which vary based on property
specific circumstances, also contributed to an increase in total noninterest income, increasing from a loss of a $1.3 million to
a gain of $0.9 million. Fees on customer-related interest rate swaps of $0.9 million during the year ended December 31,
2019, included in other noninterest income, also contributed to noninterest income growth. There were no fees on customer-
related interest rate swaps during the year ended December 31, 2018.
Partially offsetting these improvements were the mortgage servicing rights fair value adjustment and title insurance activity
income. The mortgage servicing rights fair value adjustment declined from a gain of $0.6 million to a loss of $2.4 million,
primarily due to actual and expected increases in mortgage refinances of serviced loans driven by declines in mortgage
interest rates. Title insurance activity income declined $1.0 million, due to the sale of First Community Title Services, Inc. on
February 15, 2019.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Total noninterest income for the year ended December 31, 2018 decreased by $1.9 million, or 5.8%, to $31.2 million from
$33.2 million for the year ended December 31, 2017. The decrease is primarily due to lower gains on sale of mortgage
loans, and higher losses on foreclosed assets and on securities. Rising interest rates over the period contributed to lower
mortgage origination volume and the $1.6 million decrease in gains on sales of mortgages and conversely a $0.9 million
increase in the mortgage servicing rights fair value adjustment. Gains (losses) on foreclosed assets declined from a gain of
$0.3 million to a loss of $1.3 million. The $1.3 million increase in realized losses on sales of securities were the result of
targeted security sales for tax purposes. These declines were also partially offset by improvements achieved in card income
of $0.6 million and wealth management fees of $0.1 million. The improvement in gains (losses) on other assets during the
year ended December 31, 2018 was primarily due to $1.9 million of non-recurring expenses related to the closure of seven
less productive branch locations incurred in 2017.
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Noninterest Expense
The following table outlines the amount of and changes to the various noninterest expense line items as of the dates
indicated.
$
Salaries
Employee benefits
Occupancy of bank premises
Furniture and equipment
Data processing
Marketing and customer relations
Amortization of intangible assets
FDIC insurance
Loan collection and servicing
Foreclosed assets
Net adjustments on FDIC asset and true-up liability
Other noninterest expense
Total noninterest expense
$
2019
49,345 $
9,564
6,867
2,813
5,570
3,873
1,423
198
2,633
676
—
8,064
91,026 $
$ Change
$ Change
(318) $
Year Ended December 31,
2018
(dollars in thousands)
49,663 $
6,244
7,352
3,000
5,234
4,211
1,559
942
2,710
772
—
8,630
90,317 $
3,320
(485)
(187)
336
(338)
(136)
(744)
(77)
(96)
—
(566)
709 $
2017
51,386
5,939
7,308
3,405
4,850
4,523
1,916
960
2,979
1,293
999
8,499
94,057
(1,723) $
305
44
(405)
384
(312)
(357)
(18)
(269)
(521)
(999)
131
(3,740) $
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Total noninterest expense for the year ended December 31, 2019 increased by $0.7 million, or 0.8%, to $91.0 million from
$90.3 million for the year ended December 31, 2018. The increase was primarily due to a $3.3 million increase in employee
benefits expense driven by a $3.8 million charge during the year ended December 31, 2019 related to the termination of the
SERP. The SERP liability varies inversely with interest rates and is payable in June 2020.
This increase in total noninterest expense was partially offset by a $0.7 million decrease in FDIC insurance expense due in
part to the application of small bank assessment credits. The remaining small bank assessment credits available to the
Banks were $0.4 million as of December 31, 2019, and may be applied, as determined by the FDIC, against future FDIC
insurance assessments which are paid quarterly, in arrears. Routine salary increases were offset by a reduction in employee
count as a result of the sale of First Community Title Services, Inc. and HBT Insurance during the first quarter of 2019.
Salaries and employee benefits expenses for First Community Title Services, Inc. and HBT Insurance totaled $0.4 million,
$1.3 million, and $1.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Total noninterest expense for the year ended December 31, 2018 decreased by $3.7 million, or 4.0%, to $90.3 million from
$94.1 million for the year ended December 31, 2017. Compensation expense decreased by $1.7 million due in part to a $1.3
million accrual in 2017 related to a change in policy for paid time off benefits that resulted in an increase in accrued expense.
Also in 2017, our FDIC indemnification agreements related to the previous acquisitions of two failed banks were terminated,
and as a result the related $1.0 million in net adjustments on FDIC asset and true-up liability expense during the year ended
December 31, 2017 represents expenses not recurring subsequent to 2017.
Income Taxes
The Company has historically been taxed under sections of federal and state tax law as an "S corporation" which provides
that with the exception of certain state replacement and franchise taxes, current stockholders account separately for their
share of the Company’s income, deductions, losses and credits. For additional information, see “Factors Affecting
Comparability of Financial Results: S Corp Status”.
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Table of Contents
Effective October 11, 2019, the Company voluntarily revoked its S Corporation status and became a taxable entity (C
Corporation). As such, any periods prior to October 11, 2019 will only reflect an effective state replacement tax rate. In
connection with the conversion of tax status, the Company recognized a deferred tax asset, and the associated income tax
benefit, of $0.5 million.
For the years ended December 31, 2019, 2018, and 2017, we recorded income tax expense of $5.3 million, $0.9 million,
and $0.9 million, respectively.
FINANCIAL CONDITION
Balance Sheet Information
Cash and cash equivalents
Securities available-for-sale, at fair value
Securities held-to-maturity
Equity securities
Loans held for sale
Loans, before allowance for loan losses
Less: allowance for loan losses
Loans, net of allowance for loan losses
Goodwill
Core deposit intangible assets, net
Other assets
Total Assets
Total deposits
Securities sold under agreements to repurchase
Borrowings
Subordinated debentures
Other liabilities
Total Liabilities
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
Tangible assets
Tangible common equity
(1)
(1)
2019
December 31,
2018
2017
$ Change % Change $ Change % Change
2019 vs. 2018
2018 vs. 2017
(dollars in thousands)
$
$
283,971
592,404
88,477
4,389
4,531
$
186,879
679,526
121,715
3,261
2,800
$
165,683
769,571
129,322
3,203
4,863
2,163,826
22,299
2,141,527
2,144,257
20,509
2,123,748
2,115,946
19,765
2,096,181
97,092
(87,122)
(33,238)
1,128
1,731
19,569
1,790
17,779
23,620
4,030
102,154
$ 3,245,103
23,620
5,453
102,567
$ 3,249,569
23,620
7,012
113,420
$ 3,312,875
—
(1,423)
(413)
(4,466)
$ 2,776,855
44,433
—
37,583
53,314
2,912,185
332,918
$ 3,245,103
$ 2,795,970
46,195
—
37,517
29,491
2,909,173
340,396
$ 3,249,569
$ 2,855,685
37,838
29,000
37,451
28,985
2,988,959
323,916
$ 3,312,875
$ (19,115)
(1,762)
—
66
23,823
3,012
(7,478)
(4,466)
52.0 % $
(12.8)
(27.3)
34.6
61.8
21,196
(90,045)
(7,607)
58
(2,063)
0.9
8.7
0.8
—
(26.1)
(0.4)
(0.1)
28,311
744
27,567
—
(1,559)
(10,853)
(63,306)
(0.7)% $ (59,715)
8,357
(3.8)
(29,000)
—
66
0.2
506
80.8
(79,786)
0.1
16,480
(2.2)
(63,306)
(0.1)
$ 3,217,453
305,268
$ 3,220,496
311,323
$ 3,282,243
293,284
$
(3,043)
(6,055)
(0.1)% $ (61,747)
18,039
(1.9)
12.8 %
(11.7)
(5.9)
1.8
(42.4)
1.3
3.8
1.3
—
(22.2)
(9.6)
(1.9)
(2.1)%
22.1
(100.0)
0.2
1.7
(2.7)
5.1
(1.9)
(1.9)%
5.8
(1.9)%
Core deposits
(1)
$ 2,732,101
$ 2,759,095
$ 2,812,855
$ (26,994)
(1.0)% $ (53,760)
Balance Sheet Ratios
Loan to deposit ratio
Core deposits to total deposits
Stockholders' equity to total assets
Tangible common equity to tangible assets
(1)
(1)
77.92 %
98.39
10.26
9.49
76.69 %
98.68
10.48
9.67
74.10 %
98.50
9.78
8.94
(1) See "Non-GAAP Financial Information" in Part II, Item 6 “Selected Financial Data” for reconciliation of non-GAAP measure to their most comparable
GAAP measures.
Balance Sheet Analysis
Comparison of December 31, 2019 to December 31, 2018
Total assets remained almost unchanged from December 31, 2018 to December 31, 2019, decreasing $4.5 million, or 0.1%,
to $3.25 billion as of December 31, 2019. Although total assets remained steady, the Company’s asset mix shifted with a
$120.4 million decrease in the debt securities portfolio, a $97.1 million increase in cash and cash equivalents, and a $19.6
million increase in loans, before allowance for loan losses.
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Table of Contents
Total deposits were $2.78 billion at December 31, 2019, a decrease of $19.1 million, or 0.7%, from December 31, 2018. This
slight decrease is primarily due to decreases in higher cost deposit categories such as time deposits, partially offset by
increases in money market accounts. The decline in total deposits was also partially offset by deposit growth in the fourth
quarter of 2019 which included approximately $40.2 million in increased balances in a small number of retail deposit
accounts. The Company expects some outflow in these deposits during the first quarter of 2020.
Core deposits to total deposits remained very high at 98.4% at December 31, 2019 compared to 98.7% at December 31,
2018, as we managed our deposit portfolio to retain and increase higher value core deposit relationships and maintain the
lowest practicable cost of funds. The loan to deposit ratio was 77.9% at December 31, 2019, increasing from 76.7% at
December 31, 2018.
Comparison of December 31, 2018 to December 31, 2017
Total assets were $3.25 billion at December 31, 2018, a decrease of $63.3 million, or 1.9%, from December 31, 2017,
primarily due to sales, calls, and maturities of securities available-for-sale not re-invested in securities, partially offset by an
increase in the loan portfolio from organic loan growth.
Total liabilities were $2.91 billion at December 31, 2018, a decrease of $79.8 million, or 2.7%, from December 31, 2017,
primarily due to scheduled maturities of FHLB advances and decreases in deposits. Total deposits were $2.80 billion at
December 31, 2018, a decrease of $59.7 million, or 2.1%, from December 31, 2017 due to decreases in noninterest-bearing,
money market, and time deposit accounts, partially offset by an increase in interest-bearing demand accounts.
Total equity was $340.4 million at December 31, 2018, an increase of $16.5 million, or 5.1%, from December 31, 2017 due
primarily to earnings for the period net of dividends declared.
At December 31, 2018, loans, before allowance for loan losses increased 1.3% compared to the prior year-end. We achieved
our goal of maintaining high asset quality in 2018, reflecting the relative strength of our loan originations over the past five
years. Asset quality remained strong, with nonperforming loans representing 0.74% of total loans at December 31, 2018,
compared to 1.04% at December 31, 2017. At December 31, 2018, our allowance for loan losses as a percentage of total
loans was 0.96%, compared to 0.93% at December 31, 2017. Nonperforming assets to total assets were 0.78% at December
31, 2018, compared to 1.17% at December 31, 2017.
The core deposit portfolio remained stable during 2018 as we managed our deposit portfolio to retain and increase higher
value core deposit relationships and maintain the lowest practicable cost of funds. Total deposits decreased $59.7 million, or
2.1%, from December 31, 2017 to $2.80 billion at December 31, 2018, primarily due to decreases in money market and time
deposits. Noninterest-bearing demand deposits represented 23.8% of total deposits at December 31, 2018, down from
24.7% at December 31, 2017. Core deposits remained very high at 98.7% of total deposits at December 31, 2018 compared
to 98.5% as of December 31, 2017. The loan to deposit ratio was 76.7% at December 31, 2018, compared to 74.1% at
December 31, 2017. The decline in total deposits is attributed primarily to higher cost time deposits being allowed to run off.
Loan Portfolio
The Company focuses on originating loans with appropriate risk / reward profiles. The Company has a detailed loan policy
that guides the overall loan origination philosophy and a well-established loan approval process that requires experienced
credit officers to approve larger loan relationships. The Company also has an active Credit Department that underwrites and
prepares annual reviews for larger and more complex loan relationships.
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Table of Contents
Management monitors credit quality closely with a series of monthly reports and a quarterly Credit Committee meeting where
performance and trends within the loan portfolio are reviewed. Portfolio diversification at the borrower, industry, and product
levels is actively managed to mitigate concentration risk. In addition, credit risk management 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.
Loan Categories
The principal categories of our loan portfolio are described below:
Commercial and Industrial: Consists of loans typically granted for working capital, asset acquisition and other
business purposes. These loans are underwritten primarily based on the borrower’s cash flow with most loans
secondarily supported by collateral. Most commercial and industrial loans are secured by the assets being financed
or other business assets, such as accounts receivable, inventory, and equipment, and are typically supported by
personal guarantees of the owners. Cash flows and collateral values may fluctuate based on general economic
conditions, specific industry conditions and specific borrower circumstances.
Agricultural and Farmland: Consists of loans typically secured by farmland, agricultural operating assets, or a
combination of both, and are generally underwritten to existing cash flows of operating agricultural businesses. Debt
repayment is provided by business cash flows. Economic trends influenced by unemployment rates and other key
economic indicators are not closely correlated to the credit quality of agricultural and farmland loans. The credit
quality of these loans is most correlated to changes in prices of corn and soybeans and, to a lesser extent, weather,
which has been partially mitigated by federal crop insurance programs.
Commercial Real Estate - Owner Occupied: Consists of loans secured by commercial real estate that is both
owned and occupied by the same or a related borrower. These loans are primarily underwritten based on the cash
flow of the business occupying the property. As with commercial and industrial loans, cash flows and collateral values
may fluctuate based on general economic conditions, specific industry conditions, and specific borrower
circumstances.
Commercial Real Estate - Non-owner Occupied: Consists of loans secured by commercial real estate for which
the primary source of repayment is the sale or rental cash flows from the underlying collateral. Commercial real
estate – non-owner occupied are underwritten based primarily on the historic or projected cash flow from the
underlying collateral. Adverse economic developments or an overbuilt market typically impact commercial real estate
projects. Trends in rental and vacancy rates of commercial properties impact the credit quality of these loans.
Multi-family: Consists of loans secured by five or more unit apartment buildings. Multi-family loans may be affected
by demographic and population trends, unemployment or underemployment, and deteriorating market values of real
estate.
Construction and Land Development: Consists of loans for speculative and pre-sold construction projects for
developers intending to either sell upon completion or hold for long term investment, as well as construction of
projects to be owner occupied. In addition, loans in this segment generally possess a higher inherent risk of loss than
other portfolio segments due to risk of non-completion, changes in budgeted costs, and changes in market forces
during the term of the construction period.
One-to-four Family Residential: Consists of loans secured by one-to-four family residences, including both first and
junior lien mortgage loans for owner occupied and non-owner occupied properties and home equity lines of credit.
The degree of risk in residential mortgage lending depends on the local economy, including the local real estate
market and unemployment rates.
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Table of Contents
Municipal, Consumer and Other: Loans to municipalities are primarily federally tax-exempt. Consumer loans
include loans to individuals for consumer purposes and typically consist of small balance loans. Economic trends
determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of
the consumer loans. Loans to other financial institutions, as well as leases, are also included.
Loans by Type
The following table sets forth the composition of the loan portfolio, excluding loans held-for-sale, by type of loan as of
December 31.
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
Municipal, consumer, and other
Loans, before allowance for loan losses
Allowance for loan losses
Loans, net of allowance for loan losses
Loans, before allowance for loan losses (originated)
Loans, before allowance for loan losses (acquired)
(1)
(1)
Loans, before allowance for loan losses
2019
2018
2017
2016
2015
Balance
Percent
Balance
Percent
Balance
(dollars in thousands)
Percent
Balance
Percent
Balance
Percent
$
307,175
207,776
231,162
579,757
179,073
224,887
313,580
120,416
2,163,826
(22,299)
$ 2,141,527
14.2 % $
9.6
10.7
26.8
8.3
10.4
14.5
5.5
100.0 %
360,501
209,875
255,074
533,910
135,925
237,275
313,108
98,589
2,144,257
(20,509)
$ 2,123,748
16.8 % $
9.8
11.9
24.9
6.3
11.1
14.6
4.6
100.0 %
$
371,452
208,349
276,883
488,442
137,055
170,513
358,659
104,593
2,115,946
(19,765)
2,096,181
17.5 % $
9.8
13.1
23.1
6.5
8.1
17.0
4.9
100.0 %
$
372,588
207,604
297,818
433,939
127,132
182,023
393,399
92,012
2,106,515
(19,708)
2,086,807
17.7 % $
9.9
14.1
20.6
6.0
8.6
18.7
4.4
100.0 %
$
413,365
196,704
317,315
401,403
121,348
168,342
436,051
85,083
2,139,611
(18,248)
2,121,363
19.3 %
9.2
14.8
18.7
5.7
7.9
20.4
4.0
100.0 %
$ 1,998,496
165,330
$ 2,163,826
92.4 % $ 1,923,859
220,398
100.0 % $ 2,144,257
7.6
89.7 % $
10.3
100.0 % $
1,825,129
290,817
2,115,946
86.3 % $
13.7
100.0 % $
1,689,186
417,329
2,106,515
80.2 % $
19.8
100.0 % $
1,596,603
543,008
2,139,611
74.6 %
25.4
100.0 %
(1) See "Non-GAAP Financial Information" in Part II, Item 6 “Selected Financial Data” for reconciliation of non-GAAP measure to their most comparable
GAAP measures.
Comparison of December 31, 2019 to December 31, 2018
Loans, before the allowance for loan losses, increased by $19.5 million, or 0.9%, to $2.16 billion as of December 31, 2019 as
compared to $2.14 billion as of December 31, 2018. Loan growth during the year ended December 31, 2019 was primarily
attributable to continued organic loan growth in the commercial real estate – non-owner occupied and multi-family categories
in our northern Illinois markets. Offsetting the organic loan growth was a $59.7 million reduction in the loan participations
resulting primarily from the payoff of seven loans during the year ended December 31, 2019. The seven loan participations
that paid off predominantly included $21.2 million in commercial and industrial, $4.8 million in commercial real estate – owner
occupied, $4.9 million in commercial real estate – non-owner occupied, $18.4 million in multi-family, and $4.7 million in
municipal, consumer, and other. Loan participations make up a small portion of the Company’s loan portfolio totaling $71.7
million and $131.4 million as of December 31, 2019, and 2018, respectively.
Comparison of December 31, 2018 to December 31, 2017
Loans, before the allowance for loan losses, increased by $28.3 million, or 1.3%, to $2.14 billion as of December 31, 2018 as
compared to $2.12 billion as of December 31, 2017. The increase in loans during the year ended December 31, 2018 is
primarily attributable to organic growth in the commercial real estate – non-occupied and construction and land development
categories in the Chicago MSA, partially offset by a decline in one-to-four family residential loans.
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Table of Contents
Loan Portfolio Maturities
The following table summarizes the scheduled maturities of the loan portfolio as of December 31, 2019. Demand loans
(loans having no stated repayment schedule or maturity) and overdraft loans are reported as being due in one year or less.
As of December 31, 2019
One Year or Less
One Year Through
Five Years
After Five Years
Total
Scheduled Maturities of Loans:
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
Municipal, consumer, and other
Total
Loans Maturing After One Year:
Floating interest rates:
Repricing within one year or less
Repricing in more than one year
Total floating interest rates
Predetermined (Fixed) interest rates
Total loans maturing after one year
Nonperforming Assets
$
$
204,998
103,034
37,456
106,539
33,084
139,767
54,432
15,821
695,131
$
$
(dollars in thousands)
75,164
78,632
117,821
354,761
111,486
81,184
126,209
25,734
970,991
$
$
27,013
26,110
75,885
118,457
34,503
3,936
132,939
78,861
497,704
$
$
$
$
307,175
207,776
231,162
579,757
179,073
224,887
313,580
120,416
2,163,826
397,914
101,177
499,091
969,604
1,468,695
Nonperforming loans consist of all loans past due 90 days or more or on nonaccrual. Nonperforming assets consist of all
nonperforming loans and foreclosed assets. Typically, loans are placed on nonaccrual when they reach 90 days past due, or
when, in management’s opinion, there is reasonable doubt regarding the collection of the amounts due through the normal
means of the borrower. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from
interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant
accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months
of payment performance and we believe that all remaining principal and interest is fully collectible, before the loan is eligible
to return to accrual status. Management believes the Company’s lending practices and active approach to managing
nonperforming assets has resulted in timely resolution of problem assets.
Loans acquired with deteriorated credit quality are considered past due or delinquent when the contractual principal or
interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled
payment. However, these loans are considered performing, even though they may be contractually past due, as any non-
payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included
in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is
discontinued on loans acquired with deteriorated credit quality if management can no longer estimate future cash flows on
the loan. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the
expected cash flows, is being recognized on all loans acquired with deteriorated credit quality, except those management can
no longer estimate future cash flows.
When it appears likely that we will obtain title to real estate collateral, we develop an exit strategy by assessing overall market
conditions, the current use and condition of the asset, and its highest and best use. If determined necessary to maximize
value, we complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and
improvement expenses incorporated into our estimates of the expected costs to sell. Substantially all foreclosed real estate is
valued on an "as-is" basis.
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Table of Contents
Estimates of the net realizable value of real estate collateral also include a deduction for the expected selling costs. For most
real estate collateral and foreclosed real estate, we apply a 7.0% deduction to the value of the asset to account for the
expected costs to sell the asset. This estimate includes sales commissions and closing costs. Expenses for real estate taxes
are accrued and repairs are expensed when incurred.
The following table sets forth information concerning nonperforming loans and nonperforming assets as of each of the dates
indicated.
NONPERFORMING ASSETS
Nonaccrual
Past due 90 days or more, still accruing
Total nonperforming loans
Foreclosed assets
Total nonperforming assets
(1)
(2)
NONPERFORMING ASSETS (Originated)
Nonaccrual
Past due 90 days or more, still accruing
Total nonperforming loans
Foreclosed assets
Total nonperforming (originated)
(2)
NONPERFORMING ASSETS (Acquired)
Nonaccrual
Past due 90 days or more, still accruing
Total nonperforming loans
Foreclosed assets
Total nonperforming assets (acquired)
(1)
Allowance for loan losses
Loans, before allowance for loan losses
Loans, before allowance for loan losses (originated)
(2)
Loans, before allowance for loan losses (acquired)
(2)
CREDIT QUALITY RATIOS
Allowance for loan losses to loans, before allowance for loan losses
Allowance for loan losses to nonperforming loans
Nonperforming loans to loans, before allowance for loan losses
Nonperforming assets to total assets
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets
CREDIT QUALITY RATIOS (Originated)
Nonperforming loans to loans, before allowance for loan losses
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets
(2)
CREDIT QUALITY RATIOS (Acquired)
Nonperforming loans to loans, before allowance for loan losses
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets
(2)
2019
2018
As of December 31,
2017
(dollars in thousands)
2016
2015
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
19,019
30
19,049
5,099
24,148
10,811
30
10,841
1,022
11,863
8,208
—
8,208
4,077
12,285
22,299
2,163,826
1,998,496
165,330
$
$
$
$
$
$
$
$
15,876
37
15,913
9,559
25,472
10,329
37
10,366
1,395
11,761
5,547
—
5,547
8,164
13,711
20,509
2,144,257
1,923,859
220,398
$
$
$
$
$
$
$
$
22,074
28
22,102
16,545
38,647
15,505
28
15,533
5,950
21,483
6,569
—
6,569
10,595
17,164
19,765
2,115,946
1,825,129
290,817
$
$
$
$
$
$
$
$
20,494
1,745
22,239
16,224
38,463
9,511
1,745
11,256
4,595
15,851
10,983
—
10,983
11,629
22,612
19,708
2,106,515
1,689,186
417,329
1.03 %
0.96 %
0.93 %
0.94 %
117.06
0.88
0.74
1.11
0.54 %
0.59
4.96 %
7.25
128.88
0.74
0.78
1.18
0.54 %
0.61
2.52 %
6.00
89.43
1.04
1.17
1.81
0.85 %
1.17
2.26 %
5.69
88.62
1.06
1.16
1.81
0.67 %
0.94
2.63 %
5.27
15,014
1,806
16,820
19,786
36,606
10,965
1,806
12,771
5,153
17,924
4,049
—
4,049
14,633
18,682
18,248
2,139,611
1,596,603
543,008
0.85 %
108.49
0.79
1.09
1.70
0.80 %
1.12
0.75 %
3.35
(1) Excludes loans acquired with deteriorated credit quality that are past due 90 or more days totaling $0.1 million, $2.7 million, $0.3 million, $4.6 million,
and $5.1 million as of December 31, 2019, 2018, 2017, 2016, and 2015, respectively.
(2) See "Non-GAAP Financial Information" in Part II, Item 6 “Selected Financial Data” for reconciliation of non-GAAP measure to their most comparable
GAAP measures.
Comparison of December 31, 2019 to December 31, 2018
Total nonperforming assets were $24.1 million as of December 31, 2019, a decrease of $1.3 million, or 5.2%, from $25.5
million as of December 31, 2018, due primarily to a $4.5 million reduction in foreclosed assets as a result of sales, partially
offset by a $3.1 million increase in nonaccrual loans. The increase in nonaccrual loans consisted primarily of a $4.3 million
increase in agricultural and farmland nonaccrual loans, related primarily to one acquired loan relationship, partially offset by
smaller variations in other loan categories. The one agricultural and farmland loan relationship placed on nonaccrual
previously mentioned was individually evaluated for impairment and no specific reserves were required as of December 31,
2019.
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Table of Contents
Comparison of December 31, 2018 to December 31, 2017
Total nonperforming assets decreased by $13.2 million during the year ended December 31, 2018. Nonperforming assets
totaled $25.5 million as of December 31, 2018 and $38.6 million as of December 31, 2017. Foreclosed assets declined $7.0
million during 2018 while nonaccrual loans declined by $6.2 million. The decline in foreclosed assets was the result of the
disposition of numerous properties. Approximately $4.6 million of the reduction in foreclosed assets came from originated
foreclosed assets while the remainder came via acquired foreclosed assets, which continued a trend of decline in acquired
foreclosed assets. The decline in nonaccrual loans was led by a $5.2 million reduction in originated nonaccrual loans that
was primarily due to the continuing resolution of two long-term borrowers.
Troubled Debt Restructurings
In general, if the Company grants a troubled debt restructuring (TDR) that involves either the absence of principal
amortization or a material extension of an existing loan amortization period in excess of our underwriting standards, the loan
will be placed on nonaccrual status. However, if a TDR is well secured by an abundance of collateral and the collectability of
both interest and principal is probable, the loan may remain on accrual status. A nonaccrual TDR in full compliance with the
payment requirements specified in the loan modification for at least six months may return to accrual status, if the
collectability of both principal and interest is probable. All TDRs are individually evaluated for impairment.
The following table presents TDRs by loan category.
2019
2018
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
Municipal, consumer, and other
Total accrual troubled debt restructurings
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
Municipal, consumer, and other
Total nonaccrual troubled debt restructurings
Total troubled debt restructurings
$
$
867 $
—
5,746
1,427
—
—
517
—
8,557
135
283
149
—
—
—
191
—
758
9,315 $
As of December 31,
2017
(dollars in thousands)
620 $
—
1,811
2,099
—
—
340
—
4,870
467 $
—
6,244
2,061
—
—
556
—
9,328
206
166
3,112
—
—
—
550
—
4,034
13,362 $
194
—
5,126
468
—
—
74
—
5,862
10,732 $
2016
2015
13 $
—
7,576
559
—
—
109
—
8,257
329
—
161
—
—
417
—
—
907
9,164 $
14
—
1,485
581
—
—
118
—
2,198
426
—
176
—
—
—
—
—
602
2,800
The significant reduction in TDRs from December 31, 2018 to December 31, 2019 is primarily due to the resolution of one
large loan relationship during the second quarter of 2019. TDRs have remained a small portion of our loan portfolio as loan
modifications to borrowers with deteriorating financial condition are generally offered only as a part of an overall workout
strategy to minimize losses to the Company.
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Table of Contents
Risk Classification of Loans
Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered
to be of lesser quality as watch, substandard, doubtful, or loss.
A watch loan is still considered a "pass" credit and is not a classified asset, but is a reflection of a borrower who exhibits
credit weaknesses or downward trends warranting close attention and increased monitoring. These potential weaknesses
may result in deterioration of the repayment prospects for the loan. No loss of principal or interest is expected, and the
borrower does not pose sufficient risk to warrant classification.
A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the
collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the
liquidation of the debt. They are characterized as probable that the borrower will not pay principal and interest in accordance
with the contractual terms.
An asset classified as doubtful has all the weaknesses inherent in one classified as substandard with the added characteristic
that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values,
highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that
their continuance as assets is not warranted; such balances are promptly charged-off as required by applicable federal
regulations.
As of December 31, 2019 and 2018, our risk classifications of loans were as follows:
December 31, 2019
Pass
Watch
Substandard Doubtful
Total
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
Municipal, consumer, and other
Total
December 31, 2018
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
Municipal, consumer, and other
Total
(dollars in thousands)
267,645 $
180,735
198,710
531,694
175,807
217,120
287,036
106,063
27,114 $
12,267
21,745
46,092
1,771
3,582
13,546
479
1,964,810 $ 126,596 $
12,416 $
14,774
10,707
1,971
1,495
4,185
12,998
13,874
72,420 $
— $
307,175
—
207,776
—
231,162
—
579,757
—
179,073
—
224,887
—
313,580
120,416
—
— $ 2,163,826
Pass
Watch
Substandard Doubtful
Total
(dollars in thousands)
315,815 $
185,598
217,017
486,859
131,583
227,775
282,704
97,668
35,176 $
12,116
17,845
39,231
2,468
5,663
14,599
497
1,945,019 $ 127,595 $
9,510 $
12,161
20,212
7,820
1,874
3,837
15,805
424
71,643 $
360,501
— $
209,875
—
255,074
—
533,910
—
135,925
—
237,275
—
313,108
—
—
98,589
— $ 2,144,257
$
$
$
$
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Table of Contents
Allowance for Loan Losses
The allowance for loan losses is an estimate of loan losses inherent in the Company’s loan portfolio. The allowance for loan
losses represents amounts that have been established to recognize incurred credit losses in the loan portfolio that are both
probable and reasonably estimable at the date of the consolidated financial statements. The allowance for loan losses is
established through a provision for loan losses which is charged to expense. Additions to the allowance are expected to
maintain the adequacy of the total allowance. Loan losses are charged off against the allowance when the Company
determines the loan balance to be uncollectible. Cash received on previously charged off amounts is recorded as a recovery
to the allowance for loan losses.
The allowance for loan losses consists of two primary components, general reserves and specific reserves related to
impaired loans. The general component covers non-impaired loans and is based on historical losses adjusted for qualitative
factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced
by the Company over the most recent 16-quarter period. This actual loss experience is adjusted for qualitative factors based
on the risks present for each portfolio segment. These qualitative factors include consideration of the following: levels of and
trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of
loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and
practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends
and conditions; industry conditions; and effects of changes in credit concentrations.
These qualitative factors are inherently subjective and are driven by the repayment risk associated with each portfolio
segment.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable
to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
The Company reviews the loan portfolio on an ongoing basis to determine whether any loans require classification and
impairment testing in accordance with applicable regulations and accounting principles. When a loan is classified as either
substandard or doubtful and in certain other cases, such as troubled debt restructurings, the Company generally measures
impairment based on the fair value of the collateral, but also may use the present value of expected future cash flows
discounted at the original contractual interest rate, when practical.
The Company evaluates the allowance for loan losses based upon the combined total of the specific and general
components. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology
results in a higher dollar amount of estimated probable incurred credit losses than would be the case without the increase.
Conversely, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology generally
results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
While the Company uses the best information available to make evaluations, future adjustments to the allowance for loan
losses may become necessary if conditions change substantially from the conditions used in previous evaluations.
Determinations as to the risk classification of loans and the amount of the allowance for loan losses are subject to review by
regulatory agencies, which can require that the Company establish additional loss allowances.
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Table of Contents
Net Charge-offs and Recoveries
A loan balance is classified as a loss and charged-off when it is confirmed that there is no readily apparent source of
repayment for the portion of the loan that is classified as loss.
The provision for loan losses is a function of the allowance for loan loss methodology that we use to determine the
appropriate level of the allowance for inherent loan losses after net charge-offs have been deducted.
The following table sets forth activity in the allowance for loan losses.
Balance, beginning of year
$
20,509
$
19,765
$
19,708
$
18,248
$
16,939
2019
2018
Year Ended December 31,
2017
(dollars in thousands)
2016
2015
Charge-offs:
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
Municipal, consumer, and other
Total charge-offs
Recoveries:
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
Municipal, consumer, and other
Total recoveries
Net charge-offs
Provision for loan losses
Balance, end of year
Net charge-offs
Net charge-offs (originated)
Net charge-offs (acquired)
(1)
(1)
Average loans, before allowance for loan losses
Average loans, before allowance for loan losses (originated)
(1)
Average loans, before allowance for loan losses (acquired)
(1)
(886)
(30)
(407)
(111)
(41)
(9)
(1,105)
(684)
(3,273)
440
—
56
20
—
450
350
343
1,659
(1,614)
3,404
22,299
1,614
732
882
2,178,897
1,981,658
197,239
$
$
$
(1,446)
—
(2,352)
(237)
(194)
(58)
(1,415)
(783)
(6,485)
315
—
54
141
—
260
490
272
1,532
(4,953)
5,697
20,509
4,953
3,137
1,816
2,131,512
1,873,623
257,889
$
$
$
(1,780)
(3)
(32)
(940)
(153)
(503)
(787)
(818)
(5,016)
188
—
38
958
—
27
414
309
1,934
(3,082)
3,139
19,765
3,082
2,500
582
2,091,863
1,748,418
343,445
$
$
$
(1,322)
(83)
(753)
(1,134)
—
(442)
(1,848)
(989)
(6,571)
890
—
9
95
6
19
258
320
1,597
(4,974)
6,434
19,708
4,974
1,245
3,729
2,132,405
1,611,846
520,559
$
$
$
(3,794)
(11)
(133)
(100)
—
(471)
(1,309)
(773)
(6,591)
1,458
—
10
20
—
125
212
309
2,134
(4,457)
5,766
18,248
4,457
2,220
2,237
1,877,365
1,526,402
350,963
$
$
$
Net charge-offs to average loans, before allowance for loan losses
Net charge-offs to average loans, before allowance for loan losses (originated)
(1)
Net charge-offs to average loans, before allowance for loan losses (acquired)
(1)
0.07 %
0.04
0.45
0.23 %
0.17
0.70
0.15 %
0.14
0.17
0.23 %
0.08
0.72
0.24 %
0.15
0.64
(1) See "Non-GAAP Financial Information" in Part II, Item 6 “Selected Financial Data” for reconciliation of non-GAAP measure to their most comparable
GAAP measures.
Comparison of the Year Ended December 31, 2019 to the Year Ended December 31, 2018
Net charge-offs and the ratio of net charge-offs to average loans, before allowance for loan losses were $1.6 million and
0.07%, respectively, for the year ended December 31, 2019 compared to $5.0 million and 0.23%, respectively, for the year
ended December 31, 2018. This ratio has remained low for several years, due primarily to favorable economic conditions and
our continuous credit monitoring and collection efforts.
Comparison of the Year Ended December 31, 2018 to the Year Ended December 31, 2017
Net charge-offs and the ratio of net charge-offs to average loans, before allowance for loan losses were $5.0 million and
0.23%, respectively, for the year ended December 31, 2018, compared to $3.1 million and 0.15%, respectively, for the year
ended December 31, 2017. The increase in 2018 was primarily due to a $2.1 million charge-off on one long-time non-
performing loan relationship approaching final resolution.
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Table of Contents
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of allowance for loan losses by major loan categories.
December 31, 2019
December 31, 2018
December 31, 2017
December 31, 2016
December 31, 2015
Allowance
Allowance
Allowance
Allowance
Allowance
for Loan
Losses
Loan
Balances
for Loan
Losses
Loan
Balances
for Loan
Losses
(dollars in thousands)
Loan
Balances
for Loan
Losses
Loan
Balances
for Loan
Losses
Loan
Balances
$
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
Municipal, consumer, and other
Total
$
Securities
4,441 $
2,766
1,779
307,175 $
207,776
231,162
3,748 $
2,650
2,506
360,501 $
209,875
255,074
5,411 $
2,385
1,510
371,452 $
208,349
276,883
4,870 $
3,455
1,622
372,588 $
207,604
297,818
4,464 $
3,019
1,444
413,365
196,704
317,315
3,663
1,024
2,977
2,540
3,109
22,299 $
579,757
179,073
224,887
313,580
120,416
2,163,826 $
2,644
912
4,176
2,782
1,091
20,509 $
533,910
135,925
237,275
313,108
98,589
2,144,257 $
2,476
997
2,981
2,723
1,282
19,765 $ 2,115,946 $
488,442
137,055
170,513
358,659
104,593
2,701
1,282
1,983
2,720
1,075
19,708 $ 2,106,515 $
433,939
127,132
182,023
393,399
92,012
2,494
764
2,048
3,321
694
401,403
121,348
168,342
436,051
85,083
18,248 $ 2,139,611
The Company’s investment policy is established by management and approved by the board of directors. The policy
emphasizes safety of the investment, liquidity requirements, potential returns, cash flow targets and consistency with our
interest rate risk management strategy. As of December 31, 2019, the Company did not have any non-U.S. Treasury or non-
U.S. government agency debt securities that exceeded 10% of the Company’s total stockholders’ equity.
The following table sets forth the composition, amortized cost and fair values of debt securities available-for-sale and held-to-
maturity.
December 31, 2019
December 31, 2018
December 31, 2017
Amortized
Cost
Fair Value
Amortized
Cost
(dollars in thousands)
Fair Value
Amortized
Cost
Fair Value
Debt securities available-for-sale:
U.S. Treasury
U.S. government agency
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Private-label
Corporate
Total debt securities available-for-sale
Debt securities held-to-maturity:
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Total debt securities held-to-maturity
Total debt securities
$
— $
— $
— $
— $
7,033 $
49,113
131,241
49,615
133,738
46,977
161,957
46,866
161,450
45,798
206,472
198,184
133,730
—
72,239
584,507
200,678
134,954
—
73,419
592,404
235,903
151,878
254
87,118
684,087
234,303
150,081
256
86,570
679,526
267,039
149,543
3,508
91,588
770,981
7,028
45,735
207,953
265,698
148,011
3,513
91,633
769,571
45,239
46,579
73,176
74,283
79,490
81,824
19,072
24,166
88,477
19,063
24,887
90,529
23,192
25,347
121,715
22,194
25,029
121,506
27,552
22,280
129,322
$ 672,984 $ 682,933 $ 805,802 $ 801,032 $ 900,303 $
26,766
22,204
130,794
900,365
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We evaluate securities with significant declines in fair value on a quarterly basis to determine whether they should be
considered other-than-temporarily impaired. There were no other-than-temporary impairments during the years ended
December 31, 2019, 2018, and 2017.
Portfolio Maturities and Yields
The composition and maturities of the debt securities portfolio as of December 31, 2019 is 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.
One Year or Less
Weighted
Amortized
Cost
Average
Yield
More Than One Year
through Five Years
December 31, 2019
More than Five Years
through Ten Years
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
(dollars in thousands)
More than Ten Years
Total
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Debt securities available-for-sale:
U.S. government agency
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Corporate
Total debt securities available-for-sale
$
1,998
27,451
11
3,842
19,908
53,210
1.73 % $
2.60
9,538
69,088
2.04 % $
2.60
37,577
28,468
2.63 % $
2.44
—
6,234
— % $
2.37
49,113
131,241
4.06
1.82
2.30
2.40
9,045
69,089
36,861
193,621
2.25
2.56
3.02
2.62
75,784
20,113
15,470
177,412
2.58
1.87
4.84
2.69
113,344
40,686
—
160,264
2.62
2.75
—
2.65
198,184
133,730
72,239
584,507
2.48 %
2.56
2.59
2.49
3.21
2.63
Debt securities held-to-maturity:
Municipal
Agency mortgage-backed:
Agency residential
Agency commercial
Total debt securities held-to-maturity
Total debt securities
$
SOURCES OF FUNDS
Deposits
752
2.34
31,309
3.20
11,504
3.41
1,674
4.15
45,239
3.28
—
—
752
53,962
—
—
2.34
2.40 % $
—
5,413
36,722
230,343
—
2.51
3.10
2.70 % $
—
12,284
23,788
201,200
19,072
—
6,469
2.91
3.15
27,215
2.74 % $ 187,479
2.34
3.34
2.69
2.65 % $
19,072
24,166
88,477
672,984
2.34
2.93
2.98
2.67 %
Management continues to focus on growing core deposits, which exclude time deposits of $250,000 or more and brokered
deposits, through the Company’s relationship driven banking philosophy and community-focused marketing programs.
Additionally, the Banks continue to add and improve ancillary convenience services tied to deposit accounts, such as mobile
and remote deposits and peer-to-peer payments, to solidify core deposit relationships. As of December 31, 2019, core
deposits represented 98.4% of our total deposits. See “Non-GAAP Financial Information” in Part II, Item 6 “Selected Financial
Data” for a reconciliation of this non-GAAP measure to the most comparable GAAP measure.
The Company has continued to deemphasize higher cost time deposits. Comparatively, the Company’s non-maturity deposits
have remained more stable. Average balances in money market accounts increased during the year ended December 31,
2019 primarily due to interest rate specials promoted for new money market accounts.
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Table of Contents
The following tables set forth the distribution of average deposits, by account type.
Noninterest-bearing demand
Interest-bearing demand
Money market
Savings
Total non-maturity deposits
Time
Total deposits
Noninterest-bearing demand
Interest-bearing demand
Money market
Savings
Total non-maturity deposits
Time
Total deposits
Noninterest-bearing demand
Interest-bearing demand
Money market
Savings
Total non-maturity deposits
Time
Total deposits
Year Ended December 31, 2019
Average
Balance
Percent of
Total Deposits
(dollars in thousands)
Percent
Change in
Weighted
Average Cost
Average Balance
2019 vs. 2018
666,055
821,480
463,233
430,220
2,380,988
396,560
2,777,548
24.0 %
29.6
16.7
15.5
85.7
14.3
100.0 %
— %
0.17
0.42
0.07
0.15
1.10
0.29 %
1.9 %
(0.4)
4.6
(0.8)
1.1
(10.4)
(0.7)%
Year Ended December 31, 2018
Average
Balance
Percent of
Total Deposits
(dollars in thousands)
Percent
Change in
Weighted
Average Cost
Average Balance
2018 vs. 2017
653,885
824,910
442,872
433,661
2,355,328
442,569
2,797,897
23.4 %
29.5
15.8
15.5
84.2
15.8
100.0 %
— %
0.17
0.15
0.07
0.10
0.80
0.21 %
1.6 %
2.1
(7.7)
(1.4)
(0.7)
(10.6)
(2.4)%
Year Ended December 31, 2017
Average
Balance
Percent of
Total Deposits
(dollars in thousands)
Weighted
Average Cost
643,326
808,263
479,916
439,844
2,371,349
495,222
2,866,571
22.4 %
28.2
16.7
15.3
82.7
17.3
100.0 %
— %
0.11
0.15
0.07
0.08
0.62
0.17 %
$
$
$
$
$
$
The following table sets forth time deposits by remaining maturity as of December 31, 2019.
Time deposits:
Amounts less than $100,000
Amounts of $100,000 but less than $250,000
Amounts of $250,000 or more
Total time deposits
3 Months or Over 3 through Over 6 through
Less
6 Months
12 Months
Over 12 Months
Total
(dollars in thousands)
$ 47,119 $
15,144
9,147
$ 71,410 $
46,835 $
16,629
4,253
67,717 $
64,405 $
27,857
26,548
118,810 $
67,756 $
25,909
4,806
98,471 $
226,115
85,539
44,754
356,408
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Securities Sold Under Agreements to Repurchase
All securities sold under agreements to repurchase are sweep instruments, maturing daily. The securities underlying the
agreements are held under our control in safekeeping at third-party financial institutions, and include debt securities.
The following table sets forth information concerning balances and interest rates on our securities sold under agreements to
repurchase.
Balance at end of year
Average balance during year
Maximum outstanding at any month end
Weighted average interest rate at end of year
Average interest rate during year
Borrowings
$
2019
As of or for the Years Ended December 31,
2018
(dollars in thousands)
46,195 $
40,725
52,303
44,433 $
41,177
52,085
2017
37,838
40,821
47,039
0.20 %
0.18
0.12 %
0.12
0.11 %
0.11
Deposits are the primary source of funds for our lending activities and general business purposes. However, we may also
obtain advances from the Federal Home Loan Bank of Chicago (FHLB), purchase federal funds, and engage in overnight
borrowing from the Federal Reserve. We may also use these sources of funds as part of our asset liability management
process to control our long-term interest rate risk exposure, even if it may increase our short-term cost of funds. Our level of
short-term borrowing can fluctuate on a daily basis depending on funding needs and the source of funds to satisfy the needs.
Our use of FHLB advances and federal funds purchased has been somewhat infrequent and has had a nominal impact on
our total funding for the years ended December 31, 2019, 2018, and 2017.
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The following table sets forth information concerning balances and interest rates on our borrowings.
As of or for the Years Ended December 31,
2018
(dollars in thousands)
2019
2017
FHLB Advances
Balance at end of year
Average balance during year
Maximum outstanding at any month end
Weighted average interest rate at end of year
Average interest rate during year
Federal Funds Purchased
Balance at end of year
Average balance during year
Maximum outstanding at any month end
Weighted average interest rate at end of year
Average interest rate during year
Total Borrowings
Balance at end of year
Average balance during year
Maximum outstanding at any month end
Weighted average interest rate at end of year
Average interest rate during year
IMPACT OF INFLATION
$
— $
151
5,000
— $
14,518
74,000
29,000
5,403
29,000
— %
2.52
— %
1.73
1.47 %
1.13
$
— $
200
—
— %
2.66
— $
428
—
— %
2.08
—
385
—
— %
1.35
$
— $
351
5,000
— $
14,946
74,000
29,000
5,788
29,000
— %
2.60
— %
1.74
1.47 %
1.14
The consolidated financial statements and the related notes have been prepared in conformity with GAAP. GAAP generally
requires the measurement of financial position and operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The impact of inflation, if any, is reflected in the
increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a
result, changes in market interest rates have a greater impact on performance than the effects of inflation.
LIQUIDITY
Bank Liquidity
The overall objective of bank liquidity management is to ensure the availability of sufficient cash funds to meet all financial
commitments and to take advantage of investment opportunities. The Banks manage 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 Banks continuously monitor their 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 Banks manage their liquidity position to meet the daily cash
flow needs of clients, while maintaining an appropriate balance between assets and liabilities to meet the return on
investment objectives. The Banks also monitor liquidity requirements in light of interest rate trends, changes in the economy
and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.
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Table of Contents
As part of the Banks’ liquidity management strategy, the Banks are also focused on minimizing costs of liquidity and attempt
to decrease these costs by promoting noninterest bearing and low-cost deposits and replacing higher cost funding including
time deposits and borrowed funds. While the Banks do not control the types of deposit instruments our clients choose, those
choices can be influenced with the rates and the deposit specials offered.
Core deposits are a major source of funds used by the Banks to meet their liquidity. Maintaining the ability to acquire these
funds as needed in a variety of markets is important to assuring the Banks' liquidity. Management continually monitors the
liquidity and non-core dependency ratios to ensure compliance with targets established by the Company's ALCO.
Our investment portfolio is another alternative for meeting liquidity needs. These assets generally have readily available
markets that offer conversions to cash as needed. Securities within our investment portfolio are also used to secure certain
deposit types. At December 31, 2019 and 2018, securities with a carrying value of $284.9 million and $291.4 million,
respectively, were pledged to secure public and trust deposits, securities sold under agreements to repurchase, and for other
purposes required or permitted by law.
Additional sources of liquidity include federal funds purchased and borrowings from the FHLB. Interest is charged at the
prevailing market rate on federal funds purchased and FHLB borrowings. There were no outstanding federal funds purchased
or FHLB borrowings at December 31, 2019 and 2018. Funds obtained from federal funds purchased and FHLB borrowings
are used primarily to meet day to day liquidity needs. The total amount of the remaining credit available to the Banks from the
FHLB at December 31, 2019 and 2018 was $343.8 million and $337.0 million, respectively.
As of December 31, 2019, management believed adequate liquidity existed to meet all projected cash flow obligations of the
Banks. As of December 31, 2019, the Banks had no material commitments for capital expenditures.
Holding Company Liquidity
The Company is a corporation separate and apart from the Banks and, therefore, it must provide for its own liquidity. The
Company’s main source of funding is dividends declared and paid to it by the Banks. Statutory and regulatory limitations exist
that affect the ability of the Banks to pay dividends to the Company. Management believes that these limitations will not
impact the Company’s ability to meet its ongoing short-term cash obligations.
Due to state banking laws, neither Bank may declare dividends in any calendar year in an amount that would exceed the
accumulated retained earnings of such Bank 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 a Bank to the
Company would be prohibited if the effect thereof would cause a Bank’s capital to be reduced below applicable minimum
capital requirements. During the years ended December 31, 2019, 2018, and 2017, the Banks paid $110.0 million, $44.4
million, and $57.3 million, in dividends to the Company, respectively.
The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to
stockholders and interest payments on the subordinated debentures. During the years ended December 31, 2019, 2018, and
2017, holding company operating expenses consisted of interest expense of $1.9 million, $1.8 million, and $1.5 million,
respectively, and other operating expenses of $1.0 million, $1.1 million, and $1.1 million, respectively. In February 2020, the
Company paid a quarterly cash dividend of $0.15 per share. As of December 31, 2019, management was not aware of any
known trends, events or uncertainties that had or were reasonably likely to have a material impact on the Company’s liquidity.
As of December 31, 2019, the Company had no material commitments for capital expenditures.
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Table of Contents
As of December 31, 2019, management believed adequate liquidity existed to meet all projected cash flow obligations of the
Company.
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.
The actual and required capital amounts and ratios of the Company (on a consolidated basis) and the Banks are listed below.
Management believed that, as of December 31, 2019, 2018, and 2017, the Company and the Banks met all capital adequacy
requirements to which we were subject. As of these dates, the Banks were “well capitalized” under regulatory prompt
corrective action provisions. For additional information, see “Note 18 – Regulatory Matters” to the consolidated financial
statements.
The following table presents the capital ratios of the Company (on a consolidated basis) and the Banks as well as the
minimum ratios to be well capitalized under regulatory prompt corrective action provisions.
Total Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Tier 1 Capital (to Average Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
To Be Well
Capitalized Under
Prompt Corrective
December 31, 2019 December 31, 2018 December 31, 2017 Action Provisions
14.99 %
14.44
21.02
14.17 %
13.62
20.17
12.71 %
13.62
20.17
10.80 %
11.03
10.21
14.40 %
13.62
22.27
13.58 %
12.81
21.23
12.09 %
12.81
21.23
9.94 %
9.96
9.98
N/A
10.00 %
10.00
N/A
8.00 %
8.00
N/A
6.50 %
6.50
N/A
5.00 %
5.00
14.54 %
14.02
17.58
13.64 %
13.12
16.50
12.15 %
13.12
16.50
10.38 %
10.25
9.82
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Table of Contents
Cash Dividends
The below table summarizes the cash dividends paid by quarter for years ended December 31.
Regular
Tax
Special
Total cash dividends
Regular
Tax
Special
Total cash dividends
Regular
Tax
Special
Total cash dividends
2019
First Quarter Second Quarter Third Quarter Fourth Quarter
Total
$
$
2,704 $
6,094
27,041
35,839 $
(dollars in thousands)
2,704 $
7,048
—
9,752 $
2,704 $
6,662
—
9,366 $
— $
—
169,999
169,999 $
8,112
19,804
197,040
224,956
First Quarter Second Quarter Third Quarter Fourth Quarter
Total
2018
$
$
2,105 $
6,305
5,006
13,416 $
(dollars in thousands)
2,105 $
7,092
—
9,197 $
2,101 $
7,055
—
9,156 $
2017
2,101 $
6,751
2,000
10,852 $
8,412
27,203
7,006
42,621
First Quarter Second Quarter Third Quarter Fourth Quarter
Total
$
$
1,897 $
6,302
—
8,199 $
(dollars in thousands)
1,897 $
6,331
—
8,228 $
1,897 $
6,570
—
8,467 $
1,897 $
5,288
24,990
32,175 $
7,588
24,491
24,990
57,069
On October 1, 2019, the Company’s board of directors declared a special dividend payable to the Company’s stockholders of
record as of October 2, 2019, in the aggregate amount of approximately $170.0 million. The special dividend was paid on
October 22, 2019 using net proceeds from the Company’s initial public offering and the proceeds of dividends received from
Heartland Bank and State Bank of Lincoln. On January 30, 2020, the Company announced a cash dividend of $0.15 per
share, which was paid on February 18, 2020 to stockholders of record as of February 10, 2020.
As of December 31, 2019, we had no material commitments for capital expenditures.
OFF-BALANCE SHEET ARRANGEMENTS
As a financial services provider, the Banks routinely are a party to various financial instruments with off-balance sheet risks,
such as commitments to extend credit, standby letters of credit, unused lines of credit and commitments to sell loans. While
these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit
may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process
afforded to loans originated by the Banks. Although commitments to extend credit are considered while evaluating our
allowance for loan losses, at December 31, 2019 and 2018, there were no reserves for unfunded commitments. For
additional information, see “Note 20 – Commitments and Contingencies” to the consolidated financial statements.
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Table of Contents
CONTRACTUAL OBLIGATIONS
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating
leases for premises and equipment. The following table summarizes our significant fixed and determinable contractual
obligations and other funding needs by payment date at December 31, 2019.
(1)
(1)(2)
Time deposits
Subordinated debentures
Standby letters of credit
Limited partnership investment
Operating leases
Total
Commitments to extend credit
(3)
Payments Due In
Less Than One One to Three Three to Five More Than Five
Year
Years
Years
(dollars in thousands)
Years
Total
$
$
$
257,937 $
—
1,363
2,100
93
261,493 $
343,588 $
82,352 $
—
4,058
—
137
86,547 $
79,349 $
15,949 $
—
3,570
—
42
19,561 $
72,364 $
170 $
38,765
—
—
3
38,938 $
47,404 $
356,408
38,765
8,991
2,100
275
406,539
542,705
(1) Excludes interest.
(2) Represents amounts due to the recipient and does not include unamortized discounts of $1.2 million.
(3) This commitment represents amounts we are obligated to contribute to a limited partnership investment in accordance with the provisions of the
respective limited partnership agreements. The capital contributions may be required at any time, and are therefore reflected in the "less than one year"
category.
JOBS ACT ACCOUNTING ELECTION
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). The
JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public
companies. We have elected to use the extended transition period until we are no longer an emerging growth company or
until we choose to affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements
may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public
companies.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company has established various accounting policies that govern the application of accounting principles generally
accepted in the United State of America in the preparation of its consolidated financial statements.
Critical accounting estimates are those that are critical to the portrayal and understanding of the Company’s financial
condition and results of operations and require management to make assumptions that are difficult, subjective or complex.
These estimates involve judgments, assumptions and uncertainties that are susceptible to change. In the event that different
assumptions or conditions were to prevail, and depending on the severity of such changes, the possibility of a materially
different financial condition or materially different results of operations is a reasonable likelihood. Further, changes in
accounting standards could impact the Company’s critical accounting estimates. The following policies could be deemed
critical:
Allowance for Loan losses
The allowance for loan losses (allowance) is an estimate of loan losses inherent in the Company's loan portfolio. The
allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are
expected to maintain the adequacy of the total allowance. Loan losses are charged off against the allowance when the
Company determines the loan balance to be uncollectible. Cash received on previously charged off amounts is recorded as a
recovery to the allowance.
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The allowance consists of two primary components, general reserves and specific reserves related to impaired loans. The
general component covers non-impaired loans and is based on historical losses adjusted for qualitative factors. The historical
loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over
the most recent 16-quarter period. This actual loss experience is adjusted for qualitative factors based on the risks present for
each portfolio segment. These qualitative factors include consideration of the following: levels of and trends in delinquencies
and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any
changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices;
experience, ability, and depth of lending management and other relevant staff; national and local economic trends and
conditions; industry conditions; and effects of changes in credit concentrations. These qualitative factors are inherently
subjective and are driven by the repayment risk associated with each portfolio segment.
Loans acquired that have evidence of deterioration in credit quality since origination and for which it is probable, at
acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at
fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. Loans are
evaluated by management at the time of purchase to determine if there is evidence of deterioration in credit quality since
origination. Loans where there is evidence of deterioration of credit quality since origination may be aggregated and
accounted for as a pool of loans if the loans being aggregated have common risk characteristics. The difference between the
undiscounted cash flows expected at acquisition and the investment in the loan, or the "accretable yield," is recognized as
interest income over the life of the loan. Contractually required payments for interest and principal that exceed the
undiscounted cash flows expected at acquisition, or the "nonaccretable difference," are not recognized as a yield adjustment.
Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in
expected cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of
the difference from nonaccretable to accretable yield with a positive impact on interest income on a prospective basis. If the
Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost
recovery method or cash basis method of income recognition.
Income Taxes
The Company estimates income tax expense based on amounts expected to be owed to federal and state tax jurisdictions.
Estimated income tax expense is reported in the statements of income. Accrued and deferred taxes, as reported in other
assets or other liabilities in the balance sheets, represent the net estimated amount due to or to be received from taxing
jurisdictions either currently or in the future. Management judgment is involved in estimating accrued and deferred taxes, as it
may be necessary to evaluate the risks and merits of the tax treatment of transactions, filing positions, and taxable income
calculations after considering tax-related statutes, regulations and other relevant factors. Because of the complexity of tax
laws and interpretations, interpretation is subject to judgment.
New Accounting Pronouncements
The Company reviews new accounting standards as issued. Information relating to accounting pronouncements issued and
applicable to the Company in 2019 appears in Note 1 to the consolidated financial statements.
Under the JOBS Act, emerging growth companies may also elect to delay adoption of new or revised accounting standards
until such time as those standards apply to private companies. We have elected to use this extended transition period for
complying with new or revised accounting standards and, therefore, we will not be subject to the same or revised accounting
standards as other public companies.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are
interest rate risk and credit risk. Interest rate risk is the potential reduction of net interest income as a result of changes in
interest rates. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is
due and is disclosed in detail above.
Interest Rate Risk
The most significant form of market risk is interest rate risk inherent in the normal course of lending and deposit-taking
activities. Management believes that our ability to successfully respond to changes in interest rates will have a significant
impact on our financial results. To that end, management actively monitors and manages our interest rate exposure.
The Asset/Liability Management Committee (ALCO), which is authorized by the Company’s board of directors, monitors our
interest rate sensitivity and makes decisions relating to that process. The ALCO’s goal is to structure our asset/liability
composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of
changes in interest rates on net interest income and capital in either a rising or declining interest rate environment.
Profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely
impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same
extent or on the same basis.
We monitor the impact of changes in interest rates on our net interest income and economic value of equity, or EVE, using
rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market rates
of interest in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future
business to calculate net interest income under varying hypothetical rate scenarios. EVE measures our long-term earnings
exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of
liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings
capacity of the balance sheet assuming that the rate change remains in effect over the life of the current balance sheet.
The following table sets forth, as of December 31, 2019, the estimated impact on our EVE and net interest income of
immediate changes in interest rates at the specified levels.
Change in Interest Rates (basis points)
+400
+300
+200
+100
Flat
-100
-200
Estimated Increase
(Decrease) in EVE
Amount
Percent
Increase (Decrease) in
Estimated Net Interest Income
Year 1
Year 2
Amount
Percent
Amount
Percent
(dollars in thousands)
$
200,797
165,809
122,859
68,303
—
(106,615)
(132,057)
37.8 % $
31.2
23.1
12.8
—
(20.1)
(24.8)
28,585
22,265
15,413
8,061
—
(12,878)
(22,283)
23.5 % $
18.3
12.6
6.6
—
(10.6)
(18.3)
35,711
28,128
19,788
10,550
—
(17,568)
(31,098)
30.0 %
23.7
16.6
8.9
—
(14.8)
(26.2)
This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in
rates paid on certain deposit accounts based on local competitive factors or changes in earning assets mix, which could
reduce the actual impact on EVE and net interest income, if any.
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Table of Contents
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes
in EVE and net interest income requires that we make certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. The EVE and net interest income table presented above
assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in
response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive
factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although
the EVE and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in
time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest
rates on our net interest income and will differ from actual results.
Credit Risk
Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with
the underlying contractual terms. We manage and control credit risk in the loan portfolio by adhering to well-defined
underwriting criteria and account administration standards established by management. Our loan policy documents
underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent.
Portfolio diversification at the borrower, industry, and product levels is actively managed to mitigate concentration risk. In
addition, credit risk management also includes an independent loan review process that assesses compliance with loan
policy, compliance with loan documentation standards, accuracy of the risk rating and overall credit quality of the loan
portfolio.
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Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HBT FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
92
Page
93
94
95
96
97
98
100
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors HBT Financial, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HBT Financial, Inc. and its subsidiaries (the Company)
as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related
notes to the consolidated financial statements (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019
and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the
Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’s auditor since 2017.
Chicago, Illinois
March 27, 2020
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HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2019
2018
(dollars in thousands)
ASSETS
Cash and due from banks
Interest-bearing deposits with banks
Cash and cash equivalents
Interest-bearing time deposits with banks
Securities available-for-sale, at fair value
Securities held-to-maturity (fair value of $90,529 in 2019 and $121,506 in 2018)
Equity securities
Restricted stock, at cost
Loans held for sale
Loans, net of allowance for loan losses of $22,299 in 2019 and $20,509 in 2018
Bank premises and equipment, net
Bank premises held for sale
Foreclosed assets
Goodwill
Core deposit intangible assets, net
Mortgage servicing rights, at fair value
Investments in unconsolidated subsidiaries
Accrued interest receivable
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Securities sold under agreements to repurchase
Subordinated debentures
Other liabilities
Total liabilities
21,343
165,536
186,879
248
679,526
121,715
3,261
2,719
2,800
2,123,748
54,736
749
9,559
23,620
5,453
10,918
1,165
15,300
7,173
3,249,569
$
22,112 $
261,859
283,971
248
592,404
88,477
4,389
2,425
4,531
2,141,527
53,987
121
5,099
23,620
4,030
8,518
1,165
13,951
16,640
3,245,103 $
$
$
689,116 $
2,087,739
2,776,855
44,433
37,583
53,314
2,912,185
664,876
2,131,094
2,795,970
46,195
37,517
29,491
2,909,173
COMMITMENTS AND CONTINGENCIES (Notes 11 and 20)
Stockholders' Equity
Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued or outstanding as of December 31,
2019
Common stock:
Voting - $0.01 par value; 125,000,000 and 400,000 shares authorized; 27,457,306 and 315,780 shares issued;
27,457,306 and 268,312 shares outstanding as of December 31, 2019 and 2018, respectively
Series A nonvoting - $0.01 par value, 24,000,000 shares authorized, 17,835,960 shares issued, and 17,759,200
shares outstanding as of December 31, 2018
Surplus
Retained earnings
Accumulated other comprehensive income (loss)
Less cost of treasury stock held:
Voting - 47,468 shares as of December 31, 2018
Series A nonvoting - 76,760 shares as of December 31, 2018
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements
94
—
275
—
190,524
134,287
7,832
—
—
332,918
3,245,103 $
$
—
3
178
32,288
315,234
(4,288)
(1,667)
(1,352)
340,396
3,249,569
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
INTEREST AND DIVIDEND INCOME
Loans, including fees:
Taxable
Federally tax exempt
Securities:
Taxable
Federally tax exempt
Interest-bearing deposits in bank
Other interest and dividend income
Total interest and dividend income
INTEREST EXPENSE
Deposits
Securities sold under agreements to repurchase
Borrowings
Subordinated debentures
Total interest expense
Net interest income
PROVISION FOR LOAN LOSSES
Net interest income after provision for loan losses
NONINTEREST INCOME
Card income
Service charges on deposit accounts
Wealth management fees
Mortgage servicing
Mortgage servicing rights fair value adjustment
Gains on sale of mortgage loans
Gains (losses) on securities
Gains (losses) on foreclosed assets
Gains (losses) on other assets
Title insurance activity
Other noninterest income
Total noninterest income
NONINTEREST EXPENSE
Salaries
Employee benefits
Occupancy of bank premises
Furniture and equipment
Data processing
Marketing and customer relations
Amortization of intangible assets
FDIC insurance
Loan collection and servicing
Foreclosed assets
Net adjustments on FDIC asset and true-up liability
Other noninterest expense
Total noninterest expense
INCOME BEFORE INCOME TAX EXPENSE
INCOME TAX EXPENSE
NET INCOME
EARNINGS PER SHARE - BASIC
EARNINGS PER SHARE - DILUTED
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
UNAUDITED PRO FORMA C CORP EQUIVALENT INFORMATION (Note 1)
Historical income before income tax expense
Pro forma C Corp equivalent income tax expense
Pro forma C Corp equivalent net income
PRO FORMA C CORP EQUIVALENT EARNINGS PER SHARE - BASIC
PRO FORMA C CORP EQUIVALENT EARNINGS PER SHARE - DILUTED
See accompanying Notes to Consolidated Financial Statements
95
Year Ended December 31,
2018
(dollars in thousands, except per share amounts)
2017
2019
$
117,296 $
2,846
111,349 $
2,685
14,854
5,728
2,951
60
143,735
7,932
72
9
1,922
9,935
133,800
3,404
130,396
7,765
7,870
7,127
3,143
(2,400)
3,092
(5)
940
944
167
4,108
32,751
49,345
9,564
6,867
2,813
5,570
3,873
1,423
198
2,633
676
—
8,064
91,026
72,121
5,256
66,865 $
3.33 $
3.33 $
14,459
7,154
1,717
68
137,432
5,887
48
260
1,795
7,990
129,442
5,697
123,745
7,381
8,141
7,402
3,261
629
2,872
(2,663)
(1,337)
787
1,207
3,560
31,240
49,663
6,244
7,352
3,000
5,234
4,211
1,559
942
2,710
772
—
8,630
90,317
64,668
869
63,799 $
3.54 $
3.54 $
20,090,270
18,047,332
72,121 $
18,749
53,372 $
2.66 $
2.66 $
64,668 $
16,371
48,297 $
2.68 $
2.68 $
$
$
$
$
$
$
$
104,258
2,209
11,513
7,905
1,657
51
127,593
4,959
45
66
1,525
6,595
120,998
3,139
117,859
6,780
8,170
7,314
3,398
(315)
4,506
(1,275)
282
(2,146)
1,481
4,976
33,171
51,386
5,939
7,308
3,405
4,850
4,523
1,916
960
2,979
1,293
999
8,499
94,057
56,973
870
56,103
3.10
3.10
18,070,692
56,973
19,679
37,294
2.06
2.06
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NET INCOME
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gains (losses) on securities available-for-sale
Reclassification adjustment for (gains) losses on securities available-for-sale
realized in income
Reclassification adjustment for accretion of net unrealized gain on securities
transferred to held-to-maturity
Unrealized losses on derivative instruments
Reclassification adjustment for net settlements on derivative instruments
Income tax benefit
Total other comprehensive income (loss)
TOTAL COMPREHENSIVE INCOME
See accompanying Notes to Consolidated Financial Statements
96
2019
Year Ended December 31,
2018
(dollars in thousands)
2017
$
66,865 $ 63,799 $ 56,103
12,458
(5,692)
(2,052)
—
2,541
1,275
(393)
(264)
(27)
(698)
(167)
(87)
—
711
12,120
(1,364)
78,985 $ 60,008 $ 54,739
(382)
(83)
(175)
—
(3,791)
$
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Common Stock
Retained
Comprehensive Treasury Stockholders’
Voting Series A Surplus Earnings
Income (Loss)
Stock
Equity
Accumulated
Other
Total
Balance, December 31, 2016
$
Net income
Other comprehensive loss
Cash dividends ($3.16 per share)
Balance, December 31, 2017
Adoption of ASU 2016-01
Net income
Other comprehensive loss
Repurchase of common stock -Series A
(43,180 shares)
Cash dividends ($2.36 per share)
Balance, December 31, 2018
Net income
Other comprehensive income
Reclassification of undistributed S-Corp
earnings
Issuance of common stock -Voting, net of
issuance costs (9,429,794 shares)
Conversion of common stock -Series A to
common stock -Voting
Cancelation of 124,228 shares of treasury
stock
Cash dividends ($12.48 per share)
3 $
—
—
—
3
—
—
—
178 $
—
—
—
178
—
—
—
—
—
3
—
—
—
95
—
—
178
—
—
—
—
(dollars in thousands, except per share data)
989 $
—
(1,364)
—
(375)
(122)
—
(3,791)
294,900 $
56,103
—
(57,069)
293,934
122
63,799
—
32,288 $
—
—
—
32,288
—
—
—
—
—
32,288
—
—
—
(42,621)
315,234
66,865
—
20,472
(20,472)
138,398
—
—
—
—
(4,288)
—
12,120
—
—
—
(2,112) $
—
—
—
(2,112)
—
—
—
(907)
—
(3,019)
—
—
—
—
—
326,246
56,103
(1,364)
(57,069)
323,916
—
63,799
(3,791)
(907)
(42,621)
340,396
66,865
12,120
—
138,493
—
178
(178)
—
Balance, December 31, 2019
$ 275 $
(1)
—
—
—
— $ 190,524 $
(634)
—
(2,384)
(224,956)
134,287 $
—
—
7,832 $
3,019
—
— $
—
(224,956)
332,918
See accompanying Notes to Consolidated Financial Statements
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Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
2019
Year Ended December 31,
2018
(dollars in thousands)
2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
66,865 $
63,799 $
56,103
Depreciation expense
Provision for loan losses
Net amortization of securities
Deferred income tax benefit
Net accretion of discount and deferred loan fees on loans
Net realized loss on sales of securities
Net unrealized loss on equity securities
Net (gain) loss on sales of bank premises and equipment
Net gain on sales of bank premises held for sale
Impairment losses on bank premises held for sale
Net (gain) loss on sales of foreclosed assets
Gain on loan foreclosures
Write-down of foreclosed assets
Amortization of intangibles
Decrease (increase) in mortgage servicing rights
Amortization of subordinated debt purchase accounting adjustment
Mortgage loans originated for sale
Proceeds from sale of mortgage loans
Net gain on sale of mortgage loans
Gain on sale of First Community Title Services, Inc.
Decrease (increase) in accrued interest receivable
(Increase) decrease in other assets
Increase in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits with banks
Proceeds from sales of securities available-for-sale
Proceeds from paydowns, maturities, and calls of securities
Purchase of securities
Net increase in loans
Purchase of restricted stock
Proceeds from redemption of restricted stock
Purchases of bank premises and equipment
Proceeds from sales of bank premises and equipment
Proceeds from sales of bank premises held for sale
Proceeds from sales of foreclosed assets
Capital improvements to foreclosed assets
Cash received from sale of First Community Title Services, Inc.
Net indemnification payments paid to the FDIC
Cash paid for termination of FDIC loss-sharing agreements
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits
Net (decrease) increase in repurchase agreements
Proceeds from Federal Home Loan Bank borrowings
Repayment of Federal Home Loan Bank borrowings
Issuance of common stock
Repurchase of common stock
Cash dividends paid
Net cash used in financing activities
2,709
3,404
3,450
(2,695)
(3,707)
—
5
(29)
(448)
37
(1,048)
—
563
1,423
2,400
66
(150,652)
152,013
(3,092)
(498)
1,349
(602)
17,579
89,092
—
—
201,472
(73,117)
(17,950)
—
294
(2,107)
176
1,039
5,460
(41)
114
—
—
115,340
(19,115)
(1,762)
—
—
138,493
—
(224,956)
(107,340)
3,219
5,697
5,045
—
(5,091)
2,541
122
6
(734)
52
268
(96)
1,165
1,559
(629)
66
(128,514)
133,449
(2,872)
—
(553)
35
1,460
79,994
496
104,303
171,462
(189,412)
(29,375)
(2,374)
2,531
(1,656)
10
2,252
6,851
—
—
—
—
65,088
(59,715)
8,357
—
(29,000)
—
(907)
(42,621)
(123,886)
3,292
3,139
5,921
—
(5,853)
1,275
—
216
—
1,936
(1,727)
(974)
2,419
1,916
315
65
(158,948)
166,417
(4,506)
—
(1,328)
(145)
2,549
72,082
—
51,500
224,110
(355,552)
(15,748)
(171)
4,422
(2,161)
120
—
9,049
—
—
(949)
(4,929)
(90,309)
(21,519)
(1,243)
29,000
(4,000)
—
—
(57,069)
(54,831)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS AT END OF YEAR
See accompanying Notes to Consolidated Financial Statements
97,092
186,879
283,971 $
21,196
165,683
186,879 $
(73,058)
238,741
165,683
$
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HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
2019
Year Ended December 31,
2018
(dollars in thousands)
2017
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest
Cash paid for income taxes
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Transfers of loans to foreclosed assets
Sales of foreclosed assets through loan origination
Transfers of bank premises and equipment to bank premises held for sale
See accompanying Notes to Consolidated Financial Statements
$
$
$
$
$
10,010
880
2,520
2,046
—
$
$
$
$
$
7,826
851
2,518
1,220
—
$
$
$
$
$
6,648
892
10,212
150
2,319
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HBT Financial, Inc. (Company), formerly known as Heartland Bancorp, Inc. until the Company name was changed on
September 13, 2019, provides a full range of banking services to individual and corporate customers through its subsidiary
banks. The Company is subject to competition from other financial and nonfinancial institutions providing financial services in
its customer service area which is primarily rural communities located in central and northeastern Illinois and parts of the
Chicagoland area. Additionally, the Company is subject to the regulations of certain federal and state agencies and
undergoes periodic examinations by those regulatory agencies.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (GAAP) and reporting practices applicable to the banking industry. Significant accounting policies
are summarized below.
On September 13, 2019, the Company effected a twenty-for-one stock split of its issued and outstanding shares of common
stock and its issued and outstanding shares of Series A nonvoting common stock. Accordingly, all share and per share
amounts for all periods presented in these financial statements and notes thereto have been adjusted retroactively, where
applicable, to reflect the stock split.
On October 10, 2019, each share of Series A nonvoting common stock was reclassified and converted into one share of
common stock. Additionally, the Company increased the authorized shares to 150,000,000, of which 125,000,000 shares, par
value of $0.01 per share, are designated as common stock and 25,000,000 shares, par value of $0.01 per share, are
designated as preferred stock.
Initial Public Offering
On September 13, 2019, the Company filed a Registration Statement on Form S-1 with the Securities and Exchange
Commission (SEC). The Registration Statement was declared effective by the SEC on October 10, 2019. The Company
issued and sold 9,429,794 shares of common stock at a price of $16 per share pursuant to that Registration Statement. Total
proceeds received by the Company, net of offering costs, were $138,493,000. The proceeds were used to fund a $170 million
special dividend, or $9.43 per share, to stockholders of record prior to the initial public offering.
The Company qualifies as an “emerging growth company” as defined by the Jumpstart Our Business Startups Act (JOBS
Act). Under the JOBS Act, emerging growth companies may also elect to delay adoption of new or revised accounting
standards until such time as those standards apply to private companies. The Company has elected to use this extended
transition period for complying with new or revised accounting standards and, therefore, the Company will not be subject to
the same new or revised accounting standards as other public companies.
Basis of Consolidation
The consolidated financial statements of HBT Financial, Inc. include the accounts of the Company and its wholly owned bank
subsidiaries, Heartland Bank and Trust Company (Heartland Bank) and State Bank of Lincoln. Heartland Bank and State
Bank of Lincoln are collectively referred to as “the Banks”.
The Company also has five wholly owned subsidiaries, Heartland Bancorp, Inc. Capital Trust B, Heartland Bancorp, Inc.
Capital Trust C, Heartland Bancorp, Inc. Capital Trust D, FFBI Capital Trust I, and National Bancorp Statutory Trust I, which
are not consolidated, in accordance with GAAP, as more fully described in Note 12.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant intercompany transactions and accounts have been eliminated in consolidation.
Unaudited Pro Forma Income Statement Information
Effective October 11, 2019, the Company revoked its S Corporation status and became a taxable entity (C Corporation). As
such any periods prior to October 11, 2019 will only reflect state replacement taxes.
The unaudited pro forma C Corp equivalent income tax expense information gives effect to the income tax expense had the
Company been a C Corporation during the years ended December 31, 2019, 2018, and 2017. The unaudited pro forma
C Corp equivalent net income information, therefore, includes an adjustment for income tax expense as if the Company had
been a C Corporation during the years ended December 31, 2019, 2018, and 2017.
The unaudited pro forma basic and diluted earnings per share information is computed using the unaudited pro forma C Corp
equivalent net income and weighted average shares of common stock outstanding. There were no dilutive instruments
outstanding during the years ended December 31, 2019, 2018, and 2017, therefore, the unaudited pro forma C Corp
equivalent basic and diluted earnings per share amounts are the same.
Sale of First Community Title Services, Inc.
On February 15, 2019, the Company consummated an agreement to sell substantially all assets and liabilities of First
Community Title Services, Inc. to Illinois Real Estate Title Center, LLC, an Illinois limited liability company, for a combination
of cash and an equity interest in Illinois Real Estate Title Center, LLC representing total consideration of approximately
$498,000.
Use of Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America. In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and the
reported results of operations for the periods then ended.
Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant
changes in the near term relate to the determination of the allowance for loan losses and income taxes.
Business and Significant Concentrations of Credit Risk
The Company provides several types of loans to individuals and businesses primarily located in their customer service areas.
Real estate and commercial loans are principal areas of concentration. The Company also strives to meet the borrowing
needs of the consumers in its market areas. Extension of credit is generally limited to the primary trade areas of the
Company. Primary deposit products of the Banks are noninterest-bearing and interest-bearing demand accounts, savings
accounts, money market accounts, and term certificate of deposit accounts.
Cash and Cash Equivalents
For purposes of reporting consolidated cash flows, cash and cash equivalents include cash on hand and amounts due from
banks, all of which have an original maturity within 90 days or less. Cash flows from loans and deposits are reported net.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest-Bearing Time Deposits with Banks
Interest-bearing time deposits with banks are carried at cost.
Debt Securities
Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to
maturity and are carried at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-
sale. Securities available-for-sale are carried at fair value with unrealized gains and losses reported in accumulated other
comprehensive income (loss). Realized gains and losses on securities available-for-sale are included in noninterest income
when applicable and reported as a reclassification adjustment in other comprehensive income (loss). Gains and losses on
sales of securities are determined using the specific identification method on the trade date. The amortization of premiums
and accretion of discounts are recognized in interest income using methods approximating the interest method over the
period to maturity.
Any transfers of debt securities into the held-to-maturity category from the available-for-sale category are made at fair value
at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other
comprehensive income (loss) and in the carrying value of the held-to-maturity securities. Such amounts are amortized over
the period to maturity. There were no such transfers in 2019, 2018 and 2017.
Declines in the fair value of individual securities below their cost that are other-than-temporary result in write-downs of the
individual securities to their fair value. The Company monitors the investment security portfolio for impairment on an
individual security basis and has a process in place to identify securities that could potentially have a credit impairment that is
other-than-temporary. This process involves analyzing the length of time and the extent to which the fair value has been less
than the amortized cost basis, the market liquidity for the security, the financial condition and near-term prospects of the
issuer, expected cash flows, and the intent of the Company to not sell the security or whether it is more likely than not that the
Company will be required to sell the security before its anticipated recovery. A decline in value due to a credit event that is
considered other-than-temporary is recorded as a loss in noninterest income.
Equity Securities
Equity securities with readily determinable fair values are measured at fair value with changes in fair value recognized in
gains (losses) on securities on the statements of income.
The Company has elected to measure its equity securities with no readily determinable fair values at their cost minus
impairment, if any, plus or minus charges resulting from observable price changes in orderly transactions for the identical or a
similar investment of the same issuer.
Restricted Stock
Restricted stock, consisting of Federal Home Loan Bank of Chicago (FHLB) stock, is carried at cost and evaluated for
impairment. The Company’s investment in FHLB stock amounted to $2,425,000 and $2,719,000 as of December 31, 2019
and 2018, respectively.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair
value, as determined by aggregate outstanding commitments from investors or current investor yield. Net unrealized losses, if
any, are recognized through a valuation allowance by charges to income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Company. The carrying
value of mortgage loans sold is reduced by fair value allocated to the associated mortgage servicing rights. Gains or losses
on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the
related mortgage loans sold.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are
reported at their outstanding unpaid principal balances adjusted for charge-offs and the allowance for loan losses, deferred
loan fees or costs on originated loans, and unamortized premiums or discounts on acquired loans.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as
well as premiums and discounts, are deferred and recognized as an adjustment of the related loan yield using the interest
method.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and
in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest
income if it was accrued during the current year and charged-off against the allowance for loan losses if accrued in a
prior year. Amortization of related deferred loan fees or costs is also suspended at this time. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are brought current and future payments are reasonably
assured.
As of December 31, 2019 and 2018, loans to directors, executive officers, principal shareholders and their affiliated entities
(related parties) amounted to $4,162,000 and $830,000, respectively. These loans were made in the ordinary course of
business on substantially the same terms, including interest rates and collateral, as those prevailing for comparable loans
with persons not related to us.
Allowance for Loan Losses
The allowance for loan losses (allowance) is an estimate of loan losses inherent in the Company’s loan portfolio. The
allowance is established through a provision for loan losses which is charged to expense. Additions to the allowance are
expected to maintain the adequacy of the total allowance. Loan losses are charged off against the allowance when the
Company determines the loan balance to be uncollectible. Cash received on previously charged off amounts is recorded as a
recovery to the allowance.
The allowance consists of two primary components, general reserves and specific reserves related to impaired loans. The
general component covers non-impaired loans and is based on historical losses adjusted for qualitative factors. The historical
loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over
the most recent 16‑quarter period. This actual loss experience is adjusted for qualitative factors based on the risks present for
each portfolio segment. These qualitative factors include consideration of the following: levels of and trends in delinquencies
and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any
changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices;
experience, ability, and depth of lending management and other relevant staff; national and local economic trends and
conditions; industry conditions; and effects of changes in credit concentrations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These qualitative factors are inherently subjective and are driven by the repayment risk associated with each portfolio
segment.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable
to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.
Loans determined to be impaired are individually evaluated for impairment. When a loan is impaired, the Company generally
measures impairment based on the fair value of the collateral, but also may use the present value of expected future cash
flows discounted at the original contractual interest rate, when practical.
Under certain circumstances, the Company will provide borrowers relief through loan restructurings. A restructuring of debt
constitutes a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s
financial difficulties grants a concession to the borrower that it would not otherwise consider. Restructured loans typically
present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms.
TDR concessions can include reduction of interest rates, extension of maturity dates, forgiveness of principal or interest due,
or acceptance of other assets in full or partial satisfaction of the debt.
In general, if the Company grants a TDR that involves either the absence of principal amortization or a material extension of
an existing loan amortization period in excess of our underwriting standards, the loan will be placed on nonaccrual status.
However, if a TDR is well secured by an abundance of collateral and the collectability of both interest and principal is
probable, the loan may remain on accrual status. A nonaccrual TDR in full compliance with the payment requirements
specified in the loan modification for at least six months may return to accrual status, if the collectability of both principal and
interest is probable. All TDRs are individually evaluated for impairment.
The 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 $500,000 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.
Watch: A Watch loan is not a classified asset, but reflects a borrower that 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
borrower or of the collateral pledged, if any. Loans classified as Substandard 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Doubtful: A Doubtful loan has all the weaknesses inherent in those classified as Substandard, with the added
characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable.
The Company maintains a separate general valuation allowance for each portfolio segment. These portfolio segments
include 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, with risk characteristics described as follows:
Commercial and Industrial: Consists of loans typically granted for working capital, asset acquisition and other business
purposes. These loans are underwritten primarily based on the borrower’s cash flow with most loans secondarily
supported by collateral. Most commercial and industrial loans are secured by the assets being financed or other business
assets, such as accounts receivable, inventory, and equipment, and are typically supported by personal guarantees of
the owners. Cash flows and collateral values may fluctuate based on general economic conditions, specific industry
conditions and specific borrower circumstances.
Agricultural and Farmland: Consists of loans typically secured by farmland, agricultural operating assets, or a
combination of both, and are generally underwritten to existing cash flows of operating agricultural businesses. Debt
repayment is provided by business cash flows. Economic trends influenced by unemployment rates and other key
economic indicators are not closely correlated to the credit quality of agricultural and farmland loans. The credit quality of
these loans is most correlated to changes in prices of corn and soybeans and, to a lesser extent, weather, which has
been partially mitigated by federal crop insurance programs.
Commercial Real Estate - Owner Occupied: Consists of loans secured by commercial real estate that is both owned
and occupied by the same or a related borrower. These loans are primarily underwritten based on the cash flow of the
business occupying the property. As with commercial and industrial loans, cash flows and collateral values may fluctuate
based on general economic conditions, specific industry conditions, and specific borrower circumstances.
Commercial Real Estate - Non-owner Occupied: Consists of loans secured by commercial real estate for which the
primary source of repayment is the sale or rental cash flows from the underlying collateral. Commercial real estate – non-
owner occupied are underwritten based primarily on the historic or projected cash flow from the underlying collateral.
Adverse economic developments or an overbuilt market typically impact commercial real estate projects. Trends in rental
and vacancy rates of commercial properties impact the credit quality of these loans.
Multi-family: Consists of loans secured by five or more unit apartment buildings. Multi-family loans may be affected by
demographic and population trends, unemployment or underemployment, and deteriorating market values of real estate.
Construction and Land Development: Consists of loans for speculative and pre-sold construction projects for
developers intending to either sell upon completion or hold for long term investment, as well as construction of projects to
be owner occupied. In addition, loans in this segment generally possess a higher inherent risk of loss than other portfolio
segments due to risk of non-completion, changes in budgeted costs, and changes in market forces during the term of the
construction period.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
One-to-four Family Residential: Consists of loans secured by one-to-four family residences, including both first and
junior lien mortgage loans for owner occupied and non-owner occupied properties and home equity lines of credit. The
degree of risk in residential mortgage lending depends on the local economy, including the local real estate market and
unemployment rates.
Municipal, Consumer and Other: Loans to municipalities are primarily federally tax-exempt. Consumer loans include
loans to individuals for consumer purposes and typically consist of small balance loans. Economic trends determined by
unemployment rates and other key economic indicators are closely correlated to the credit quality of the consumer loans.
Loans to other financial institutions, as well as leases, are also included.
Although management believes the allowance to be adequate, ultimate losses may vary from its estimates. At least quarterly,
the Board of Directors reviews the adequacy of the allowance, including consideration of the relevant risks in the portfolio,
current economic conditions and other factors. If the Board of Directors and management determine that changes are
warranted based on those reviews, the allowance is adjusted. In addition, the Company’s regulators review the adequacy of
the allowance and may require additions to the allowance based on their judgment about information available at the time of
their examinations.
Loans Acquired with Deteriorated Credit Quality
Loans acquired that have evidence of deterioration in credit quality since origination and for which it is probable, at
acquisition, that the Company will be unable to collect all contractually required payments receivable, are initially recorded at
fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. Loans are
evaluated by management at the time of purchase to determine if there is evidence of deterioration in credit quality since
origination. Loans where there is evidence of deterioration of credit quality since origination may be aggregated and
accounted for as a pool of loans if the loans being aggregated have common risk characteristics. The difference between the
undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” is recognized as
interest income over the life of the loan. Contractually required payments for interest and principal that exceed the
undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” are not recognized as a yield adjustment.
Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in
expected cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of
the difference from nonaccretable to accretable yield with a positive impact on interest income on a prospective basis. If the
Company does not have the information necessary to reasonably estimate cash flows to be expected, it may use the cost
recovery method or cash basis method of income recognition.
Off-Balance Sheet Credit Related Financial Instruments
In the ordinary course of business, the Banks have entered into commitments to extend credit, including commitments under
credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when
they are funded.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Other Intangible Assets
Goodwill represents the excess of the original cost over the fair value of assets acquired and liabilities assumed. Goodwill is
not amortized but instead is subject to an annual impairment evaluation. The Company has selected December 31 as the
date to perform the annual impairment test. At December 31, 2019 and 2018, the Company’s evaluations of goodwill
indicated that goodwill was not impaired. Other identifiable intangible assets consist of core deposit intangible assets with
definite useful lives which are being amortized using straight-line and accelerated methods over 10 years. The Company will
periodically review the status of core deposit intangible assets for any events or circumstances which may change the
recoverability of the underlying basis.
Loan Servicing
The Company periodically sells mortgage loans on the secondary market with servicing retained. For sales of mortgage
loans, a portion of the cost of originating the loan is allocated to the servicing right based on fair value. Fair value is based on
market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model
that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that
market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income, prepayment speeds, and default rates and losses. Mortgage
servicing rights are carried at fair value on the consolidated balance sheets and changes in fair value are recorded in
mortgage servicing rights fair value adjustment on the consolidated statements of income.
Bank Premises and Equipment
Land is carried at cost. Bank premises and equipment are carried at cost less accumulated depreciation. Depreciation is
computed over the estimated useful lives of the individual assets using straight-line and accelerated methods.
Bank Premises Held for Sale
Bank premises held for sale is carried at the lower of cost or fair value less estimated costs to sell. The bank premises are not
depreciated while classified as held for sale.
During the year ended December 31, 2017, the Company closed certain branch locations. As of December 31, 2019 and
2018, the related branch buildings classified as held for sale totaled $121,000 and $749,000, respectively. During the years
ended December 31, 2019, 2018, and 2017, there were impairment losses of $37,000, $52,000, and $1,936,000,
respectively, included in gains (losses) on other assets on the consolidated statements of income.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair
value less estimated costs to sell.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FDIC Indemnification Asset and True-up Liability
As a part of the Bank of Illinois (BOI) acquisition in 2010 and the Western Springs National Bank and Trust (WSNBT)
acquisition in 2011, the Bank entered into loss-sharing agreements with the FDIC covering realized losses on loans and
foreclosed assets. The BOI agreement included single family residential and non-single family residential loss-share
agreements, while the WSNBT agreement only included a non-single family residential loss-share agreement. The single-
family loss-share agreement had an original term of ten years and the non-single family residential loss-share agreement had
an original term of eight years. The loss-sharing assets were measured separately from the loan portfolio because they were
not contractually embedded in the loans and were not transferable with the loans should the Company choose to dispose of
them. Fair values at the acquisition date were estimated based on projected cash flows for loss-sharing reimbursements and
based on the credit adjustments estimated for each loan pool and the loss-sharing percentages. The loss-sharing assets
were also separately measured from the related foreclosed real estate. Although these assets were contractual receivables
from the FDIC, there were no contractual interest rates.
On October 27, 2017, the loss-sharing agreements with the FDIC were terminated. As part of the termination agreement, the
Company paid cash of $4,929,000 to the FDIC and also incurred a write-down of $459,000 which represented the remaining
carrying value of the FDIC indemnification asset.
Wealth Management Assets and Fees
Assets of the wealth management department of the Banks are not included in the consolidated balance sheets as they are
not assets of the Company or Banks. Fee income generated from wealth management services is recorded in the
consolidated statements of income as a source of noninterest income.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less estimated
cost to sell at the date of foreclosure, establishing a new cost basis. Any write-down based on the fair value of the asset at
the date of acquisition is charged to the allowance for loan losses. If the fair value of the asset less estimated cost to sell
exceeds the recorded investment in the loan at the date of foreclosure, the increase in value is charged to current year
operations unless there has been a prior charge-off, in which case a recovery to the allowance for loan losses is recorded.
Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less estimated cost to sell. Write-downs of foreclosed assets subsequent to foreclosure are
charged to current year operations as are gains and losses from sale of foreclosed assets, as well as expenses to maintain
and hold foreclosed assets.
Employee Benefit Plans
The Company sponsors a profit sharing plan under which the Company may contribute, at the discretion of the Board of
Directors, a discretionary amount to all participating employees for the plan year. Participating employees are those
employees in service on the valuation date who were employed on the last day of the plan year then ended, were on leave of
absence on the last day of the plan year then ended, or any participant whose service was terminated during the plan year
then ended due to retirement, disability, or death. A 401(k) feature also allows the Bank to make discretionary matching
contributions in an amount up to 5% of compensation contributed by employees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Executive Retirement Plan
Heartland Bank has a supplemental executive retirement plan (SERP) that provides retirement incentives for certain
executive employees. The liabilities for these awards are included in other liabilities in the consolidated balance sheets. This
is an unfunded plan. In June 2019, the Company approved termination of the SERP agreements, and each participant will
receive a lump sum payment equal to the present value of any remaining installment payments, payable in June 2020.
Stock Based Compensation
The Company recognizes compensation cost over the requisite service period, if any, which is generally defined as the
vesting period. For awards classified as equity, compensation cost is based on the fair value of the awards on the grant date.
For awards classified as liabilities, compensation cost also includes subsequent remeasurements of the fair value of the
awards until the award is settled. The Company’s policy is to recognize forfeitures as they occur.
Transfers of Financial Assets and Participating Interests
Transfers of an entire financial asset or a participating interest in an entire financial asset are accounted for as sales when
control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the
assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them before their maturity.
The transfer of a participating interest in an entire financial asset must also meet the definition of a participating interest. A
participating interest in a financial asset has all of the following characteristics: (1) from the date of transfer, it must represent
a proportionate (pro rata) ownership interest in the financial asset, (2) from the date of transfer, all cash flows received,
except any cash flows allocated as any compensation for servicing or other services performed, must be divided
proportionately among participating interest holders in the amount equal to their share ownership, (3) the rights of each
participating interest holder must have the same priority, and (4) no party has the right to pledge or exchange the entire
financial asset unless all participating interest holders agree to do so.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Through October 10, 2019, the Company, with the consent of its then current stockholders, elected to be taxed under
sections of federal and state income tax law as an "S Corporation" which provides that, in lieu of Company income taxes,
except for state replacement taxes, the stockholders separately account for their pro rata shares of the Company’s items of
income, deductions, losses and credits. As a result of this election, no income taxes, other than state replacement taxes,
have been recognized in the accompanying consolidated financial statements. No provision has been made for any amounts
which may be advanced or paid as dividends to the stockholders to assist them in paying their personal taxes on the income
from the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective October 11, 2019, the Company voluntarily revoked its S Corporation status and became a taxable entity (C
Corporation). As such, any periods prior to October 11, 2019 will only reflect state replacement taxes. In connection with the
conversion of tax status, the Company recognized a deferred tax asset of approximately $0.5 million and an income tax
benefit of approximately $0.5 million.
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
With regard to uncertain tax matters, the Company recognizes in the consolidated financial statements the impact of a tax
position taken, or expected to be taken, if it is more likely than not that the position will be sustained on audit based on the
technical merit of the position. Management has analyzed the tax positions taken by the Company and concluded as of
December 31, 2019 and 2018, there are no uncertain tax positions taken or expected to be taken that require recognition of a
liability or disclosure in the consolidated financial statements. When applicable, the Company recognizes interest accrued
related to unrecognized tax benefits and penalties in operating expenses.
The Company files consolidated federal and state income tax returns. The Company is no longer subject to federal or state
income tax examinations for years prior to 2016.
Derivative Financial Instruments
As part of the Company’s asset/liability management, the Company uses interest rate swaps (swaps) to hedge various
exposures or to modify interest rate characteristics of various balance sheet accounts. Derivatives that are used as part of the
asset/liability management process are linked to specific assets or liabilities, or pools of assets or liabilities, and have high
correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period.
All derivatives are recognized on the consolidated balance sheet at their fair value. On the date the derivative contract is
entered into, the Company may designate the derivative as a hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or liability "cash flow" hedge. Changes in the fair value of a
derivative that is highly effective as - and that is designated and qualifies as - a cash-flow hedge are recorded in other
comprehensive income (loss), until earnings are affected by the variability of cash flows (e.g., when periodic settlements on a
variable-rate asset or liability are recorded in earnings).
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-
management objective and strategy for undertaking various hedged transactions. This process includes linking all derivatives
that are designated as cash-flow hedges to specific assets and liabilities on the balance sheet or forecasted transactions.
The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that
are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is
determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the
Company discontinues hedge accounting prospectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company discontinues hedge accounting prospectively when (a) it is determined that the derivative is no longer highly
effective in offsetting changes in the cash flows of a hedged item (including forecasted transactions); (b) the derivative
expires or is sold, terminated, or exercised; (c) the derivative is dedesignated as a hedge instrument, because it is unlikely
that a forecasted transaction will occur; or (d) management determines that designation of the derivative as a hedge
instrument is no longer appropriate.
When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will
continue to be carried on the consolidated balance sheet at its fair value, and gains and losses that were accumulated in
other comprehensive income (loss) will be recognized immediately in earnings. In all other situations in which hedge
accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with subsequent changes in its
fair value recognized in current-period earnings.
Comprehensive Income (Loss)
Accounting principles generally require that recognized revenue, expenses, gains, and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and losses on securities available-for-sale and
interest rate swap agreements designated as cash flow hedges, are reported as a separate component of the equity section
of the consolidated balance sheets, such items, along with net income, are components of comprehensive income (loss).
Fair Value Measurements
The Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy based on the priority of
the inputs to the valuation technique used to determine fair value. The fair value hierarchy gives the highest priority to quoted
prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If
the inputs used in the determination of the fair value measurement fall within different levels of the hierarchy, the
categorization is based on the lowest level input that is significant to the fair value measurement. Assets and liabilities valued
at fair value are categorized based on the inputs to the valuation techniques as follows:
Level 1 - Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company
has the ability to access as of the measurement date.
Level 2 - Inputs that are significant other observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3 - Inputs that are unobservable inputs that reflect a Company’s own assumptions about the assumptions that
market participants would use in pricing as asset or liability.
Subsequent to initial recognition, the Company may re-measure the carrying value of assets and liabilities measured on a
nonrecurring basis to fair value. Adjustments to fair value usually result when certain assets are impaired. Such assets are
written down from their carrying amounts to their fair value.
Accounting standards allow entities the irrevocable option to elect to measure certain financial instruments and other items at
fair value for the initial and subsequent measurement on an instrument-by-instrument basis. The Company adopted the policy
and has not elected to measure any existing financial instruments at fair value, except for mortgage servicing rights; however,
it may elect to measure newly acquired financial instruments at fair value in the future.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue from Contracts with Customers
ASC Topic 606, Revenue from Contracts with Customers, requires an entity to recognize revenue in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve this, the
Company takes the following steps: identify the contract(s) with a customer; identify the performance obligations in the
contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and
recognize revenue when (or as) the Company satisfies a performance obligation. The non-interest revenue streams that are
considered to be in the scope of this new guidance are discussed below.
Card income: Consists of debit and credit card interchange fees. For debit and credit card transactions, the
Company considers the merchant as the customer for interchange revenue with the performance obligation being
satisfied when the cardholder purchases goods or services from the merchant. Interchange revenue is recognized as
the services are provided. Payment is typically received daily.
Service charges on deposit accounts: Consists of deposit related fees such as account analysis fees, monthly
service fees, and other related fees. The Company’s performance obligation is ongoing and either party may cancel
at any time. These fees are generally recognized as the services are rendered on a monthly basis. Payment is
typically received monthly.
Wealth management fees: Consists of revenue from the management and advisement of client assets and trust
administration. The Company’s performance obligation is generally satisfied over time, and the fees are
recognized monthly. Payment is typically received quarterly or annually.
Title insurance activity: Consists of fees related to real estate sale closings, title search fees, and title insurance
premiums with First Community Title Services, Inc. acting as an agent. The Company’s performance obligations are
generally satisfied and payment is typically received at the time a real estate transaction is finalized.
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average shares of common stock outstanding
during the year. There were no dilutive instruments outstanding during 2019, 2018, and 2017 therefore, diluted earnings per
share is the same as basic earnings per share.
Segment Reporting
The Company’s operations consist of one reportable segment called community banking. The operations of the non-bank
subsidiaries of the Company primarily support the operations of the Banks. While the Company’s management monitors both
bank subsidiaries’ operations and profitability separately, these subsidiaries have been aggregated into one reportable
segment due to the similarities in products and services, customer base, operations, profitability measures, and economic
characteristics.
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 consolidated financial statements were issued.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since December 2019, a strain of coronavirus (“COVID-19”) has spread globally including in the areas in which the Company
and its customers operate. The COVID-19 pandemic has caused disruption of regional and global economic activity,
emergency actions by the Federal Reserve and other U.S. governmental authorities, significant declines in interest rates and
equity market valuations, heightened volatility in the financial markets, the shutdown of countries’ borders and directives for
residents within the Company’s primary market area to stay at home or in their place of residence and for certain business to
suspend some or all of their business activities. These actions have affected our operations and are expected to impact our
financial results in 2020. As of the date of this filing, we anticipate that we will take actions to support our customers in a
manner consistent with current guidance provided by Federal banking regulatory authorities. Future developments with
respect to COVID-19 are highly uncertain and cannot be predicted and new information may emerge concerning the severity
of the outbreak and the actions to contain the outbreak or treat its impact, among others. The extent to which the COVID-19
outbreak will impact our business, results of operations and financial condition will depend on future developments, which are
highly uncertain and cannot be predicted, including the scope and duration of the outbreak and additional actions taken by
governmental authorities to contain the financial and economic impact of the COVID-19 outbreak. Other national health
concerns, including the outbreak of other contagious diseases or pandemics may adversely affect us in the future.
Recent Accounting Pronouncements
On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016‑02, Leases (Topic 842). Under the
new guidance in this ASU, lessees will be required to recognize the following for all leases (with the exception of short-term
leases) at the commencement date: (1) a lease liability, which is a lessee`s obligation to make lease payments arising from a
lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to
use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely
unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee
accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance also simplified the
accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.
Lessees will no longer be provided with a source of off-balance sheet financing. On January 1, 2019, the Company adopted
this standard without a material impact on the Company’s results of operations or financial condition. See Note 20 for future
minimum lease payments.
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016‑13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016‑13 requires the measurement of all
expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments
used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In
addition, ASU 2016‑13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial
assets with credit deterioration. ASU 2016‑13 is effective for years beginning after December 15, 2022, including interim
periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that this
standard will have on the consolidated results of operations and financial position.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2017, the FASB issued ASU 2017‑04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for
Goodwill Impairment. This ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test.
Under the ASU, a company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its
carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the
reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The
amendments in this update are effective for annual or any interim goodwill impairment tests in years beginning after
December 15, 2022, including interim periods within those years. Early adoption is permitted for goodwill impairment tests
performed on testing dates after January 1, 2017. This standard is not expected to have a material impact on the Company’s
consolidated results of operations or financial position.
In August 2018, the FASB issued ASU 2018‑13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the
Disclosure Requirements for Fair Value Measurement. ASU 2018‑13 removes, modifies, and adds certain disclosure
requirements on fair value measurements. This guidance is effective for annual reporting periods beginning after
December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. This standard is not
expected to have a material impact on the Company’s consolidated results of operations or financial position.
NOTE 2 – RESTRICTED CASH AND DUE FROM BANKS
The Federal Reserve Bank required the Banks to maintain balances on reserve of approximately $23,100,000 and
$22,037,000 as of December 31, 2019 and 2018, respectively.
NOTE 3 – SECURITIES
The carrying balances of the securities were as follows:
Securities available-for-sale
Securities held-to-maturity
Equity securities:
Readily determinable fair value
No readily determinable fair value
Total securities
December 31,
2019
December 31,
2018
(dollars in thousands)
592,404 $
88,477
679,526
121,715
3,241
1,148
685,270 $
3,081
180
804,502
$
$
The Company has elected to measure the equity securities with no readily determinable fair values at cost minus impairment,
if any, plus or minus changes resulting from observable price changes for identical or similar securities of the same issuer.
During the year ended December 31, 2019, the Company recognized losses of $165,000 on equity securities with no readily
determinable fair value based on observable price changes of an identical investment.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair values of securities available-for-sale, with gross unrealized gains and losses, are as follows:
December 31, 2019
Available-for-sale:
U.S. government agency
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Corporate
Total
December 31, 2018
Available-for-sale:
U.S. government agency
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Private-label
Corporate
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(dollars in thousands)
Fair Value
$
49,113 $
131,241
529 $
2,503
(27) $
(6)
49,615
133,738
198,184
133,730
72,239
$ 584,507 $
2,780
1,516
1,180
8,508 $
(286)
(292)
—
200,678
134,954
73,419
(611) $ 592,404
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(dollars in thousands)
Fair Value
$
46,977 $
161,957
250 $
761
(361) $
(1,268)
46,866
161,450
235,903
151,878
254
87,118
$ 684,087 $
788
285
2
207
234,303
150,081
256
86,570
2,293 $ (6,854) $ 679,526
(2,388)
(2,082)
—
(755)
The amortized cost and fair value of securities held-to-maturity, with gross unrealized gains and losses, are as follows:
December 31, 2019
Held-to-maturity:
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Total
December 31, 2018
Held-to-maturity:
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Total
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(dollars in thousands)
Fair Value
$ 45,239 $
1,340 $
— $ 46,579
19,072
24,166
$ 88,477 $
161
775
2,276 $
(170)
(54)
19,063
24,887
(224) $ 90,529
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(dollars in thousands)
Fair Value
$
73,176 $
1,149 $
(42) $
74,283
—
177
22,194
25,029
1,326 $ (1,535) $ 121,506
(998)
(495)
23,192
25,347
$ 121,715 $
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019 and 2018, the Banks had securities with a carrying value of $284,895,000 and $291,404,000,
respectively, which were pledged to secure public and trust deposits, securities sold under agreements to repurchase, and for
other purposes required or permitted by law.
The Company has no direct exposure to the State of Illinois, but approximately 51% of the obligations of local municipalities
portfolio consists of securities issued by municipalities located in Illinois as of December 31, 2019. Approximately 88% of
such securities were general obligation issues as of December 31, 2019.
The amortized cost and fair value of securities available-for-sale and securities held-to-maturity, as of December 31, 2019, by
contractual maturity, 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
Amortized
Cost
Fair Value
Amortized
Cost
(dollars in thousands)
Fair Value
Due in 1 year or less
Due after 1 year through 5 years
Due after 5 years through 10 years
Due after 10 years
Mortgage-backed:
Agency residential
Agency commercial
Total
$
49,357 $
115,487
81,515
6,234
752 $
49,527 $
758
117,484 31,309 32,238
83,392 11,504 11,799
1,784
6,369
1,674
198,184
133,730
200,678 19,072 19,063
134,954 24,166 24,887
$ 584,507 $ 592,404 $ 88,477 $ 90,529
Sales of securities available-for-sale were as follows during the years ended December 31:
Proceeds from sales
Gross realized gains
Gross realized losses
2019
$
Year Ended December 31,
2018
(dollars in thousands)
104,303 $
281
(2,822)
—
—
—
2017
51,500
—
(1,275)
Gains (losses) on securities were as follows during the years ended December 31:
Net realized losses on sales
Net unrealized gains (losses) on equities:
Readily determinable fair value
No readily determinable fair value
Gains (losses) on securities
116
2019
Year Ended December 31,
2018
(dollars in thousands)
(2,541) $
—
160
(165)
(5)
(122)
—
(2,663) $
2017
(1,275)
—
—
(1,275)
$
$
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present gross unrealized losses and fair value of investments, aggregated by investment category and
length of time that individual securities have been in a continuous unrealized loss position, as of December 31:
December 31, 2019
Available-for-sale:
U.S. government agency
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Total
Held-to-maturity:
Mortgage-backed:
Agency residential
Agency commercial
Total
December 31, 2018
Available-for-sale:
U.S. government agency
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Corporate
Total
Held-to-maturity:
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Total
Investments in a Continuous Unrealized Loss Position
Less than 12 Months
12 Months or More
Total
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
$
(26) $ 18,865 $
894
(6)
(1) $
—
1,998 $
—
(27) $
(6)
20,863
894
(dollars in thousands)
(108) 25,563
(100) 20,056
(240) $ 65,378 $
27,296
(178)
(192)
15,704
(371) $ 44,998 $
52,859
(286)
(292)
35,760
(611) $ 110,376
(30) $
(47)
(77) $
2,516 $
7,016
9,532 $
(140) $
(7)
(147) $
9,002 $
599
9,601 $
(170) $
(54)
(224) $
11,518
7,615
19,133
$
$
$
Less than 12 Months
Investments in a Continuous Unrealized Loss Position
12 Months or More
Total
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
Unrealized
Loss
Fair Value
$
(302) $
(230)
19,079 $
31,034
(59) $
(1,038)
7,938 $
59,702
(361) $
(1,268)
27,017
90,736
(dollars in thousands)
(299)
(262)
(263)
140,831
117,361
59,788
$ (1,356) $ 147,173 $ (5,498) $ 288,560 $ (6,854) $ 435,733
99,967
81,899
39,054
(2,388)
(2,082)
(755)
(2,089)
(1,820)
(492)
40,864
35,462
20,734
$
(32) $
4,166 $
(10) $
1,856 $
(42) $
6,022
(59)
(67)
(158) $
4,046
8,910
(939)
(428)
17,122 $ (1,377) $
(998)
17,564
10,413
(495)
29,833 $ (1,535) $
21,610
19,323
46,955
$
As of December 31, 2019, there were 59 securities in an unrealized loss position for a period of twelve months or more, and
35 securities in an unrealized loss position for a period of less than twelve months. These unrealized losses are primarily a
result of fluctuations in interest rates in the bond market. In analyzing an issuer’s financial condition, management considers
whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies
have occurred, and industry analysts’ reports. Management believes that all declines in value of these securities are deemed
to be temporary.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Major categories of loans as of December 31, 2019 and 2018 are summarized as follows:
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
Municipal, consumer, and other
Loans, before allowance for loan losses
Allowance for loan losses
Loans, net of allowance for loan losses
December 31,
2019
December 31,
2018
(dollars in thousands)
307,175 $
207,776
231,162
579,757
179,073
224,887
313,580
120,416
2,163,826
(22,299)
2,141,527 $
360,501
209,875
255,074
533,910
135,925
237,275
313,108
98,589
2,144,257
(20,509)
2,123,748
$
$
The following tables detail activity in the allowance for loan losses for the years ended December 31:
Commercial Agricultural
Commercial Commercial
Real Estate
Non-owner
Real Estate
Owner
and
and
Industrial
Construction One-to-four
and Land
Family
Municipal,
Consumer,
and
Other
Total
Farmland Occupied Occupied Multi-Family Development Residential
Allowance for loan losses:
Balance, December 31, 2016
Provision for loan losses
Charge-offs
Recoveries
Balance, December 31, 2017
Provision for loan losses
Charge-offs
Recoveries
Balance, December 31, 2018
Provision for loan losses
Charge-offs
Recoveries
Balance, December 31, 2019
$
$
4,870 $
2,133
(1,780)
188
5,411
(532)
(1,446)
315
3,748
1,139
(886)
440
4,441 $
3,455 $
(1,067)
(3)
—
2,385
265
—
—
2,650
146
(30)
—
2,766 $
1,622 $
(118)
(32)
38
1,510
3,294
(2,352)
54
2,506
(376)
(407)
56
1,779 $
118
(dollars in thousands)
1,282 $
(132)
(153)
—
997
109
(194)
—
912
153
(41)
—
1,024 $
2,701 $
(243)
(940)
958
2,476
264
(237)
141
2,644
1,110
(111)
20
3,663 $
1,983 $
1,474
(503)
27
2,981
993
(58)
260
4,176
(1,640)
(9)
450
2,977 $
2,720 $
376
(787)
414
2,723
984
(1,415)
490
2,782
513
(1,105)
350
2,540 $
1,075 $
716
(818)
309
1,282
320
(783)
272
1,091
2,359
(684)
343
3,109 $
19,708
3,139
(5,016)
1,934
19,765
5,697
(6,485)
1,532
20,509
3,404
(3,273)
1,659
22,299
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the recorded investments in loans and the allowance for loan losses by category as of
December 31:
December 31, 2019
Loan balances:
Collectively evaluated
for impairment
Individually evaluated
for impairment
Acquired with
deteriorated credit
quality
Total
Allowance for loan
losses:
Collectively evaluated
for impairment
Individually evaluated
for impairment
Acquired with
deteriorated credit
quality
Total
December 31, 2018
Loan balances:
Collectively evaluated
for impairment
Individually evaluated
for impairment
Acquired with
deteriorated credit
quality
Total
Allowance for loan
losses:
Collectively evaluated
for impairment
Individually evaluated
for impairment
Acquired with
deteriorated credit
quality
Total
Commercial
and
Industrial
Commercial Commercial
Agricultural Real Estate Real Estate
Non-owner
Owner
and
Construction One-to-four Consumer,
Municipal,
and Land
Family
Farmland Occupied Occupied Multi-Family Development Residential
(dollars in thousands)
and
Other
Total
$
294,006 $
192,722 $
211,744 $
561,277 $
176,273 $
217,708 $
291,624 $
106,448 $
2,051,802
10,733
13,966
10,927
3,398
1,324
3,782
11,349
13,872
69,351
$
2,436
307,175 $
1,088
207,776 $
8,491
231,162 $
15,082
579,757 $
1,476
179,073 $
3,397
224,887 $
10,607
313,580 $
96
120,416 $
42,673
2,163,826
$
1,926 $
2,576 $
1,486 $
3,591 $
1,019 $
2,283 $
1,684 $
931 $
15,496
2,170
105
270
70
—
567
822
2,176
6,180
$
345
4,441 $
85
2,766 $
23
1,779 $
2
3,663 $
5
1,024 $
127
2,977 $
34
2,540 $
2
3,109 $
623
22,299
Commercial
and
Industrial
Commercial Commercial
Agricultural Real Estate Real Estate
Non-owner
Owner
and
Construction One-to-four Consumer,
Municipal,
and Land
Family
Farmland Occupied Occupied Multi-Family Development Residential
(dollars in thousands)
and
Other
Total
$
350,435 $
197,414 $
226,068 $
504,368 $
132,379 $
229,626 $
287,173 $
98,059 $
2,025,522
7,488
11,295
19,202
7,820
1,678
3,331
12,837
416
64,067
$
2,578
360,501 $
1,166
209,875 $
9,804
255,074 $
21,722
533,910 $
1,868
135,925 $
4,318
237,275 $
13,098
313,108 $
114
98,589 $
54,668
2,144,257
$
2,188 $
2,611 $
1,423 $
2,566 $
640 $
2,024 $
1,464 $
1,024 $
13,940
1,554
39
1,066
73
267
1,714
1,265
67
6,045
$
6
3,748 $
—
2,650 $
17
2,506 $
5
2,644 $
5
912 $
438
4,176 $
53
2,782 $
—
1,091 $
524
20,509
119
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present loans individually evaluated for impairment by category of loans as of December 31:
December 31, 2019
With an allowance recorded:
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
Municipal, consumer, and other
Total
With no related allowance:
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
Municipal, consumer, and other
Total
Total:
Unpaid
Principal
Balance
Recorded
Related
Average
Recorded
Interest
Income
Investment Allowance Investment Recognized
(dollars in thousands)
$
4,292 $
590
830
99
—
3,679
3,401
9,138
4,292 $
590
830
99
—
3,679
3,390
9,111
$ 22,029 $ 21,991 $
$
6,438 $
6,441 $
13,376
10,097
3,299
1,324
103
7,959
4,761
$ 47,386 $ 47,360 $
13,369
10,089
3,297
1,328
104
7,986
4,775
2,170 $
5,275 $
105
464
270
874
70
101
—
—
567
3,988
822
3,414
9,284
2,176
6,180 $ 23,400 $
— $
6,744 $
—
14,826
—
10,190
—
3,465
—
1,344
—
107
—
8,360
4,874
—
— $ 49,910 $
152
12
43
7
—
171
79
396
860
206
824
483
131
9
4
240
104
2,001
358
836
526
138
9
175
319
500
2,861
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
Municipal, consumer, and other
Total
$ 10,730 $ 10,733 $
13,966
10,927
3,398
1,324
3,782
11,349
13,872
$ 69,415 $ 69,351 $
13,959
10,919
3,396
1,328
3,783
11,387
13,913
2,170 $ 12,019 $
15,290
105
11,064
270
3,566
70
1,344
—
4,095
567
11,774
822
2,176
14,158
6,180 $ 73,310 $
120
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
With an allowance recorded:
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
Municipal, consumer, and other
Total
With no related allowance:
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
Municipal, consumer, and other
Total
Total:
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
Municipal, consumer, and other
Total
Unpaid
Principal
Balance
Recorded
Related
Average
Recorded
Interest
Income
Investment Allowance Investment Recognized
(dollars in thousands)
$
2,833 $
406
2,323
103
1,362
3,136
3,022
230
2,833 $
406
2,322
103
1,362
3,135
3,008
231
$ 13,415 $ 13,400 $
$
4,651 $
4,655 $
10,889
16,880
7,717
316
196
9,829
185
$ 50,717 $ 50,667 $
10,888
16,891
7,715
316
198
9,874
184
$
7,484 $
7,488 $
11,295
19,202
7,820
1,678
3,331
12,837
416
$ 64,132 $ 64,067 $
11,294
19,214
7,818
1,678
3,334
12,896
414
121
1,554 $
39
1,066
73
267
1,714
1,265
67
4,274 $
566
3,574
640
1,472
2,593
3,377
302
6,045 $ 16,798 $
5,093 $
— $
8,815
—
12,217
—
7,110
—
355
—
528
—
10,706
—
—
297
— $ 45,121 $
1,554 $
39
1,066
73
267
1,714
1,265
67
9,367 $
9,381
15,791
7,750
1,827
3,121
14,083
599
6,045 $ 61,919 $
106
16
67
7
66
161
82
5
510
59
526
384
147
17
3
168
5
1,309
165
542
451
154
83
164
250
10
1,819
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the recorded investment in loans by category based on current payment and accrual status as of
December 31:
December 31, 2019
Current
Past Due
Past Due Nonaccrual
Accruing Interest
30 - 89 Days 90+ Days
Total
Loans
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
Municipal, consumer, and other
Total
December 31, 2018
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
Municipal, consumer, and other
Total
$
$
$
$
301,975 $
201,519
228,218
579,626
177,696
224,716
307,712
119,898
2,141,360 $
(dollars in thousands)
— $
558 $
—
—
—
941
—
131
—
—
—
140
75
1,329
247
26
3,346 $
307,175
4,642 $
207,776
6,257
231,162
2,003
579,757
—
179,073
1,377
224,887
31
313,580
4,464
245
120,416
101 $ 19,019 $ 2,163,826
Accruing Interest
30 - 89 Days
90+ Days
Current
Past Due
Past Due Nonaccrual
Total
Loans
(dollars in thousands)
122 $ 1,747 $
—
108
184
538
—
1,058
196
1,361
—
82
600
2,154
37
380
360,501
209,875
255,074
533,910
135,925
237,275
313,108
98,589
5,803 $ 2,764 $ 15,876 $ 2,144,257
2,151 $
1,976
4,654
611
—
395
5,915
174
356,481 $
207,791
249,698
532,241
134,368
236,798
304,439
97,998
2,119,814 $
122
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present total loans by category based on their assigned risk ratings determined by management as of
December 31:
December 31, 2019
Pass
Watch
Substandard Doubtful
Total
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
Municipal, consumer, and other
Total
December 31, 2018
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
Municipal, consumer, and other
Total
(dollars in thousands)
267,645 $
180,735
198,710
531,694
175,807
217,120
287,036
106,063
27,114 $
12,267
21,745
46,092
1,771
3,582
13,546
479
1,964,810 $ 126,596 $
12,416 $
14,774
10,707
1,971
1,495
4,185
12,998
13,874
72,420 $
307,175
— $
207,776
—
231,162
—
579,757
—
179,073
—
224,887
—
313,580
—
120,416
—
— $ 2,163,826
Pass
Watch
Substandard Doubtful
Total
(dollars in thousands)
315,815 $
185,598
217,017
486,859
131,583
227,775
282,704
97,668
35,176 $
12,116
17,845
39,231
2,468
5,663
14,599
497
1,945,019 $ 127,595 $
9,510 $
12,161
20,212
7,820
1,874
3,837
15,805
424
71,643 $
— $
360,501
—
209,875
—
255,074
—
533,910
—
135,925
—
237,275
—
313,108
98,589
—
— $ 2,144,257
$
$
$
$
123
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the financial effect of troubled debt restructurings for the years ended December 31:
Year Ended December 31, 2019
Commercial and industrial
Agricultural and farmland
Commercial real estate - owner occupied
One-to-four family residential
Total
Recorded Investment
Number Pre-Modification Post-Modification Reserves
Charge-offs
and Specific
(dollars in thousands)
3 $
2
1
1
7 $
516 $
392
170
21
1,099 $
516 $
392
170
21
1,099 $
—
—
—
—
—
Recorded Investment
Charge-offs
and Specific
Reserves
Year Ended December 31, 2018
Number Pre-Modification
Post-Modification
Commercial and industrial
Agricultural and farmland
Commercial real estate - owner occupied
One-to-four family residential
Total
Year Ended December 31, 2017
Commercial and industrial
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
One-to-four family residential
Total
(dollars in thousands)
2 $
1
2
4
9 $
296 $
171
5,173
1,230
6,870 $
296 $
171
5,189
1,255
6,911 $
157
—
47
480
684
Recorded Investment
Number Pre-Modification Post-Modification Reserves
Charge-offs
and Specific
(dollars in thousands)
4 $
4
4
4
16 $
659 $
613
2,954
350
4,576 $
659 $
613
2,281
350
3,903 $
165
—
674
52
891
During the years ended December 31, 2019, 2018, and 2017, all troubled debt restructurings were the result of a payment
concession.
The following table presents the recorded investment of troubled debt restructurings which had subsequent payment defaults
within 12 months following the modification as of December 31:
Commercial and industrial
Agricultural and farmland
Commercial real estate - owner occupied
One-to-four family residential
Total
December 31,
2019
December 31,
2018
(dollars in thousands)
December 31,
2017
$
$
— $
98
—
—
98 $
47 $
166
172
542
927 $
—
—
—
—
—
For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due as to interest or principal
or were on nonaccrual status subsequent to restructuring.
124
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019 and 2018, the Company had $9,315,000 and $13,362,000 of troubled debt restructurings,
respectively. Restructured loans are evaluated for impairment quarterly as part of the Company’s determination of the
allowance for loan losses. There were no material commitments to lend additional funds to debtors owing receivables whose
terms have been modified in troubled debt restructurings.
Changes in the accretable yield for loans acquired with deteriorated credit quality were as follows for the years ended
December 31:
Beginning balance
Reclassification from non-accretable difference
Accretion income
Ending balance
NOTE 5 – LOAN SERVICING
$
$
2019
Year Ended December 31,
2018
(dollars in thousands)
2,723 $
2,092
(2,714)
2,101 $
2,101 $
822
(1,261)
1,662 $
2017
3,647
4,061
(4,985)
2,723
Mortgage loans serviced for others, not included in the accompanying consolidated balance sheets, amounted to
$1,152,535,000 and $1,229,953,000 as of December 31, 2019 and 2018, respectively. Activity in mortgage servicing rights is
as follows for years ended December 31:
Beginning balance
Capitalized servicing rights
Fair value adjustment
Ending balance
125
$ 10,918 $ 10,289 $ 10,604
1,049
1,018
(3,418)
(1,364)
8,518 $ 10,918 $ 10,289
885
(256)
$
2019
Year Ended December 31,
2018
(dollars in thousands)
2017
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost less accumulated depreciation as of December 31 as follows:
Land, buildings, and improvements
Furniture, fixtures, and equipment
Less accumulated depreciation
Total bank premises and equipment, net
Depreciation expense by category for the years ended December 31 is as follows:
2019
2018
(dollars in thousands)
75,878 $
21,200
97,078
43,091
53,987 $
75,168
20,265
95,433
40,697
54,736
$
$
Buildings and improvements
Furniture, fixtures, and equipment
Total depreciation expense
NOTE 7 – FORECLOSED ASSETS
Foreclosed assets activity is as follows for the years ended December 31:
Beginning balance
Transfers from loans
Capitalized improvements
Proceeds from sales
Sales through loan origination
Net gain (loss) on sales
Direct write-downs
Ending balance
2019
Year Ended December 31,
2018
(dollars in thousands)
2017
$
$
1,813 $
896
2,709 $
2,107 $
1,112
3,219 $
1,908
1,384
3,292
2019
Year Ended December 31,
2018
(dollars in thousands)
2017
9,559 $ 16,545 $ 16,224
10,212
2,518
2,520
—
—
41
(9,049)
(6,851)
(5,460)
(1,220)
(2,046)
(150)
1,727
1,048
(268)
(1,165)
(563)
(2,419)
9,559 $ 16,545
5,099 $
$
$
Gains (losses) on foreclosed assets includes the following for the years ended December 31:
2019
Direct write-downs
Net gain (loss) on sales
Guarantee reimbursements
Gain on settlement
Gain on foreclosure
Gains (losses) on foreclosed assets
$
$
126
Year Ended December 31,
2018
(dollars in thousands)
(1,165) $
(268)
—
—
96
(1,337) $
(563) $
1,048
80
375
—
940 $
2017
(2,419)
1,727
—
—
974
282
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying value of foreclosed one-to-four family residential real estate property as of December 31, 2019 and 2018, was
$1,037,000 and $2,558,000, respectively. As of December 31, 2019, there were 10 one-to-four family residential real estate
loans in the process of foreclosure totaling approximately $588,000. As of December 31, 2018, there were 14 residential real
estate loans in the process of foreclosure totaling approximately $1,097,000.
NOTE 8 – CORE DEPOSIT INTANGIBLE ASSETS
Core deposit intangible assets as of December 31 are as follows:
2019
2018
Gross carrying amount
Accumulated amortization
Core deposit intangible assets, net
$
$
(dollars in thousands)
21,718 $
(17,688)
4,030 $
21,718
(16,265)
5,453
Amortization of core deposit intangible assets for the years subsequent to December 31, 2019 is expected to be as follows
(dollars in thousands):
Year ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total
NOTE 9 – DEPOSITS
$
$
1,232
1,047
852
330
316
253
4,030
The Company’s interest-bearing deposits are summarized below as December 31:
Interest-bearing demand
Money market
Savings
Time
Total interest-bearing deposits
December 31, 2019 December 31, 2018
$
$
(dollars in thousands)
814,639 $
477,765
438,927
356,408
2,087,739 $
856,919
427,730
421,698
424,747
2,131,094
Money market deposits include $14,309,000 and $20,512,000 of reciprocal transaction deposits as of December 31, 2019
and 2018, respectively. Time deposits include $3,538,000 and $4,895,000 of reciprocal time deposits as of December 31,
2019 and 2018, respectively.
The aggregate amounts of time deposits in denominations of $250,000 or more amounted to $44,754,000 and $36,875,000
as of December 31, 2019 and 2018, respectively. The aggregate amounts of time deposits in denominations of $100,000 or
more amounted to $130,293,000 and $153,717,000 as of December 31, 2019 and 2018, respectively.
127
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2019, the scheduled maturities of time deposits are as follows (dollars in thousands):
Year ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total
$
$
257,937
58,929
23,423
8,926
7,023
170
356,408
Deposits of related parties amounted to $11,949,000 and $12,717,000 as of December 31, 2019 and 2018, respectively.
The components of interest expense on deposits for the years ended December 31 are as follows:
Interest-bearing demand
Money market
Savings
Time
Total interest expense on deposits
2019
$
$
$
Year Ended December 31,
2018
(dollars in thousands)
1,378
685
283
3,541
5,887
$
1,474
1,837
278
4,343
7,932
2017
908
704
293
3,054
4,959
$
$
NOTE 10 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
All repurchase agreements are sweep instruments. The securities underlying the agreements as of December 31, 2019 and
2018 were under the Company’s control in safekeeping at third-party financial institutions, and included securities available-
for-sale.
Information pertaining to securities sold under agreements to repurchase as of December 31 is as follows:
2019
2018
Balance at end of year
Weighted average rate as of end of year
Fair value of securities underlying the agreements
Carrying value of securities underlying the agreements
NOTE 11 – BORROWINGS
$
$
$
(dollars in thousands)
44,433 $
0.20 %
57,760 $
57,760 $
46,195
0.12 %
61,092
61,092
There were no Federal Home Loan Bank of Chicago (FHLB) borrowings outstanding as of December 31, 2019 and 2018.
Available borrowings from the FHLB are secured by FHLB stock held by the Company and pledged security in the form of
qualifying loans. The total amount of loans pledged as of December 31, 2019 and 2018 was $548,229,000 and
$538,537,000, respectively. As of December 31, 2019 and 2018, loans pledged also served as collateral for credit exposure
of approximately $355,000 associated with the Banks’ participation in the FHLB’s Mortgage Partnership Finance Program.
128
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Banks also have available a line of credit from the FHLB with available borrowings based on the collateral pledged.
There was no outstanding balance under the line of credit as of December 31, 2019 and 2018. The line, when drawn upon, is
due on demand and bears interest at a variable rate.
State Bank of Lincoln also has available a line of credit from the Federal Reserve Bank of Chicago (FRB) with available
borrowings based on the collateral pledged. As of December 31, 2019 and 2018, the carrying value of securities pledged
amounted to $515,000 and $490,000, respectively. There was no outstanding balance under the line of credit as of
December 31, 2019 and 2018. The line, when drawn upon, is due on demand and bears interest at a variable rate.
NOTE 12 – SUBORDINATED DEBENTURES
Five subsidiary business trusts of the Company have issued floating rate capital securities (“capital securities”) which are
guaranteed by the Company.
The Company owns all of the outstanding stock of the five subsidiary business trusts. The trusts used the proceeds from the
issuance of their capital securities to buy floating rate junior subordinated deferrable interest debentures (“debentures”)
issued by the Company. These debentures are the only assets of the trusts and the interest payments from the debentures
finance the distributions paid on the capital securities. The debentures are unsecured and rank junior and subordinate in the
right of payment to all senior debt of the Company.
The trusts are not consolidated in the Company’s financial statements.
The carrying value of subordinated debentures are summarized as follows:
Heartland Bancorp, Inc. Capital Trust B
Heartland Bancorp, Inc. Capital Trust C
Heartland Bancorp, Inc. Capital Trust D
FFBI Capital Trust I
National Bancorp Statutory Trust I
Total
December 31, 2019 December 31, 2018
$
$
(dollars in thousands)
10,310 $
10,310
5,155
7,217
4,591
37,583 $
10,310
10,310
5,155
7,217
4,525
37,517
The National Bancorp Statutory Trust I debenture was assumed through a business combination and has a contractual
obligation of $5,773,000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The interest rates on the subordinated debentures are variable, reset quarterly, and are equal to the three-month LIBOR, as
determined on the LIBOR Determination Date immediately preceding each Distribution Payment Date specific to each
subordinated debenture, plus a fixed percentage. The interest rates and maturities of the subordinated debentures are
summarized as follows:
Heartland Bancorp, Inc. Capital Trust B
Heartland Bancorp, Inc. Capital Trust C
Heartland Bancorp, Inc. Capital Trust D
FFBI Capital Trust I
National Bancorp Statutory Trust I
Variable
Interest Rate
December 31,
2019
December 31,
2018
Interest Rate at
LIBOR plus 2.75 %
LIBOR plus 1.53
LIBOR plus 1.35
LIBOR plus 2.80
LIBOR plus 2.90
4.74 %
3.42
3.24
4.79
4.79
5.19 %
4.32
4.14
5.24
5.69
Maturity
Date
April 6, 2034
June 15, 2037
September 15, 2037
April 6, 2034
December 31, 2037
The distribution rate payable on the debentures is cumulative and payable quarterly in arrears. The Company has the right,
subject to events in default, to defer payments of interest on the debentures at any time by extending the interest payment
period for a period not exceeding 10 quarterly periods with respect to each deferral period, provided that no extension period
may extend beyond the redemption or maturity date of the debentures. The capital securities are subject to mandatory
redemption upon payment of the debentures and carry an interest rate identical to that of the related debenture. The
debentures maturity dates may be shortened if certain conditions are met, or at any time within 90 days following the
occurrence and continuation of certain changes in either tax treatment or the capital treatment of the debentures or the
capital securities. If the 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 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 December 31, 2019 and 2018, 100% of the trust
preferred securities qualified as Tier 1 capital under the final rule adopted in March 2005.
NOTE 13 – 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 Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using
derivative financial instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk
associated with the Company’s variable-rate borrowings and variable-rate loans.
The derivatives and hedge accounting guidance requires that the Company recognize all derivative financial instruments as
either assets or liabilities at fair value in the consolidated balance sheets. In accordance with this guidance, the Company
designated certain interest rate swaps on variable-rate borrowings and variable-rate loans as cash flow hedges. The gain or
loss on interest rate swaps designated as cash flow hedging instruments are 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.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the years ended December 31, 2017 and 2018 and the three months ended March 31, 2019, the Company had an
interest rate swap contract with a notional amount of $10,000,000 designated as a cash flow hedge on variable-rate loans.
Beginning April 1, 2019, this hedging relationship was no longer considered highly effective, and the Company discontinued
hedge accounting. In accordance with hedge accounting guidance, the net unrealized gain associated with the discontinued
hedging relationship, recorded within accumulated other comprehensive income, will be reclassified into earnings as the
hedged forecasted transactions affect earnings, through April 7, 2020. On June 25, 2019, the Company cancelled the interest
rate swap agreement and received $174,000 to settle the financial instrument. As of December 31, 2019, the remaining
unrealized gain recognized as a component of accumulated other comprehensive income was $52,000.
As of December 31, 2019, the Company also had interest rate swap contracts with a total notional amount of $17,000,000
designated as a cash flow hedge on variable-rate borrowings. As of December 31, 2019, these interest rate swap contracts
had contractual maturities between 2024 and 2025. As of December 31, 2019, the Company had cash pledged of $710,000,
held on deposit at counterparties.
The Company also entered into interest rate swap contracts with several borrowers on variable-rate loans, on which the
Company has offsetting interest rate swap contracts. These interest rate swap contracts with borrowers have a total notional
value of $138,356,000 and $112,947,000 as of December 31, 2019 and 2018, respectively, and the offsetting interest rate
swap contracts entered into by the Company have a total notional value of $138,356,000 and $112,947,000 as of
December 31, 2019 and 2018, respectively. As of December 31, 2019, the interest rate swap contracts with borrowers on
variable-rate loans had contractual maturities between 2022 and 2042. As of December 31, 2019 and 2018, the Company
had $8,713,000 and $589,000, respectively, of securities pledged and held in safekeeping at the counterparty. While these
interest rate swap derivatives generally worked 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.
As of December 31, the fair values of the Company’s derivative instrument assets and liabilities related to interest rate swap
contracts are summarized as follows:
Designated as cash flow hedges:
Fair value recorded in other assets
Fair value recorded in other liabilities
Total
Not designated as hedging instruments:
Fair value recorded in other assets
Fair value recorded in other liabilities
Total
December 31, 2019 December 31, 2018
(dollars in thousands)
$
$
$
$
— $
(676)
(676) $
8,642 $
(8,642)
— $
151
—
151
3,074
(3,074)
—
131
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, the effect of interest rate contracts designated as cash flow hedges on the consolidated
statements of income are summarized as follows:
Location of gross gain (loss) reclassified
from accumulated other
comprehensive income to income
Amounts of gross gain (loss)
reclassified from accumulated
other comprehensive income
Year Ended December 31,
2019
2018
2017
Designated as cash flow hedges:
Taxable loan interest income
Subordinated debentures interest expense
Total
$
$
116
(29)
87
$
(dollars in thousands)
175
—
175
$
$
$
275
(108)
167
For the years ended December 31, 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:
Year Ended December 31,
2019
2018
2017
Not designated as hedging instruments:
Gross gains
Gross losses
Net gains (losses)
$
$
13,537
(13,500)
37
NOTE 14 – ACCUMULATED OTHER COMPREHENSIVE INCOME
$
(dollars in thousands)
1,758
(1,758)
—
$
$
$
1,468
(1,468)
—
The following table presents the activity and accumulated balances for components of other comprehensive income (loss) for
the years ended December 31:
Unrealized Gains (Losses)
on Securities
Available-for-Sale Held-to-Maturity Derivatives
Total
$
Balance, December 31, 2016
Other comprehensive income (loss) before reclassifications
Reclassifications
Other comprehensive income (loss)
Balance, December 31, 2017
Adoption of ASU 2016-01
Other comprehensive income (loss) before reclassifications
Reclassifications
Other comprehensive loss
Balance, December 31, 2018
Other comprehensive income (loss) before reclassifications
Reclassifications
Other comprehensive income (loss), before tax
Income tax expense (benefit)
Other comprehensive income (loss), after tax
Balance, December 31, 2019
$
(511) $
(2,052)
1,275
(777)
(1,288)
(122)
(5,692)
2,541
(3,151)
(4,561)
12,458
—
12,458
(762)
13,220
8,659 $
(dollars in thousands)
897 $
—
(393)
(393)
504
—
—
(382)
(382)
122
—
(264)
(264)
(11)
(253)
(131) $
603 $
(27)
(167)
(194)
409
—
(83)
(175)
(258)
151
(698)
(87)
(785)
62
(847)
(696) $
989
(2,079)
715
(1,364)
(375)
(122)
(5,775)
1,984
(3,791)
(4,288)
11,760
(351)
11,409
(711)
12,120
7,832
The amounts reclassified from accumulated other comprehensive income (loss) for unrealized gains (losses) on securities
available-for-sale are included in gain (loss) on securities in the accompanying consolidated statements of income.
132
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amounts reclassified from accumulated other comprehensive income (loss) for unrealized gains on securities held-to-
maturity are included in securities interest income in the accompanying consolidated statements of income.
The amounts reclassified from accumulated other comprehensive income (loss) for the fair value of derivative instruments
represent net interest payments received or made on derivatives designated as cash flow hedges. See Note 13 for additional
information.
NOTE 15 – INCOME TAXES
Effective October 11, 2019, the Company voluntarily revoked its S Corporation status and became a taxable entity (C
Corporation). As such, any periods prior to October 11, 2019 will only reflect an effective state income tax rate. In connection
with the conversion of tax status, the Company recognized a deferred tax asset of $534,000 and an income tax benefit of
$534,000.
In recording the impact of the conversion to a C Corporation, the Company recorded a deferred income tax expense of
$2,741,000 related to the unrealized gains (losses) on securities and derivatives, through the income statement in
accordance with ASC 740-20-45-8; therefore, the amount shown in other comprehensive income has not been reduced by
the above expense. This difference will remain in accumulated other comprehensive income until the underlying securities
are sold or mature and the underlying cash flow hedging relationships terminate in accordance with the portfolio approach
allowed under ASC 740.
Allocation of income tax expense between current and deferred portions for the years ended December 31 is as follows:
Current
Federal
State
Total current
Deferred
Federal
State
Change in tax status
Total deferred
Income tax expense
2019
2018
(dollars in thousands)
2017
$
4,849 $
3,102
7,951
(1,437)
(724)
(534)
(2,695)
5,256 $
$
— $
869
869
—
—
—
—
869 $
—
870
870
—
—
—
—
870
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense differs from the statutory federal rate for the years ended December 31 due to the following:
Amount
2019
Percentage Amount Percentage Amount Percentage
2018
2017
Federal income tax, at statutory rate
Increase (decrease) resulting from:
State taxes, net of federal benefit
Change in tax status
Other
Income tax expense
$ 3,933
5.5 % $
—
— %$
—
(dollars in thousands)
2,212
(534)
(355)
$ 5,256
869
3.1
—
(0.8)
(0.5)
—
7.3 % $ 869
870
1.3
—
—
—
—
1.3 %$ 870
The components of the net deferred tax asset as of December 31, 2019 are as follows (dollars in thousands):
Deferred tax assets
Allowance for loan losses
Compensation related
Nonaccrual interest
Foreclosed assets
Goodwill
Other
Total deferred tax assets
Deferred tax liabilities
Fixed asset depreciation
Mortgage servicing rights
Other purchase accounting adjustments
Intangible assets
Prepaid assets
Net unrealized gain on securities available-for-sale
Other
Total deferred tax liabilities
Net deferred tax asset
$
$
— %
1.5
—
—
1.5 %
6,309
5,859
858
574
531
1,282
15,413
4,201
2,428
1,356
841
504
2,251
426
12,007
3,406
Prior to the Company becoming a taxable entity (C Corporation) on October 11, 2019, the Company’s deferred tax assets
and liabilities were not considered material.
NOTE 16 – EMPLOYEE BENEFIT PLANS
During the years ended December 31, 2019, 2018, and 2017, the Company’s profit-sharing plan contribution expense
amounted to $1,223,000, $1,109,000, and $920,000, respectively. Matching contributions vest to employees ratably over a
six-year period.
The Company is partially self-insured for medical claims filed by its employees. As of December 31, 2019 and 2018, the
Company’s maximum aggregate liability under the plan was $6,194,000 and $6,017,000, respectively. The individual stop
loss coverage was $130,000 per covered person each year. As of December 31, 2019 and 2018, there were 566 and 570,
respectively, participants in the plan. During the years ended December 31, 2019, 2018, and 2017, the Company paid out
claims and administrative service fees of approximately $5,638,000, $6,139,000, and $6,178,000, respectively.
134
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company maintained a supplemental executive retirement plan (the SERP) for certain key executive officers. The SERP
benefit payments were scheduled to be paid in equal monthly installments over 30 years. In June 2019, the Company
approved termination of the SERP agreements, and each participant will receive a lump sum payment equal to the present
value of any remaining installment payments, payable in June 2020. As of December 31, 2019 and 2018, the deferred
compensation liability for the SERP was $12,789,000 and $9,179,000, respectively. During the years ended December 31,
2019, 2018, and 2017, the Company recognized deferred compensation expense for the SERP of $4,291,000, $505,000, and
$514,000, respectively.
NOTE 17 – 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 (vii) 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.
Restricted Stock Units
A restricted stock unit grants a participant the right to receive one share of common stock, following the completion of the
requisite service period. Units are classified as equity. Compensation cost is based on the Company’s stock price on the
grant date.
On January 28, 2020, the Company granted 70,400 restricted stock units to certain key employees which vest in four equal
annual installments beginning on February 1, 2021. On January 28, 2020, the Company also granted 2,750 restricted stock
units to non-employee directors which vest on February 1, 2021.
Stock Appreciation Rights
A stock appreciation right grants a participant the right to receive an amount of cash, the value of which equals the
appreciation in the Company’s stock price between the grant date and the exercise date. Stock appreciation rights units are
classified as liabilities. Prior to becoming a public entity, the liability was based on the intrinsic value of the stock appreciation
rights, calculated using the grant date assigned value and an independent appraisal of the Company’s stock price that was
subject to approval by the Board of Directors. Since becoming a public entity on October 11, 2019, the liability was based on
an option-pricing model used to estimate the fair value of the stock appreciation rights.
On September 1, 2019, the Company granted 110,160 stock appreciation rights to certain key employees, at a grant date
assigned value of $25.75 per stock appreciation right, subsequently adjusted to $16.32, reflecting a decrease per stock
appreciation right equal to the $9.43 per share special dividend paid to shareholders of record prior to the initial public
offering. Of the stock appreciation rights granted on September 1, 2019, 79,560 stock appreciation rights were fully vested on
the grant date and 30,600 stock appreciation rights vest in four equal annual installments beginning on September 1, 2020.
As of December 31, 2019 and 2018, the liability recorded for outstanding stock appreciation rights was $409,000 and
$1,884,000, respectively. During the years ended December 31, 2019, 2018, and 2017, the Company recognized $343,000,
$540,000, and $291,000 as compensation expense, respectively. As of December 31, 2019, unrecognized compensation
cost related to non-vested stock appreciation rights units was $140,000. As of December 31, 2018, there was no
unrecognized compensation cost related to non-vested stock-based compensation agreements.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2019, the liability recorded for previously exercised stock appreciation rights was $1,512,000, which will
be paid in five remaining equal annual installments beginning in 2020. As of December 31, 2018, the liability recorded for
previously exercised units was $176,000 and was paid in 2019.
A summary of the status of stock appreciation rights as of December 31, 2019 and 2018, and changes during the years
ended December 31, 2019, 2018, and 2017 is as follows:
Outstanding, December 31, 2016
Granted
Exercised
Forfeited
Outstanding, December 31, 2017
Granted
Exercised
Forfeited
Outstanding, December 31, 2018
Granted
Exercised
Forfeited
Outstanding, December 31, 2019
Exercisable, December 31, 2019
Exercisable, December 31, 2018
Stock
Appreciation
Rights
116,280 $
—
—
—
116,280 $
—
(24,480)
—
91,800 $
110,160
(91,800)
—
110,160 $
79,560 $
91,800 $
Weighted Average
Grant Date
Assigned Value
5.66
—
—
—
5.66
—
5.43
—
5.73
16.32
5.73
—
16.32
16.32
5.73
A further summary of outstanding stock appreciation rights as of December 31, 2019, is as follows:
Weighted Average
Remaining
Range of Grant Date Assigned Values
$ 16.32
NOTE 18 – REGULATORY MATTERS
Outstanding Exercisable Contractual Term
79,560
110,160
9.7 years
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules)
became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over
a multi-year schedule, and fully phased in by January 1, 2019. As allowed under the new regulations, the Banks and
Company elected to exclude accumulated other comprehensive income, including unrealized gains and losses on securities,
in the computation of regulatory capital.
136
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The ability of the Company to pay dividends to its stockholders is dependent upon the ability of the Banks to pay dividends to
the Company. The Banks are subject to certain statutory and regulatory restrictions on the amount it may pay in dividends.
Under the Basel III regulations, a capital conservation buffer calculation will phase in over five years which limits allowable
bank dividends if regulatory capital ratios fall below specific thresholds. As of December 31, 2019 and 2018, the capital
conservation buffer was 2.5% and 1.875%, respectively.
HBT Financial, Inc. (on a consolidated basis) and the Banks 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 consodliated financial statements of HBT Financial, Inc. and the Banks. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, HBT Financial, Inc. and the Banks must meet specific capital
guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to
bank holding companies.
Management believes, as of December 31, 2019 and 2018, that HBT Financial, Inc. and the Banks each met all capital
adequacy requirements to which they are subject.
The actual and required capital amounts and ratios of HBT Financial, Inc. (consolidated) and the Banks are as follows:
December 31, 2019
Total Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Common Equity Tier 1 Capital (to Risk
Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Tier 1 Capital (to Average Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Actual
Amount
Ratio
For Capital
Adequacy
Purposes
Amount
(dollars in thousands)
Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$ 356,994
315,516
35,390
14.54 % $ 196,358
180,071
14.02
16,104
17.58
8.00 %
8.00
8.00
N/A
$ 225,088
20,130
N/A
10.00 %
10.00
$ 334,695
295,385
33,222
13.64 % $ 147,268
135,053
13.12
12,078
16.50
6.00 %
6.00
6.00
N/A
$ 180,071
16,104
N/A
8.00 %
8.00
$ 298,277
295,385
33,222
12.15 % $ 110,451
101,290
13.12
9,058
16.50
4.50 %
4.50
4.50
N/A
$ 146,307
13,084
N/A
6.50 %
6.50
$ 334,695
295,385
33,222
10.38 % $ 129,027
115,281
10.25
13,531
9.82
4.00 %
4.00
4.00
N/A
$ 144,102
16,914
N/A
5.00 %
5.00
137
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018
Total Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Common Equity Tier 1 Capital (to Risk
Weighted Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Tier 1 Capital (to Average Assets)
Consolidated HBT Financial, Inc.
Heartland Bank
State Bank of Lincoln
Actual
Amount
Ratio
For Capital
Adequacy
Purposes
Amount
(dollars in thousands)
Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
$ 372,472
332,391
38,059
14.99 % $ 198,730
184,127
14.44
14,488
21.02
8.00 %
8.00
8.00
N/A
$ 230,159
18,110
N/A
10.00 %
10.00
$ 351,963
313,406
36,535
14.17 % $ 149,047
138,095
13.62
10,866
20.17
6.00 %
6.00
6.00
N/A
$ 184,127
14,488
N/A
8.00 %
8.00
$ 315,611
313,406
36,535
12.71 % $ 111,785
103,572
13.62
8,150
20.17
4.50 %
4.50
4.50
N/A
$ 149,603
11,772
N/A
6.50 %
6.50
$ 351,963
313,406
36,535
10.80 % $ 130,393
113,668
11.03
14,319
10.21
4.00 %
4.00
4.00
N/A
$ 142,085
17,899
N/A
5.00 %
5.00
NOTE 19 – 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 are summarized in Note 1. There were no transfers between
levels during the years ended December 31, 2019 and 2018. 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.
138
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present the balances of the assets measured at fair value on a recurring basis as of December 31:
December 31, 2019
Securities available-for-sale:
U.S. government agency
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Corporate
Equity securities with readily determinable fair values
Mortgage servicing rights
Derivative financial assets
Derivative financial liabilities
December 31, 2018
Securities available-for-sale:
U.S. government agency
Municipal
Mortgage-backed:
Agency residential
Agency commercial
Private-label
Corporate
Equity securities with readily determinable fair values
Mortgage servicing rights
Derivative financial assets
Derivative financial liabilities
Level 1
Inputs
Level 2
Inputs
(dollars in thousands)
Level 3
Inputs
Total
Fair Value
$
— $
—
49,615 $
133,738
— $
—
49,615
133,738
—
—
—
3,241
—
—
—
200,678
134,954
73,419
—
—
8,642
9,318
—
—
—
—
8,518
—
—
200,678
134,954
73,419
3,241
8,518
8,642
9,318
Level 1
Inputs
Level 2
Inputs
Level 3
Inputs
Total
Fair Value
(dollars in thousands)
$
— $
—
46,866 $
161,450
— $
—
46,866
161,450
—
—
—
—
3,081
—
—
—
234,303
150,081
256
86,570
—
—
3,225
3,074
—
—
—
—
—
10,918
—
—
234,303
150,081
256
86,570
3,081
10,918
3,225
3,074
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, 2018 to December 31, 2019.
139
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Investment Securities
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
securities available-for-sale is recorded through an adjustment to the consolidated statement of comprehensive income. The
change in fair value of equity securities with readily determinable fair values is recorded through an adjustment to the
consolidated statement of income.
Derivative Financial Instruments
Interest rate swap agreements are carried at fair value as determined by dealer valuation models. Based on the inputs used,
the derivative financial instruments subjected to recurring fair value adjustments are classified as Level 2. For derivative
financial instruments designated as a hedging instruments, the change in fair value is recorded through an adjustment to the
consolidated statement of comprehensive income. For derivative financial instruments not designated as a hedging
instruments, the change in fair value is recorded through an adjustment to the consolidated statement of income.
Mortgage Servicing Rights
The Company has elected to record its mortgage servicing rights at fair value. Mortgage servicing rights do not trade in an
active market with readily observable prices. Accordingly, the Company determines the fair value of mortgage servicing rights
by estimating the fair value of the future cash flows associated with the mortgage loans being serviced as calculated by an
independent third party. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but
are not limited to, prepayment speeds and discount rates. Due to the nature of the valuation inputs, mortgage servicing rights
are classified in Level 3 of the fair value hierarchy. The change in fair value is recorded through an adjustment to the
consolidated statement of income.
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present additional information about the unobservable inputs used in the fair value measurement of the
mortgage servicing rights (dollars in thousands):
Range
(Weighted Average)
7.0% to 68.5% (12.3%)
9.0% to 11.0% (9.0%)
Range
(Weighted Average)
7.5% to 87.6% (8.9%)
December 31, 2019
Mortgage servicing rights
Fair Value Valuation Technique Unobservable Inputs
$
Constant pre-
8,518
Discounted cash
flows
payment rates (CPR)
Discount rate
December 31, 2018
Mortgage servicing rights
Fair Value
$ 10,918
Nonrecurring Basis
Valuation Technique
Discounted cash
flows
Unobservable Inputs
Constant pre-
payment rates (CPR)
Discount rate
9.0% to 11.0% (9.0%)
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 as of December 31:
December 31, 2019
Loans held for sale
Collateral-dependent impaired loans
Bank premises held for sale
Foreclosed assets
December 31, 2018
Loans held for sale
Collateral-dependent impaired loans
Bank premises held for sale
Foreclosed assets
Loans Held for Sale
$
Level 1
Inputs
Level 2
Inputs
(dollars in thousands)
Level 3
Inputs
Total
Fair Value
— $ 4,531 $
—
—
—
—
—
—
15,811
121
5,099
— $
4,531
15,811
121
5,099
$
Level 1
Inputs
Level 2
Inputs
(dollars in thousands)
Level 3
Inputs
Total
Fair Value
— $ 2,800 $
—
—
—
—
—
—
— $ 2,800
7,355
749
9,559
7,355
749
9,559
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.
141
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Collateral-dependent Impaired Loans
In accordance with the provisions of the loan impairment guidance, impairment was measured for loans which it is probable
that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The
fair value of collateral-dependent impaired loans is estimated based on the fair value of the underlying collateral supporting
the loan. Collateral-dependent impaired loans require classification in the fair value hierarchy. Impaired loans include loans
acquired with deteriorated credit quality. Collateral values are estimated using Level 3 inputs based on customized
discounting criteria.
Bank Premises Held for Sale
Bank premises held for sale are recorded at the lower of cost or fair value, less estimated selling costs, at the date classified
as held for sale. Values are estimated using Level 3 inputs based on appraisals and customized discounting criteria. The
carrying value of bank premises held for sale is not re-measured to fair value on a recurring basis but is subject to fair value
adjustments when the carrying value exceeds the fair value, less estimated selling costs.
Foreclosed Assets
Foreclosed assets are recorded at fair value based on property appraisals, less estimated selling costs, at the date of the
transfer. Subsequent to the transfer, foreclosed assets are carried at the lower of cost or fair value, less estimated selling
costs. Values are estimated using Level 3 inputs based on appraisals and customized discounting criteria. The carrying value
of foreclosed assets is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the
carrying value exceeds the fair value, less estimated selling costs.
Collateral-Dependent Impaired Loans, Bank Premises Held for Sale, and Foreclosed Assets
The estimated fair value of collateral-dependent impaired loans, bank premises held for sale, and foreclosed assets is based
on the appraised fair value of the collateral, less estimated costs to sell. Collateral-dependent impaired loans, bank premises
held for sale, and foreclosed assets are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or a similar evaluation as the starting point for determining fair value and then
considers other factors and events in the environment that may affect the fair value. Appraisals or a similar evaluation of the
collateral underlying collateral-dependent loans and foreclosed assets are obtained at the time a loan is first considered
impaired or a loan is transferred to foreclosed assets. Appraisals or a similar evaluation of bank premises held for sale are
obtained when first classified as held for sale. Appraisals or similar evaluations are obtained subsequently as deemed
necessary by management but at least annually on foreclosed assets and bank premises held for sale. Appraisals are
reviewed for accuracy and consistency by management. Appraisals are performed by individuals selected from the list of
approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of
marketability and estimated costs to sell. These discounts and estimates are developed by management by comparison to
historical results.
142
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value
measurements (dollars in thousands).
December 31, 2019
Collateral-dependent impaired
loans
Bank premises held for sale
Foreclosed assets
December 31, 2018
Collateral-dependent impaired
loans
Bank premises held for sale
Foreclosed assets
Other Fair Value Methods
Fair
Value
Valuation
Technique
Unobservable Inputs
Range
(Weighted Average)
$ 15,811
121
5,099
Appraisal of collateral
Appraisal
Appraisal
Appraisal adjustments
Appraisal adjustments
Appraisal adjustments
20% to 40% (25%)
7% (7%)
7% (7%)
Fair
Value
Valuation
Technique
Unobservable Inputs
Range
(Weighted Average)
$
7,355
749
9,559
Appraisal of collateral
Appraisal
Appraisal
Appraisal adjustments
Appraisal adjustments
Appraisal adjustments
20% to 40% (25%)
7% (7%)
7% (7%)
The following methods and assumptions were used by the Company in estimating fair value disclosures of its other financial
instruments. There were no changes in the methods and significant assumptions used to estimate the fair value of these
financial instruments.
Cash and Cash Equivalents
The carrying amounts of these financial instruments approximate their fair values.
Interest-bearing Time Deposits with Banks
The carrying values of interest-bearing time deposits with banks approximate their fair values.
Restricted Stock
The carrying amount of FHLB stock approximates fair value based on the redemption provisions of the FHLB.
Loans
The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company
believes are consistent with discounts in the market place. Fair values are estimated for portfolios of loans with similar
characteristics. Loans are segregated by type such as commercial and industrial, agricultural and farmland, commercial real
estate - owner occupied, commercial real estate - non-owner occupied, multi-family, construction and land development, one-
to-four family residential, and municipal, consumer, and other. The fair value of loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar
maturities. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those a
market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit
spreads, as appropriate.
143
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
144
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides summary information on the carrying amounts and estimated fair values of the Company’s
financial instruments as of December 31:
Fair Value
Hierarchy
Level
December 31, 2019
December 31, 2018
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
(dollars in thousands)
Financial assets:
Cash and cash equivalents
Interest-bearing time deposits with banks
Securities held-to-maturity
Restricted stock
Loans, net
Investments in unconsolidated subsidiaries
Accrued interest receivable
Level 1 $
Level 1
Level 2
Level 3
Level 3
Level 3
Level 2
283,971 $
248
88,477
2,425
2,141,527
1,165
13,951
283,971 $
248
90,529
2,425
2,181,103
1,165
13,951
186,879 $
248
121,715
2,719
2,123,748
1,165
15,300
186,879
248
121,506
2,719
2,125,698
1,165
15,300
Financial liabilities:
Time deposits
Securities sold under agreements to
repurchase
Subordinated debentures
Accrued interest payable
Level 3
356,408
355,340
424,747
419,333
Level 2
Level 3
Level 2
44,433
37,583
1,132
44,433
31,959
1,132
46,195
37,517
1,207
46,195
32,149
1,207
The Company estimated the fair value of lending related commitments as described in Note 20 to be immaterial based on
limited interest rate exposure due to their variable nature, short-term commitment periods and termination clauses provided in
the agreements.
NOTE 20 – COMMITMENTS AND CONTINGENCIES
Financial Instruments
The Banks are 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 Banks’ 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 Banks use the same credit policies in making commitments and conditional obligations as they do for on-balance sheet
instruments.
Such commitments and conditional obligations were as follows as of December 31:
Commitments to extend credit
Standby letters of credit
145
Contractual Amount
December 31,
2019
December 31,
2018
(dollars in thousands)
542,705 $
8,991
524,112
10,358
$
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Banks evaluate each customer’s credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, by the Banks 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 Banks 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 Banks secure
the standby letters of credit with the same collateral used to secure the related loan.
Lease Commitments
The Company leases office space under operating leases. Certain leases contain renewal options for periods from three to
five years at their fair rental value at the time of renewal. Future minimum lease payments under these leases are as follows
(dollars in thousands):
Year ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total
Legal Contingencies
$
$
93
86
51
21
21
3
275
Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have
no material effect on the Company’s consolidated financial statements.
146
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 – CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Following are the condensed financial statements of HBT Financial, Inc. (Parent only).
Condensed Parent Company Only Balance Sheets
ASSETS
Cash and cash equivalents
Investment in subsidiaries:
Bank
Non-bank
Other assets
Total assets
LIABILITIES
Subordinated debentures
Other liabilities
Total liabilities
STOCKHOLDERS' EQUITY
Total liabilities and stockholders' equity
147
December 31
2018
2019
(dollars in thousands)
4,978
$
2,169
363,860
1,201
1,081
371,120
37,583
619
38,202
332,918
371,120
$
$
$
375,194
1,251
422
379,036
37,517
1,123
38,640
340,396
379,036
$
$
$
$
Table of Contents
HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Parent Company Only Statements of Income
INCOME
Dividends received from subsidiaries:
Bank
Non-bank
Undistributed earnings from subsidiaries:
Bank
Non-bank
Other income
Total income
EXPENSES
Interest expense
Other expense
Total expenses
INCOME BEFORE INCOME TAX BENEFIT
INCOME TAX BENEFIT
NET INCOME
2019
Years ended December 31
2018
(dollars in thousands)
2017
$
109,969
385
$
44,446
941
$
57,327
1,900
(41,202)
(151)
52
69,053
1,922
1,025
2,947
66,106
(759)
66,865
$
$
23,239
(1,984)
1
66,643
1,795
1,085
2,880
63,763
(36)
63,799
$
(115)
(404)
35
58,743
1,525
1,134
2,659
56,084
(19)
56,103
148
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HBT FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Condensed Parent Company Only Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed earnings of consolidated subsidiaries
Amortization of subordinated debenture purchase accounting adjustment
Changes in other assets and liabilities, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Capital contribution to bank subsidiary
Capital contribution to non-bank subsidiary
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock
Repurchase of common stock
Cash dividends
Net cash used in financing activities
NET CHANGE IN CASH AND EQUIVALENTS
CASH AND CASH EQUIVALENTS
Beginning of year
End of year
149
2019
Year ended December 31
2018
(dollars in thousands)
2017
$
66,865
$
63,799
$
56,103
41,353
66
(1,912)
106,372
(17,000)
(100)
(17,100)
138,493
—
(224,956)
(86,463)
2,809
2,169
4,978
$
(21,255)
66
700
43,310
—
—
—
519
65
306
56,993
—
—
—
—
(907)
(42,621)
(43,528)
—
—
(57,069)
(57,069)
(218)
(76)
2,387
2,169
$
2,463
2,387
$
Table of Contents
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
None.
ITEM 9A. 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 December 31, 2019,
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.
Management’s Report on Internal Control Over Financial Reporting
This Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over
financial reporting due to a transition period established by the SEC for newly public companies. In addition, because we are
an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to
attest to the effectiveness of our internal control over financial reporting for so long as we are an emerging growth company.
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 December 31, 2019 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Our Code of Ethics applies to all of our officers, directors and employees, including our principal executive officer, principal
financial officer and principal accounting officer. The Code of Ethics is publicly available on our internet website at
ir.hbtfinancial.com. We intend to satisfy the disclosure requirements of Item 5.05 of Form 8-K regarding any amendment to, or
waiver from, a provision of the Code of Ethics that applies to our principal executive officer, principal financial officer or
principal accounting officer and relates to any element of the definition of code of ethics set forth in Item 406(b) of Regulation
S-K by posting such information on our website, ir.hbtfinancial.com.
All other information required by this item is incorporated by reference to the information set forth in our Definitive Proxy
Statement for our 2020 Annual Meeting of Stockholders (the “Definitive Proxy Statement”), which we expect to file with the
SEC within 120 days after our fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our Definitive Proxy Statement, which we expect to file
with the SEC within 120 days after our fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table summarizes information as of December 31, 2019 relating to our equity compensation plans pursuant to
which grants of options, restricted stock or other rights to acquire shares may be granted from time to time.
Plan Category
Equity Compensation Plans approved by security holders
Equity Compensation Plans not approved by security holders
Total
Number of
Securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(A)
Weighted-Average
exercise price of
outstanding options,
warrants and rights
(B)
Number of
Securities
remaining available
for future issuance
under equity
compensation
plans (excluding
securities reflected
in column (A)) (C)
— $
—
— $
—
—
—
1,820,000
—
1,820,000
All other information required by this item is incorporated by reference to our Definitive Proxy Statement, which we expect to
file with the SEC within 120 days after our fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our Definitive Proxy Statement, which we expect to file
with the SEC within 120 days after our fiscal year end.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our Definitive Proxy Statement, which we expect to file
with the SEC within 120 days after our fiscal year end.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1).
See Index to Consolidated Financial Statements on page 92.
(a)(2).
Financial Statement Schedule
All financial statement schedules are omitted because they are either not applicable or not required, or because the required
information is included in the Consolidated Financial Statements or the Notes thereto included in Part II, Item 8.
(a)(3).
Exhibits
152
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Exhibit No.
Description
3.1
3.2
4.1
4.2 *
10.1
Restated Certificate of Incorporation of HBT Financial, Inc. (incorporated by reference to Exhibit 4.1 to the Company’s
Registration Statement on Form S‑8 (No. 333‑234385), filed with the Commission on October 30, 2019).
Amended and Restated By-law of HBT Financial, Inc. (incorporated by reference to Exhibit 4.2 to the Company’s
Registration Statement on Form S‑8 (No. 333‑234385), filed with the Commission on October 30, 2019).
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement
on Form S-1/A (No. 333-233747), filed with the Commission on October 1, 2019).
Description of Common Stock.
Voting Trust Agreement, dated as of May 4, 2016, among Fred L. Drake, the Company and the depositors party thereto
(incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 (No. 333-233747), filed
with the Commission on September 13, 2019).
10.2
Amended Restated Stockholder Agreement, dated as of September 27, 2019, by and among the Company and the
stockholders party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form
S-1/A (No. 333-233747), filed with the Commission on October 1, 2019).
10.3
Registration Rights Agreement, dated as of October 16, 2019, by and among the Company and the stockholders party
thereto (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2019 (No. 001-39085), filed with the Commission on November 20, 2019).
10.4 §
HBT Financial, Inc. Omnibus Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Registration
Statement on Form S‑8 (No. 333‑234385), filed with the Commission on October 30, 2019).
10.5 §
Form of employment agreement for executive officers of the Company (incorporated by reference to Exhibit 10.5 to the
Registrant’s Registration Statement on Form S-1/A (No. 333-233747), filed with the Commission on October 1, 2019).
10.6 §
Form of employment agreement for executive officers of the Company and Heartland Bank and Trust Company
(incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S-1/A (No. 333-233747),
filed with the Commission on October 1, 2019).
10.7 §
Form of Stock Appreciation Rights Agreement (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration
Statement on Form S-1 (No. 333-233747), filed with the Commission on September 13, 2019).
10.8 §
Form of Option Award Agreement (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement
on Form S-1/A (No. 333-233747), filed with the Commission on October 1, 2019).
10.9 §
Form of Restricted Shares Award Agreement (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration
Statement on Form S-1/A (No. 333-233747), filed with the Commission on October 1, 2019).
10.10 §
Form of Restricted Stock Unit Award Agreement (with dividend equivalent rights) (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K (No. 001-39085), filed with the Commission on February 3, 2020).
21.1 *
23.1 *
24 *
Subsidiaries of the Registrant.
Consent of RSM US LLP.
Power of Attorney (included on signature page).
153
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31.1 *
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 *
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act
of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 **
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 **
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
*
Filed herewith.
**
This exhibit is furnished herewith and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or
otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
§ A management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 601 of Regulation S-
K.
ITEM 16. FORM 10‑K SUMMARY
None.
154
Table of Contents
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.
SIGNATURES
Dated:
March 27, 2020
HBT FINANCIAL, INC.
By:
/s/ Matthew J. Doherty
Matthew J. Doherty
Chief Financial Officer
(on behalf of the registrant and as principal financial
officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Fred L. Drake
Fred L. Drake
/s/ Matthew J. Doherty
Matthew J. Doherty
/s/ C. Alvin Bowman
C. Alvin Bowman
/s/ Eric E. Burwell
Eric E. Burwell
/s/ Patrick F. Busch
Patrick F. Busch
/s/ J. Lance Carter
J. Lance Carter
/s/ Allen C. Drake
Allen C. Drake
/s/ Gerald E. Pfeiffer
Gerald E. Pfeiffer
/s/ Dale S. Strassheim
Dale S. Strassheim
Title
Chairman and Chief Executive Officer
(Principal executive officer)
Executive Vice President and Chief Financial
Officer (Principal financial officer and principal
accounting officer)
Director
Director
Date
March 27, 2020
March 27, 2020
March 27, 2020
March 27, 2020
Executive Vice President, Chief Lending
March 27, 2020
Officer and Director
President, Chief Operating Officer and Director
March 27, 2020
Director
Director
Director
155
March 27, 2020
March 27, 2020
March 27, 2020
Exhibit 4.2
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of our capital stock does not purport to be complete and is subject
to our restated certificate of incorporation, our amended and restated bylaws and the provisions of applicable law. Copies
of our restated certificate of incorporation and amended and restated bylaws have been filed as exhibits 4.1 and 4.2,
respectively, to our Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October
30, 2019.
General
The total amount of our authorized capital stock consists of 125,000,000 shares of common stock, par value
$0.01 per share, and 25,000,000 shares of undesignated preferred stock.
Common Stock
Voting Rights
Each holder of our common stock is entitled to one vote per share on each matter submitted to a vote of
stockholders. Our amended and restated bylaws provide that the presence, in person or by proxy, of holders of shares
representing a majority of the outstanding shares of capital stock entitled to vote at a stockholders’ meeting shall
constitute a quorum. When a quorum is present, the affirmative vote of a majority of the votes cast is required to take
action, unless otherwise specified by law or our certificate of incorporation, and except for the election of directors,
which is determined by a plurality vote. There are no cumulative voting rights.
Dividend Rights
Each holder of shares of our common stock is entitled to receive such dividends and other distributions in cash,
stock or property as may be declared by our board of directors from time to time out of our assets or funds legally
available for dividends or other distributions. These rights will be subject to the preferential rights of any other class or
series of our preferred stock.
Other Rights
Each holder of common stock will be subject to, and may be adversely affected by, the rights of the holders of any
series of preferred stock that we may designate and issue in the future.
Liquidation Rights
If the Company is involved in a consolidation, merger, recapitalization, reorganization, or similar event, each holder
of common stock will participate pro rata in all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding.
Preferred Stock
We do not have any shares of preferred stock outstanding. Our board of directors has the authority to issue shares of
preferred stock from time to time on terms it may determine, to divide shares of preferred stock into one or more series
and to fix the designations, preferences, privileges, and restrictions of preferred stock, including dividend rights,
conversion rights, voting rights, terms of redemption,
liquidation preference, sinking fund terms, and the number of shares constituting any series or the designation of any
series to the fullest extent permitted by the DGCL. The issuance of our preferred stock could have the effect of
decreasing the trading price of our common stock, restricting dividends on our capital stock, diluting the voting power of
our common stock, impairing the liquidation rights of our capital stock, or delaying or preventing a change in control of
our company.
Anti-takeover Effects of our Restated Certificate of Incorporation and Amended and Restated Bylaws
Our restated certificate of incorporation and our amended and restated bylaws contain provisions that may delay,
defer or discourage another party from acquiring control of us. We expect that these provisions, which are summarized
below, will discourage coercive takeover practices or inadequate takeover bids. These provisions are also designed to
encourage persons seeking to acquire control of us to first negotiate with the board of directors, which we believe may
result in an improvement of the terms of any such acquisition in favor of our stockholders. However, they also give the
board of directors the power to discourage acquisitions that some stockholders may favor.
Authorized But Unissued Shares
We have authorized but unissued shares of common stock and preferred stock, and our board of directors may
authorize the issuance of one or more series of preferred stock without stockholder approval. These shares could be used
by our board of directors to make it more difficult or to discourage an attempt to obtain control of us through a merger,
tender offer, proxy contest or otherwise.
Action by Written Consent, Special Meeting of Stockholders and Advance Notice Requirements for Stockholder
Proposals
Our restated certificate of incorporation provides that stockholder action can be taken only at an annual or special
meeting of stockholders and cannot be taken by written consent in lieu of a meeting once the Voting Trust ceases to own
more than 35% of our outstanding common stock. Our restated certificate of incorporation and bylaws also provide that,
except as otherwise required by law, special meetings of the stockholders can be called only by the chairperson of the
board of directors or pursuant to a resolution adopted by a majority of the total number of directors that we would have if
there were no vacancies. Stockholders are not permitted to call a special meeting or to require the board of directors to
call a special meeting. In addition, our amended and restated bylaws require advance notice procedures for stockholder
proposals to be brought before an annual meeting of the stockholders, including the nomination of directors.
Stockholders at an annual meeting may only consider the proposals specified in the notice of meeting or brought before
the meeting by or at the direction of the board of directors, or by a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has delivered a timely written notice in proper form to our
secretary, of the stockholder's intention to bring such business before the meeting. These provisions could have the effect
of delaying until the next stockholder meeting any stockholder actions, even if they are favored by the holders of a
majority of our outstanding voting securities.
Amendment to Bylaws
The DGCL provides generally that the affirmative vote of a majority of the outstanding stock entitled to vote on
amendments to a corporation's bylaws is required to approve such amendment, unless a corporation's certificate of
incorporation also confers the power to adopt, amend or repeal bylaws upon the board of directors. Our amended and
restated bylaws may be amended, altered, changed or repealed
by a majority vote of our board of directors or by an affirmative vote of the holders of a majority in voting power of our
outstanding shares of capital stock entitled to vote thereon.
Delaware Anti-Takeover Statute
Section 203 of the DGCL provides that if a person acquires 15% or more of the voting stock of a Delaware
corporation, such person becomes an “interested stockholder” and may not engage in certain “business combinations”
with the corporation for a period of three years from the time such person acquired 15% or more of the corporation's
voting stock, unless: (1) the board of directors approves the acquisition of stock or the merger transaction before the time
that the person becomes an interested stockholder, (2) the interested stockholder owns at least 85% of the outstanding
voting stock of the corporation at the time the merger transaction commences (excluding voting stock owned by directors
who are also officers and certain employee stock plans), or (3) the merger transaction is approved by the board of
directors and by the affirmative vote at a meeting, not by written consent, of stockholders of two-thirds of the holders of
the outstanding voting stock which is not owned by the interested stockholder. A Delaware corporation may elect in its
certificate of incorporation or bylaws not to be governed by this particular Delaware law.
Under our restated certificate of incorporation, we have opted out of Section 203 of the DGCL and are therefore
not subject to Section 203.
Anti-takeover Effects of Banking Laws
Acquisitions of our voting stock above certain thresholds are subject to prior regulatory notice or approval under
federal banking laws, including the BHCA and the Change in Bank Control Act of 1978. Under the Change in Bank
Control Act, a person or entity generally must provide prior notice to the Federal Reserve before acquiring the power to
vote 10% or more of our outstanding common stock. Investors should be aware of these requirements when acquiring
shares in our stock. In addition, under the Illinois Banking Act, any acquisition of our stock that results in a change in
control of the Company will require prior approval of the IDFPR.
Exclusive Jurisdiction of Certain Actions
Our amended and restated bylaws provide that, subject to limited exceptions, the Court of Chancery of the State of
Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware),
will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action
asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our
stockholders, (iii) any action asserting a claim against us or any of our directors, officers or other employees arising
pursuant to any provision of the DGCL, our certificate of incorporation or our by-laws or (iv) any other action asserting a
claim against us or any of our directors, officers or other employees that is governed by the internal affairs doctrine.
Although we believe this provision benefits the Company by providing increased consistency in the application of
Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits
against our directors and officers.
Our forum selection clause will be subject to a number of exceptions, including actions which are vested in the
exclusive jurisdiction of a court or forum other than the Court of Chancery. Section 27 of the Exchange Act vests
exclusive federal jurisdiction for all claims brought to enforce any duty or liability created under the Exchange Act.
Therefore, our forum selection clause will not apply to any such claim.
In addition, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits
brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result,
there is uncertainty as to whether a court would enforce a forum selection clause in connection with claims arising under
the Securities Act and the rules and regulations thereunder, and in any event, stockholders will not be deemed to have
waived the Company’s compliance with the federal securities laws and the rules and regulations thereunder.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Computershare Trust Company, N.A. Its address is 250
Royall Street, Canton, Massachusetts 02021.
Listing
Our common stock is listed on the Nasdaq Global Select Market under the trading symbol “HBT.”
Subsidiaries of the Registrant
EXHIBIT 21.1
Subsidiaries of HBT Financial, Inc.
Heartland Bank and Trust Company (Illinois)
State Bank of Lincoln (Illinois)
Subsidiaries of Heartland Bank and Trust Company
Heartland Real Estate Holdings, LLC (Illinois)
Lakewood & Barrington LLC (Illinois)
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statement (No. 333-234385) on Form S-8 of HBT
Financial, Inc. of our report dated March 27, 2020, relating to the consolidated financial statements of HBT Financial, Inc.,
appearing in this Annual Report on Form 10-K of HBT Financial, Inc. for the year ended December 31, 2019.
/s/ RSM US LLP
Chicago, Illinois
March 27, 2020
1
Certification of Chief Executive Officer
Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934
and Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
I, Fred L. Drake, certify that:
1. I have reviewed this annual report on Form 10-K of HBT Financial, Inc.:
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual report is being prepared;
b) [Paragraph omitted in accordance with Exchange Act Rule 13a-14(a)];
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on
such evaluation; and
d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 27, 2020
/s/ Fred L. Drake
Fred L. Drake
Chairman and Chief Executive Officer
(Principal Executive Officer)
Certification of Chief Financial Officer
Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934
and Section 302 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.2
I, Matthew J. Doherty, certify that:
1. I have reviewed this annual report on Form 10-K of HBT Financial, Inc.:
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this annual report is being prepared;
b) [Paragraph omitted in accordance with Exchange Act Rule 13a-14(a)];
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on
such evaluation; and
d) Disclosed in this annual report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 27, 2020
/s/ Matthew J. Doherty
Matthew J. Doherty
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.1
In connection with the Annual Report of HBT Financial, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
1. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Fred L. Drake
Fred L. Drake
Chairman and Chief Executive Officer
(Principal Executive Officer)
March 27, 2020
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32.2
In connection with the Annual Report of HBT Financial, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2019 as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
1. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
/s/ Matthew J. Doherty
Matthew J. Doherty
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
March 27, 2020