Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
⌧ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
◻ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-39085
HBT Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware
37-1117216
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
401 North Hershey Rd
Bloomington, Illinois 61704
(888) 897-2276
(Address of principal executive offices,including zip code)
(Registrant’s telephone number,including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
HBT
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
Non-accelerated filer
☒
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2020, there were 27,457,306 shares outstanding of the registrant’s common stock, $0.01 par value.
TABLE OF CONTENTSHBT Financial, Inc.
Page
PART I. FINANCIAL INFORMATION
3
Item 1.
Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019
4
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019
5
Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019
6
Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019
8
Notes to Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
53
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
92
Item 4.
Controls and Procedures
93
PART II. OTHER INFORMATION
94
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
96
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
97
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this quarterly report are forward-looking statements. Forward-looking statements may include statements relating to our plans, strategies and expectations, the economic impact of the COVID-19 pandemic and our future financial results, near-term loan growth, net interest margin, mortgage banking profits, wealth management fees, expenses, asset quality, capital levels, continued earnings and liquidity. Forward looking statements are generally identifiable by use of the words "believe," "may," "will," "should," "could," "expect," "estimate," "intend," "anticipate," "project," "plan" or similar expressions. Forward looking statements are frequently based on assumptions that may or may not materialize and are subject to numerous uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could cause actual results to differ materially from the results anticipated or projected and which could materially and adversely affect our operating results, financial condition or prospects include, but are not limited to:
1
These risks and uncertainties, as well as the factors discussed under "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.
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
HBT FINANCIAL, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
December 31,
2020
2019
(dollars in thousands)
ASSETS
Cash and due from banks
$
22,347
22,112
Interest-bearing deposits with banks
214,377
261,859
Cash and cash equivalents
236,724
283,971
Interest-bearing time deposits with banks
—
248
Debt securities available-for-sale, at fair value
814,798
592,404
Debt securities held-to-maturity (fair value of $78,891 in 2020 and $90,529 in 2019)
74,510
88,477
Equity securities
4,814
4,389
Restricted stock, at cost
2,498
2,425
Loans held for sale
23,723
4,531
Loans, net of allowance for loan losses of $31,654 in 2020 and $22,299 in 2019
2,247,985
2,141,527
Bank premises and equipment, net
53,271
53,987
Bank premises held for sale
121
Foreclosed assets
3,857
5,099
Goodwill
23,620
Core deposit intangible assets, net
3,103
4,030
Mortgage servicing rights, at fair value
5,571
8,518
Investments in unconsolidated subsidiaries
1,165
Accrued interest receivable
13,820
13,951
Other assets
25,643
16,640
Total assets
3,535,223
3,245,103
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Noninterest-bearing
850,306
689,116
Interest-bearing
2,166,355
2,087,739
Total deposits
3,016,661
2,776,855
Securities sold under agreements to repurchase
45,438
44,433
Subordinated notes
39,218
Junior subordinated debentures issued to capital trusts
37,632
37,583
Other liabilities
40,980
53,314
Total liabilities
3,179,929
2,912,185
COMMITMENTS AND CONTINGENCIES (Notes 7 and 18)
Stockholders' Equity
Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued or outstanding
Common stock, $0.01 par value; 125,000,000 shares authorized; 27,457,306 shares issued and outstanding
275
Surplus
190,787
190,524
Retained earnings
146,101
134,287
Accumulated other comprehensive income
18,131
7,832
Total stockholders’ equity
355,294
332,918
Total liabilities and stockholders’ equity
See accompanying Notes to Consolidated Financial Statements (Unaudited)
HBT FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30,
Nine Months Ended September 30,
INTEREST AND DIVIDEND INCOME
(dollars in thousands, except per share amounts)
Loans, including fees:
Taxable
25,118
29,308
77,396
89,257
Federally tax exempt
542
684
1,748
2,130
Securities:
3,266
3,572
9,772
11,295
1,233
1,395
3,488
4,459
Interest-bearing deposits in bank
65
662
873
1,948
Other interest and dividend income
14
15
42
46
Total interest and dividend income
30,238
35,636
93,319
109,135
INTEREST EXPENSE
Deposits
843
2,000
3,480
6,094
9
17
40
48
Borrowings
7
147
367
478
1,209
1,462
Total interest expense
1,367
2,495
4,878
7,611
Net interest income
28,871
33,141
88,441
101,524
PROVISION FOR LOAN LOSSES
2,174
10,102
Net interest income after provision for loan losses
26,697
32,457
78,339
98,258
NONINTEREST INCOME
Card income
2,146
1,985
5,936
5,813
Service charges on deposit accounts
1,493
2,111
4,460
5,805
Wealth management fees
1,646
1,676
4,967
4,916
Mortgage servicing
724
795
2,175
2,342
Mortgage servicing rights fair value adjustment
(268)
(860)
(2,947)
(2,982)
Gains on sale of mortgage loans
3,184
992
5,855
2,177
Gains (losses) on securities
(2)
(73)
Gains (losses) on foreclosed assets
27
(20)
120
132
Gains (losses) on other assets
(29)
(71)
1,244
Title insurance activity
167
Other noninterest income
1,101
1,005
2,866
2,759
Total noninterest income
10,052
7,582
23,364
22,415
NONINTEREST EXPENSE
Salaries
12,595
12,303
38,023
36,422
Employee benefits
1,666
2,253
6,555
8,220
Occupancy of bank premises
1,609
1,785
5,079
5,260
Furniture and equipment
679
545
1,891
2,050
Data processing
1,583
1,471
4,841
4,023
Marketing and customer relations
690
801
2,551
2,837
Amortization of intangible assets
305
335
927
1,087
FDIC insurance
222
476
435
Loan collection and servicing
450
547
1,292
1,901
226
196
403
525
Other noninterest expense
2,460
2,059
7,253
6,316
Total noninterest expense
22,485
22,303
69,291
69,076
INCOME BEFORE INCOME TAX EXPENSE
14,264
17,736
32,412
51,597
INCOME TAX EXPENSE
3,701
299
8,209
819
NET INCOME
10,563
17,437
24,203
50,778
EARNINGS PER SHARE - BASIC
0.38
0.97
0.88
2.82
EARNINGS PER SHARE - DILUTED
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING
27,457,306
18,027,512
UNAUDITED PRO FORMA C CORP EQUIVALENT INFORMATION (Note 1)
Historical income before income tax expense
Pro forma C Corp equivalent income tax expense
4,614
13,313
Pro forma C Corp equivalent net income
13,122
38,284
PRO FORMA C CORP EQUIVALENT EARNINGS PER SHARE - BASIC
0.73
2.12
PRO FORMA C CORP EQUIVALENT EARNINGS PER SHARE - DILUTED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
OTHER COMPREHENSIVE INCOME
Unrealized gains on debt securities available-for-sale
1,176
1,289
15,368
13,913
Reclassification adjustment for accretion of net unrealized gain on debt securities transferred to held-to-maturity
(62)
(221)
Unrealized gains (losses) on derivative instruments
(208)
(1,098)
(897)
Reclassification adjustment for net settlements on derivative instruments
(24)
138
(76)
Total other comprehensive income, before tax
1,286
995
14,413
12,719
Income tax expense
366
4,114
Total other comprehensive income
920
10,299
TOTAL COMPREHENSIVE INCOME
11,483
18,432
34,502
63,497
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated
Other
Total
Common Stock
Retained
Comprehensive
Treasury
Stockholders’
Voting
Series A
Earnings
Income (Loss)
Stock
Equity
(dollars in thousands, except per share data)
Balance, June 30, 2020
190,687
139,667
17,211
347,840
Net income
Other comprehensive income
Stock-based compensation
100
Cash dividends ($0.15 per share)
(4,129)
Balance, September 30, 2020
Balance, June 30, 2019
178
32,288
302,984
7,436
(3,019)
339,870
Cash dividends ($0.52 per share)
(9,366)
Balance, September 30, 2019
311,055
8,431
348,936
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
Balance, December 31, 2019
263
Cash dividends ($0.45 per share)
(12,389)
Balance, December 31, 2018
315,234
(4,288)
340,396
Cash dividends ($3.05 per share)
(54,957)
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation expense
2,176
2,042
Provision for loan losses
Net amortization of debt securities
3,298
Amortization of unrealized gain on dedesignated cash flow hedge
(64)
(53)
Deferred income tax benefit
(628)
Net accretion of discount and deferred loan fees on loans
(3,459)
(3,150)
Net unrealized gain on equity securities
(3)
(42)
Net loss (gain) on sales of bank premises and equipment
Net gain on sales of bank premises held for sale
(448)
Impairment losses on bank premises held for sale
37
Net gain on sales of foreclosed assets
(269)
(240)
Write-down of foreclosed assets
156
552
Amortization of intangibles
Decrease in mortgage servicing rights
2,947
2,982
Amortization of discount and issuance costs on subordinated notes and junior subordinated debentures
56
49
Mortgage loans originated for sale
(271,903)
(106,885)
Proceeds from sale of mortgage loans
258,566
104,254
Net gain on sale of mortgage loans
(5,855)
(2,177)
Gain on sale of First Community Title Services, Inc.
(498)
Decrease in accrued interest receivable
131
484
Increase in other assets
437
(2,175)
(Decrease) increase in other liabilities
(26,156)
4,705
Net cash (used in) provided by operating activities
(5,073)
57,298
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing time deposits with banks
Proceeds from paydowns, maturities, and calls of debt securities
147,561
134,347
Purchase of securities
(344,335)
(40,903)
Net increase in loans
(113,533)
(26,049)
Purchase of restricted stock
Proceeds from redemption of restricted stock
294
Purchases of bank premises and equipment
(1,463)
(1,558)
Proceeds from sales of bank premises and equipment
176
Proceeds from sales of bank premises held for sale
1,039
Proceeds from sales of foreclosed assets
1,793
4,142
Capital improvements to foreclosed assets
(6)
(41)
Cash received from sale of First Community Title Services, Inc.
114
Net cash used in investing activities
(309,807)
71,561
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits
239,806
(91,912)
Net increase (decrease) in repurchase agreements
(13,928)
Issuance of subordinated notes, net of issuance costs
39,211
Cash dividends paid
Net cash provided by (used in) financing activities
267,633
(160,797)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(47,247)
(31,938)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
186,879
CASH AND CASH EQUIVALENTS AT END OF PERIOD
154,941
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest
5,191
7,646
Cash paid for income taxes
14,308
880
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIES
Transfers of loans to foreclosed assets
499
1,788
Sales of foreclosed assets through loan origination
67
360
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ACCOUNTING POLICIES
Basis of Presentation
HBT Financial, Inc. (the Company) is headquartered in Bloomington, Illinois and is the holding company for 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 Banks provide a comprehensive suite of business, commercial, wealth management and retail banking products and services to individuals, businesses, and municipal entities throughout Central and Northeastern Illinois.
The unaudited consolidated financial statements, including the notes thereto, have been prepared in accordance with generally accepted accounting principles (GAAP) interim reporting requirements. Certain information in footnote disclosures normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission. These interim unaudited consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on March 27, 2020.
The unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results for interim periods are not necessarily indicative of results for a full year.
The Company qualifies as an "emerging growth company" as defined by the Jumpstart Our Business Startups Act (JOBS Act). The JOBS Act permits emerging growth companies an extended transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to use the extended transition period until the Company is no longer an emerging growth company or until the Company chooses to affirmatively and irrevocably opt out of the extended transition period. As a result, the Company’s financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies.
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.
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 were advanced or paid as dividends to the stockholders to assist them in paying their personal taxes on the income from the Company.
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 only reflect an effective state replacement tax rate.
The Company files consolidated federal and state income tax returns. The Company is no longer subject to federal and state income tax examinations for years prior to 2017.
Unaudited Pro Forma Income Statement Information
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 three and nine months ended September 30, 2019. 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 three and nine months ended September 30, 2019.
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 2019, therefore, the unaudited pro forma C Corp equivalent basic and diluted earnings per share amounts are the same.
Segment Reporting
The Company’s operations consist of one reportable segment called community banking. 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.
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, and at December 31, 2019, the Company’s evaluation of goodwill indicated that goodwill was not impaired.
Due to the economic weakness resulting from the COVID-19 pandemic, the Company completed a quantitative assessment of goodwill as of March 31, 2020 which indicated that goodwill was not impaired. Subsequently, the Company determined there were no adverse changes in criteria and key considerations to the previous assessment. Accordingly, the Company concluded that there is no impairment of goodwill as of September 30, 2020. Further goodwill impairment evaluations, which may result in goodwill impairment, may be necessary if events or circumstance changes would more likely than not reduce the fair value of a reporting unit below its carrying amount.
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.
11
Subsequent Events
In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential of recognition or disclosure through the date the financial statements were issued.
On October 20, 2020, Heartland Bank and State Bank of Lincoln, our two bank subsidiaries, entered into a Bank Merger Agreement providing for the merger of State Bank of Lincoln into Heartland Bank. If the merger is consummated, the resulting institution will be Heartland Bank, which will then be our sole bank subsidiary, and the branch locations of State Bank of Lincoln will operate as “State Bank of Lincoln, a division of Heartland Bank and Trust Company.” The proposed merger is subject to conditions, including, among others, approval by the FDIC and the Illinois Department of Financial and Professional Regulation.
On November 2, 2020, the Company’s board of directors approved a stock repurchase program that authorizes the Company to repurchase up to $15 million of its common stock. The stock repurchase program will be in effect until December 31, 2021 with the timing of purchases and number of shares repurchased dependent upon a variety of factors including price, trading volume, corporate and regulatory requirements, and market conditions. The Company is not obligated to purchase any shares under the stock repurchase program, and the stock repurchase program may be suspended or discontinued at any time without notice.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities available-for-sale and purchased financial assets with credit deterioration. ASU 2016-13 is effective for years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted for years beginning after December 31, 2018, including interim periods within those years. The Company is currently evaluating the effect that this standard will have on the consolidated results of operations and financial position.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies measurement of goodwill and eliminates Step 2 from the goodwill impairment test. Under the ASU, a company should perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The impairment charge is limited to the amount of goodwill allocated to that reporting unit. The amendments in this update are effective for annual or any interim goodwill impairment tests in years beginning after December 15, 2022, including interim periods within those years. Early adoption is permitted for goodwill impairment tests performed on testing dates after January 1, 2017. This standard is not expected to have a material impact on the Company’s consolidated results of operations or financial position.
12
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform, if certain criteria are met. Entities may apply the provisions as of the beginning of the reporting period when the election is made and are available until December 31, 2022. The Company is currently evaluating the effect that this standard will have on the consolidated results of operations and financial position.
NOTE 2 – SECURITIES
The carrying balances of the securities were as follows:
Debt securities available-for-sale
Debt securities held-to-maturity
Equity securities:
Readily determinable fair value
3,262
3,241
No readily determinable fair value
1,552
1,148
Total securities
894,122
685,270
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 three and nine months ended September 30, 2020, there were no adjustments to the carrying balance of equity securities with no readily determinable fair value based on an observable price change of an identical investment. During the three and nine months ended September 30, 2019, there were downward adjustments of $128,000 to the carrying balance of equity securities with no readily determinable fair value based on an observable price change of an identical investment. As of September 30, 2020 and December 31, 2019, the carrying balance of equity securities with no readily determinable fair value reflect cumulative downward adjustments based on observable price changes of $165,000. There have been no impairments or upward adjustments based on observable price changes to the equity securities with no readily determinable fair value held at September 30, 2020 and December 31, 2019.
13
The amortized cost and fair values of debt securities, with gross unrealized gains and losses, are as follows:
September 30, 2020
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
Fair Value
Available-for-sale:
U.S. government agency
100,462
3,866
104,326
Municipal
232,795
7,962
(347)
240,410
Mortgage-backed:
Agency residential
220,970
5,462
(115)
226,317
Agency commercial
166,444
4,831
(203)
171,072
Corporate
70,862
1,907
(96)
72,673
Total available-for-sale
791,533
24,028
(763)
Held-to-maturity:
26,830
1,480
28,310
14,556
523
15,079
33,124
2,378
35,502
Total held-to-maturity
4,381
78,891
Total debt securities
866,043
28,409
893,689
December 31, 2019
49,113
529
(27)
49,615
131,241
2,503
133,738
198,184
2,780
(286)
200,678
133,730
1,516
(292)
134,954
72,239
1,180
73,419
584,507
8,508
(611)
45,239
1,340
46,579
19,072
161
(170)
19,063
24,166
775
(54)
24,887
2,276
(224)
90,529
672,984
10,784
(835)
682,933
As of September 30, 2020 and December 31, 2019, the Banks had debt securities with a carrying value of $349,412,000 and $284,895,000, 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 41% of the obligations of local municipalities portfolio consists of debt securities issued by municipalities located in Illinois as of September 30, 2020. Approximately 87% of such debt securities were general obligation issues as of September 30, 2020.
The amortized cost and fair value of debt securities by contractual maturity, as of September 30, 2020, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale
Held-to-Maturity
Due in 1 year or less
36,762
37,033
747
749
Due after 1 year through 5 years
85,100
87,897
14,702
15,452
Due after 5 years through 10 years
183,944
191,538
10,490
11,186
Due after 10 years
98,313
100,941
891
923
There were no sales of securities during the three and nine months ended September 30, 2020 and 2019. Gains (losses) on securities were as follows during the three and nine months ended September 30:
Net realized gains (losses) on sales
Net unrealized gains (losses) on equities:
55
170
(128)
The following tables present gross unrealized losses and fair value of debt securities, aggregated by category and length of time that individual debt securities have been in a continuous unrealized loss position, as of September 30, 2020 and December 31, 2019:
Investments in a Continuous Unrealized Loss Position
Less than 12 Months
12 Months or More
UnrealizedLoss
3,493
28,955
(101)
20,386
(14)
4,378
24,764
(177)
22,668
(26)
3,471
26,139
9,858
(723)
85,360
(40)
7,849
93,209
18,865
(1)
1,998
20,863
894
(108)
25,563
(178)
27,296
52,859
(100)
20,056
(192)
15,704
35,760
65,378
(371)
44,998
110,376
(30)
2,516
(140)
9,002
11,518
(47)
7,016
(7)
599
7,615
(77)
9,532
(147)
9,601
19,133
(317)
74,910
(518)
54,599
129,509
As of September 30, 2020, there were 7 debt securities in an unrealized loss position for a period of twelve months or more, and 58 debt securities in an unrealized loss position for a period of less than twelve months. These unrealized losses are primarily a result of fluctuations in market interest rates. In analyzing an issuer’s financial condition, management considers whether the debt securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analysts’ reports. Management believes that all declines in value of these debt securities are deemed to be temporary.
16
NOTE 3 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Major categories of loans are summarized as follows:
Commercial and industrial
389,231
307,175
Agricultural and farmland
235,597
207,776
Commercial real estate - owner occupied
225,345
231,162
Commercial real estate - non-owner occupied
532,454
579,757
Multi-family
199,441
179,073
Construction and land development
265,758
224,887
One-to-four family residential
308,365
313,580
Municipal, consumer, and other
123,448
120,416
Loans, before allowance for loan losses
2,279,639
2,163,826
Allowance for loan losses
(31,654)
(22,299)
Loans, net of allowance for loan losses
Paycheck Protection Program (PPP) loans (included above)
168,466
4,179
7,095
Total PPP loans
179,740
The following tables detail activity in the allowance for loan losses for the three and nine months ended September 30:
Commercial
Municipal,
Agricultural
Real Estate
Construction
One-to-four
Consumer,
and
Owner
Non-owner
and Land
Family
Three Months Ended September 30, 2020
Industrial
Farmland
Occupied
Multi-Family
Development
Residential
Allowance for loan losses:
4,356
2,890
3,257
6,767
1,581
3,366
3,010
4,496
29,723
(98)
(585)
86
2,496
614
179
(656)
Charge-offs
(881)
(39)
(90)
(1,078)
Recoveries
517
198
69
835
3,894
2,305
3,304
9,268
2,195
3,717
3,152
3,819
31,654
Three Months Ended September 30, 2019
5,187
2,862
2,487
2,721
1,153
3,723
3,569
840
22,542
(915)
(133)
(482)
521
(182)
(601)
(692)
3,168
(32)
(216)
(111)
(387)
(150)
(937)
313
26
85
472
4,553
2,729
1,815
3,136
930
3,123
2,532
3,943
22,761
Nine Months Ended September 30, 2020
4,441
2,766
1,779
3,663
1,024
2,977
2,540
3,109
22,299
565
(434)
1,124
5,591
1,171
551
598
936
(1,690)
(56)
(154)
(466)
(2,459)
578
440
70
216
168
240
1,712
Consumer
Nine Months Ended September 30, 2019
3,748
2,650
2,506
2,644
912
4,176
2,782
1,091
20,509
700
109
(356)
588
59
(1,478)
541
(315)
(382)
(9)
(1,026)
(522)
(2,436)
420
47
434
235
271
1,422
18
The following tables present the recorded investments in loans and the allowance for loan losses by category as of September 30, 2020 and December 31, 2019:
Loan balances:
Collectively evaluated for impairment
382,617
220,094
204,200
485,307
197,277
259,453
287,849
109,898
2,146,695
Individually evaluated for impairment
5,558
14,555
13,167
32,600
889
3,628
11,219
13,485
95,101
Acquired with deteriorated credit quality
1,056
948
7,978
14,547
1,275
2,677
9,297
37,843
2,190
2,270
2,509
7,896
2,180
3,290
2,336
979
23,650
1,588
33
884
796
2,840
6,801
116
361
488
201
20
1,203
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
1,088
8,491
15,082
1,476
3,397
10,607
42,673
1,926
2,576
1,486
3,591
1,019
2,283
1,684
931
15,496
2,170
105
270
567
822
6,180
345
23
127
34
623
19
The following tables present loans individually evaluated for impairment by category of loans as of September 30, 2020 and December 31, 2019:
Unpaid
Principal
Recorded
Related
Balance
Investment
Allowance
With an allowance recorded:
2,781
173
172
1,440
1,441
4,203
4,201
2,055
3,614
3,596
8,790
8,764
23,056
23,010
With no related allowance:
2,777
14,383
11,728
11,726
28,462
28,399
1,575
1,573
7,672
7,623
4,733
4,721
72,219
72,091
13,168
32,665
3,630
11,286
13,523
95,275
4,292
590
830
99
3,679
3,401
3,390
9,138
9,111
22,029
21,991
6,438
6,441
13,369
13,376
10,089
10,097
3,297
3,299
1,328
104
103
7,986
7,959
4,775
4,761
47,386
47,360
10,730
13,959
10,919
3,396
3,783
11,387
69,415
21
The following table presents the average recorded investment and interest income recognized for loans individually evaluated for impairment by category of loans during the three and nine months ended September 30, 2020 and 2019:
Average
Interest
Income
Recognized
2,763
41
4,957
174
491
1,281
1,970
4,216
101
2,080
25
2,754
3,587
24
2,082
8,823
9,254
22,924
154
21,609
204
2,894
61
5,480
10,220
144
15,384
11,766
150
10,555
28
28,544
282
3,853
57
1,339
106
7,500
63
9,904
74
4,763
4,832
68,052
722
51,453
5,657
102
10,437
10,394
146
15,875
13,047
12,525
39
32,760
284
3,954
62
3,556
2,860
43
11,087
87
11,986
90
13,586
14,086
90,976
876
73,062
374
22
3,124
129
5,081
115
307
404
1,141
1,504
2,571
91
2,842
3,240
84
2,091
10,069
230
9,202
21,956
603
21,720
4,637
213
5,681
13,187
500
15,889
352
11,367
401
10,640
17,358
388
4,000
111
1,349
637
107
8,167
266
10,107
194
3,660
78
4,871
71
59,312
1,849
52,644
1,250
7,761
342
10,762
265
13,494
506
16,293
364
12,508
457
12,638
18,862
395
4,102
3,208
2,949
134
11,407
350
12,198
259
13,729
308
14,073
81,268
2,452
74,364
1,771
The following tables present the recorded investment in loans by category based on current payment and accrual status as of September 30, 2020 and December 31, 2019:
Accruing Interest
30 - 89 Days
90+ Days
Current
Past Due
Nonaccrual
Loans
388,158
919
231,349
4,248
224,451
139
755
528,145
4,309
198,552
263,803
1,410
303,014
1,030
4,281
123,081
2,260,553
3,848
15,191
301,975
558
4,642
201,519
6,257
228,218
941
2,003
579,626
177,696
1,377
224,716
140
31
307,712
1,329
75
4,464
119,898
247
245
2,141,360
3,346
19,019
The following tables present total loans by category based on their assigned risk ratings determined by management as of September 30, 2020 and December 31, 2019:
Pass
Pass-Watch
Substandard
Doubtful
365,872
16,828
6,531
200,879
19,415
15,303
183,836
27,901
13,608
452,942
43,941
35,571
170,134
28,418
228,126
33,600
4,032
284,072
11,285
13,008
109,542
425
13,481
1,995,403
181,813
102,423
267,645
27,114
12,416
180,735
12,267
14,774
198,710
21,745
10,707
531,694
46,092
1,971
175,807
1,495
217,120
3,582
4,185
287,036
13,546
12,998
106,063
479
13,874
1,964,810
126,596
72,420
The following tables present the financial effect of troubled debt restructurings for the three and nine months ended September 30, 2019 and 2020:
Recorded Investment
and Specific
Number
Pre-Modification
Post-Modification
Reserves
853
516
392
1,099
During the three months ended September 30, 2020, the troubled debt restructuring was the result of a payment concession. During the three and nine months ended September 30, 2019, all troubled debt restructurings were the result of a payment concession.
Of the troubled debt restructurings entered into during the last 12 months, there were none which had subsequent payment defaults during the three and nine months ended September 30, 2020 and 2019. For purposes of this disclosure, the Company considers “default” to mean 90 days or more past due as to interest or principal or were on nonaccrual status subsequent to restructuring.
As of September 30, 2020 and December 31, 2019, the Company had $9,038,000 and $9,315,000 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 three and nine months ended September 30, 2020 and 2019:
Beginning balance
1,378
1,633
1,662
2,101
Reclassification from non-accretable difference
162
536
Accretion income
(231)
(441)
(1,106)
Ending balance
1,383
1,531
NOTE 4 – LOAN SERVICING
Mortgage loans serviced for others, which are not included in the accompanying consolidated balance sheets, amounted to $1,085,957,000 and $1,152,535,000 as of September 30, 2020 and December 31, 2019, respectively. Activity in mortgage servicing rights is as follows for the three and nine months ended September 30, 2020 and 2019:
5,839
8,796
10,918
Capitalized servicing rights
658
344
1,432
720
Fair value adjustment:
Attributable to payments and principal reductions
(650)
(483)
(1,844)
(1,227)
Attributable to changes in valuation inputs and assumptions
(276)
(721)
(2,535)
(2,475)
Total fair value adjustment
(926)
(1,204)
(4,379)
(3,702)
7,936
NOTE 5 – FORECLOSED ASSETS
Foreclosed assets activity is as follows for the three and nine months ended September 30, 2020 and 2019:
4,450
9,707
9,559
Transfers from loans
Capitalized improvements
Proceeds from sales
(792)
(3,173)
(1,793)
(4,142)
Sales through loan origination
(67)
(360)
Net gain (loss) on sales
125
135
269
Direct write-downs
(163)
(156)
(552)
6,574
Gains (losses) on foreclosed assets includes the following for the three and nine months ended September 30, 2020 and 2019:
Guarantee reimbursements
Gain on settlement
375
The carrying value of foreclosed one-to-four family residential real estate property as of September 30, 2020 and December 31, 2019, was $352,000 and $1,037,000, respectively. As of September 30, 2020, there were 7 one-to-four family residential real estate loans in the process of foreclosure totaling approximately $571,000. As of December 31, 2019, there were 10 residential real estate loans in the process of foreclosure totaling approximately $588,000.
NOTE 6 – DEPOSITS
The Company’s deposits are summarized below:
Noninterest-bearing deposits
Interest-bearing deposits:
Interest-bearing demand
885,719
814,639
Money market
475,047
477,765
Savings
497,682
438,927
Time
307,907
356,408
Total interest-bearing deposits
Money market deposits include $7,407,000 and $14,309,000 of reciprocal transaction deposits as of September 30, 2020 and December 31, 2019, respectively. Time deposits include $3,540,000 and $3,538,000 of reciprocal time deposits as of September 30, 2020 and December 31, 2019, respectively.
The aggregate amounts of time deposits in denominations of $250,000 or more amounted to $24,734,000 and $44,754,000 as of September 30, 2020 and December 31, 2019, respectively. The aggregate amounts of time deposits in denominations of $100,000 or more amounted to $102,115,000 and $130,293,000 as of September 30, 2020 and December 31, 2019, respectively.
The components of interest expense on deposits are as follows:
123
347
1,175
497
608
1,356
157
207
587
1,086
2,179
3,356
Total interest expense on deposits
NOTE 7 – BORROWINGS
There were no Federal Home Loan Bank of Chicago (FHLB) borrowings outstanding as of September 30, 2020 and December 31, 2019. Available borrowings from the FHLB are secured by FHLB stock held by the Company and pledged security in the form of qualifying loans. The total amount of loans pledged as of September 30, 2020 and December 31, 2019 was $544,999,000 and $548,229,000, respectively. As of September 30, 2020 and December 31, 2019, 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.
The Banks also have available borrowings through the discount window of the Federal Reserve Bank of Chicago (FRB). Available borrowings are based on the collateral pledged. As of September 30, 2020 and December 31, 2019, the carrying value of debt securities pledged amounted to $511,000 and $515,000, respectively. There was no outstanding borrowings under the FRB discount window as of September 30, 2020 and December 31, 2019.
29
NOTE 8 – SUBORDINATED NOTES
On September 3, 2020, the Company issued $40,000,000 of fixed-to-floating rate subordinated notes that mature on September 15, 2030. The subordinated notes, which are unsecured obligations of the Company, bear a fixed interest rate of 4.50% for the first five years after issuance and thereafter bear interest at a floating rate equal to three-month SOFR, as determined on the Floating Interest Determination Date, plus 4.37%. Interest is payable semi-annually during the five year fixed rate period and quarterly during the subsequent five year floating rate period. The subordinated notes have an optional redemption in whole or in part on any interest payment date on or after September 15, 2025. If the subordinated notes are redeemed before they mature, the redemption price will be the principal amount plus any accrued but unpaid interest. The transaction resulted in debt issuance costs of $789,000 which will be amortized over 10 years. As of September 30, 2020, 100% of the subordinated notes qualified as Tier 2 capital.
The face value and carrying value of the subordinated notes are summarized below:
Subordinated notes, at face value
40,000
Unamortized issuance costs
(782)
Subordinated notes, at carrying value
NOTE 9 – JUNIOR SUBORDINATED DEBENTURES ISSUED TO CAPITAL TRUSTS
Five subsidiary business trusts of the Company have issued floating rate capital securities (“capital securities”) which are guaranteed by the Company.
The Company owns all of the outstanding stock of the five subsidiary business trusts. The trusts used the proceeds from the issuance of their capital securities to buy floating rate junior subordinated deferrable interest debentures (“junior subordinated debentures”) issued by the Company. These junior subordinated debentures are the only assets of the trusts and the interest payments from the junior subordinated debentures finance the distributions paid on the capital securities. The junior subordinated debentures are unsecured and rank junior and subordinate in the right of payment to all senior debt of the Company.
The trusts are not consolidated in the Company’s financial statements.
The face and carrying value of junior subordinated debentures are summarized below:
Heartland Bancorp, Inc. Capital Trust B
10,310
Heartland Bancorp, Inc. Capital Trust C
Heartland Bancorp, Inc. Capital Trust D
5,155
FFBI Capital Trust I
7,217
National Bancorp Statutory Trust I
5,773
Total junior subordinated debentures, at face value
38,765
National Bancorp Statutory Trust I unamortized discount
(1,133)
(1,182)
Total junior subordinated debentures, at carrying value
30
The interest rates on the junior subordinated debentures are variable, reset quarterly, and are equal to the three-month LIBOR, as determined on the LIBOR Determination Date specific to each junior subordinated debenture, plus a fixed percentage. The interest rates and maturities of the junior subordinated debentures are summarized as follows:
Interest Rate at
Variable
Maturity
Interest Rate
Date
LIBOR plus
2.75
%
3.03
4.74
April 6, 2034
1.53
1.78
3.42
June 15, 2037
1.35
1.60
3.24
September 15, 2037
2.80
3.08
4.79
2.90
3.15
December 31, 2037
The distribution rate payable on the junior subordinated debentures is cumulative and payable quarterly in arrears. The Company has the right, subject to events in default, to defer payments of interest on the junior subordinated debentures at any time by extending the interest payment period for a period not exceeding 10 quarterly periods with respect to each deferral period, provided that no extension period may extend beyond the redemption or maturity date of the junior subordinated debentures. The capital securities are subject to mandatory redemption upon payment of the junior subordinated debentures and carry an interest rate identical to that of the related junior subordinated debenture. The junior subordinated debentures maturity dates may be shortened if certain conditions are met, or at any time within 90 days following the occurrence and continuation of certain changes in either tax treatment or the capital treatment of the debentures or the capital securities. If the junior subordinated debentures are redeemed before they mature, the redemption price will be the principal amount plus any accrued but unpaid interest. The Company has the right to terminate each Capital Trust and cause the junior subordinated debentures to be distributed to the holders of the capital securities in liquidation of such trusts.
Under current banking regulations, bank holding companies are allowed to include qualifying trust preferred securities in their Tier 1 Capital for regulatory capital purposes, subject to a 25% limitation to all core (Tier 1) capital elements, net of goodwill and other intangible assets less any associated deferred tax liability. As of September 30, 2020 and December 31, 2019, 100% of the trust preferred securities qualified as Tier 1 capital under the final rule adopted in March 2005.
NOTE 10 – DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are negotiated contracts entered into by two issuing counterparties containing specific agreement terms, including the underlying instrument, amount, exercise price, and maturities. The derivatives accounting guidance requires that the Company recognize all derivative financial instruments as either assets or liabilities at fair value in the consolidated balance sheets. The Company may utilize interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position.
Interest Rate Swaps Designated as Cash Flow Hedges
The Company designated certain interest rate swap agreements as cash flow hedges on variable-rate borrowings. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on interest rate swaps designated as cash flow hedging instruments 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.
The interest rate swap agreements designated as cash flow hedges are summarized as follows:
Notional
Fair
Amount
Value
Designated as cash flow hedges:
Fair value recorded in other liabilities
17,000
(1,572)
(676)
As of September 30, 2020, the interest rate swap agreements designated as cash flow hedges had contractual maturities between 2024 and 2025. As of September 30, 2020 and December 31, 2019, the Company had cash pledged and held on deposit at counterparties of $1,630,000 and $710,000, respectively.
During 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, was reclassified into earnings through April 7, 2020, the period the hedged forecasted transactions affect earnings.
For the three and nine months ended September 30, 2020 and 2019, the effect of interest rate swap agreements designated as cash flow hedges on the consolidated statements of income are summarized as follows:
Location of gross gain (loss) reclassified
Amounts of gross gain (loss)
from accumulated other
reclassified from accumulated
comprehensive income to income
other comprehensive income
Three Months Ended
Nine Months Ended
Taxable loan interest income
64
83
Junior subordinated debentures interest expense
(97)
(202)
(138)
76
32
Interest Rate Swaps Not Designated as Hedging Instruments
The Company may offer interest rate swap agreements to its commercial borrowers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party financial institution. While these interest rate swap agreements generally 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.
The interest rate swap agreements not designated as hedging instruments are summarized as follows:
Not designated as hedging instruments:
Fair value recorded in other assets:
Interest rate swaps with a commercial borrower counterparty
140,820
21,568
114,140
8,532
Interest rate swaps with a financial institution counterparty
24,216
110
Total fair value recorded in other assets
138,356
8,642
Fair value recorded in other liabilities:
(110)
(21,568)
(8,532)
Total fair value recorded in other liabilities
(8,642)
As of September 30, 2020, the interest rate swap agreements not designated as hedging instruments had contractual maturities between 2022 and 2042. As of September 30, 2020 and December 31, 2019, the Company had $22,280,000 and $8,713,000, respectively, of debt securities pledged and held in safekeeping at the financial institution counterparty.
For the three and nine months ended September 30, 2020 and 2019, 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:
Gross gains
2,188
4,151
17,369
10,196
Gross losses
(2,188)
(4,151)
(17,369)
(10,159)
Net gains (losses)
NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the activity and accumulated balances for components of other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019:
Unrealized Gains (Losses)
on Debt Securities
Derivatives
18,806
(1,462)
Other comprehensive income before reclassifications
1,181
Other comprehensive income, before tax
336
Other comprehensive income, after tax
19,646
(127)
(1,388)
8,063
(37)
(590)
Other comprehensive income (loss) before reclassifications
1,081
(86)
Other comprehensive income (loss)
(232)
9,352
(99)
(822)
8,659
(131)
(696)
14,270
143
Other comprehensive income (loss), before tax
(960)
Income tax expense (benefit)
Other comprehensive income (loss), after tax
10,987
(4,561)
122
151
13,016
(297)
(973)
The amounts reclassified from accumulated other comprehensive income (loss) for unrealized gains (losses) on debt securities available-for-sale are included in gain (loss) on securities in the accompanying consolidated statements of income.
The amounts reclassified from accumulated other comprehensive income (loss) for unrealized gains on debt securities held-to-maturity are included in securities interest income in the accompanying consolidated statements of income.
The amounts reclassified from accumulated other comprehensive income (loss) for the fair value of derivative financial instruments represent net interest payments received or made on derivatives designated as cash flow hedges. See Note 10 for additional information.
NOTE 12 – 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 replacement tax rate. The consolidated statements of income present unaudited pro forma C Corp equivalent information for the three and nine months ended September 30, 2019.
Allocation of income tax expense between current and deferred portions for the three and nine months ended September 30 is as follows:
Federal
2,921
5,619
State
1,593
3,218
Total current
4,514
8,837
Deferred
(542)
(419)
(271)
(209)
Total deferred
(813)
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Income tax expense differs from the statutory federal rate for the three and nine months ended September 30 due to the following:
Percentage
Federal income tax, at statutory rate
2,995
21.0
Increase (decrease) resulting from:
Federally tax exempt interest income
(372)
(2.6)
State taxes, net of federal benefit
7.3
1.7
0.2
25.9
6,806
(1,099)
(3.4)
2,397
7.4
1.6
0.3
25.3
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The components of the net deferred tax asset as of September 30, 2020 and December 31, 2019 are as follows:
Deferred tax assets
8,927
6,309
Compensation related
2,156
5,859
Deferred loan fees
1,937
Nonaccrual interest
617
858
574
385
531
1,084
785
Total deferred tax assets
15,199
15,413
Deferred tax liabilities
Fixed asset depreciation
4,363
Mortgage servicing rights
2,428
Other purchase accounting adjustments
1,195
Intangible assets
645
841
Prepaid assets
475
504
Net unrealized gain on debt securities available-for-sale
6,632
2,251
381
426
Total deferred tax liabilities
15,279
12,007
Net deferred tax asset (liability)
(80)
3,406
NOTE 13 – EARNINGS PER SHARE
ASC 260, Earnings Per Share, requires unvested share-based payment awards that have non-forfeitable rights to dividends or dividend equivalents as a separate class of securities in calculating earnings per share. The Company has granted restricted stock units that contain non-forfeitable rights to dividend equivalents. Such restricted stock units are considered participating securities. As such, we have included these restricted stock units in the calculation of basic earnings per share and calculate basic earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings.
Diluted earnings per share is computed using the treasury stock method and reflects the potential dilution that could occur if the Company’s outstanding restricted stock units were vested. For the three and nine months ended September 30, 2020, the restricted stock units were considered anti-dilutive and excluded from the calculation of common stock equivalents. There were no restricted stock units outstanding during the three and nine months ended September 30, 2019.
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Earnings allocated to unvested restricted stock units
(28)
Numerator for earnings per share - basic and diluted
10,535
24,141
Denominator:
Weighted average common shares outstanding
Dilutive effect of outstanding restricted stock units
Weighted average common shares outstanding, including all dilutive potential shares
Earnings per share - Basic
Earnings per share - Diluted
NOTE 14 – DEFERRED COMPENSATION
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 a lump sum payment was made in June 2020 to each participant equal to the present value of any remaining installment payments. As of September 30, 2020, there was no remaining deferred compensation liability for the SERP, and there was no deferred compensation expense recognized for the SERP during the three months ended September 30, 2020. During the three months ended September 30, 2019, the Company recognized deferred compensation expense for the SERP of $968,000. During the nine months ended September 30, 2020 and 2019, the Company recognized deferred compensation expense for the SERP of $1,660,000 and $4,533,000, respectively. As of December 31, 2019, the deferred compensation liability for the SERP was $12,789,000.
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NOTE 15 – STOCK-BASED COMPENSATION PLANS
The Company has adopted the HBT Financial, Inc. Omnibus Incentive Plan (the “Omnibus Incentive Plan”). The Omnibus Incentive Plan provides for grants of (i) stock options, (ii) stock appreciation rights, (iii) restricted shares, (iv) restricted stock units, (v) performance awards, (vi) other share-based awards and (vi) other cash-based awards to eligible employees, non-employee directors and consultants of the Company. The maximum number of shares of common stock available for issuance under the Omnibus Incentive Plan is 1,820,000 shares.
The following is a summary of stock-based compensation expense (benefit):
Restricted stock units
Stock appreciation rights
(75)
(303)
(51)
Total stock-based compensation expense (benefit)
Restricted Stock Units
A restricted stock unit grants a participant the right to receive one share of common stock, following the completion of the requisite service period. Restricted stock units are classified as equity. Compensation cost is based on the Company’s stock price on the grant date and is recognized on a straight-line basis over the vesting period for the entire award. Non-forfeitable dividend equivalents are paid on non-vested restricted stock units and are classified as dividends charged to retained earnings. If restricted stock units are subsequently forfeited, the non-forfeitable dividends related to the forfeited restricted stock units are reclassified to compensation cost in the period the forfeiture occurs.
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. The total fair value of the restricted stock units granted on January 28, 2020 was $1,392,000, based on the grant date closing price of $19.03 per share.
On June 24, 2020, the Company also granted 550 restricted stock units to a non-employee director which vest on February 1, 2021. The total fair value of the restricted stock units granted on June 24, 2020 was $7,000, based on the grant date closing price of $12.71 per share.
The following is a summary of outstanding restricted stock unit activity:
Weighted
Restricted
Stock Units
Grant Date
Outstanding
73,700
18.98
Granted
Vested
Forfeited
A further summary of outstanding restricted stock units as of September 30, 2020, is as follows:
Weighted Average
Remaining
Range of Grant Date Fair Values
Contractual Term
$ 12.71
550
years
$ 19.03
73,150
3.2
As of September 30, 2020, unrecognized compensation cost related to non-vested restricted stock units was $1,136,000.
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. Compensation cost for unvested stock appreciation rights is recognized on a straight line basis over the vesting period of the entire award. The unvested stock appreciation rights vest in four equal annual installments beginning on the first anniversary of the grant date.
The following is a summary of outstanding stock appreciation rights activity:
StockAppreciationRightsOutstanding
WeightedAverageGrant DateAssigned Value
110,160
16.32
42,840
7.46
Exercised
(42,840)
91,800
5.73
(91,800)
A further summary of outstanding stock appreciation rights as of September 30, 2020, is as follows:
Range of Grant Date Assigned Values
Exercisable
$ 16.32
87,210
8.9
As of September 30, 2020, unrecognized compensation cost related to non-vested stock appreciation rights was $27,000.
As of September 30, 2020 and December 31, 2019, the liability recorded for outstanding stock appreciation rights was $106,000 and $409,000, respectively. As of September 30, 2020 and December 31, 2019, the Company used an option pricing model to value the stock appreciation rights, using the assumptions in the following table. Expected volatility is derived from the historical volatility of the Company’s stock price and a selected peer group of industry-related companies.
Risk-free interest rate
0.61
1.90
Expected volatility
34.10
28.83
Expected life (in years)
9.7
Expected dividend yield
5.35
3.16
As of September 30, 2020, the liability recorded for previously exercised stock appreciation rights was $1,206,000, which will be paid in four remaining equal annual installments. As of December 31, 2019, the liability recorded for previously exercised units was $1,512,000.
NOTE 16 – REGULATORY MATTERS
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 Basel III rules, the Banks and Company elected to exclude accumulated other comprehensive income, including unrealized gains and losses on debt securities, in the computation of regulatory capital.
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 September 30, 2020 and December 31, 2019, the capital conservation buffer was 2.5%.
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 financial statements of HBT Financial, Inc. and the Banks. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, HBT Financial, Inc. (on a consolidated basis) 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 September 30, 2020 and December 31, 2019, 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. (on a consolidated basis) and the Banks are as follows:
Actual
For Capital Adequacy Purposes
To Be Well Capitalized Under Prompt Corrective Action Provisions
Ratio
Total Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.
417,844
16.81
198,827
8.00
N/A
Heartland Bank
333,344
14.52
183,710
229,638
10.00
State Bank of Lincoln
35,955
19.16
15,013
18,766
Tier 1 Capital (to Risk Weighted Assets)
347,552
13.98
149,120
6.00
304,639
13.27
137,783
33,602
17.91
11,260
Common Equity Tier 1 Capital (to Risk Weighted Assets)
311,085
12.52
111,840
4.50
103,337
149,265
6.50
8,445
Tier 1 Capital (to Average Assets)
10.04
138,524
4.00
9.77
124,701
155,876
5.00
9.82
13,691
17,114
356,994
14.54
196,358
315,516
14.02
180,071
225,088
35,390
17.58
16,104
20,130
334,695
13.64
147,268
295,385
13.12
135,053
33,222
16.50
12,078
298,277
12.15
110,451
101,290
146,307
9,058
13,084
10.38
129,027
10.25
115,281
144,102
13,531
16,914
NOTE 17 – 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 to the Company’s annual consolidated financial statements included in the Annual Report on Form 10-K filed with the SEC on March 27, 2020. There were no transfers between levels during the three and nine months ended September 30, 2020 and 2019. 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.
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The following tables present the balances of the assets measured at fair value on a recurring basis:
Level 1 Inputs
Level 2Inputs
Level 3 Inputs
Total Fair Value
Debt securities available-for-sale:
Equity securities with readily determinable fair values
Derivative financial assets
Derivative financial liabilities
23,140
9,318
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, 2019 to September 30, 2020.
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Investment Securities
When available, the Company uses quoted market prices to determine the fair value of securities; such items are classified in Level 1 of the fair value hierarchy. For the Company’s securities where quoted prices are not available for identical securities in an active market, the Company determines fair value utilizing vendors who apply matrix pricing for similar bonds where no price is observable or may compile prices from various sources. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace. Fair values from these models are verified, where possible, against quoted market prices for recent trading activity of assets with similar characteristics to the security being valued. Such methods are generally classified as Level 2. However, when prices from independent sources vary, cannot be obtained or cannot be corroborated, a security is generally classified as Level 3. The change in fair value of debt securities available-for-sale is recorded through an adjustment to the consolidated statement of comprehensive income. The change in fair value of equity securities with readily determinable fair values is recorded through an adjustment to the consolidated statement of income.
Derivative Financial Instruments
Interest rate swap agreements are carried at fair value as determined by dealer valuation models. Based on the inputs used, the derivative financial instruments subjected to recurring fair value adjustments are classified as Level 2. For derivative financial instruments designated as 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 as Level 3. The change in fair value is recorded through an adjustment to the consolidated statement of income.
The following tables present additional information about the unobservable inputs used in the fair value measurement of the mortgage servicing rights (dollars in thousands):
Valuation Technique
Unobservable Inputs
Range(Weighted Average)
Discounted cash flows
Constant pre-payment rates (CPR)
7.0% to 85.0% (18.2%)
Discount rate
9.0% to 11.0% (9.0%)
7.0% to 68.5% (12.3%)
Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as there is evidence of impairment or a change in the amount of previously recognized impairment.
The following tables present the balances of the assets measured at fair value on a nonrecurring basis:
Collateral-dependent impaired loans
16,209
15,811
Loans Held for Sale
Mortgage loans originated and held for sale are carried at the lower of cost or estimated fair value. The Company obtains quotes or bids on these loans directly from purchasing financial institutions. Typically, these quotes include a premium on the sale and thus these quotes indicate fair value of the held for sale loans is greater than cost.
Collateral-Dependent Impaired Loans
In accordance with the provisions of the loan impairment guidance, impairment was measured for loans which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. The fair value of collateral-dependent impaired loans is estimated based on the fair value of the underlying collateral supporting the loan. Collateral-dependent impaired loans require classification in the fair value hierarchy. Impaired loans include loans acquired with deteriorated credit quality. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.
Bank Premises Held for Sale
Bank premises held for sale are recorded at the lower of cost or fair value, less estimated selling costs, at the date classified as held for sale. Values are estimated using Level 3 inputs based on appraisals and customized discounting criteria. The carrying value of bank premises held for sale is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.
Foreclosed Assets
Foreclosed assets are recorded at fair value based on property appraisals, less estimated selling costs, at the date of the transfer. Subsequent to the transfer, foreclosed assets are carried at the lower of cost or fair value, less estimated selling costs. Values are estimated using Level 3 inputs based on appraisals and customized discounting criteria. The carrying value of foreclosed assets is not re-measured to fair value on a recurring basis but is subject to fair value adjustments when the carrying value exceeds the fair value, less estimated selling costs.
Collateral-Dependent Impaired Loans, Bank Premises Held for Sale, and Foreclosed Assets
The estimated fair value of collateral-dependent impaired loans, bank premises held for sale, and foreclosed assets is based on the appraised fair value of the collateral, less estimated costs to sell. Collateral-dependent impaired loans, bank premises held for sale, and foreclosed assets are classified within Level 3 of the fair value hierarchy.
The Company considers the appraisal or a similar evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals or a similar evaluation of the collateral underlying collateral-dependent loans and foreclosed assets are obtained at the time a loan is first considered impaired or a loan is transferred to foreclosed assets. Appraisals or a similar evaluation of bank premises held for sale are obtained when first classified as held for sale. Appraisals or similar evaluations are obtained subsequently as deemed necessary by management but at least annually on foreclosed assets and bank premises held for sale. Appraisals are reviewed for accuracy and consistency by management. Appraisals are performed by individuals selected from the list of approved appraisers maintained by management. The appraised values are reduced by estimated costs to sell. These discounts and estimates are developed by management by comparison to historical results.
The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements (dollars in thousands):
FairValue
ValuationTechnique
Range (Weighted Average)
Appraisal of collateral
Appraisal adjustments
Not meaningful
Appraisal
7% (7%)
Other Fair Value Methods
The following methods and assumptions were used by the Company in estimating fair value disclosures of its other financial instruments. There were no changes in the methods and significant assumptions used to estimate the fair value of these financial instruments.
Cash and Cash Equivalents
The carrying amounts of these financial instruments approximate their fair values.
Interest-bearing Time Deposits with Banks
The carrying values of interest-bearing time deposits with banks approximate their fair values.
Restricted Stock
The carrying amount of FHLB stock approximates fair value based on the redemption provisions of the FHLB.
The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the 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.
Investments in Unconsolidated Subsidiaries
The fair values of the Company’s investments in unconsolidated subsidiaries are presumed to approximate carrying amounts.
Time Deposits
Fair values of certificates of deposit with stated maturities have been estimated using the present value of estimated future cash flows discounted at rates currently offered for similar instruments. Time deposits also include public funds time deposits.
Securities Sold Under Agreements to Repurchase
The fair values of repurchase agreements with variable interest rates are presumed to approximate their recorded carrying amounts.
Subordinated Notes
The fair values of subordinated notes are estimated using discounted cash flow analyses based on rates observed on recent debt issuances by other financial institutions.
Junior Subordinated Debentures
The fair values of subordinated debentures are estimated using discounted cash flow analyses based on rates observed on recent debt issuances by other financial institutions.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Limitations
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair values have been estimated using data which management considered the best available and estimation methodologies deemed suitable for the pertinent category of financial instrument.
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The following table provides summary information on the carrying amounts and estimated fair values of the Company’s financial instruments:
Hierarchy
Carrying
Estimated
Level
Financial assets:
Level 1
Level 2
Restricted stock
Level 3
Loans, net
2,269,402
2,181,103
Financial liabilities:
Time deposits
309,806
355,340
39,999
Junior subordinated debentures
24,844
31,959
Accrued interest payable
1,132
The Company estimated the fair value of lending related commitments as described in Note 18 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 18 – 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.
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Such commitments and conditional obligations were as follows:
Contractual Amount
Commitments to extend credit
536,052
542,705
Standby letters of credit
10,154
8,991
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.
Legal Contingencies
Various legal claims arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to HBT Financial, Inc. and its consolidated subsidiaries.
The following is management’s discussion and analysis of the financial condition as of September 30, 2020 (unaudited), as compared with December 31, 2019, and the results of operations for the three and nine months ended September 30, 2020 and 2019 (unaudited). Management’s discussion and analysis should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be attained for any other period.
OVERVIEW
HBT Financial, Inc. is headquartered in Bloomington, Illinois and is the holding company for Heartland Bank and State Bank of Lincoln. The Banks provide a comprehensive suite of business, commercial, wealth management, and retail banking products and services to individuals, businesses, and municipal entities throughout Central and Northeastern Illinois through 63 branches. As of September 30, 2020, the Company had total assets of $3.5 billion, total loans of $2.3 billion, and total deposits of $3.0 billion. HBT Financial, Inc. is a longstanding Central Illinois company, with banking roots that can be traced back 100 years.
Market Area
We currently operate 60 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 of our strong track record of financial performance.
Below is a summary of the loan and deposit balances by the metropolitan and micropolitan statistical areas in which we operate:
Bloomington-Normal
510,780
552,787
Champaign-Urbana
212,006
209,317
Chicago
1,168,732
1,020,524
Lincoln
109,031
107,162
Ottawa-Peru
104,923
103,665
Peoria
174,167
170,371
746,612
694,519
167,731
152,108
1,039,574
911,916
199,719
194,784
331,299
290,138
531,726
533,390
The Bloomington-Normal metropolitan statistical area includes our branches within McLean and De Witt counties. The Champaign-Urbana metropolitan statistical area includes our branches within Champaign and Ford counties. The Chicago metropolitan statistical area includes our branches within Cook, DeKalb, Grundy, Kane, Kendall, Lake, and Will counties. The Lincoln micropolitan statistical area includes our branches within Logan county. The Ottawa-Peru micropolitan statistical area includes our branches within Bureau and LaSalle counties. The Peoria metropolitan statistical area includes our branches within Peoria, Marshall, Tazewell, and Woodford counties.
COVID-19 Response and Impact Overview
The Company has taken a number of steps to support our employees and customers while maintaining the health and safety of all involved, including, but not limited to:
The Company operates primarily in Illinois which has established a five-phase reopening plan. Illinois entered Phase 4 of its reopening plan on June 26, 2020 which allows gatherings of 50 people or fewer, restaurants and bars to reopen for indoor dining at reduced capacity, and child care and schools to reopen under guidance from the Illinois Department of Public Health. Subsequent to September 30, 2020, Illinois has seen an increase in COVID-19 cases and more restrictive mitigation measures have been reinstated, such as a ban on indoor dining. Illinois is only likely to transition to Phase 5 of its reopening plan, a full reopening, when a vaccine or highly effective COVID-19 treatment is available.
Paycheck Protection Program Loans
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) established the Paycheck Protection Program (PPP) which provides small businesses with funds to pay payroll costs, including benefits, and certain non-payroll costs such as mortgage interest, rent, and utilities. Administered by the SBA, program funds are provided to eligible businesses in the form of loans which may be fully forgiven when loan proceeds are used for payroll costs and allowable non-payroll costs. PPP loans are unsecured, have a two-year or five-year term, bear a fixed contractual interest rate of 1.00%, and are 100% guaranteed by the SBA.
Additionally, the SBA pays lenders fees for processing PPP loans, based on a set percentage of the loan amount. In accordance with ASC 310-20, Receivables: Nonrefundable Fees and Other Costs, these fees, along with direct origination costs are deferred and recognized over the life of the loan as an adjustment of yield (included in taxable loan interest income). Recognition of net deferred origination fees are expected to be accelerated upon loan forgiveness or repayment prior to contractual maturity.
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The following table summarizes PPP loans originated, along with the origination fees received from the SBA, during the nine months ended September 30, 2020:
Loan
Fee
Origination
Range of Loan Amounts
Less than $350,000
2,233
109,063
5.0%
5,453
Over $350,000, but less than $2,000,000
69,254
3.0%
2,078
Over $2,000,000
7,085
1.0%
2,329
185,402
7,602
As of September 30, 2020, PPP loans, net of deferred origination fees, were $179.7 million or 7.9% of loans, before allowance for loan losses. Net deferred origination fees on PPP loans totaled $5.4 million as of September 30, 2020. The deferred origination fees were reduced by direct origination costs, primarily salaries and benefits costs, of less than $0.1 million during the three months ended September 30, 2020 and $0.5 million during the nine months ended September 30, 2020. Net deferred origination fees on PPP loans of $0.9 million during the three months ended September 30, 2020 and $1.7 million during the nine months ended September 30, 2020 were recognized as taxable loan interest income.
Payment Modifications Related to COVID-19
Loan payment modifications have been made for borrowers experiencing financial hardship due to COVID-19, with substantially all modifications in the form of a three-month interest-only period or a one-month payment deferral. Consistent with the applicable accounting and regulatory guidance, short-term loan payment modifications such as these are generally not considered a TDR.
Following the phased reopening of Illinois businesses and federal economic stimulus received by commercial and retail customers during the second quarter of 2020, the volume of loan modifications requests related to a COVID-19 financial hardship slowed significantly. Additionally, many loans that received a short-term payment modification returned to regular payments during the third quarter of 2020. The following table presents the number and balance of loans granted a payment modification that have not returned to regular payments as of September 30, 2020 and June 30, 2020.
As of September 30, 2020
As of June 30, 2020
4,739
23,949
3,178
4,175
7,294
40,104
18,021
98
102,407
12,031
5,148
124
15,048
370
36,394
203,232
Industries Adversely Impacted by COVID-19
While many industries have and will continue to be adversely impacted by the COVID-19 pandemic, the retail, restaurant, and hotel industries are considered particularly susceptible to significant adverse impacts. Adverse impacts in these and other industries may result in a deterioration of the loan portfolio’s credit quality or an increase in provision for loan losses. The below table summarizes loan balances within the retail, restaurant, and hotel industries along with select credit quality information as of September 30, 2020.
Carrying Balance
Modified
Non-PPP Loans
PPP Loans
Status
Risk Rating
Payments (1)
Retail
10,473
12,068
22,541
3,350
17,554
273
128,252
6,985
8,990
5,607
161,886
173,954
12,640
Restaurants
3,456
11,064
14,520
16,153
2,816
1,606
7,245
480
635
26,854
37,918
3,631
2,241
Hotels
1,538
22,748
6,699
6,098
24,286
Subordinated Note Issuance
To further enhance the Company’s strong capital and liquidity positions, we successfully completed a private placement of $40.0 million 4.50% Fixed-to-Floating Rate Subordinated Notes due 2030 during the quarter. This issuance of subordinated notes, which qualify as Tier 2 regulatory capital, contributed to an increase in the Company’s total risk based capital ratio, which was 16.81% at September 30, 2020, compared to 14.54% at December 31, 2019, while also significantly bolstering the cash reserves held at the holding company.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Economic Conditions
The Company's business and financial performance are affected by economic conditions generally in the United States and more directly in the Illinois markets where we primarily operate. The significant economic factors that are most relevant to our business and our financial performance include the general economic conditions in the U.S. and in the Company's markets, unemployment rates, real estate markets, and interest rates.
COVID-19 Pandemic
Although the Company has maintained business operations with appropriate social distancing procedures since the beginning of the COVID-19 pandemic, it has caused significant economic disruption throughout the United States and the communities that we serve. While the length, duration and ultimate impact of the COVID-19 pandemic is unknown at this time, it may adversely impact the businesses we serve and impair the ability of our customers to fulfill their contractual obligations to us. This could adversely affect our asset valuations, financial condition, liquidity and results of operations, and the impacts may be material. During 2020, we experienced, and we may continue to experience, the following adverse impacts of the COVID-19 pandemic:
Adverse impacts may also include valuation impairments on our goodwill, intangible assets, investment securities, loans, mortgage servicing rights, deferred tax assets or counter-party risk derivatives.
The Company’s executive management continues to closely monitor the COVID-19 pandemic. As of the date of this filing, we anticipate we will continue to take actions to support our customers in a manner consistent with the current guidance provided by federal banking regulatory authorities.
Interest Rates
Net interest income is our primary source of revenue. Net interest income 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 the economic downturn related to the COVID-19 pandemic.
We expect these rate cuts and potential increases in nonperforming loans as a result of the economic downturn related to the COVID-19 pandemic 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. In addition, the economic slow-down caused by the COVID-19 pandemic may result in decreases in loan demand and increases in provision for loan losses due to increased net charge-offs and deterioration in the loan portfolio’s credit quality.
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 / Trends
We are subject to federal and state regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment includes extensive regulation and supervision in areas such as consumer compliance, the BSA and anti-money laundering compliance, risk management and internal audit. We anticipate that this environment of extensive regulation and supervision will continue for the industry. As a result, changes in the regulatory environment may result in additional costs for additional compliance, risk management and audit personnel or professional fees associated with advisors and consultants.
58
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.
The following table illustrates the impact of being taxed as a C Corporation:
As Reported
Income before income tax expense
Effective tax rate
Unaudited Pro Forma C Corp Equivalent
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
26.0
25.8
N/A Not applicable.
The C Corp equivalent effective tax rate reflects a federal income tax rate of 21% and state income tax rate of 9.5% for the three and nine months ended September 30, 2019.
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.
Annualization Factor
The method used to calculate annualization factors for interim period ratios has changed from financial information previously presented. The annualization factor is now calculated using the number of days in the year divided by the number of days in the interim period. Previously, annualization factors were calculated as 4 divided by the number of quarters in the interim period, or an annualization factor of 4 for a quarterly period. The change was applied retrospectively to all periods presented and did not have a material impact on the annualized interim ratios.
60
RESULTS OF OPERATIONS
Overview of Recent Financial Results
The following table presents selected financial results and measures:
Statement of Income Information
Net income after provision for loan losses
C Corp equivalent net income (1)
Adjusted net income (2)
10,755
14,343
27,352
43,010
Net interest income (tax-equivalent basis) (2) (3)
29,366
33,700
89,882
103,299
Share and Per Share Information
C Corp equivalent earnings per share - Diluted (1)
Adjusted earnings per share - Diluted (2)
0.39
0.80
0.99
2.39
Weighted average number shares of common stock outstanding
Summary Ratios
Net interest margin *
3.39
4.27
3.63
4.38
Net interest margin (tax-equivalent basis) * (2) (3)
3.45
4.35
3.69
4.46
Yield on loans *
4.48
5.43
5.59
Yield on interest-earning assets *
3.55
4.60
3.83
4.71
Cost of interest-bearing liabilities *
0.24
0.46
0.29
Cost of total deposits *
0.11
0.16
Efficiency ratio
56.98
53.94
61.15
54.86
Efficiency ratio (tax-equivalent basis) (2) (3)
56.27
53.21
60.37
54.08
Return on average assets *
1.20
2.16
0.96
2.11
Return on average stockholders' equity *
11.83
19.84
9.30
19.69
Return on average tangible common equity * (2)
12.80
21.58
10.08
21.46
C Corp equivalent return on average assets * (1)
1.63
1.59
C Corp equivalent return on average stockholders' equity * (1)
14.93
14.84
C Corp equivalent return on average tangible common equity * (1) (2)
16.24
16.18
Adjusted return on average assets * (2)
1.22
1.08
Adjusted return on average stockholders' equity * (2)
12.04
10.50
16.68
Adjusted return on average tangible common equity * (2)
13.03
17.75
11.40
18.18
* Annualized measure.
Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019
For the three months ended September 30, 2020, net income was $10.6 million decreasing by $6.9 million, or 39.4%, when compared to net income for the three months ended September 30, 2019, or a decrease of $2.6 million, or 19.5%, when compared to C Corp equivalent net income for the three months ended September 30, 2019. Net income declined primarily due to lower net interest income and higher provision for loan losses. Net interest income declined by $4.3 million, primarily as a result of a lower interest rate environment. Provision for loan losses increased by $1.5 million, primarily due to the economic weakness resulting from the COVID-19 pandemic. Partially offsetting these declines was a $2.2 million increase in gains on sale of mortgage loans attributable to a strong mortgage refinancing environment and higher premiums received on mortgage loans sold.
Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019
For the nine months ended September 30, 2020, net income was $24.2 million decreasing by $26.6 million, or 52.3%, when compared to net income for the nine months ended September 30, 2019, or a decrease of $14.1 million, or 36.8%, when compared to C Corp equivalent net income for the nine months ended September 30, 2019. Net income declined primarily due to lower net interest income and higher provision for loan losses. Net interest income declined by $13.1 million, primarily as a result of a lower interest rate environment. Provision for loan losses increased by $6.8 million, primarily due to the economic weakness resulting from the COVID-19 pandemic. Partially offsetting these declines was a $3.7 million increase in gains on sale of mortgage loans attributable to a strong mortgage refinancing environment and higher premiums received on mortgage loans sold.
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.
The following tables sets forth average balances, average yields and costs, and certain other information for the three and nine months ended September 30, 2020 and 2019. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs, discounts and premiums, as well as purchase accounting adjustments that are accreted or amortized to interest income or expense.
September 30, 2019
Yield/Cost *
2,277,826
25,660
2,191,230
29,992
Securities
831,120
4,499
2.15
745,532
2.64
Deposits with banks
274,022
0.09
136,635
1.93
2.29
2.35
Total interest-earning assets
3,385,466
3,075,822
(30,221)
(22,326)
Noninterest-earning assets
157,446
149,146
3,512,691
3,202,642
888,941
0.05
812,526
0.17
479,314
0.08
468,139
0.42
493,278
0.03
428,447
0.06
306,154
0.76
383,070
1.12
2,167,687
0.15
2,092,182
51,686
35,757
0.18
1,196
0.47
2.40
11,976
4.87
37,621
3.89
37,561
5.05
Total interest-bearing liabilities
2,270,166
2,165,533
846,808
651,085
Noninterest-bearing liabilities
40,421
37,274
3,157,395
2,853,892
355,296
348,750
Net interest income/Net interest margin (3)
Tax-equivalent adjustment (2)
495
559
Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) (1) (2)
Net interest rate spread (4)
3.31
4.14
Net interest-earning assets (5)
1,115,300
910,289
Ratio of interest-earning assets to interest-bearing liabilities
1.49
1.42
Cost of total deposits
2,228,145
79,144
2,184,263
91,387
740,834
13,260
779,375
15,754
2.70
283,730
0.41
131,209
1.99
2,473
2,527
2.42
3,255,182
3,097,374
(26,288)
(21,346)
156,121
147,972
3,385,015
3,224,000
853,775
821,848
0.19
473,647
455,469
0.40
467,482
0.04
428,865
321,905
0.90
408,972
1.10
2,116,809
0.22
2,115,154
49,183
39,542
1,333
378
2.61
4,021
37,605
4.30
37,544
5.21
2,208,951
2,192,618
780,826
654,818
47,426
31,720
3,037,203
2,879,156
347,812
344,844
1,775
3.54
4.25
1,046,231
904,756
1.47
1.41
The following tables set forth the components of loan interest income, which includes contractual interest on loans, loan fees, accretion of acquired loan discounts and net earnings on cash flow hedges:
Yield
Contribution *
Contractual interest
23,715
28,648
5.19
73,939
4.43
86,620
5.29
Loan fees (excluding PPP loans)
904
1,007
2,847
2,584
PPP loan fees
1,727
0.10
Accretion of acquired loan discounts
165
304
2,100
0.13
Net cash flow hedge earnings
0.01
Total loan interest income
The following tables set forth the components of net interest income, which includes 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.
Net Interest
Margin
Interest income:
Contractual interest on loans
2.78
3.74
Contractual interest on securities
5,972
0.70
5,858
0.75
16,558
0.68
18,513
Contractual interest on deposits with banks
0.12
0.07
0.02
Securities amortization, net
(1,473)
(0.17)
(891)
(0.11)
(3,298)
(0.14)
(2,759)
(0.12)
Total interest income
Interest expense:
Contractual interest on deposits
1,994
0.26
3,463
0.14
6,103
Contractual interest on other interest-bearing liabilities
469
1,140
1,461
0.33
0.20
Tax equivalent adjustment (1)
Net interest income (tax equivalent) (1) (2)
Rate/Volume Analysis
The following table sets forth the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate), and changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both volume and rate that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
vs.
Increase (Decrease) Due to
Volume
Rate
Interest-earning assets:
1,147
(5,479)
(4,332)
1,803
(14,046)
(12,243)
(989)
(468)
(774)
(1,720)
(2,494)
(942)
(597)
1,204
(2,279)
(1,075)
(4)
2,013
(7,411)
(5,398)
2,232
(18,048)
(15,816)
Interest-earning liabilities:
(254)
(683)
(639)
(413)
(401)
(800)
(748)
(33)
(68)
(50)
(191)
(308)
(499)
(646)
(531)
(1,177)
(1,017)
(1,157)
(532)
(2,082)
(2,614)
(13)
(8)
(18)
(12)
(5)
(112)
(255)
(253)
(1,142)
(1,128)
(366)
(2,367)
(2,733)
Change in net interest income
1,999
(6,269)
(4,270)
2,598
(15,681)
(13,083)
Net interest income for the three months ended September 30, 2020 decreased $4.3 million, or 12.9%, to $28.9 million from $33.1 million for the three months ended September 30, 2019. The decrease is primarily attributable to declines in benchmark interest rates, which drove lower yields on interest-earning assets. Partially offsetting this decline were an increase in interest-earning asset balances, lower costs on deposits, and a decrease in time deposit balances.
Net interest margin decreased as well to 3.39% for the three months ended September 30, 2020 compared to 4.27% for the three months ended September 30, 2019. The decrease was primarily attributable to the decline in the average yield on earning assets. The contribution of acquired loan discount accretion to net interest income declined to $0.2 million or 2 basis points of the net interest margin, for the three months ended September 30, 2020 from $0.3 million or 4 basis points of the net interest margin, for the three months ended September 30, 2019.
66
Net interest income for the nine months ended September 30, 2020 decreased $13.1 million, or 12.9%, to $88.4 million from $101.5 million for the nine months ended September 30, 2019. The decrease is primarily attributable to declines in benchmark interest rates, which drove lower yields on interest-earning assets. Partially offsetting this decline were an increase in interest-earning asset balances, lower costs on deposits, and a decrease in time deposit balances.
Net interest margin decreased as well to 3.63% for the nine months ended September 30, 2020 compared to 4.38% for the nine months ended September 30, 2019. The decrease was primarily attributable to the decline in the average yield on earning assets. The contribution of acquired loan discount accretion to net interest income declined to $0.6 million or 2 basis points of the net interest margin, for the nine months ended September 30, 2020 from $2.1 million or 9 basis points of the net interest margin, for the nine months ended September 30, 2019.
Additionally, the $40 million of subordinated notes issued during the third quarter of 2020 is expected to add downward pressure to net interest income and net interest margin in subsequent periods. However, the proceeds from the issuance, which were primarily invested in debt securities, provide additional regulatory capital to buffer against higher than estimated credit losses and support organic or acquisitive growth.
The quarterly net interest margins were as follows:
Three months ended
March 31,
4.03
June 30,
3.51
4.37
4.09
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 the economic downturn related to the COVID-19 pandemic.
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.
The deterioration of economic conditions related to the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the communities that we serve. As a result, our provision for loan losses has increased, and may continue to increase, possibly materially, and adversely affect our financial condition, results of operations, and cash flows.
The provision for loan losses was $2.2 million and $0.7 million for the three months ended September 30, 2020 and 2019, respectively. The increase in provision for loan losses was primarily due to reserve build during the three months ended September 30, 2020 related to adjustments to qualitative factors to reflect the economic weakness resulting from the COVID-19 pandemic.
The provision for loan losses was $10.1 million and $3.3 million for the nine months ended September 30, 2020 and 2019, respectively. The increase in provision for loan losses was primarily due to $9.2 million of reserve build during the nine months ended September 30, 2020 related to adjustments to qualitative factors to reflect the economic weakness resulting from the COVID-19 pandemic. The remaining $0.9 million of the provision during the nine months ended September 30, 2020 was primarily due to a $0.6 million increase in specific reserves on loans individually evaluated for impairment.
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Noninterest Income
The following table sets forth the major categories of noninterest income for the periods indicated:
$ Change
(618)
(1,345)
(167)
592
2,192
3,678
(1,315)
2,470
949
Total noninterest income for the three months ended September 30, 2020 increased by $2.5 million, or 32.6%, to $10.1 million from $7.6 million for the three months ended September 30, 2019. The increase is primarily attributable to a $2.2 million increase in gains on sale of mortgage loans, attributable to a strong mortgage refinancing environment and higher premiums received on mortgage loans sold, and a less negative mortgage servicing rights fair value adjustment. Partially offsetting these increases was a $0.6 million decrease in service charges on deposit accounts.
Total noninterest income for the nine months ended September 30, 2020 increased by $1.0 million, or 4.2%, to $23.4 million from $22.4 million for the nine months ended September 30, 2019. The increase is primarily attributable to a $3.7 million increase in gains on sale of mortgage loans, attributable to a strong mortgage refinancing environment and higher premiums received on mortgage loans sold. Partially offsetting this increase were a $1.3 million decrease in service charges on deposit accounts, associated with lower overdraft incidences and fee waivers, and nonrecurring gains contained in the 2019 results, including gains on sales of First Community Title Services, Inc. and HBT insurance of $0.8 million and gains on sales of bank premises held for sale of $0.4 million.
Noninterest Expense
The following table sets forth the major categories of noninterest expense for the periods indicated:
292
1,601
(587)
(1,665)
(176)
(181)
(159)
112
818
(160)
214
(609)
(122)
937
182
215
Total noninterest expense for the three months ended September 30, 2020 increased by $0.2 million, or 0.8%, to $22.5 million from $22.3 million for the three months ended September 30, 2019. Employee benefits expense declined by $0.6 million as third quarter of 2019 results included a $0.8 million charge related to the termination of the supplemental executive retirement plan (SERP) which was paid out in June 2020 and no longer affects earnings. Increased other noninterest expenses include higher legal and professional fees associated with public company costs not incurred during the three months ended September 30, 2019. Higher salaries expense was primarily driven by higher mortgage lender commissions and overtime for mortgage support personnel, as a result of increased residential mortgage origination volume.
Total noninterest expense for the nine months ended September 30, 2020 increased by $0.2 million, or 0.3%, to $69.3 million from $69.1 million for the nine months ended September 30, 2019. The decrease in employee benefits expense, primarily the result of smaller charges related to the SERP which was terminated, was mostly offset by increased salaries expense. The charge related to termination of the SERP was $1.5 million and $4.2 million during the nine months ended September 30, 2020 and 2019, respectively. The remaining $1.0 million increase in employee benefits expense was primarily related to higher medical benefit expenses. Increased other noninterest expenses include higher legal and professional fees associated with public company costs not incurred during the nine months ended September 30, 2019.
The increase in salaries expense was primarily driven by higher mortgage lender commissions and overtime for mortgage support personnel, as a result of increased residential mortgage origination volume. Partially offsetting this increase was a reduction in employee count occurred 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 was $0.4 million for the nine months ended September 30, 2019. There was no salaries and employee benefits expenses for First Community Title Services, Inc. or HBT Insurance subsequent to 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. For additional information, see “Factors Affecting Comparability of Financial Results: S Corp Status”.
We recorded income tax expense of $3.7 million, or 25.9% effective tax rate, during the three months ended September 30, 2020 compared to $0.3 million, or 1.7% effective tax rate, on a historical basis and $4.6 million, or 26.0% effective tax rate, on a pro forma C Corp equivalent basis during the three months ended September 30, 2019. The effective income tax rate was lower than the combined federal and state statutory rate of approximately 28.5% primarily due to tax exempt interest income.
We recorded income tax expense of $8.2 million, or 25.3% effective tax rate, during the nine months ended September 30, 2020 compared to $0.8 million, or 1.6% effective tax rate, on a historical basis and $13.3 million, or 25.8% effective tax rate, on a pro forma C Corp equivalent basis during the nine months ended September 30, 2019. The effective income tax rate was lower than the combined federal and state statutory rate of approximately 28.5% primarily due to tax exempt interest income. Relative to the pro forma C Corp equivalent effective tax rate, the effective income tax rate decreased primarily due to tax exempt interest income making up a larger portion of pre-tax net income during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
FINANCIAL CONDITION
% Change
Balance Sheet Information
(16.6)
Securities available-for-sale, at fair value
222,394
37.5
Securities held-to-maturity
(13,967)
(15.8)
19,192
423.6
115,813
5.4
Less: allowance for loan losses
9,355
42.0
106,458
5.0
(927)
(23.0)
105,946
102,154
3,792
3.7
290,120
8.6
2.3
NM
0.1
(12,334)
(23.1)
267,744
9.2
Total stockholders' equity
22,376
6.7
Total liabilities and stockholders' equity
Tangible assets (1)
3,508,500
3,217,453
291,047
9.0
Tangible common equity (1)
328,571
305,268
23,303
7.6
Core deposits (1)
2,991,927
2,732,101
259,826
9.5
Book value per share
12.94
12.12
Tangible book value per share (1)
11.97
11.12
Ending number shares of common stock outstanding
Balance Sheet Ratios
Loan to deposit ratio
75.57
77.92
Core deposits to total deposits (1)
99.18
98.39
Stockholders' equity to total assets
10.05
10.26
Tangible common equity to tangible assets (1)
9.36
9.49
NM Not meaningful
Total assets were $3.54 billion at September 30, 2020, an increase of $290.1 million, or 8.9%, from December 31, 2019, which was primarily a result of an increase in total deposits which were invested primarily in debt securities and loans. Loans, before allowance for loan losses increased $115.8 million, primarily due to the origination of PPP loans which totaled $179.7 million as of September 30, 2020. Loans held for sale increased $19.2 million, primarily due to a strong mortgage refinancing environment.
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Total deposits were $3.02 billion at September 30, 2020, an increase of $239.8 million, or 8.6%, from December 31, 2019. This increase is primarily due to PPP loan proceeds received by commercial customers and federal economic stimulus received by retail customers.
Core deposits to total deposits remained very high at 99.2% at September 30, 2020 compared to 98.4% at December 31, 2019, as we managed our deposit portfolio to retain higher value core deposit relationships and maintain the lowest practicable cost of funds. The loan to deposit ratio was 75.6% at September 30, 2020, decreasing from 77.9% at December 31, 2019.
Loan Portfolio
The following table sets forth the composition of the loan portfolio, excluding loans held-for-sale, by type of loan.
Percent
17.1
14.2
10.3
9.6
9.9
10.7
23.4
26.8
8.7
8.3
11.7
10.4
13.5
14.5
5.5
100.0
Loans, before allowance for loan losses (originated) (1)
2,148,074
94.2
1,998,496
92.4
Loans, before allowance for loan losses (acquired) (1)
131,565
5.8
165,330
PPP loans (included above)
Loans, before allowance for loan losses increased by $115.8 million, or 5.4%, to $2.28 billion as of September 30, 2020 from $2.16 billion as of December 31, 2019. The increase was primarily due to PPP loan originations during the second and third quarters of 2020. Partially offsetting this increase was a $24.6 reduction in participation loan balances and a $42.9 million reduction in balances on existing business lines of credit.
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Loan Portfolio Maturities
The following table summarizes the scheduled maturities of the loan portfolio as of September 30, 2020. Demand loans (loans having no stated repayment schedule or maturity) and overdraft loans are reported as being due in one year or less.
One Year Through
One Year or Less
Five Years
After Five Years
Scheduled Maturities of Loans:
130,150
246,472
12,609
114,017
89,741
31,839
27,893
134,838
62,614
71,950
334,725
125,779
37,760
114,453
47,228
150,656
109,227
5,875
73,436
98,233
136,696
23,512
25,240
74,696
629,374
1,152,929
497,336
Loans Maturing After One Year:
Floating interest rates:
Repricing within one year or less
338,890
Repricing in more than one year
83,550
Total floating interest rates
422,440
Predetermined (fixed) interest rates
1,227,825
Total loans maturing after one year
1,650,265
Nonperforming Assets
Nonperforming loans consist of all loans past due 90 days or more or on nonaccrual. Nonperforming assets consist of all nonperforming loans and foreclosed assets. Typically, loans are placed on nonaccrual when they reach 90 days past due, or when, in management’s opinion, there is reasonable doubt regarding the collection of the amounts due through the normal means of the borrower. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income. Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies. Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance and we must believe that all remaining principal and interest is fully collectible, before the loan is eligible to return to accrual status. Management believes the Company’s lending practices and active approach to managing nonperforming assets has resulted in timely resolution of problem assets.
Loans acquired with deteriorated credit quality are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment. However, these loans may be considered performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments. The accrual of interest is discontinued on loans acquired with deteriorated credit quality if management can no longer estimate future cash flows on the loan. Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all loans acquired with deteriorated credit quality, except those management can no longer estimate future cash flows.
The following table below sets forth information concerning nonperforming loans and nonperforming assets as of each of the dates indicated.
NONPERFORMING ASSETS
Past due 90 days or more, still accruing (1)
Total nonperforming loans
15,208
19,049
Total nonperforming assets
19,065
24,148
NONPERFORMING ASSETS (Originated) (2)
10,179
10,811
Past due 90 days or more, still accruing
Total nonperforming loans (originated)
10,841
939
1,022
Total nonperforming (originated)
11,135
11,863
NONPERFORMING ASSETS (Acquired) (2)
5,012
8,208
Total nonperforming loans (acquired)
2,918
4,077
Total nonperforming assets (acquired)
7,930
12,285
Loans, before allowance for loan losses (originated) (2)
Loans, before allowance for loan losses (acquired) (2)
CREDIT QUALITY RATIOS
Allowance for loan losses to loans, before allowance for loan losses
1.39
1.03
Allowance for loan losses to nonperforming loans
208.14
117.06
Nonperforming loans to loans, before allowance for loan losses
0.67
Nonperforming assets to total assets
0.54
0.74
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets
0.83
1.11
CREDIT QUALITY RATIOS (Originated) (2)
0.52
0.59
CREDIT QUALITY RATIOS (Acquired) (2)
3.81
4.96
5.90
7.25
Total nonperforming assets decreased by $5.1 million, or 21.0%, to $19.1 million as of September 30, 2020 from $24.1 million as of December 31, 2019. The decline in nonperforming loans was primarily attributable to the pay-down or pay-off of several loans, and to a lesser extent, the transfer of a few loans to foreclosed assets.
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.
321
867
6,506
5,746
1,373
1,427
473
Total accrual troubled debt restructurings
8,673
8,557
283
145
149
142
191
Total nonaccrual troubled debt restructurings
365
758
Total troubled debt restructurings
9,038
9,315
TDRs have remained a small portion of our loan portfolio as loan modifications to borrowers with deteriorating financial condition are generally offered only as part of an overall workout strategy to minimize losses to the Company.
Risk Classification of Loans
Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as pass-watch, substandard, doubtful, or loss.
A pass-watch loan is still considered a "pass" credit and is not a classified or criticized asset, but is a reflection of a borrower who exhibits credit weaknesses or downward trends warranting close attention and increased monitoring. These potential weaknesses may result in deterioration of the repayment prospects for the loan. No loss of principal or interest is expected, and the borrower does not pose sufficient risk to warrant classification.
A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized as probable that the borrower will not pay principal and interest in accordance with the contractual terms.
An asset classified as doubtful has all the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted; such balances are promptly charged-off as required by applicable federal regulations.
As of September 30, 2020 and December 31, 2019, our risk classifications of loans were as follows:
Pass-watch loans increased $55.2 million, or 43.6% from December 31, 2019 to September 30, 2020. Additionally, substandard loans increased $30.0 million, or 41.4%, from December 31, 2019 to September 30, 2020. This downward credit migration was primarily due to current or emerging credit weaknesses exhibited by borrowers negatively impacted by the economic downturn caused by the COVID-19 pandemic.
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Net Charge-offs and Recoveries
The following table sets forth activity in the allowance for loan losses.
Balance, beginning of period
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net (charge-offs) recoveries
(243)
(465)
(747)
(1,014)
Balance, end of period
Net charge-offs (recoveries)
243
465
1,014
Net charge-offs (recoveries) - (originated) (1)
224
155
Net charge-offs (recoveries) - (acquired) (1)
241
832
Average loans, before allowance for loan losses
Average loans, before allowance for loan losses (originated) (1)
2,140,376
2,001,803
2,080,668
1,979,383
Average loans, before allowance for loan losses (acquired) (1)
137,450
189,427
147,477
204,880
Net charge-offs (recoveries) to average loans, before allowance for loan losses *
Net charge-offs (recoveries) to average loans, before allowance for loan losses (originated) * (1)
Net charge-offs (recoveries) to average loans, before allowance for loan losses (acquired) * (1)
0.50
Net charge-offs to average total loans before allowance for loan losses have remained low during each of the three months ended September 30, 2020 and 2019. This ratio has remained low for several years, due primarily to the favorable economic conditions prior to the economic weakness resulting from the COVID-19 pandemic and our continuous credit monitoring and collection efforts.
Net charge-offs to average total loans before allowance for loan losses have remained low during each of the nine months ended September 30, 2020 and 2019. This ratio has remained low for several years, due primarily to the favorable economic conditions prior to the economic weakness resulting from the COVID-19 pandemic and our continuous credit monitoring and collection efforts.
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of allowance for loan losses by major loan categories:
Allowance for
Loan Losses
Balances
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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 September 30, 2020, 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:
Amortized
Cost
We evaluate securities with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired. There were no other-than-temporary impairments during the three and nine months ended September 30, 2020 and 2019.
Portfolio Maturities and Yields
The composition and maturities of the debt securities portfolio as of September 30, 2020 are summarized in the following tables. 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.
More Than One Year
More than Five Years
through Five Years
through Ten Years
More than Ten Years
4,544
2.20
71,029
1.92
24,889
1.38
1.80
27,122
2.46
50,261
2.54
83,988
2.07
71,424
2.00
2.19
4,533
2.14
75,264
2.23
141,173
1.09
1.50
4,746
2.68
58,086
2.62
41,327
1.97
62,285
1.91
9,640
2.32
30,295
2.91
28,927
3.44
41,508
2.45
147,719
300,535
2.27
301,771
1.52
2.06
2.34
3.68
3.76
5,329
2.51
16,759
2.60
11,036
2.89
20,031
3.19
27,249
3.02
26,483
2.92
42,255
167,750
2.69
327,784
328,254
1.61
2.13
80
Management continues to focus on growing non-maturity deposits, through the Company’s relationship driven banking philosophy and community-focused marketing programs, and to deemphasize higher cost deposit categories, such as time deposits. Additionally, the Banks continue to add and improve ancillary convenience services tied to deposit accounts, such as mobile, remote deposits and peer-to-peer payments, to solidify deposit relationships.
The following tables set forth the distribution of average deposits, by account type:
Change in
Percent of
Total Deposits
Average Cost *
28.1
23.7
30.1
29.5
29.6
9.4
15.9
2.4
16.3
15.6
15.1
Total non-maturity deposits
2,708,341
89.8
2,360,197
86.0
14.8
10.2
14.0
(20.1)
3,014,495
2,743,267
26.9
23.6
19.2
29.7
3.9
16.4
4.0
16.1
15.5
2,575,730
88.9
2,361,000
85.2
9.1
11.1
(21.3)
2,897,635
2,769,972
4.6
The average balances of non-maturity deposits increased 14.8% from the three months ended September 30, 2019 to the three months ended September 30, 2020, with the increase primarily attributable to PPP loan proceeds received by commercial customers and federal economic stimulus received by retail customers. Partially offsetting the increase in non-maturity deposits was a 20.1% decline in the average balances of time deposits, which resulted in a 9.9% increase in average balances of total deposits from the three months ended September 30, 2019 to the three months ended September 30, 2020.
The average balances of non-maturity deposits increased 9.1% from the nine months ended September 30, 2019 to the nine months ended September 30, 2020, with the increase primarily attributable to PPP loan proceeds received by commercial customers and federal economic stimulus received by retail customers. Partially offsetting the increase in non-maturity deposits was a 21.3% decline in the average balances of time deposits, which resulted in a 4.6% increase in average balances of total deposits from the nine months ended September 30, 2019 to the nine months ended September 30, 2020.
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The following table sets forth time deposits by remaining maturity as of September 30, 2020:
3 Months or
Over 3 through
Over 6 through
Over
Less
6 Months
12 Months
Time deposits:
Amounts less than $100,000
40,581
43,082
58,356
63,773
205,792
Amounts of $100,000 but less than $250,000
15,868
23,640
24,144
77,381
Amounts of $250,000 or more
8,183
6,353
6,703
3,495
24,734
Total time deposits
64,632
63,164
88,699
91,412
IMPACT OF INFLATION
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.
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.
Additional sources of liquidity include unpledged securities, federal funds purchased, and borrowings from the Federal Home Loan Bank of Chicago (FHLB). Unpledged securities may be sold or pledged as collateral for borrowings to meet liquidity needs. Interest is charged at the prevailing market rate on federal funds purchased and FHLB borrowings. There were no outstanding federal funds purchased or FHLB borrowings at September 30, 2020 and December 31, 2019. Funds obtained from federal funds purchased and FHLB borrowings are used primarily to meet daily liquidity needs. The total amount of the remaining credit available to the Banks from the FHLB at September 30, 2020 and December 31, 2019 was $337.0 million and $343.8 million, respectively.
As of September 30, 2020, management believed adequate liquidity existed to meet all projected cash flow obligations of the Banks. As of September 30, 2020, the Banks had no material commitments for capital expenditures.
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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 three months ended September 30, 2020 and 2019, the Banks paid $6.7 million and $10.9 million, in dividends to the Company, respectively. During the nine months ended September 30, 2020 and 2019, the Banks paid $17.6 million and $60.0 million, in dividends to the Company, respectively. Additionally, the private placement of $40 million of subordinated notes completed on September 3, 2020 significantly bolstered the cash reserves at the holding company.
The liquidity needs of the Company on an unconsolidated basis consist primarily of operating expenses, dividends to stockholders and interest payments on the subordinated notes and junior subordinated debentures. During the three months ended September 30, 2020 and 2019, holding company operating expenses consisted of interest expense of $0.5 million and $0.5 million, respectively, and other operating expenses of $0.6 million and $0.3 million, respectively. During the nine months ended September 30, 2020 and 2019, holding company operating expenses consisted of interest expense of $1.4 million and $1.5 million, respectively, and other operating expenses of $2.0 million and $0.9 million, respectively. As of September 30, 2020, management was not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on the Company’s liquidity.
As of September 30, 2020, management believed adequate liquidity existed to meet all projected cash flow obligations of the Company. As of September 30, 2020, the Company had no material commitments for capital expenditures.
CAPITAL RESOURCES
The overall objectives of capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. The Company seeks to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders.
Regulatory Capital Requirements
The Company and Banks are each subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company and the Banks.
In addition to meeting minimum capital requirements, the Company and the Banks must also maintain a “capital conservation buffer” to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management. The capital conservation buffer requirement began phasing in on January 1, 2016 and became fully implemented on January 1, 2019 at 2.5% of risk-weighted assets.
As of September 30, 2020 and December 31, 2019, the Company and the Banks met all capital adequacy requirements to which they were subject. As of those dates, the Banks were “well capitalized” under the regulatory prompt corrective action provisions.
The following table sets forth actual capital ratios of the Company and the Banks for the dates indicated, the minimum ratios for capital adequacy purposes with the capital conservation buffer, and the minimum ratios to be well capitalized under regulatory prompt corrective action provisions.
For Capital
To Be Well
Adequacy Purposes
Capitalized Under
With Capital
Prompt Corrective
Conversation Buffer (1)
Action Provisions (2)
8.50
7.00
Cash Dividends
The below table summarizes the cash dividends paid by quarter for nine months ended September 30, 2020 and the year ended December 31, 2019.
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Regular
4,119
4,118
12,356
Restricted stock unit dividend equivalent
Total cash dividends
4,130
4,129
12,389
2,704
8,112
Tax
7,048
6,662
19,804
Special
27,041
169,999
197,040
35,839
9,752
9,366
224,956
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.
During the first, second, and third quarters of 2020, the Company announced quarterly cash dividends of $0.15 per share.
Stock Repurchase Program
OFF-BALANCE SHEET ARRANGEMENTS
As financial services providers, 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, as of September 30, 2020 and December 31, 2019, there were no reserves for unfunded commitments. For additional information, see “Note 18 – Commitments and Contingencies” to the consolidated financial statements.
CONTRACTUAL OBLIGATIONS
There have been no material changes to our contractual obligations and other funding needs as disclosed in our Annual Report on Form 10-K filed with the SEC on March 27, 2020.
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.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in the Company's Annual Report on Form 10-K filed with the SEC on March 27, 2020. For more information, please refer to “Note 1 – Summary of Significant Accounting Policies” to our consolidated financial statements included in the Company's Annual Report on Form 10-K filed with the SEC on March 27, 2020.
NON-GAAP FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q 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 net income, adjusted earnings per share – basic and diluted, adjusted return on average assets, adjusted return on average stockholders’ equity, and adjusted 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 9.5%.
Originated loans and acquired loans along with the related credit quality ratios such as net charge-offs to average loans, before allowance for loan losses (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 appear below.
Reconciliation of Non-GAAP Financial Measure - Adjusted Net Income and Adjusted Return on Average Assets
C Corp equivalent adjustment (2)
(4,315)
(12,494)
C Corp equivalent net income (2)
Adjustments:
Net earnings (losses) from closed or sold operations, including gains on sale (1)
533
Charges related to termination of certain employee benefit plans
(845)
(1,457)
(4,161)
Total adjustments
(1,708)
(4,404)
(6,610)
Tax effect of adjustments
487
1,255
1,884
Less adjustments after tax effect
(1,221)
(3,149)
(4,726)
Adjusted net income
Average assets
C Corp equivalent return on average assets * (2)
Adjusted return on average assets *
Adjusted net income adjusts for the additional C Corp equivalent tax expense for the periods prior to October 11, 2019, 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. Adjusted return on average assets is calculated by dividing adjusted net income for a period by average assets for the period. We believe these non-GAAP financial measures provide investors additional insights into operational performance of the Company.
Reconciliation of Non-GAAP Financial Measure - Adjusted Earnings Per Share
Earnings allocated to unvested restricted stock units (1)
C Corp equivalent net income (3)
Earnings allocated to unvested restricted stock units (1)(3)
Numerator for C Corp equivalent earnings per share - basic and diluted (3)
(69)
Numerator for adjusted earnings per share - basic and diluted
10,727
27,283
Dilutive effect of outstanding restricted stock units (2)
C Corp equivalent earnings per share - Basic (3)
C Corp equivalent earnings per share - Diluted (3)
Adjusted earnings per share - Basic
Adjusted earnings per share - Diluted
Adjusted earnings per share – basic is a non-GAAP financial measure that is calculated dividing the previously described adjusted net income allocated to common shares by the weighted average common shares outstanding. Adjusted earnings per share – diluted is a non-GAAP financial measure that is calculated dividing the previously described adjusted net income allocated to common shares by the weighted average common shares outstanding, including all dilutive potential shares. We believe these non-GAAP financial measures provide investors additional insights into operational performance of the Company.
88
Reconciliation of Non-GAAP Financial Measure - Net Interest Margin (Tax Equivalent Basis)
Net interest income (tax equivalent basis)
Tax-equivalent adjustment (1)
Net interest income (tax equivalent basis) (1)
Net interest margin (tax equivalent basis)
Tax-equivalent adjustment * (1)
Net interest margin (tax equivalent basis) * (1)
Average interest-earning assets
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)
Less: amortization of intangible assets
Adjusted noninterest expense
22,180
21,968
68,364
67,989
Operating revenue
38,923
40,723
111,805
123,939
Operating revenue (tax-equivalent basis) (1)
39,418
41,282
113,246
125,714
Efficiency ratio (tax equivalent basis) (1)
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 net interest income on a tax equivalent basis.
89
Reconciliation of Non-GAAP Financial Measure - Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share
Tangible Common Equity
Less: Goodwill
Less: Core deposit intangible assets, net
Tangible common equity
Tangible Assets
Tangible assets
Total stockholders' equity to total assets
Tangible common equity to tangible assets
Tangible book value per share
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 core deposit intangible assets; (ii) tangible assets as total assets less goodwill and core deposit 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.
Reconciliation of Non-GAAP Financial Measure – Adjusted Return on Average Stockholders’ Equity and Adjusted Return on Tangible Common Equity
Average Tangible Common Equity
3,284
4,561
3,589
4,924
Average tangible common equity
328,392
320,569
320,603
316,300
Adjusted return on average stockholders' equity *
Return on average tangible common equity *
C Corp equivalent return on average tangible common equity * (1)
Adjusted return on average tangible common equity *
Adjusted return on average stockholders’ equity is a non-GAAP financial measure that is calculated by dividing adjusted net income for a period by average stockholders’ equity for the period. Adjusted return on average tangible common equity is a non-GAAP financial measure that is calculated by dividing adjusted 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
Core Deposits
Less: time deposits of $250,000 or more
44,754
Less: brokered deposits
Core deposits
Core deposits to total deposits
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are interest rate risk and credit risk. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due and is disclosed in detail above.
Interest Rate Risk
The most significant form of market risk is interest rate risk inherent in the normal course of lending and deposit-taking activities. Management believes that our ability to successfully respond to changes in interest rates will have a significant impact on our financial results. To that end, management actively monitors and manages our interest rate exposure.
The Asset/Liability Management Committee (ALCO), which is authorized by the Company’s board of directors, monitors our interest rate sensitivity and makes decisions relating to that process. The ALCO’s goal is to structure our asset/liability composition to maximize net interest income while managing interest rate risk so as to minimize the adverse impact of changes in interest rates on net interest income and capital in either a rising or declining interest rate environment. Profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact our earnings because the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis.
We monitor the impact of changes in interest rates on our net interest income and economic value of equity, or EVE, using rate shock analysis. Net interest income simulations measure the short-term earnings exposure from changes in market rates of interest in a rigorous and explicit fashion. Our current financial position is combined with assumptions regarding future business to calculate net interest income under varying hypothetical rate scenarios. EVE measures our long-term earnings exposure from changes in market rates of interest. EVE is defined as the present value of assets minus the present value of liabilities at a point in time. A decrease in EVE due to a specified rate change indicates a decline in the long-term earnings capacity of the balance sheet assuming that the rate change remains in effect over the life of the current balance sheet.
The following table sets forth, as of September 30, 2020 and December 31, 2019, the estimated impact on our EVE and net interest income of immediate changes in interest rates at the specified levels.
Increase (Decrease) in
Estimated Increase
Estimated Net Interest Income
(Decrease) in EVE
Year 1
Year 2
Change in Interest Rates (basis points)
+400
103,843
27.9
24,960
22.1
45,243
42.9
+300
67,814
18.2
19,440
17.2
35,536
33.7
+200
21,180
5.7
13,216
24,738
23.5
+100
(21,398)
(5.7)
6,500
12,759
12.1
Flat
20,514
(2,111)
(1.9)
(4,036)
(3.8)
200,797
37.8
28,585
35,711
30.0
165,809
31.2
22,265
18.3
28,128
122,859
23.1
12.6
19,788
16.6
68,303
12.8
8,061
6.6
10,550
(106,615)
(12,878)
(10.6)
(17,568)
(14.8)
This data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors or changes in earning assets mix, which could reduce the actual impact on EVE and net interest income, if any.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in EVE and net interest income requires that we make certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. The EVE and net interest income table presented above assumes that the composition of our interest-rate-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and, accordingly, the data does not reflect any actions that we may undertake in response to changes in interest rates, such as changes in rates paid on certain deposit accounts based on local competitive factors. The table also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or the repricing characteristics of specific assets and liabilities. Accordingly, although the EVE and net interest income table provides an indication of our sensitivity to interest rate changes at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Credit Risk
Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Our loan policy documents underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the borrower, industry, and product levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent loan review process that assesses compliance with loan policy, compliance with loan documentation standards, accuracy of the risk rating and overall credit quality of the loan portfolio.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of the period covered by this report was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) or Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 1. LEGAL PROCEEDINGS
We are sometimes party to legal actions that are routine and incidental to our business. Management, in consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our assets, business, cash flow, condition (financial or otherwise), liquidity, prospects and results of operations. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business, including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws, we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on March 27, 2020, except as described below.
The COVID-19 pandemic is adversely affecting us, our business, employees, customers, counterparties and third-party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity and prospects is uncertain.
Coronavirus disease 2019, known as COVID-19, which has been identified as a pandemic by the World Health Organization, is causing worldwide health concerns as well as significant economic disruption in the United States and globally. In March 2020, U.S. President Trump declared a public health and national emergency due to COVID-19, which resulted in mandatory stay-at-home orders in most U.S. states, including Illinois. The associated impacts have had, are currently having, and may for some time continue to have a destabilizing and negative effect on U.S. and global financial and capital markets and have caused significant disruption in global, national, and local economic and business activity.
Although the Banks have been deemed essential businesses and have maintained business operations since the beginning of the COVID-19 pandemic, the ultimate extent of the impact of the pandemic on our business, cash flows, financial condition, liquidity, results of operations, customer confidence, profitability and growth prospects will depend on continuing and future developments related to the virus, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the pandemic, and governmental, regulatory and private sector actions and responses taken to contain or prevent further spread. Continued deterioration in general business and economic conditions, including extended closure of non-essential businesses, further increases in unemployment rates, or turbulence in U.S. or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility. These and other potential impacts of the COVID-19 pandemic could therefore materially and adversely affect our business, revenue, operations, financial condition, liquidity, results of operations and prospects. If the response and efforts to contain COVID-19 prove to be unsuccessful, any such material adverse effects may be exacerbated.
Due in large part to actions taken by the Federal Reserve to lower interest rates in response to the severe financial market reaction to the COVID-19 pandemic, market interest rates have declined significantly. We expect that these reductions in interest rates, especially if prolonged, will adversely affect our net interest income, margins and profitability. Our assets and liabilities may be significantly impacted by changes in interest rates.
Our business is dependent upon the willingness and ability of our customers to conduct banking and other financial transactions. The spread of COVID-19 has and is likely to continue to disrupt the business, activities, and operations of our customers and, cause a decline in demand for our products and services, including loans and deposits, which may result in a significant decrease in business and could negatively impact our results of operations, our liquidity position, our growth strategy and our ability to make payments under our subordinated note and junior subordinated debenture obligations as they become due. Our financial results could also be impacted due to an inability of our customers to meet their loan commitments because of their losses associated with impacts of the virus, and could result in an increased risk of loan delinquencies, defaults, foreclosures, declining collateral values and a general inability of our borrowers to repay their loans. In addition, the financial and other information we receive from and about our customers that we rely on in extending or renewing credit and monitoring our loan portfolio may have changed significantly and no longer be accurate, which could affect our ability to timely and accurately manage our credit risk. Any or all of these factors could necessitate an increase in our allowance for loan losses, which would negatively impact our earnings and results of operations. Moreover, current and future governmental actions may temporarily require us to conduct business related to foreclosures, repossessions, payments, deferrals and other customer-related transactions differently, which may result in an increase in expenses and a decrease in net income.
Our workforce has been, and may continue to be, impacted by COVID-19. We are taking precautions to protect the safety and well-being of our employees and customers, including requiring face coverings and appropriate social distancing, but no assurance can be given that our actions will be adequate or appropriate, nor can we predict the level of disruption which will occur to our employees’ ability to provide customer support and service over an extended period of time. The continued spread of the virus and social distancing mandate could also negatively impact the availability of key personnel and employee productivity, as well as the business and operations of third-party service providers who perform critical services for us, which could adversely impact our ability to deliver products and services to our customers and continue to grow our business, which could negatively affect our reputation. Our business continuity plan and the efforts we have taken to adapt our work and business to the current environment has resulted in, and will continue to require us to incur, increased expenses.
In addition, changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways. President Trump has signed into law three economic stimulus packages, including the $2 trillion Coronavirus Relief and Economic Security Act (the “CARES Act”) on March 27, 2020, which, among other things, initiated the Paycheck Protection Program (the “PPP”) under the Small Business Administration (“SBA”). We assisted our customers in participating in the PPP, which was designed to help small businesses maintain their workforce during the COVID-19 pandemic. We understand that these loans are fully guaranteed by the U.S. government and believe the majority of these loans will be forgiven. However, in the event of a loss resulting from a default on a PPP loan or a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated or serviced by us, which may or may not be related to an ambiguity in the laws, rules or guidance regarding the operation of the PPP, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already been paid under the guaranty, seek recovery of any loss related to the deficiency from us.
Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks followed in accepting and processing applications for the PPP. We may be exposed to the risk of similar litigation, from both customers and non-customers that contacted the Banks regarding obtaining PPP loans with respect to the processes and procedures we used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability to us or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our reputation, business, financial condition and results of operations.
95
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Repurchases of Equity Securities
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit No.
Description
4.1
Form of 4.50% Fixed-to-Floating Rate Subordinated Note due 2030 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (No. 001-39085), filed with the Commission on September 3, 2020).
10.1
Subordinated Note Purchase Agreement, dated September 3, 2020, by and among HBT Financial, Inc. and the Purchasers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (No. 001-39085), filed with the Commission on September 3, 2020).
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a).
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).
32.1 *
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350.
32.2 *
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350.
101.INS
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.
*
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HBT FINANCIAL, INC.
November 6, 2020
By:
/s/ Matthew J. Doherty
Matthew J. Doherty
Chief Financial Officer
(on behalf of the registrant and as principal financial officer)