10-Q - HBT - Equibles

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

◻ 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<br><br>incorporation or organization)	(I.R.S. Employer<br><br>Identification No.)

401 North Hershey Rd<br><br>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 Contents TABLE OF CONTENTS HBT Financial, Inc.

		Page

PART I. FINANCIAL INFORMATION		3
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	3
	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
Item 1.	Legal Proceedings	94
Item 1A.	Risk Factors	94
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96
Item 3.	Defaults Upon Senior Securities	96
Item 4.	Mine Safety Disclosures	96
Item 5.	Other Information	96
Item 6.	Exhibits	97

Table of Contents 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:

●	our asset quality and any loan charge-offs;
●	the composition of our loan portfolio;
---	---
●	time and effort necessary to resolve nonperforming assets and the loans modified or deferred as a result of the impact of the COVID-19 pandemic;
---	---
●	the length and severity of the COVID-19 pandemic, and the effects of the COVID-19 pandemic, including the impact of the pandemic on our operations and the operations of our customers and the communities that we serve;
---	---
●	environmental liability associated with our lending activities;
---	---
●	the effects of the current low interest rate environment or changes in interest rates on our net interest income, net interest margin, our investments, and our loan originations, and our modeling estimates relating to interest rate changes;
---	---
●	our access to sources of liquidity and capital to address our liquidity needs;
---	---
●	our inability to receive dividends from our Banks, pay dividends to our common stockholders or satisfy obligations as they become due;
---	---
●	the effects of problems encountered by other financial institutions;
---	---
●	our ability to achieve organic loan and deposit growth and the composition of such growth;
---	---
●	our ability to attract and retain skilled employees or changes in our management personnel;
---	---
●	any failure or interruption of our information and communications systems;
---	---
●	our ability to identify and address cybersecurity risks;
---	---
●	the effects of the failure of any component of our business infrastructure provided by a third party;
---	---
●	our ability to keep pace with technological changes;
---	---
●	our ability to successfully develop and commercialize new or enhanced products and services;
---	---
●	current and future business, economic and market conditions in the United States generally or in Illinois in particular;
---	---
●	the geographic concentration of our operations in the State of Illinois;
---	---
●	our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business;
---	---
●	our ability to attract and retain customer deposits;
---	---
●	our ability to maintain our Banks’ reputations;
---	---
●	severe weather, natural disasters, pandemics, acts of war or terrorism or other external events;
---	---
●	possible impairment of our goodwill and other intangible assets;
---	---
●	the impact of, and changes in applicable laws, regulations and accounting standards and policies;
---	---
●	our prior status as an S Corp;
---	---
●	possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations;
---	---
●	the effectiveness of our risk management and internal disclosure controls and procedures;
---	---
●	market perceptions associated with certain aspects of our business;
---	---
●	the one-time and incremental costs of operating as a standalone public company;
---	---
●	our ability to meet our obligations as a public company, including our obligations under Section 404 of Sarbanes-Oxley;
---	---
●	damage to our reputation from any of the factors described above; and
---	---

Table of Contents

●	the factors discussed in “Risk Factors”, "Management's Discussion and Analysis of Financial Condition and Results of Operations" or elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019.

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.

Table of Contents PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

HBT FINANCIAL, INC. AND SUBSIDIARIES CONSOLIDATED 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			121
Foreclosed assets		3,857			5,099
Goodwill		23,620			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			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			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	$	3,535,223		$	3,245,103

See accompanying Notes to Consolidated Financial Statements (Unaudited)

Table of Contents HBT FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		****	2019		****	2020		****	2019
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:
Taxable		3,266			3,572			9,772			11,295
Federally tax exempt		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
Securities sold under agreements to repurchase		9			17			40			48
Borrowings		1			—			2			7
Subordinated notes		147			—			147			—
Junior subordinated debentures issued to capital trusts		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			684			10,102			3,266
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)			3			42
Gains (losses) on foreclosed assets		27			(20)			120			132
Gains (losses) on other assets		1			(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			8			476			435
Loan collection and servicing		450			547			1,292			1,901
Foreclosed assets		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	$	0.38		$	0.97		$	0.88		$	2.82
WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING		27,457,306			18,027,512			27,457,306			18,027,512

UNAUDITED PRO FORMA C CORP EQUIVALENT INFORMATION (Note 1)
Historical income before income tax expense				$	17,736					$	51,597
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				$	0.73					$	2.12

See accompanying Notes to Consolidated Financial Statements (Unaudited)

Table of Contents HBT FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		****	2019		****	2020		****	2019
	(dollars in thousands)
NET INCOME	$	10,563		$	17,437		$	24,203		$	50,778

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		8			(62)			5			(221)
Unrealized gains (losses) on derivative instruments		5			(208)			(1,098)			(897)
Reclassification adjustment for net settlements on derivative instruments		97			(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			995			10,299			12,719
TOTAL COMPREHENSIVE INCOME	$	11,483		$	18,432		$	34,502		$	63,497

See accompanying Notes to Consolidated Financial Statements (Unaudited)

Table of Contents HBT FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


														Accumulated
														Other						Total
		Common Stock									Retained			Comprehensive			Treasury			Stockholders’
	****	Voting		****	Series A		****	Surplus		****	Earnings		****	Income (Loss)		****	Stock		****	Equity
		(dollars in thousands, except per share data)
Balance, June 30, 2020		$	275		$	—		$	190,687		$	139,667		$	17,211		$	—		$	347,840
Net income			—			—			—			10,563			—			—			10,563
Other comprehensive income			—			—			—			—			920			—			920
Stock-based compensation			—			—			100			—			—			—			100
Cash dividends ($0.15 per share)			—			—			—			(4,129)			—			—			(4,129)
Balance, September 30, 2020		$	275		$	—		$	190,787		$	146,101		$	18,131		$	—		$	355,294

Balance, June 30, 2019		$	3		$	178		$	32,288		$	302,984		$	7,436		$	(3,019)		$	339,870
Net income			—			—			—			17,437			—			—			17,437
Other comprehensive income			—			—			—			—			995			—			995
Cash dividends ($0.52 per share)			—			—			—			(9,366)			—			—			(9,366)
Balance, September 30, 2019		$	3		$	178		$	32,288		$	311,055		$	8,431		$	(3,019)		$	348,936

See accompanying Notes to Consolidated Financial Statements (Unaudited)

Table of Contents HBT FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)

(Unaudited)


														Accumulated
														Other						Total
		Common Stock									Retained			Comprehensive			Treasury			Stockholders’
	****	Voting		****	Series A		****	Surplus		****	Earnings		****	Income (Loss)		****	Stock		****	Equity
		(dollars in thousands, except per share data)
Balance, December 31, 2019		$	275		$	—		$	190,524		$	134,287		$	7,832		$	—		$	332,918
Net income			—			—			—			24,203			—			—			24,203
Other comprehensive income			—			—			—			—			10,299			—			10,299
Stock-based compensation			—			—			263			—			—			—			263
Cash dividends ($0.45 per share)			—			—			—			(12,389)			—			—			(12,389)
Balance, September 30, 2020		$	275		$	—		$	190,787		$	146,101		$	18,131		$	—		$	355,294

Balance, December 31, 2018		$	3		$	178		$	32,288		$	315,234		$	(4,288)		$	(3,019)		$	340,396
Net income			—			—			—			50,778			—			—			50,778
Other comprehensive income			—			—			—			—			12,719			—			12,719
Cash dividends ($3.05 per share)			—			—			—			(54,957)			—			—			(54,957)
Balance, September 30, 2019		$	3		$	178		$	32,288		$	311,055		$	8,431		$	(3,019)		$	348,936

See accompanying Notes to Consolidated Financial Statements (Unaudited)

Table of Contents HBT FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Nine Months Ended September 30,
	****	2020		****	2019
		(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	24,203		$	50,778
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation expense			2,176			2,042
Provision for loan losses			10,102			3,266
Net amortization of debt securities			3,298			2,759
Amortization of unrealized gain on dedesignated cash flow hedge			(64)			(53)
Deferred income tax benefit			(628)			—
Stock-based compensation			263			—
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			2			(29)
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			927			1,087
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			248			—
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			(73)			—
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			1			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			1,005			(13,928)
Issuance of subordinated notes, net of issuance costs			39,211			—
Cash dividends paid			(12,389)			(54,957)
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			283,971			186,879
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	236,724		$	154,941

See accompanying Notes to Consolidated Financial Statements (Unaudited) 8

Table of Contents HBT FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(Unaudited)


		Nine Months Ended September 30,
	****	2020		****	2019
		(dollars in thousands)
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

See accompanying Notes to Consolidated Financial Statements (Unaudited)

Table of Contents

HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. 10

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:


		September 30,			December 31,
	****	2020		****	2019
		(dollars in thousands)
Debt securities available-for-sale		$	814,798		$	592,404
Debt securities held-to-maturity			74,510			88,477
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.

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:	(dollars in thousands)
U.S. government agency	$	100,462	$	3,866	$	(2)	$	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)		814,798
Held-to-maturity:
Municipal		26,830		1,480		—		28,310
Mortgage-backed:
Agency residential		14,556		523		—		15,079
Agency commercial		33,124		2,378		—		35,502
Total held-to-maturity		74,510		4,381		—		78,891
Total debt securities	$	866,043	$	28,409	$	(763)	$	893,689


December 31, 2019	AmortizedCost		GrossUnrealizedGains		GrossUnrealizedLosses		Fair Value
Available-for-sale:	(dollars in thousands)
U.S. government agency	$	49,113	$	529	$	(27)	$	49,615
Municipal		131,241		2,503		(6)		133,738
Mortgage-backed:
Agency residential		198,184		2,780		(286)		200,678
Agency commercial		133,730		1,516		(292)		134,954
Corporate		72,239		1,180		—		73,419
Total available-for-sale		584,507		8,508		(611)		592,404
Held-to-maturity:
Municipal		45,239		1,340		—		46,579
Mortgage-backed:
Agency residential		19,072		161		(170)		19,063
Agency commercial		24,166		775		(54)		24,887
Total held-to-maturity		88,477		2,276		(224)		90,529
Total debt securities	$	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. 14

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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
	AmortizedCost		Fair Value		AmortizedCost		Fair Value
	(dollars in thousands)
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

Mortgage-backed:
Agency residential		220,970		226,317		14,556		15,079
Agency commercial		166,444		171,072		33,124		35,502
Total	$	791,533	$	814,798	$	74,510	$	78,891

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:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2020		****	2019		2020		****	2019
	(dollars in thousands)
Net realized gains (losses) on sales	$	—		$	—	$	—		$	—
Net unrealized gains (losses) on equities:
Readily determinable fair value		(2)			55		3			170
No readily determinable fair value		—			(128)		—			(128)
Gains (losses) on securities	$	(2)		$	(73)	$	3		$	42

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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						Total
September 30, 2020	****	UnrealizedLoss		****	Fair Value		****	UnrealizedLoss		****	Fair Value		****	UnrealizedLoss		****	Fair Value
Available-for-sale:		(dollars in thousands)
U.S. government agency		$	(2)		$	3,493		$	—		$	—		$	(2)		$	3,493
Municipal			(347)			28,955			—			—			(347)			28,955
Mortgage-backed:
Agency residential			(101)			20,386			(14)			4,378			(115)			24,764
Agency commercial			(177)			22,668			(26)			3,471			(203)			26,139
Corporate			(96)			9,858			—			—			(96)			9,858
Total available-for-sale			(723)			85,360			(40)			7,849			(763)			93,209
Total debt securities		$	(723)		$	85,360		$	(40)		$	7,849		$	(763)		$	93,209


		Investments in a Continuous Unrealized Loss Position
		Less than 12 Months						12 Months or More						Total
December 31, 2019	****	UnrealizedLoss		****	Fair Value		****	UnrealizedLoss		****	Fair Value		****	UnrealizedLoss		****	Fair Value
Available-for-sale:		(dollars in thousands)
U.S. government agency		$	(26)		$	18,865		$	(1)		$	1,998		$	(27)		$	20,863
Municipal			(6)			894			—			—			(6)			894
Mortgage-backed:
Agency residential			(108)			25,563			(178)			27,296			(286)			52,859
Agency commercial			(100)			20,056			(192)			15,704			(292)			35,760
Total available-for-sale			(240)			65,378			(371)			44,998			(611)			110,376
Held-to-maturity:
Mortgage-backed:
Agency residential			(30)			2,516			(140)			9,002			(170)			11,518
Agency commercial			(47)			7,016			(7)			599			(54)			7,615
Total held-to-maturity			(77)			9,532			(147)			9,601			(224)			19,133
Total debt securities		$	(317)		$	74,910		$	(518)		$	54,599		$	(835)		$	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.

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 3 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Major categories of loans are summarized as follows:


	September 30,			December 31,
	2020		****	2019
	(dollars in thousands)
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	$	2,247,985		$	2,141,527

Paycheck Protection Program (PPP) loans (included above)
Commercial and industrial	$	168,466		$	—
Agricultural and farmland		4,179			—
Municipal, consumer, and other		7,095			—
Total PPP loans	$	179,740		$	—

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables detail activity in the allowance for loan losses for the three and nine months ended September 30:


					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
Three Months Ended September 30, 2020	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total
Allowance for loan losses:	(dollars in thousands)
Balance, June 30, 2020	$	4,356	$	2,890	$	3,257	$	6,767	$	1,581	$	3,366	$	3,010	$	4,496	$	29,723
Provision for loan losses		(98)		(585)		86		2,496		614		179		138		(656)		2,174
Charge-offs		(881)		—		(39)		—		—		(26)		(42)		(90)		(1,078)
Recoveries		517		—		—		5		—		198		46		69		835
Balance, September 30, 2020	$	3,894	$	2,305	$	3,304	$	9,268	$	2,195	$	3,717	$	3,152	$	3,819	$	31,654

					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
Three Months Ended September 30, 2019	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total
Allowance for loan losses:	(dollars in thousands)
Balance, June 30, 2019	$	5,187	$	2,862	$	2,487	$	2,721	$	1,153	$	3,723	$	3,569	$	840	$	22,542
Provision for loan losses		(915)		(133)		(482)		521		(182)		(601)		(692)		3,168		684
Charge-offs		(32)		—		(216)		(111)		(41)		—		(387)		(150)		(937)
Recoveries		313		—		26		5		—		1		42		85		472
Balance, September 30, 2019	$	4,553	$	2,729	$	1,815	$	3,136	$	930	$	3,123	$	2,532	$	3,943	$	22,761


					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
Nine Months Ended September 30, 2020	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total
Allowance for loan losses:	(dollars in thousands)
Balance, December 31, 2019	$	4,441	$	2,766	$	1,779	$	3,663	$	1,024	$	2,977	$	2,540	$	3,109	$	22,299
Provision for loan losses		565		(434)		1,124		5,591		1,171		551		598		936		10,102
Charge-offs		(1,690)		(27)		(39)		(56)		—		(27)		(154)		(466)		(2,459)
Recoveries		578		—		440		70		—		216		168		240		1,712
Balance, September 30, 2020	$	3,894	$	2,305	$	3,304	$	9,268	$	2,195	$	3,717	$	3,152	$	3,819	$	31,654

					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate								Consumer
	and		and		Owner		Non-owner				Construction		Residential		and
Nine Months Ended September 30, 2019	Industrial		Farmland		Occupied		Occupied		Multi-Family		and Land		Real Estate		Other		Total
Allowance for loan losses:	(dollars in thousands)
Balance, December 31, 2018	$	3,748	$	2,650	$	2,506	$	2,644	$	912	$	4,176	$	2,782	$	1,091	$	20,509
Provision for loan losses		700		109		(356)		588		59		(1,478)		541		3,103		3,266
Charge-offs		(315)		(30)		(382)		(111)		(41)		(9)		(1,026)		(522)		(2,436)
Recoveries		420		—		47		15		—		434		235		271		1,422
Balance, September 30, 2019	$	4,553	$	2,729	$	1,815	$	3,136	$	930	$	3,123	$	2,532	$	3,943	$	22,761

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:


					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
September 30, 2020	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total
Loan balances:	(dollars in thousands)
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		65		37,843
Total	$	389,231	$	235,597	$	225,345	$	532,454	$	199,441	$	265,758	$	308,365	$	123,448	$	2,279,639

Allowance for loan losses:
Collectively evaluated for impairment	$	2,190	$	2,270	$	2,509	$	7,896	$	2,180	$	3,290	$	2,336	$	979	$	23,650
Individually evaluated for impairment		1,588		33		434		884		—		226		796		2,840		6,801
Acquired with deteriorated credit quality		116		2		361		488		15		201		20		—		1,203
Total	$	3,894	$	2,305	$	3,304	$	9,268	$	2,195	$	3,717	$	3,152	$	3,819	$	31,654

					Commercial		Commercial								Municipal,
	Commercial		Agricultural		Real Estate		Real Estate				Construction		One-to-four		Consumer,
	and		and		Owner		Non-owner				and Land		Family		and
December 31, 2019	Industrial		Farmland		Occupied		Occupied		Multi-Family		Development		Residential		Other		Total
Loan balances:	(dollars in thousands)
Collectively evaluated for impairment	$	294,006	$	192,722	$	211,744	$	561,277	$	176,273	$	217,708	$	291,624	$	106,448	$	2,051,802
Individually evaluated for impairment		10,733		13,966		10,927		3,398		1,324		3,782		11,349		13,872		69,351
Acquired with deteriorated credit quality		2,436		1,088		8,491		15,082		1,476		3,397		10,607		96		42,673
Total	$	307,175	$	207,776	$	231,162	$	579,757	$	179,073	$	224,887	$	313,580	$	120,416	$	2,163,826

Allowance for loan losses:
Collectively evaluated for impairment	$	1,926	$	2,576	$	1,486	$	3,591	$	1,019	$	2,283	$	1,684	$	931	$	15,496
Individually evaluated for impairment		2,170		105		270		70		—		567		822		2,176		6,180
Acquired with deteriorated credit quality		345		85		23		2		5		127		34		2		623
Total	$	4,441	$	2,766	$	1,779	$	3,663	$	1,024	$	2,977	$	2,540	$	3,109	$	22,299

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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
September 30, 2020	Balance		****	Investment		****	Allowance
With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	2,781		$	2,781		$	1,588
Agricultural and farmland		173			172			33
Commercial real estate - owner occupied		1,440			1,441			434
Commercial real estate - non-owner occupied		4,203			4,201			884
Multi-family		—			—			—
Construction and land development		2,055			2,055			226
One-to-four family residential		3,614			3,596			796
Municipal, consumer, and other		8,790			8,764			2,840
Total	$	23,056		$	23,010		$	6,801

With no related allowance:
Commercial and industrial	$	2,777		$	2,777		$	—
Agricultural and farmland		14,383			14,383			—
Commercial real estate - owner occupied		11,728			11,726			—
Commercial real estate - non-owner occupied		28,462			28,399			—
Multi-family		889			889			—
Construction and land development		1,575			1,573			—
One-to-four family residential		7,672			7,623			—
Municipal, consumer, and other		4,733			4,721			—
Total	$	72,219		$	72,091		$	—

Total
Commercial and industrial	$	5,558		$	5,558		$	1,588
Agricultural and farmland		14,556			14,555			33
Commercial real estate - owner occupied		13,168			13,167			434
Commercial real estate - non-owner occupied		32,665			32,600			884
Multi-family		889			889			—
Construction and land development		3,630			3,628			226
One-to-four family residential		11,286			11,219			796
Municipal, consumer, and other		13,523			13,485			2,840
Total	$	95,275		$	95,101		$	6,801

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Unpaid
	Principal			Recorded			Related
December 31, 2019	Balance		****	Investment		****	Allowance
With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	4,292		$	4,292		$	2,170
Agricultural and farmland		590			590			105
Commercial real estate - owner occupied		830			830			270
Commercial real estate - non-owner occupied		99			99			70
Multi-family		—			—			—
Construction and land development		3,679			3,679			567
One-to-four family residential		3,401			3,390			822
Municipal, consumer, and other		9,138			9,111			2,176
Total	$	22,029		$	21,991		$	6,180

With no related allowance:
Commercial and industrial	$	6,438		$	6,441		$	—
Agricultural and farmland		13,369			13,376			—
Commercial real estate - owner occupied		10,089			10,097			—
Commercial real estate - non-owner occupied		3,297			3,299			—
Multi-family		1,328			1,324			—
Construction and land development		104			103			—
One-to-four family residential		7,986			7,959			—
Municipal, consumer, and other		4,775			4,761			—
Total	$	47,386		$	47,360		$	—

Total
Commercial and industrial	$	10,730		$	10,733		$	2,170
Agricultural and farmland		13,959			13,966			105
Commercial real estate - owner occupied		10,919			10,927			270
Commercial real estate - non-owner occupied		3,396			3,398			70
Multi-family		1,328			1,324			—
Construction and land development		3,783			3,782			567
One-to-four family residential		11,387			11,349			822
Municipal, consumer, and other		13,913			13,872			2,176
Total	$	69,415		$	69,351		$	6,180

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:


	Three Months Ended September 30,
	2020						2019
	Average			Interest			Average		****	Interest
	Recorded			Income			Recorded			Income
	Investment		****	Recognized		****	Investment		****	Recognized
With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	2,763		$	41		$	4,957		$	26
Agricultural and farmland		174			2			491			5
Commercial real estate - owner occupied		1,281			18			1,970			11
Commercial real estate - non-owner occupied		4,216			2			101			5
Multi-family		—			—			—			—
Construction and land development		2,080			25			2,754			42
One-to-four family residential		3,587			24			2,082			16
Municipal, consumer, and other		8,823			42			9,254			99
Total	$	22,924		$	154		$	21,609		$	204

With no related allowance:
Commercial and industrial	$	2,894		$	61		$	5,480		$	—
Agricultural and farmland		10,220			144			15,384			10
Commercial real estate - owner occupied		11,766			150			10,555			28
Commercial real estate - non-owner occupied		28,544			282			3,853			57
Multi-family		889			—			1,339			—
Construction and land development		1,476			1			106			1
One-to-four family residential		7,500			63			9,904			74
Municipal, consumer, and other		4,763			21			4,832			—
Total	$	68,052		$	722		$	51,453		$	170

Total
Commercial and industrial	$	5,657		$	102		$	10,437		$	26
Agricultural and farmland		10,394			146			15,875			15
Commercial real estate - owner occupied		13,047			168			12,525			39
Commercial real estate - non-owner occupied		32,760			284			3,954			62
Multi-family		889			—			1,339			—
Construction and land development		3,556			26			2,860			43
One-to-four family residential		11,087			87			11,986			90
Municipal, consumer, and other		13,586			63			14,086			99
Total	$	90,976		$	876		$	73,062		$	374

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Nine Months Ended September 30,
	2020						2019
	Average			Interest			Average		****	Interest
	Recorded			Income			Recorded			Income
	Investment		****	Recognized		****	Investment		****	Recognized
With an allowance recorded:	(dollars in thousands)
Commercial and industrial	$	3,124		$	129		$	5,081		$	115
Agricultural and farmland		307			6			404			12
Commercial real estate - owner occupied		1,141			56			1,998			90
Commercial real estate - non-owner occupied		1,504			7			102			5
Multi-family		—			—			—			—
Construction and land development		2,571			91			2,842			131
One-to-four family residential		3,240			84			2,091			65
Municipal, consumer, and other		10,069			230			9,202			103
Total	$	21,956		$	603		$	21,720		$	521

With no related allowance:
Commercial and industrial	$	4,637		$	213		$	5,681		$	150
Agricultural and farmland		13,187			500			15,889			352
Commercial real estate - owner occupied		11,367			401			10,640			360
Commercial real estate - non-owner occupied		17,358			388			4,000			111
Multi-family		299			—			1,349			9
Construction and land development		637			3			107			3
One-to-four family residential		8,167			266			10,107			194
Municipal, consumer, and other		3,660			78			4,871			71
Total	$	59,312		$	1,849		$	52,644		$	1,250

Total
Commercial and industrial	$	7,761		$	342		$	10,762		$	265
Agricultural and farmland		13,494			506			16,293			364
Commercial real estate - owner occupied		12,508			457			12,638			450
Commercial real estate - non-owner occupied		18,862			395			4,102			116
Multi-family		299			—			1,349			9
Construction and land development		3,208			94			2,949			134
One-to-four family residential		11,407			350			12,198			259
Municipal, consumer, and other		13,729			308			14,073			174
Total	$	81,268		$	2,452		$	74,364		$	1,771

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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				Total
September 30, 2020	Current		Past Due		Past Due		Nonaccrual		Loans
	(dollars in thousands)
Commercial and industrial	$	388,158	$	154	$	—	$	919	$	389,231
Agricultural and farmland		231,349		—		—		4,248		235,597
Commercial real estate - owner occupied		224,451		139		—		755		225,345
Commercial real estate - non-owner occupied		528,145		—		—		4,309		532,454
Multi-family		198,552		889		—		—		199,441
Construction and land development		263,803		1,410		—		545		265,758
One-to-four family residential		303,014		1,030		40		4,281		308,365
Municipal, consumer, and other		123,081		226		7		134		123,448
Total	$	2,260,553	$	3,848	$	47	$	15,191	$	2,279,639


	Accruing Interest
			30 - 89 Days		90+ Days				Total
December 31, 2019	Current		Past Due		Past Due		Nonaccrual		Loans
	(dollars in thousands)
Commercial and industrial	$	301,975	$	558	$	—	$	4,642	$	307,175
Agricultural and farmland		201,519		—		—		6,257		207,776
Commercial real estate - owner occupied		228,218		941		—		2,003		231,162
Commercial real estate - non-owner occupied		579,626		131		—		—		579,757
Multi-family		177,696		—		—		1,377		179,073
Construction and land development		224,716		140		—		31		224,887
One-to-four family residential		307,712		1,329		75		4,464		313,580
Municipal, consumer, and other		119,898		247		26		245		120,416
Total	$	2,141,360	$	3,346	$	101	$	19,019	$	2,163,826

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:


September 30, 2020	Pass		Pass-Watch		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial and industrial	$	365,872	$	16,828	$	6,531	$	—	$	389,231
Agricultural and farmland		200,879		19,415		15,303		—		235,597
Commercial real estate - owner occupied		183,836		27,901		13,608		—		225,345
Commercial real estate - non-owner occupied		452,942		43,941		35,571		—		532,454
Multi-family		170,134		28,418		889		—		199,441
Construction and land development		228,126		33,600		4,032		—		265,758
One-to-four family residential		284,072		11,285		13,008		—		308,365
Municipal, consumer, and other		109,542		425		13,481		—		123,448
Total	$	1,995,403	$	181,813	$	102,423	$	—	$	2,279,639


December 31, 2019	Pass		Pass-Watch		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial and industrial	$	267,645	$	27,114	$	12,416	$	—	$	307,175
Agricultural and farmland		180,735		12,267		14,774		—		207,776
Commercial real estate - owner occupied		198,710		21,745		10,707		—		231,162
Commercial real estate - non-owner occupied		531,694		46,092		1,971		—		579,757
Multi-family		175,807		1,771		1,495		—		179,073
Construction and land development		217,120		3,582		4,185		—		224,887
One-to-four family residential		287,036		13,546		12,998		—		313,580
Municipal, consumer, and other		106,063		479		13,874		—		120,416
Total	$	1,964,810	$	126,596	$	72,420	$	—	$	2,163,826

Table of Contents

HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present the financial effect of troubled debt restructurings for the three and nine months ended September 30, 2019 and 2020:


										Charge-offs
				Recorded Investment						and Specific
Three Months Ended September 30, 2020	****	Number	****	Pre-Modification		****	Post-Modification		****	Reserves
		(dollars in thousands)
Commercial real estate - owner occupied		1		$	853		$	853		$	—
Total		1		$	853		$	853		$	—


										Charge-offs
				Recorded Investment						and Specific
Three Months Ended September 30, 2019	****	Number	****	Pre-Modification		****	Post-Modification		****	Reserves
		(dollars in thousands)
One-to-four family residential		1		$	21		$	21		$	—
Total		1		$	21		$	21		$	—


										Charge-offs
				Recorded Investment						and Specific
Nine Months Ended September 30, 2020	****	Number	****	Pre-Modification		****	Post-Modification		****	Reserves
		(dollars in thousands)
Commercial real estate - owner occupied		1		$	853		$	853		$	—
Total		1		$	853		$	853		$	—

										Charge-offs
				Recorded Investment						and Specific
Nine Months Ended September 30, 2019	****	Number	****	Pre-Modification		****	Post-Modification		****	Reserves
		(dollars in thousands)
Commercial and industrial		3		$	516		$	516		$	—
Agricultural and farmland		2			392			392			—
Commercial real estate - owner occupied		1			170			170			—
One-to-four family residential		1			21			21			—
Total		7		$	1,099		$	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. 26

Table of Contents

HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(dollars in thousands)
Beginning balance	$	1,378	$	1,633	$	1,662	$	2,101
Reclassification from non-accretable difference		116		129		162		536
Accretion income		(111)		(231)		(441)		(1,106)
Ending balance	$	1,383	$	1,531	$	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:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(dollars in thousands)
Beginning balance	$	5,839	$	8,796	$	8,518	$	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)
Ending balance	$	5,571	$	7,936	$	5,571	$	7,936

Table of Contents

HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 5 – FORECLOSED ASSETS

Foreclosed assets activity is as follows for the three and nine months ended September 30, 2020 and 2019:


		Three Months Ended September 30,					Nine Months Ended September 30,
	****	2020		2019		****	2020		2019
		(dollars in thousands)
Beginning balance		$	4,450	$	9,707		$	5,099	$	9,559
Transfers from loans			172		27			499		1,788
Capitalized improvements			—		41			6		41
Proceeds from sales			(792)		(3,173)			(1,793)		(4,142)
Sales through loan origination			—		—			(67)		(360)
Net gain (loss) on sales			125		135			269		240
Direct write-downs			(98)		(163)			(156)		(552)
Ending balance		$	3,857	$	6,574		$	3,857	$	6,574

Gains (losses) on foreclosed assets includes the following for the three and nine months ended September 30, 2020 and 2019:


		Three Months Ended September 30,					Nine Months Ended September 30,
	****	2020		2019		****	2020		2019
		(dollars in thousands)
Direct write-downs		$	(98)	$	(163)		$	(156)	$	(552)
Net gain (loss) on sales			125		135			269		240
Guarantee reimbursements			—		8			7		69
Gain on settlement			—		—			—		375
Gains (losses) on foreclosed assets		$	27	$	(20)		$	120	$	132

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.

Table of Contents

HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 6 – DEPOSITS

The Company’s deposits are summarized below:


	September 30, 2020		****	December 31, 2019
	(dollars in thousands)
Noninterest-bearing deposits	$	850,306		$	689,116
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		2,166,355			2,087,739
Total deposits	$	3,016,661		$	2,776,855

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:


		Three Months Ended September 30,				Nine Months Ended September 30,
	****	2020		2019		2020		2019
		(dollars in thousands)
Interest-bearing demand		$	123	$	347	$	536	$	1,175
Money market			96		497		608		1,356
Savings			37		70		157		207
Time			587		1,086		2,179		3,356
Total interest expense on deposits		$	843	$	2,000	$	3,480	$	6,094

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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:


	****	September 30, 2020		****	December 31, 2019
		(dollars in thousands)
Subordinated notes, at face value		$	40,000		$	—
Unamortized issuance costs			(782)			—
Subordinated notes, at carrying value		$	39,218		$	—

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:


	****	September 30, 2020		****	December 31, 2019
		(dollars in thousands)
Heartland Bancorp, Inc. Capital Trust B		$	10,310		$	10,310
Heartland Bancorp, Inc. Capital Trust C			10,310			10,310
Heartland Bancorp, Inc. Capital Trust D			5,155			5,155
FFBI Capital Trust I			7,217			7,217
National Bancorp Statutory Trust I			5,773			5,773
Total junior subordinated debentures, at face value			38,765			38,765
National Bancorp Statutory Trust I unamortized discount			(1,133)			(1,182)
Total junior subordinated debentures, at carrying value		$	37,632		$	37,583

Table of Contents

HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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			September 30,		December 31,		Maturity
	****	Interest Rate		****	2020	****	2019	****	Date
Heartland Bancorp, Inc. Capital Trust B		LIBOR plus	2.75	%	3.03	%	4.74	%	April 6, 2034
Heartland Bancorp, Inc. Capital Trust C		LIBOR plus	1.53		1.78		3.42		June 15, 2037
Heartland Bancorp, Inc. Capital Trust D		LIBOR plus	1.35		1.60		3.24		September 15, 2037
FFBI Capital Trust I		LIBOR plus	2.80		3.08		4.79		April 6, 2034
National Bancorp Statutory Trust I		LIBOR plus	2.90		3.15		4.79		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.

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(Unaudited)

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:


	September 30, 2020						December 31, 2019
	Notional			Fair			Notional			Fair
	Amount		****	Value		****	Amount		****	Value
Designated as cash flow hedges:	(dollars in thousands)
Fair value recorded in other liabilities	$	17,000		$	(1,572)		$	17,000		$	(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
	September 30,				September 30,
	2020		2019		2020		2019
Designated as cash flow hedges:	(dollars in thousands)
Taxable loan interest income	$	—	$	33	$	64	$	83
Junior subordinated debentures interest expense		(97)		(9)		(202)		(7)
Total	$	(97)	$	24	$	(138)	$	76

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(Unaudited)

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:


	September 30, 2020						December 31, 2019
	Notional			Fair			Notional			Fair
	Amount		****	Value		****	Amount		****	Value
Not designated as hedging instruments:	(dollars in thousands)
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	$	140,820		$	21,568		$	138,356		$	8,642

Fair value recorded in other liabilities:
Interest rate swaps with a commercial borrower counterparty	$	—		$	—		$	24,216		$	(110)
Interest rate swaps with a financial institution counterparty		140,820			(21,568)			114,140			(8,532)
Total fair value recorded in other liabilities	$	140,820		$	(21,568)		$	138,356		$	(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:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Not designated as hedging instruments:	(dollars in thousands)
Gross gains	$	2,188	$	4,151	$	17,369	$	10,196
Gross losses		(2,188)		(4,151)		(17,369)		(10,159)
Net gains (losses)	$	—	$	—	$	—	$	37

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(Unaudited)

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
	****	Available-for-Sale		****	Held-to-Maturity		****	Derivatives		****	Total
		(dollars in thousands)
Three Months Ended September 30, 2020
Balance, June 30, 2020		$	18,806		$	(133)		$	(1,462)		$	17,211
Other comprehensive income before reclassifications			1,176			—			5			1,181
Reclassifications			—			8			97			105
Other comprehensive income, before tax			1,176			8			102			1,286
Income tax expense			336			2			28			366
Other comprehensive income, after tax			840			6			74			920
Balance, September 30, 2020		$	19,646		$	(127)		$	(1,388)		$	18,131

Three Months Ended September 30, 2019
Balance, June 30, 2019		$	8,063		$	(37)		$	(590)		$	7,436
Other comprehensive income (loss) before reclassifications			1,289			—			(208)			1,081
Reclassifications			—			(62)			(24)			(86)
Other comprehensive income (loss)			1,289			(62)			(232)			995
Balance, September 30, 2019		$	9,352		$	(99)		$	(822)		$	8,431

Nine Months Ended September 30, 2020
Balance, December 31, 2019		$	8,659		$	(131)		$	(696)		$	7,832
Other comprehensive income (loss) before reclassifications			15,368			—			(1,098)			14,270
Reclassifications			—			5			138			143
Other comprehensive income (loss), before tax			15,368			5			(960)			14,413
Income tax expense (benefit)			4,381			1			(268)			4,114
Other comprehensive income (loss), after tax			10,987			4			(692)			10,299
Balance, September 30, 2020		$	19,646		$	(127)		$	(1,388)		$	18,131

Nine Months Ended September 30, 2019
Balance, December 31, 2018		$	(4,561)		$	122		$	151		$	(4,288)
Other comprehensive income (loss) before reclassifications			13,913			—			(897)			13,016
Reclassifications			—			(221)			(76)			(297)
Other comprehensive income (loss)			13,913			(221)			(973)			12,719
Balance, September 30, 2019		$	9,352		$	(99)		$	(822)		$	8,431

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. 34

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(Unaudited)

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:


		Three Months Ended						Nine Months Ended
		September 30,						September 30,
	****	2020		****	2019		****	2020		****	2019
		(dollars in thousands)
Current
Federal		$	2,921		$	—		$	5,619		$	—
State			1,593			299			3,218			819
Total current			4,514			299			8,837			819

Deferred
Federal			(542)			—			(419)			—
State			(271)			—			(209)			—
Total deferred			(813)			—			(628)			—
Income tax expense		$	3,701		$	299		$	8,209		$	819

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Income tax expense differs from the statutory federal rate for the three and nine months ended September 30 due to the following:


	****	Three Months Ended September 30,
	****	2020				****	2019
		Amount		****	Percentage		Amount		****	Percentage
		(dollars in thousands)
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			1,039		7.3			299		1.7
Other			39		0.2			—		—
Income tax expense		$	3,701		25.9	%	$	299		1.7	%

		Nine Months Ended September 30,
		2020					2019
		Amount			Percentage		Amount			Percentage
		(dollars in thousands)
Federal income tax, at statutory rate		$	6,806		21.0	%	$	—		—	%
Increase (decrease) resulting from:
Federally tax exempt interest income			(1,099)		(3.4)			—		—
State taxes, net of federal benefit			2,397		7.4			819		1.6
Other			105		0.3			—		—
Income tax expense		$	8,209		25.3	%	$	819		1.6	%

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The components of the net deferred tax asset as of September 30, 2020 and December 31, 2019 are as follows:


	September 30,		December 31,
	2020		2019
	(dollars in thousands)
Deferred tax assets
Allowance for loan losses	$	8,927	$	6,309
Compensation related		2,156		5,859
Deferred loan fees		1,937		497
Nonaccrual interest		617		858
Foreclosed assets		93		574
Goodwill		385		531
Other		1,084		785
Total deferred tax assets		15,199		15,413

Deferred tax liabilities
Fixed asset depreciation		4,363		4,201
Mortgage servicing rights		1,588		2,428
Other purchase accounting adjustments		1,195		1,356
Intangible assets		645		841
Prepaid assets		475		504
Net unrealized gain on debt securities available-for-sale		6,632		2,251
Other		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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table sets forth the computation of basic and diluted earnings per share:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		****	2019		****	2020		****	2019
	(dollars in thousands)
Numerator:
Net income	$	10,563		$	17,437		$	24,203		$	50,778
Earnings allocated to unvested restricted stock units		(28)			—			(62)			—
Numerator for earnings per share - basic and diluted	$	10,535		$	17,437		$	24,141		$	50,778

Denominator:
Weighted average common shares outstanding		27,457,306			18,027,512			27,457,306			18,027,512
Dilutive effect of outstanding restricted stock units		—			—			—			—
Weighted average common shares outstanding, including all dilutive potential shares		27,457,306			18,027,512			27,457,306			18,027,512

Earnings per share - Basic	$	0.38		$	0.97		$	0.88		$	2.82
Earnings per share - Diluted	$	0.38		$	0.97		$	0.88		$	2.82

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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2020		****	2019		****	2020		****	2019
	(dollars in thousands)
Restricted stock units	$	100		$	—		$	263		$	—
Stock appreciation rights		(75)			64			(303)			(51)
Total stock-based compensation expense (benefit)	$	25		$	64		$	(40)		$	(51)

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of outstanding restricted stock unit activity:


		Three Months Ended September 30,
		2020					2019
				Weighted					Weighted
		Restricted		Average			Restricted		Average
		Stock Units		Grant Date			Stock Units		Grant Date
	****	Outstanding	****	Fair Value		****	Outstanding	****	Fair Value
Beginning balance		73,700		$	18.98		—		$	—
Granted		—			—		—			—
Vested		—			—		—			—
Forfeited		—			—		—			—
Ending balance		73,700		$	18.98		—		$	—

		Nine Months Ended September 30,
		2020					2019
				Weighted					Weighted
		Restricted		Average			Restricted		Average
		Stock Units		Grant Date			Stock Units		Grant Date
	****	Outstanding	****	Fair Value		****	Outstanding	****	Fair Value
Beginning balance		—		$	—		—		$	—
Granted		73,700			18.98		—			—
Vested		—			—		—			—
Forfeited		—			—		—			—
Ending balance		73,700		$	18.98		—		$	—

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	****	Outstanding	****	Contractual Term
$ 12.71		550		0.3	years
$ 19.03		73,150		3.2	years

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. 40

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of outstanding stock appreciation rights activity:


		Three Months Ended September 30,
		2020					2019
	****	StockAppreciationRightsOutstanding	****	WeightedAverageGrant DateAssigned Value		****	StockAppreciationRightsOutstanding	****	WeightedAverageGrant DateAssigned Value
Beginning balance		110,160		$	16.32		42,840		$	7.46
Granted		—			—		110,160			16.32
Exercised		—			—		(42,840)			7.46
Forfeited		—			—		—			—
Ending balance		110,160		$	16.32		110,160		$	16.32

		Nine Months Ended September 30,
		2020					2019
	****	StockAppreciationRightsOutstanding	****	WeightedAverageGrant DateAssigned Value		****	StockAppreciationRightsOutstanding	****	WeightedAverageGrant DateAssigned Value
Beginning balance		110,160		$	16.32		91,800		$	5.73
Granted		—			—		110,160			16.32
Exercised		—			—		(91,800)			5.73
Forfeited		—			—		—			—
Ending balance		110,160		$	16.32		110,160		$	16.32

A further summary of outstanding stock appreciation rights as of September 30, 2020, is as follows:


						Weighted Average
						Remaining
Range of Grant Date Assigned Values	****	Outstanding	****	Exercisable	****	Contractual Term
$ 16.32		110,160		87,210		8.9	years

As of September 30, 2020, unrecognized compensation cost related to non-vested stock appreciation rights was $27,000.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.


	September 30,			December 31,
	2020		****	2019
Risk-free interest rate		0.61	%		1.90	%
Expected volatility		34.10	%		28.83	%
Expected life (in years)		8.9			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. 42

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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
September 30, 2020	****	Amount		****	Ratio	****	Amount		****	Ratio	****	Amount		****	Ratio	****
			(dollars in thousands)
Total Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		$	417,844		16.81	%	$	198,827		8.00	%		N/A		N/A
Heartland Bank			333,344		14.52			183,710		8.00		$	229,638		10.00	%
State Bank of Lincoln			35,955		19.16			15,013		8.00			18,766		10.00

Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		$	347,552		13.98	%	$	149,120		6.00	%		N/A		N/A
Heartland Bank			304,639		13.27			137,783		6.00		$	183,710		8.00	%
State Bank of Lincoln			33,602		17.91			11,260		6.00			15,013		8.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		$	311,085		12.52	%	$	111,840		4.50	%		N/A		N/A
Heartland Bank			304,639		13.27			103,337		4.50		$	149,265		6.50	%
State Bank of Lincoln			33,602		17.91			8,445		4.50			12,198		6.50

Tier 1 Capital (to Average Assets)
Consolidated HBT Financial, Inc.		$	347,552		10.04	%	$	138,524		4.00	%		N/A		N/A
Heartland Bank			304,639		9.77			124,701		4.00		$	155,876		5.00	%
State Bank of Lincoln			33,602		9.82			13,691		4.00			17,114		5.00

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


		Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
December 31, 2019	****	Amount		****	Ratio	****	Amount		****	Ratio	****	Amount		****	Ratio	****
			(dollars in thousands)
Total Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		$	356,994		14.54	%	$	196,358		8.00	%		N/A		N/A
Heartland Bank			315,516		14.02			180,071		8.00		$	225,088		10.00	%
State Bank of Lincoln			35,390		17.58			16,104		8.00			20,130		10.00

Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		$	334,695		13.64	%	$	147,268		6.00	%		N/A		N/A
Heartland Bank			295,385		13.12			135,053		6.00		$	180,071		8.00	%
State Bank of Lincoln			33,222		16.50			12,078		6.00			16,104		8.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		$	298,277		12.15	%	$	110,451		4.50	%		N/A		N/A
Heartland Bank			295,385		13.12			101,290		4.50		$	146,307		6.50	%
State Bank of Lincoln			33,222		16.50			9,058		4.50			13,084		6.50

Tier 1 Capital (to Average Assets)
Consolidated HBT Financial, Inc.		$	334,695		10.38	%	$	129,027		4.00	%		N/A		N/A
Heartland Bank			295,385		10.25			115,281		4.00		$	144,102		5.00	%
State Bank of Lincoln			33,222		9.82			13,531		4.00			16,914		5.00

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. 44

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(Unaudited)

The following tables present the balances of the assets measured at fair value on a recurring basis:


September 30, 2020	****	Level ** 1 Inputs**		****	Level 2Inputs		****	Level 3 Inputs		****	Total Fair Value
			(dollars in thousands)
Debt securities available-for-sale:
U.S. government agency		$	—		$	104,326		$	—		$	104,326
Municipal			—			240,410			—			240,410
Mortgage-backed:
Agency residential			—			226,317			—			226,317
Agency commercial			—			171,072			—			171,072
Corporate			—			72,673			—			72,673
Equity securities with readily determinable fair values			3,262			—			—			3,262
Mortgage servicing rights			—			—			5,571			5,571
Derivative financial assets			—			21,568			—			21,568
Derivative financial liabilities			—			23,140			—			23,140


December 31, 2019	****	Level 1 Inputs		****	Level 2Inputs		****	Level 3 Inputs		****	Total Fair Value
			(dollars in thousands)
Debt securities available-for-sale:
U.S. government agency		$	—		$	49,615		$	—		$	49,615
Municipal			—			133,738			—			133,738
Mortgage-backed:
Agency residential			—			200,678			—			200,678
Agency commercial			—			134,954			—			134,954
Corporate			—			73,419			—			73,419
Equity securities with readily determinable fair values			3,241			—			—			3,241
Mortgage servicing rights			—			—			8,518			8,518
Derivative financial assets			—			8,642			—			8,642
Derivative financial liabilities			—			9,318			—			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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present additional information about the unobservable inputs used in the fair value measurement of the mortgage servicing rights (dollars in thousands):


September 30, 2020	****	Fair ** Value**		****	Valuation Technique	****	Unobservable Inputs	****	Range(Weighted Average)
Mortgage servicing rights		$	5,571		Discounted cash flows		Constant pre-payment rates (CPR)		7.0% to 85.0% (18.2%)
							Discount rate		9.0% to 11.0% (9.0%)

December 31, 2019		Fair Value			Valuation Technique		Unobservable Inputs		Range(Weighted Average)
Mortgage servicing rights		$	8,518		Discounted cash flows		Constant pre-payment rates (CPR)		7.0% to 68.5% (12.3%)
							Discount rate		9.0% to 11.0% (9.0%)

Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as there is evidence of impairment or a change in the amount of previously recognized impairment.

The following tables present the balances of the assets measured at fair value on a nonrecurring basis:


September 30, 2020	****	Level 1 Inputs		****	Level 2Inputs		****	Level 3 Inputs		****	Total Fair Value
			(dollars in thousands)
Loans held for sale		$	—		$	23,723		$	—		$	23,723
Collateral-dependent impaired loans			—			—			16,209			16,209
Bank premises held for sale			—			—			121			121
Foreclosed assets			—			—			3,857			3,857


December 31, 2019	****	Level 1 Inputs		****	Level 2Inputs		****	Level 3 Inputs		****	Total Fair Value
			(dollars in thousands)
Loans held for sale		$	—		$	4,531		$	—		$	4,531
Collateral-dependent impaired loans			—			—			15,811			15,811
Bank premises held for sale			—			—			121			121
Foreclosed assets			—			—			5,099			5,099

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. 47

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(Unaudited)

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. 48

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables present quantitative information about unobservable inputs used in nonrecurring Level 3 fair value measurements (dollars in thousands):


September 30, 2020	****	FairValue		****	ValuationTechnique	****	Unobservable ** Inputs**	****	Range (Weighted Average)
Collateral-dependent impaired loans		$	16,209		Appraisal of collateral		Appraisal adjustments		Not meaningful
Bank premises held for sale			121		Appraisal		Appraisal adjustments		7% (7%)
Foreclosed assets			3,857		Appraisal		Appraisal adjustments		7% (7%)

December 31, 2019		FairValue			ValuationTechnique		Unobservable Inputs		Range (Weighted Average)
Collateral-dependent impaired loans		$	15,811		Appraisal of collateral		Appraisal adjustments		Not meaningful
Bank premises held for sale			121		Appraisal		Appraisal adjustments		7% (7%)
Foreclosed assets			5,099		Appraisal		Appraisal adjustments		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.

Loans

The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are consistent with discounts in the market place. Fair values are estimated for portfolios of loans with similar characteristics. Loans are segregated by type such as commercial and industrial, agricultural and farmland, commercial real estate - owner occupied, commercial real estate - non-owner occupied, multi-family, construction and land development, one-to-four family residential, and municipal, consumer, and other. The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, interest rates, liquidity, and credit spreads, as appropriate. 49

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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. 50

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HBT FINANCIAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table provides summary information on the carrying amounts and estimated fair values of the Company’s financial instruments:


		Fair ** Value**		September 30, 2020						December 31, 2019
		Hierarchy		Carrying			Estimated			Carrying			Estimated
	****	Level	****	Amount		****	Fair Value		****	Amount		****	Fair Value
					(dollars in thousands)
Financial assets:
Cash and cash equivalents		Level 1		$	236,724		$	236,724		$	283,971		$	283,971
Interest-bearing time deposits with banks		Level 1			—			—			248			248
Debt securities held-to-maturity		Level 2			74,510			78,891			88,477			90,529
Restricted stock		Level 3			2,498			2,498			2,425			2,425
Loans, net		Level 3			2,247,985			2,269,402			2,141,527			2,181,103
Investments in unconsolidated subsidiaries		Level 3			1,165			1,165			1,165			1,165
Accrued interest receivable		Level 2			13,820			13,820			13,951			13,951

Financial liabilities:
Time deposits		Level 3			307,907			309,806			356,408			355,340
Securities sold under agreements to repurchase		Level 2			45,438			45,438			44,433			44,433
Subordinated notes		Level 3			39,218			39,999			—			—
Junior subordinated debentures		Level 3			37,632			24,844			37,583			31,959
Accrued interest payable		Level 2			819			819			1,132			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. 51

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Such commitments and conditional obligations were as follows:


		Contractual Amount
		September 30,			December 31,
	****	2020		****	2019
			(dollars in thousands)
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.

Table of Contents 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:


	****	September 30, 2020		****	December 31, 2019
		(dollars in thousands)
Loans, before allowance for loan losses
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
Loans, before allowance for loan losses		$	2,279,639		$	2,163,826

Total deposits
Bloomington-Normal		$	746,612		$	694,519
Champaign-Urbana			167,731			152,108
Chicago			1,039,574			911,916
Lincoln			199,719			194,784
Ottawa-Peru			331,299			290,138
Peoria			531,726			533,390
Total deposits		$	3,016,661		$	2,776,855

Table of Contents 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:

●	Enabling work from home for many employees and social distancing for employees who need to report to the office;
●	Maintaining regular business hours at branches for drive-up services and the call center to serve customers while branch lobby service was closed;
---	---
●	Branch lobby service was reopened for all locations by July 13, 2020, except one location which was permanently closed and consolidated with an existing branch on June 30, 2020;
---	---
●	Offering loan payment modifications to customers experiencing financial hardship due to COVID-19;
---	---
●	Waiving or refunding overdraft and ATM fees, as well as time deposit early withdrawal penalties, to customers experiencing financial hardship due to COVID-19;
---	---
●	Participating in the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) with $185 million of PPP loans approved and funded to 2,329 businesses supporting approximately 24,000 employees in our communities during the second and third quarters of 2020.
---	---

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.

Table of Contents 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	Number	Amount		Percentage	Fee
	(dollars in thousands)
Less than 350,000	2,233	$	109,063	5.0%	$	5,453
Over 350,000, but less than 2,000,000	94		69,254	3.0%		2,078
Over 2,000,000	2		7,085	1.0%		71
Total	2,329	$	185,402		$	7,602

All values are in US Dollars.

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
		Number	Balance		Number	Balance
	****	(dollars in thousands)
Commercial and industrial		10	$	4,739	69	$	23,949
Agricultural and farmland		3		3,178	7		4,175
Commercial real estate - owner occupied		7		7,294	61		40,104
Commercial real estate - non-owner occupied		15		18,021	98		102,407
Multi-family		2		992	17		12,031
Construction and land development		1		361	6		5,148
One-to-four family residential		17		1,779	124		15,048
Municipal, consumer, and other		2		30	13		370
Total		57	$	36,394	395	$	203,232

Table of Contents 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						Nonaccrual		Substandard		Modified
		Non-PPP Loans		PPP Loans		Total		Status		Risk Rating		Payments ^(1)^
	****	(dollars in thousands)
Retail
Commercial and industrial		$	10,473	$	12,068	$	22,541	$	—	$	3,350	$	—
Commercial real estate - owner occupied			17,554		—		17,554		273		2,305		—
Commercial real estate - non-owner occupied			128,252		—		128,252		—		6,985		8,990
Construction and land development			5,607		—		5,607		—		—		—
Total		$	161,886	$	12,068	$	173,954	$	273	$	12,640	$	8,990

Restaurants
Commercial and industrial		$	3,456	$	11,064	$	14,520	$	—	$	335	$	—
Commercial real estate - owner occupied			16,153		—		16,153		270		2,816		1,606
Commercial real estate - non-owner occupied			7,245		—		7,245		—		480		635
Total		$	26,854	$	11,064	$	37,918	$	270	$	3,631	$	2,241

Hotels
Commercial and industrial		$	—	$	1,538	$	1,538	$	—	$	—	$	—
Commercial real estate - non-owner occupied			22,748		—		22,748		—		6,699		6,098
Total		$	22,748	$	1,538	$	24,286	$	—	$	6,699	$	6,098

(1)	Borrowers that were granted a loan payment modification related to a COVID-19 financial hardship that have not returned to regular payments as of September 30, 2020.

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.

Table of Contents 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:

●	Decrease in net interest income and net interest margin, as a result of the lower interest rate environment;
●	Increase in provision for loan losses due to deterioration in the loan portfolio’s credit quality, as a result of the economic slow-down caused by the COVID-19 pandemic;
---	---
●	Decrease in debit and credit card interchange income, as a result of a lower level of consumer activity and lower associated volume of debit and credit card transactions;
---	---
●	Decrease in service charge income on deposit accounts, such as overdraft fees, as a result of an increase in waived or refunded fees and federal economic stimulus payments received by customers;
---	---
●	Decrease in demand for loans, as a result of the economic slow-down caused by 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.

Table of Contents 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

Table of Contents FACTORS AFFECTING COMPARABILITY OF FINANCIAL RESULTS

S Corp Status

Prior to the initial public offering, the Company, with the consent of its then current stockholders, elected to be taxed under sections of federal and state income tax law as an "S Corporation" which provides that, in lieu of Company income taxes, except for state replacement taxes, the stockholders separately account for their pro rata shares of the Company’s items of income, deductions, losses and credits. As a result of this election, no income taxes, other than state replacement taxes, had been recognized in the accompanying consolidated financial statements prior to October 11, 2019.

The following table illustrates the impact of being taxed as a C Corporation:


	****	Three Months Ended September 30,						Nine Months Ended September 30,
		2020				2019		2020			2019
	****	(dollars in thousands, except per share amounts)
As Reported
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		$	0.38		$	0.97		$	0.88		$	2.82

Effective tax rate			25.9	%		1.7	%		25.3	%		1.6	%

Unaudited Pro Forma C Corp Equivalent
Historical income before income tax expense			N/A		$	17,736			N/A		$	51,597
C Corp equivalent income tax expense			N/A			4,614			N/A			13,313
C Corp equivalent net income			N/A		$	13,122			N/A		$	38,284

C Corp equivalent earnings per share - Basic			N/A		$	0.73			N/A		$	2.12
C Corp equivalent earnings per share - Diluted			N/A		$	0.73			N/A		$	2.12

Effective tax rate			N/A			26.0	%		N/A			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.

Table of Contents 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

Table of Contents RESULTS OF OPERATIONS

Overview of Recent Financial Results

The following table presents selected financial results and measures:


	****	Three Months Ended September 30,						Nine Months Ended September 30,
		2020			2019			2020			2019
	****	(dollars in thousands, except per share amounts)
Statement of Income Information
Total interest and dividend income		$	30,238		$	35,636		$	93,319		$	109,135
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			684			10,102			3,266
Net income after provision for loan losses			26,697			32,457			78,339			98,258
Total noninterest income			10,052			7,582			23,364			22,415
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

C Corp equivalent net income ^(1)^			N/A		$	13,122			N/A		$	38,284
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
Earnings per share - Diluted		$	0.38		$	0.97		$	0.88		$	2.82
C Corp equivalent earnings per share - Diluted ^(1)^			N/A			0.73			N/A			2.12
Adjusted earnings per share - Diluted ^(2)^			0.39			0.80			0.99			2.39

Weighted average number shares of common stock outstanding			27,457,306			18,027,512			27,457,306			18,027,512

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			4.74			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			0.46
Cost of total deposits *			0.11			0.29			0.16			0.29

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)^			N/A			1.63	%		N/A			1.59	%
C Corp equivalent return on average stockholders' equity * ^(1)^			N/A			14.93			N/A			14.84
C Corp equivalent return on average tangible common equity * ^(1) (2)^			N/A			16.24			N/A			16.18

Adjusted return on average assets * ^(2)^			1.22	%		1.78	%		1.08	%		1.78	%
Adjusted return on average stockholders' equity * ^(2)^			12.04			16.32			10.50			16.68
Adjusted return on average tangible common equity * ^(2)^			13.03			17.75			11.40			18.18

* Annualized measure.

(1)	Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent provision for income tax for such period. No such adjustment is necessary for periods subsequent to 2019.
(2)	See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most comparable GAAP measures.
---	---
(3)	On a tax-equivalent basis assuming a federal income tax rate of 21% and a state income tax rate of 9.5%.
---	---

N/A Not applicable. 61

Table of Contents 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.

Table of Contents 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.


		Three Months Ended
	****	September 30, 2020						September 30, 2019
		Average						Average
		Balance		Interest		Yield/Cost *		Balance		Interest		Yield/Cost *
	****	(dollars in thousands)
ASSETS
Loans		$	2,277,826	$	25,660	4.48	%	$	2,191,230	$	29,992	5.43	%
Securities			831,120		4,499	2.15			745,532		4,967	2.64
Deposits with banks			274,022		65	0.09			136,635		662	1.93
Other			2,498		14	2.29			2,425		15	2.35
Total interest-earning assets			3,385,466	$	30,238	3.55	%		3,075,822	$	35,636	4.60	%
Allowance for loan losses			(30,221)						(22,326)
Noninterest-earning assets			157,446						149,146
Total assets		$	3,512,691					$	3,202,642

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing deposits:
Interest-bearing demand		$	888,941	$	123	0.05	%	$	812,526	$	347	0.17	%
Money market			479,314		96	0.08			468,139		497	0.42
Savings			493,278		37	0.03			428,447		70	0.06
Time			306,154		587	0.76			383,070		1,086	1.12
Total interest-bearing deposits			2,167,687		843	0.15			2,092,182		2,000	0.38
Securities sold under agreements to repurchase			51,686		9	0.06			35,757		17	0.18
Borrowings			1,196		1	0.47			33		—	2.40
Subordinated notes			11,976		147	4.87			—		—	—
Junior subordinated debentures issued to capital trusts			37,621		367	3.89			37,561		478	5.05
Total interest-bearing liabilities			2,270,166	$	1,367	0.24	%		2,165,533	$	2,495	0.46	%
Noninterest-bearing deposits			846,808						651,085
Noninterest-bearing liabilities			40,421						37,274
Total liabilities			3,157,395						2,853,892
Stockholders' Equity			355,296						348,750
Total liabilities and stockholders’ equity		$	3,512,691					$	3,202,642

Net interest income/Net interest margin ^(3)^				$	28,871	3.39	%			$	33,141	4.27	%
Tax-equivalent adjustment ^(2)^					495	0.06					559	0.08
Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) ^(1) (2)^				$	29,366	3.45	%			$	33,700	4.35	%
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						0.11	%					0.29	%

* Annualized measure.

(1)	See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most comparable GAAP measures.
(2)	On a tax-equivalent basis assuming a federal income tax rate of 21% and a state income tax rate of 9.5%.
---	---
(3)	Net interest margin represents net interest income divided by average total interest-earning assets.
---	---
(4)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
---	---
(5)	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
---	---

Table of Contents


		Nine Months Ended
	****	September 30, 2020						September 30, 2019
		Average						Average
		Balance		Interest		Yield/Cost *		Balance		Interest		Yield/Cost *
	****	(dollars in thousands)
ASSETS
Loans		$	2,228,145	$	79,144	4.74	%	$	2,184,263	$	91,387	5.59	%
Securities			740,834		13,260	2.39			779,375		15,754	2.70
Deposits with banks			283,730		873	0.41			131,209		1,948	1.99
Other			2,473		42	2.29			2,527		46	2.42
Total interest-earning assets			3,255,182	$	93,319	3.83	%		3,097,374	$	109,135	4.71	%
Allowance for loan losses			(26,288)						(21,346)
Noninterest-earning assets			156,121						147,972
Total assets		$	3,385,015					$	3,224,000

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Interest-bearing deposits:
Interest-bearing demand		$	853,775	$	536	0.08	%	$	821,848	$	1,175	0.19	%
Money market			473,647		608	0.17			455,469		1,356	0.40
Savings			467,482		157	0.04			428,865		207	0.06
Time			321,905		2,179	0.90			408,972		3,356	1.10
Total interest-bearing deposits			2,116,809		3,480	0.22			2,115,154		6,094	0.39
Securities sold under agreements to repurchase			49,183		40	0.11			39,542		48	0.16
Borrowings			1,333		2	0.19			378		7	2.61
Subordinated notes			4,021		147	4.87			—		—	—
Junior subordinated debentures issued to capital trusts			37,605		1,209	4.30			37,544		1,462	5.21
Total interest-bearing liabilities			2,208,951	$	4,878	0.29	%		2,192,618	$	7,611	0.46	%
Noninterest-bearing deposits			780,826						654,818
Noninterest-bearing liabilities			47,426						31,720
Total liabilities			3,037,203						2,879,156
Stockholders' Equity			347,812						344,844
Total liabilities and stockholders’ equity		$	3,385,015						3,224,000

Net interest income/Net interest margin ^(3)^				$	88,441	3.63	%			$	101,524	4.38	%
Tax-equivalent adjustment ^(2)^					1,441	0.06					1,775	0.08
Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) ^(1) (2)^				$	89,882	3.69	%			$	103,299	4.46	%
Net interest rate spread ^(4)^						3.54	%					4.25	%
Net interest-earning assets ^(5)^		$	1,046,231					$	904,756
Ratio of interest-earning assets to interest-bearing liabilities			1.47						1.41
Cost of total deposits						0.16	%					0.29	%

* Annualized measure.

(1)	See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most comparable GAAP measures.
(2)	On a tax-equivalent basis assuming a federal income tax rate of 21% and a state income tax rate of 9.5%.
---	---
(3)	Net interest margin represents net interest income divided by average total interest-earning assets.
---	---
(4)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
---	---
(5)	Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
---	---

Table of Contents 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:


		Three Months Ended September 30,								Nine Months Ended September 30,
	****	2020			****	2019				2020				2019
				Yield				Yield				Yield				Yield
		Interest		Contribution *		Interest		Contribution *		Interest		Contribution *		Interest		Contribution *
	****	(dollars in thousands)
Contractual interest		$	23,715	4.14	%	$	28,648	5.19	%	$	73,939	4.43	%	$	86,620	5.29	%
Loan fees (excluding PPP loans)			904	0.16			1,007	0.18			2,847	0.18			2,584	0.16
PPP loan fees			876	0.15			—	—			1,727	0.10			—	—
Accretion of acquired loan discounts			165	0.03			304	0.05			567	0.03			2,100	0.13
Net cash flow hedge earnings			—	—			33	0.01			64	—			83	0.01
Total loan interest income		$	25,660	4.48	%	$	29,992	5.43	%	$	79,144	4.74	%	$	91,387	5.59	%

* Annualized measure.

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.


		Three Months Ended September 30,								Nine Months Ended September 30,
	****	2020			****	2019				2020				2019
				Net Interest				Net Interest				Net Interest				Net Interest
				Margin				Margin				Margin				Margin
		Interest		Contribution *		Interest		Contribution *		Interest		Contribution *		Interest		Contribution *
	****	(dollars in thousands)
Interest income:
Contractual interest on loans		$	23,715	2.78	%	$	28,648	3.69	%	$	73,939	3.03	%	$	86,620	3.74	%
Contractual interest on securities			5,972	0.70			5,858	0.75			16,558	0.68			18,513	0.80
Contractual interest on deposits with banks			65	0.01			662	0.09			873	0.04			1,948	0.08
Loan fees (excluding PPP loans)			904	0.11			1,007	0.13			2,847	0.12			2,584	0.11
PPP loan fees			876	0.10			—	—			1,727	0.07			—	—
Accretion of acquired loan discounts			165	0.02			304	0.04			567	0.02			2,100	0.09
Securities amortization, net			(1,473)	(0.17)			(891)	(0.11)			(3,298)	(0.14)			(2,759)	(0.12)
Other			14	—			48	0.01			106	0.01			129	0.01
Total interest income			30,238	3.55			35,636	4.60			93,319	3.83			109,135	4.71

Interest expense:
Contractual interest on deposits			840	0.10			1,994	0.26			3,463	0.14			6,103	0.26
Contractual interest on other interest-bearing liabilities			404	0.05			469	0.07			1,140	0.05			1,461	0.07
Other			123	0.01			32	—			275	0.01			47	—
Total interest expense			1,367	0.16			2,495	0.33			4,878	0.20			7,611	0.33
Net interest income			28,871	3.39			33,141	4.27			88,441	3.63			101,524	4.38
Tax equivalent adjustment ^(1)^			495	0.06			559	0.08			1,441	0.06			1,775	0.08
Net interest income (tax equivalent) ^(1) (2)^		$	29,366	3.45	%	$	33,700	4.35	%	$	89,882	3.69	%	$	103,299	4.46	%

* Annualized measure.

(1)	On a tax-equivalent basis assuming a federal income tax rate of 21% and a state income tax rate of 9.5%.
(2)	See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most comparable GAAP measures.
---	---

Table of Contents 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.


		Three Months Ended September 30, 2020							Nine Months Ended September 30, 2020
	****	vs.						****	vs.
	****	Three Months Ended September 30, 2019						****	Nine Months Ended September 30, 2019
	****	Increase (Decrease) Due to						****	Increase (Decrease) Due to
		Volume		Rate		Total			Volume		Rate		Total
	****	(dollars in thousands)
Interest-earning assets:
Loans		$	1,147	$	(5,479)	$	(4,332)		$	1,803	$	(14,046)	$	(12,243)
Securities			521		(989)		(468)			(774)		(1,720)		(2,494)
Deposits with banks			345		(942)		(597)			1,204		(2,279)		(1,075)
Other			—		(1)		(1)			(1)		(3)		(4)
Total interest-earning assets			2,013		(7,411)		(5,398)			2,232		(18,048)		(15,816)

Interest-earning liabilities:
Interest-bearing deposits:
Interest-bearing demand			30		(254)		(224)			44		(683)		(639)
Money market			12		(413)		(401)			52		(800)		(748)
Savings			9		(42)		(33)			18		(68)		(50)
Time			(191)		(308)		(499)			(646)		(531)		(1,177)
Total interest-bearing deposits			(140)		(1,017)		(1,157)			(532)		(2,082)		(2,614)
Securities sold under agreements to repurchase			5		(13)		(8)			10		(18)		(8)
Borrowings			1		—		1			7		(12)		(5)
Subordinated notes			147		—		147			147		—		147
Junior subordinated debentures issued to capital trusts			1		(112)		(111)			2		(255)		(253)
Total interest-bearing liabilities			14		(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)

Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019

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.

Table of Contents Comparison of the Nine Months Ended September30, 2020 to the Nine Months Ended September30, 2019

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:


	2020		2019
Three months ended
March 31,	4.03	%	4.50	%
June 30,	3.51		4.37
September 30,	3.39		4.27
December 31,	—		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.

Table of Contents 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.

Comparison of the Three Months Ended September30, 2020 to the Three Months Ended September30, 2019

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.

Comparison of the Nine Months Ended September30, 2020 to the Nine Months Ended September30, 2019

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.

Table of Contents Noninterest Income

The following table sets forth the major categories of noninterest income for the periods indicated:


	****	Three Months Ended September 30,					****	Nine Months Ended September 30,
		2020		2019		Change		2020		2019		Change
	****	(dollars in thousands)
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)				3		42
Gains (losses) on foreclosed assets			27		(20)				120		132
Gains (losses) on other assets			1		(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

All values are in US Dollars.

Comparison of the Three Months Ended September30, 2020 to the Three Months Ended September30, 2019

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.

Comparison of the Nine Months Ended September30, 2020 to the Nine Months Ended September30, 2019

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.

Table of Contents Noninterest Expense

The following table sets forth the major categories of noninterest expense for the periods indicated:


	****	Three Months Ended September 30,					Nine Months Ended September 30,
		2020		2019		Change	2020		2019		Change
	****	(dollars in thousands)
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		8			476		435
Loan collection and servicing			450		547			1,292		1,901
Foreclosed assets			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

All values are in US Dollars.

Comparison of the Three Months Ended September30, 2020 to the Three Months Ended September30, 2019

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.

Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019

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.

Table of Contents 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. For additional information, see “Factors Affecting Comparability of Financial Results: S Corp Status”.

Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019

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.

Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019

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.

Table of Contents FINANCIAL CONDITION


		September 30,			December 31,
		2020			2019			Change	****	% Change
	****	(dollars in thousands, except per share amounts)
Balance Sheet Information
Cash and cash equivalents		$	236,724		$	283,971				(16.6)	%
Securities available-for-sale, at fair value			814,798			592,404				37.5
Securities held-to-maturity			74,510			88,477				(15.8)
Equity securities			4,814			4,389				9.7
Loans held for sale			23,723			4,531				423.6

Loans, before allowance for loan losses			2,279,639			2,163,826				5.4
Less: allowance for loan losses			31,654			22,299				42.0
Loans, net of allowance for loan losses			2,247,985			2,141,527				5.0

Goodwill			23,620			23,620				—
Core deposit intangible assets, net			3,103			4,030				(23.0)
Other assets			105,946			102,154				3.7
Total assets		$	3,535,223		$	3,245,103				8.9

Total deposits		$	3,016,661		$	2,776,855				8.6	%
Securities sold under agreements to repurchase			45,438			44,433				2.3
Subordinated notes			39,218			—				NM
Junior subordinated debentures			37,632			37,583				0.1
Other liabilities			40,980			53,314				(23.1)
Total liabilities			3,179,929			2,912,185				9.2
Total stockholders' equity			355,294			332,918				6.7
Total liabilities and stockholders' equity		$	3,535,223		$	3,245,103				8.9

Tangible assets ^(1)^		$	3,508,500		$	3,217,453				9.0	%
Tangible common equity ^(1)^			328,571			305,268				7.6

Core deposits ^(1)^		$	2,991,927		$	2,732,101				9.5	%

Share and Per Share Information
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			27,457,306			27,457,306

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

All values are in US Dollars.

(1)	See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most comparable GAAP measures.

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. 72

Table of Contents 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.


		September 30, 2020				December 31, 2019
		Balance		Percent		Balance		Percent
	****	(dollars in thousands)
Commercial and industrial		$	389,231	17.1	%	$	307,175	14.2	%
Agricultural and farmland			235,597	10.3			207,776	9.6
Commercial real estate - owner occupied			225,345	9.9			231,162	10.7
Commercial real estate - non-owner occupied			532,454	23.4			579,757	26.8
Multi-family			199,441	8.7			179,073	8.3
Construction and land development			265,758	11.7			224,887	10.4
One-to-four family residential			308,365	13.5			313,580	14.5
Municipal, consumer, and other			123,448	5.4			120,416	5.5
Loans, before allowance for loan losses			2,279,639	100.0	%		2,163,826	100.0	%
Allowance for loan losses			(31,654)				(22,299)
Loans, net of allowance for loan losses		$	2,247,985			$	2,141,527

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	7.6
Loans, before allowance for loan losses		$	2,279,639	100.0	%	$	2,163,826	100.0	%

PPP loans (included above)
Commercial and industrial		$	168,466			$	—
Agricultural and farmland			4,179				—
Municipal, consumer, and other			7,095				—
Total PPP loans		$	179,740			$	—

(1)	See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most comparable GAAP measures.

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.

Table of Contents 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.


As of September 30, 2020
				One Year Through
		One Year or Less		Five Years		After Five Years		Total
	****	(dollars in thousands)
Scheduled Maturities of Loans:
Commercial and industrial		$	130,150	$	246,472	$	12,609	$	389,231
Agricultural and farmland			114,017		89,741		31,839		235,597
Commercial real estate - owner occupied			27,893		134,838		62,614		225,345
Commercial real estate - non-owner occupied			71,950		334,725		125,779		532,454
Multi-family			37,760		114,453		47,228		199,441
Construction and land development			150,656		109,227		5,875		265,758
One-to-four family residential			73,436		98,233		136,696		308,365
Municipal, consumer, and other			23,512		25,240		74,696		123,448
Total		$	629,374	$	1,152,929	$	497,336	$	2,279,639

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. 74

Table of Contents The following table below sets forth information concerning nonperforming loans and nonperforming assets as of each of the dates indicated.


	****	September 30, 2020		****	December 31, 2019		****
	****	(dollars in thousands)
NONPERFORMING ASSETS
Nonaccrual		$	15,191		$	19,019
Past due 90 days or more, still accruing ^(1)^			17			30
Total nonperforming loans			15,208			19,049
Foreclosed assets			3,857			5,099
Total nonperforming assets		$	19,065		$	24,148

NONPERFORMING ASSETS (Originated) ^(2)^
Nonaccrual		$	10,179		$	10,811
Past due 90 days or more, still accruing			17			30
Total nonperforming loans (originated)			10,196			10,841
Foreclosed assets			939			1,022
Total nonperforming (originated)		$	11,135		$	11,863

NONPERFORMING ASSETS (Acquired) ^(2)^
Nonaccrual		$	5,012		$	8,208
Past due 90 days or more, still accruing ^(1)^			—			—
Total nonperforming loans (acquired)			5,012			8,208
Foreclosed assets			2,918			4,077
Total nonperforming assets (acquired)		$	7,930		$	12,285

Allowance for loan losses		$	31,654		$	22,299

Loans, before allowance for loan losses		$	2,279,639		$	2,163,826
Loans, before allowance for loan losses (originated) ^(2)^			2,148,074			1,998,496
Loans, before allowance for loan losses (acquired) ^(2)^			131,565			165,330

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			0.88
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)^
Nonperforming loans to loans, before allowance for loan losses			0.47	%		0.54	%
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets			0.52			0.59

CREDIT QUALITY RATIOS (Acquired) ^(2)^
Nonperforming loans to loans, before allowance for loan losses			3.81	%		4.96	%
Nonperforming assets to loans, before allowance for loan losses and foreclosed assets			5.90			7.25

(1)	Excludes loans acquired with deteriorated credit quality that are past due 90 or more days totaling $30 thousand and $0.1 million as of September 30, 2020 and December 31, 2019, respectively.
(2)	See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most comparable GAAP measures.
---	---

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.

Table of Contents 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.


	****	September 30, 2020		****	December 31, 2019
	****	(dollars in thousands)
Commercial and industrial		$	321		$	867
Agricultural and farmland			—			—
Commercial real estate - owner occupied			6,506			5,746
Commercial real estate - non-owner occupied			1,373			1,427
Multi-family			—			—
Construction and land development			—			—
One-to-four family residential			473			517
Municipal, consumer, and other			—			—
Total accrual troubled debt restructurings			8,673			8,557

Commercial and industrial			78			135
Agricultural and farmland			—			283
Commercial real estate - owner occupied			145			149
Commercial real estate - non-owner occupied			—			—
Multi-family			—			—
Construction and land development			—			—
One-to-four family residential			142			191
Municipal, consumer, and other			—			—
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.

Table of Contents Risk Classification of Loans

Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as 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:


September 30, 2020	Pass		Pass-Watch		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial and industrial	$	365,872	$	16,828	$	6,531	$	—	$	389,231
Agricultural and farmland		200,879		19,415		15,303		—		235,597
Commercial real estate - owner occupied		183,836		27,901		13,608		—		225,345
Commercial real estate - non-owner occupied		452,942		43,941		35,571		—		532,454
Multi-family		170,134		28,418		889		—		199,441
Construction and land development		228,126		33,600		4,032		—		265,758
One-to-four family residential		284,072		11,285		13,008		—		308,365
Municipal, consumer, and other		109,542		425		13,481		—		123,448
Total	$	1,995,403	$	181,813	$	102,423	$	—	$	2,279,639


December 31, 2019	Pass		Pass-Watch		Substandard		Doubtful		Total
	(dollars in thousands)
Commercial and industrial	$	267,645	$	27,114	$	12,416	$	—	$	307,175
Agricultural and farmland		180,735		12,267		14,774		—		207,776
Commercial real estate - owner occupied		198,710		21,745		10,707		—		231,162
Commercial real estate - non-owner occupied		531,694		46,092		1,971		—		579,757
Multi-family		175,807		1,771		1,495		—		179,073
Construction and land development		217,120		3,582		4,185		—		224,887
One-to-four family residential		287,036		13,546		12,998		—		313,580
Municipal, consumer, and other		106,063		479		13,874		—		120,416
Total	$	1,964,810	$	126,596	$	72,420	$	—	$	2,163,826

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. 77

Table of Contents Net Charge-offs and Recoveries

The following table sets forth activity in the allowance for loan losses.


	****	Three Months Ended September 30,					****	Nine Months Ended September 30,
		2020			2019			2020			2019
	****	(dollars in thousands)
Balance, beginning of period		$	29,723		$	22,542		$	22,299		$	20,509

Charge-offs:
Commercial and industrial			(881)			(32)			(1,690)			(315)
Agricultural and farmland			—			—			(27)			(30)
Commercial real estate - owner occupied			(39)			(216)			(39)			(382)
Commercial real estate - non-owner occupied			—			(111)			(56)			(111)
Multi-family			—			(41)			—			(41)
Construction and land development			(26)			—			(27)			(9)
One-to-four family residential			(42)			(387)			(154)			(1,026)
Municipal, consumer, and other			(90)			(150)			(466)			(522)
Total charge-offs			(1,078)			(937)			(2,459)			(2,436)

Recoveries:
Commercial and industrial			517			313			578			420
Agricultural and farmland			—			—			—			—
Commercial real estate - owner occupied			—			26			440			47
Commercial real estate - non-owner occupied			5			5			70			15
Multi-family			—			—			—			—
Construction and land development			198			1			216			434
One-to-four family residential			46			42			168			235
Municipal, consumer, and other			69			85			240			271
Total recoveries			835			472			1,712			1,422

Net (charge-offs) recoveries			(243)			(465)			(747)			(1,014)
Provision for loan losses			2,174			684			10,102			3,266
Balance, end of period		$	31,654		$	22,761		$	31,654		$	22,761

Net charge-offs (recoveries)		$	243		$	465		$	747		$	1,014
Net charge-offs (recoveries) - (originated) ^(1)^			(20)			224			155			182
Net charge-offs (recoveries) - (acquired) ^(1)^			263			241			592			832

Average loans, before allowance for loan losses		$	2,277,826		$	2,191,230		$	2,228,145		$	2,184,263
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 *			0.04	%		0.08	%		0.04	%		0.06	%
Net charge-offs (recoveries) to average loans, before allowance for loan losses (originated) * ^(1)^			—			0.04			0.01			0.01
Net charge-offs (recoveries) to average loans, before allowance for loan losses (acquired) * ^(1)^			0.76			0.50			0.54			0.54

***Annualized measure.

(1)	See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most comparable GAAP measures.

Table of Contents Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019

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.

Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019

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:


	****	September 30, 2020					December 31, 2019
		Allowance for		Loan			Allowance for		Loan
		Loan Losses		Balances		****	Loan Losses		Balances
	****	(dollars in thousands)
Commercial and industrial		$	3,894	$	389,231		$	4,441	$	307,175
Agricultural and farmland			2,305		235,597			2,766		207,776
Commercial real estate - owner occupied			3,304		225,345			1,779		231,162
Commercial real estate - non-owner occupied			9,268		532,454			3,663		579,757
Multi-family			2,195		199,441			1,024		179,073
Construction and land development			3,717		265,758			2,977		224,887
One-to-four family residential			3,152		308,365			2,540		313,580
Municipal, consumer, and other			3,819		123,448			3,109		120,416
Total		$	31,654	$	2,279,639		$	22,299	$	2,163,826

Table of Contents Securities

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:


		September 30, 2020				December 31, 2019
		Amortized				Amortized
		Cost		Fair Value		Cost		Fair Value
	****	(dollars in thousands)
Available-for-sale:
U.S. government agency		$	100,462	$	104,326	$	49,113	$	49,615
Municipal			232,795		240,410		131,241		133,738
Mortgage-backed:
Agency residential			220,970		226,317		198,184		200,678
Agency commercial			166,444		171,072		133,730		134,954
Corporate			70,862		72,673		72,239		73,419
Total available-for-sale			791,533		814,798		584,507		592,404
Held-to-maturity:
Municipal			26,830		28,310		45,239		46,579
Mortgage-backed:
Agency residential			14,556		15,079		19,072		19,063
Agency commercial			33,124		35,502		24,166		24,887
Total held-to-maturity			74,510		78,891		88,477		90,529
Total debt securities		$	866,043	$	893,689	$	672,984	$	682,933

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.


	****	September 30, 2020
	****				****	More Than One Year			****	More than Five Years
		One Year or Less			****	through Five Years			****	through Ten Years				More than Ten Years				Total
				Weighted				Weighted				Weighted				Weighted				Weighted
		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield		Cost		Yield
	****	(dollars in thousands)
Available-for-sale:
U.S. government agency		$	—	—	%	$	4,544	2.20	%	$	71,029	1.92	%	$	24,889	1.38	%	$	100,462	1.80	%
Municipal			27,122	2.46			50,261	2.54			83,988	2.07			71,424	2.00			232,795	2.19
Mortgage-backed:
Agency residential			—	—			4,533	2.14			75,264	2.23			141,173	1.09			220,970	1.50
Agency commercial			4,746	2.68			58,086	2.62			41,327	1.97			62,285	1.91			166,444	2.20
Corporate			9,640	2.32			30,295	2.91			28,927	4.30			2,000	4.50			70,862	3.44
Total available-for-sale			41,508	2.45			147,719	2.62			300,535	2.27			301,771	1.52			791,533	2.06
Held-to-maturity:
Municipal			747	2.34			14,702	3.44			10,490	3.68			891	3.76			26,830	3.51
Mortgage-backed:
Agency residential			—	—			—	—			—	—			14,556	2.35			14,556	2.35
Agency commercial			—	—			5,329	2.51			16,759	2.60			11,036	2.89			33,124	2.68
Total held-to-maturity			747	2.34			20,031	3.19			27,249	3.02			26,483	2.62			74,510	2.92
Total debt securities		$	42,255	2.45	%	$	167,750	2.69	%	$	327,784	2.34	%	$	328,254	1.61	%	$	866,043	2.13	%

Table of Contents Deposits

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:


		Three Months Ended September 30,												Percent	****
	****	2020					****	2019					****	Change in
		Average		Percent of		Weighted		Average		Percent of		Weighted		Average
		Balance		Total Deposits		Average Cost *		Balance		Total Deposits		Average Cost *		Balance
	****	(dollars in thousands)
Noninterest-bearing		$	846,808	28.1	%	—	%	$	651,085	23.7	%	—	%	30.1	%
Interest-bearing demand			888,941	29.5		0.05			812,526	29.6		0.17		9.4
Money market			479,314	15.9		0.08			468,139	17.1		0.42		2.4
Savings			493,278	16.3		0.03			428,447	15.6		0.06		15.1
Total non-maturity deposits			2,708,341	89.8		0.04			2,360,197	86.0		0.15		14.8
Time			306,154	10.2		0.76			383,070	14.0		1.12		(20.1)
Total deposits		$	3,014,495	100.0	%	0.11	%	$	2,743,267	100.0	%	0.29	%	9.9	%

		Nine Months Ended September 30,												Percent
		2020					****	2019					****	Change in
		Average		Percent of		Weighted		Average		Percent of		Weighted		Average
		Balance		Total Deposits		Average Cost *		Balance		Total Deposits		Average Cost *		Balance
		(dollars in thousands)
Noninterest-bearing		$	780,826	26.9	%	—	%	$	654,818	23.6	%	—	%	19.2	%
Interest-bearing demand			853,775	29.5		0.08			821,848	29.7		0.19		3.9
Money market			473,647	16.4		0.17			455,469	16.4		0.40		4.0
Savings			467,482	16.1		0.04			428,865	15.5		0.06		9.0
Total non-maturity deposits			2,575,730	88.9		0.07			2,361,000	85.2		0.16		9.1
Time			321,905	11.1		0.90			408,972	14.8		1.10		(21.3)
Total deposits		$	2,897,635	100.0	%	0.16	%	$	2,769,972	100.0	%	0.29	%	4.6	%

* Annualized measure.

Comparison of the Three Months Ended September 30, 2020 to the Three Months Ended September 30, 2019

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.

Comparison of the Nine Months Ended September 30, 2020 to the Nine Months Ended September 30, 2019

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.

Table of Contents 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			12 Months			Total
	****	(dollars in thousands)
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			13,729			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		$	307,907

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. 82

Table of Contents 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. 83

Table of Contents 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
		September 30,			December 31,			With Capital			Prompt Corrective
	****	2020		****	2019		****	Conversation Buffer ^(1)^		****	Action Provisions ^(2)^
Total Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		16.81	%		14.54	%		10.50	%		N/A
Heartland Bank		14.52			14.02			10.50			10.00	%
State Bank of Lincoln		19.16			17.58			10.50			10.00

Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		13.98	%		13.64	%		8.50	%		N/A
Heartland Bank		13.27			13.12			8.50			8.00	%
State Bank of Lincoln		17.91			16.50			8.50			8.00

Common Equity Tier 1 Capital (to Risk Weighted Assets)
Consolidated HBT Financial, Inc.		12.52	%		12.15	%		7.00	%		N/A
Heartland Bank		13.27			13.12			7.00			6.50	%
State Bank of Lincoln		17.91			16.50			7.00			6.50

Tier 1 Capital (to Average Assets)
Consolidated HBT Financial, Inc.		10.04	%		10.38	%		4.00			N/A
Heartland Bank		9.77			10.25			4.00			5.00	%
State Bank of Lincoln		9.82			9.82			4.00			5.00

(1)	The Tier 1 capital to average assets ratio (known as the “leverage ratio”) is not impacted by the capital conservation buffer.
(2)	The prompt corrective action provisions are not applicable to bank holding companies.
---	---

N/A Not applicable.

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.


	2020
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
	(dollars in thousands)
Regular	$	4,119	$	4,119	$	4,118	$	—	$	12,356
Restricted stock unit dividend equivalent		11		11		11		—		33
Total cash dividends	$	4,130	$	4,130	$	4,129	$	—	$	12,389

	2019
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
	(dollars in thousands)
Regular	$	2,704	$	2,704	$	2,704	$	—	$	8,112
Tax		6,094		7,048		6,662		—		19,804
Special		27,041		—		—		169,999		197,040
Total cash dividends	$	35,839	$	9,752	$	9,366	$	169,999	$	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. 84

Table of Contents 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.

Table of Contents 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.

Table of Contents Reconciliation of Non-GAAP Financial Measure - Adjusted Net Income and Adjusted Return on Average Assets


		Three Months Ended September 30,						Nine Months Ended September 30,
		2020			2019			2020			2019
	****	(dollars in thousands)
Net income		$	10,563		$	17,437		$	24,203		$	50,778
C Corp equivalent adjustment ^(2)^			—			(4,315)			—			(12,494)
C Corp equivalent net income ^(2)^			10,563			13,122			24,203			38,284
Adjustments:
Net earnings (losses) from closed or sold operations, including gains on sale ^(1)^			—			(3)			—			533
Charges related to termination of certain employee benefit plans			—			(845)			(1,457)			(4,161)
Mortgage servicing rights fair value adjustment			(268)			(860)			(2,947)			(2,982)
Total adjustments			(268)			(1,708)			(4,404)			(6,610)
Tax effect of adjustments			76			487			1,255			1,884
Less adjustments after tax effect			(192)			(1,221)			(3,149)			(4,726)
Adjusted net income		$	10,755		$	14,343		$	27,352		$	43,010

Average assets		$	3,512,691		$	3,202,642		$	3,385,015		$	3,224,000

Return on average assets *			1.20	%		2.16	%		0.96	%		2.11	%
C Corp equivalent return on average assets * ^(2)^			N/A			1.63			N/A			1.59
Adjusted return on average assets *			1.22			1.78			1.08			1.78

* Annualized measure.

(1)	Closed or sold operations include HB Credit Company, HBT Insurance, and First Community Title Services, Inc.
(2)	Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent income tax expense for such period. No such adjustment is necessary for periods subsequent to 2019.
---	---

N/A Not applicable.

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.

Table of Contents Reconciliation of Non-GAAP Financial Measure - Adjusted Earnings Per Share


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(dollars in thousands, except per share amounts)
Numerator:
Net income	$	10,563	$	17,437	$	24,203	$	50,778
Earnings allocated to unvested restricted stock units ^(1)^		(28)		—		(62)		—
Numerator for earnings per share - basic and diluted	$	10,535	$	17,437	$	24,141	$	50,778

C Corp equivalent net income ^(3)^		N/A	$	13,122		N/A	$	38,284
Earnings allocated to unvested restricted stock units ^(1)(3)^		N/A		—		N/A		—
Numerator for C Corp equivalent earnings per share - basic and diluted ^(3)^		N/A	$	13,122		N/A	$	38,284

Adjusted net income	$	10,755	$	14,343	$	27,352	$	43,010
Earnings allocated to unvested restricted stock units ^(1)^		(28)		—		(69)		—
Numerator for adjusted earnings per share - basic and diluted	$	10,727	$	14,343	$	27,283	$	43,010

Denominator:
Weighted average common shares outstanding		27,457,306		18,027,512		27,457,306		18,027,512
Dilutive effect of outstanding restricted stock units ^(2)^		—		—		—		—
Weighted average common shares outstanding, including all dilutive potential shares		27,457,306		18,027,512		27,457,306		18,027,512

Earnings per share - Basic	$	0.38	$	0.97	$	0.88	$	2.82
Earnings per share - Diluted	$	0.38	$	0.97	$	0.88	$	2.82

C Corp equivalent earnings per share - Basic ^(3)^		N/A	$	0.73		N/A	$	2.12
C Corp equivalent earnings per share - Diluted ^(3)^		N/A	$	0.73		N/A	$	2.12

Adjusted earnings per share - Basic	$	0.39	$	0.80	$	0.99	$	2.39
Adjusted earnings per share - Diluted	$	0.39	$	0.80	$	0.99	$	2.39

(1)	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.
(2)	Restricted stock units were anti-dilutive and excluded from the calculation of common stock equivalents during the three and nine months ended September 30, 2020. There were no restricted stock units outstanding during the three and nine months ended September 30, 2019.
---	---
(3)	Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent income tax expense for such period. No such adjustment is necessary for periods subsequent to 2019.
---	---

N/A Not applicable.

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

Table of Contents Reconciliation of Non-GAAP Financial Measure - Net Interest Margin (Tax Equivalent Basis)


		Three Months Ended September 30,						Nine Months Ended September 30,
		2020			2019			2020			2019
	****	(dollars in thousands)
Net interest income (tax equivalent basis)
Net interest income		$	28,871		$	33,141		$	88,441		$	101,524
Tax-equivalent adjustment ^(1)^			495			559			1,441			1,775
Net interest income (tax equivalent basis) ^(1)^		$	29,366		$	33,700		$	89,882		$	103,299

Net interest margin (tax equivalent basis)
Net interest margin *			3.39	%		4.27	%		3.63	%		4.38	%
Tax-equivalent adjustment * ^(1)^			0.06			0.08			0.06			0.08
Net interest margin (tax equivalent basis) * ^(1)^			3.45	%		4.35	%		3.69	%		4.46	%

Average interest-earning assets		$	3,385,466		$	3,075,822		$	3,255,182		$	3,097,374

* Annualized measure.

(1)	On a tax-equivalent basis assuming a federal income tax rate of 21% and a state tax rate of 9.5%.

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)


		Three Months Ended September 30,						Nine Months Ended September 30,
		2020			2019			2020			2019
	****	(dollars in thousands)
Efficiency ratio (tax equivalent basis)
Total noninterest expense		$	22,485		$	22,303		$	69,291		$	69,076
Less: amortization of intangible assets			305			335			927			1,087
Adjusted noninterest expense		$	22,180		$	21,968		$	68,364		$	67,989

Net interest income		$	28,871		$	33,141		$	88,441		$	101,524
Total noninterest income			10,052			7,582			23,364			22,415
Operating revenue			38,923			40,723			111,805			123,939
Tax-equivalent adjustment ^(1)^			495			559			1,441			1,775
Operating revenue (tax-equivalent basis) ^(1)^		$	39,418		$	41,282		$	113,246		$	125,714

Efficiency ratio			56.98	%		53.94	%		61.15	%		54.86	%
Efficiency ratio (tax equivalent basis) ^(1)^			56.27			53.21			60.37			54.08

(1)	On a tax-equivalent basis assuming a federal income tax rate of 21% and a state tax rate of 9.5%.

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

Table of Contents Reconciliation of Non-GAAP Financial Measure - Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share


	****	September 30, 2020		****	December 31, 2019		****
		(dollars in thousands)
Tangible Common Equity
Total stockholders' equity		$	355,294		$	332,918
Less: Goodwill			23,620			23,620
Less: Core deposit intangible assets, net			3,103			4,030
Tangible common equity		$	328,571		$	305,268

Tangible Assets
Total assets		$	3,535,223		$	3,245,103
Less: Goodwill			23,620			23,620
Less: Core deposit intangible assets, net			3,103			4,030
Tangible assets		$	3,508,500		$	3,217,453

Total stockholders' equity to total assets			10.05	%		10.26	%
Tangible common equity to tangible assets			9.36			9.49

Ending number shares of common stock outstanding			27,457,306			27,457,306

Book value per share		$	12.94		$	12.12
Tangible book value per share			11.97			11.12

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.

Table of Contents Reconciliation of Non-GAAP Financial Measure – Adjusted Return on Average Stockholders’ Equity and Adjusted Return on Tangible Common Equity


		Three Months Ended September 30,						Nine Months Ended September 30,
	****	2020		****	2019		****	2020		****	2019
		(dollars in thousands)
Average Tangible Common Equity
Total stockholders' equity		$	355,296		$	348,750		$	347,812		$	344,844
Less: Goodwill			23,620			23,620			23,620			23,620
Less: Core deposit intangible assets, net			3,284			4,561			3,589			4,924
Average tangible common equity		$	328,392		$	320,569		$	320,603		$	316,300

Net income		$	10,563		$	17,437		$	24,203		$	50,778
C Corp equivalent net income ^(1)^			N/A			13,122			N/A			38,284
Adjusted net income			10,755			14,343			27,352			43,010

Return on average stockholders' equity *			11.83	%		19.84	%		9.30	%		19.69	%
C Corp equivalent return on average stockholders' equity * ^(1)^			N/A			14.93			N/A			14.84
Adjusted return on average stockholders' equity *			12.04			16.32			10.50			16.68

Return on average tangible common equity *			12.80	%		21.58	%		10.08	%		21.46	%
C Corp equivalent return on average tangible common equity * ^(1)^			N/A			16.24			N/A			16.18
Adjusted return on average tangible common equity *			13.03			17.75			11.40			18.18

* Annualized measure.

(1)	Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent income tax expense for such period. No such adjustment is necessary for periods subsequent to 2019.

N/A Not applicable.

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


	****	September 30, 2020		****	December 31, 2019		****
	****	(dollars in thousands)
Core Deposits
Total deposits		$	3,016,661		$	2,776,855
Less: time deposits of $250,000 or more			24,734			44,754
Less: brokered deposits			—			—
Core deposits		$	2,991,927		$	2,732,101

Core deposits to total deposits			99.18	%		98.39	%

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.

Table of Contents 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)		Amount		Percent		Amount		Percent		Amount		Percent
		(dollars in thousands)
September 30, 2020
+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	11.7			24,738	23.5
+100			(21,398)	(5.7)			6,500	5.7			12,759	12.1
Flat			—	—			—	—			—	—
(100)			20,514	5.5			(2,111)	(1.9)			(4,036)	(3.8)

December 31, 2019
+400		$	200,797	37.8	%	$	28,585	23.5	%	$	35,711	30.0	%
+300			165,809	31.2			22,265	18.3			28,128	23.7
+200			122,859	23.1			15,413	12.6			19,788	16.6
+100			68,303	12.8			8,061	6.6			10,550	8.9
Flat			—	—			—	—			—	—
(100)			(106,615)	(20.1)			(12,878)	(10.6)			(17,568)	(14.8)

Table of Contents 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.

Table of Contents PART II. OTHER INFORMATION

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.

Table of Contents 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

Table of Contents ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Repurchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

Table of Contents 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).

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a).

32.1 *		Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350.

32.2 *		Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350.

101.INS		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.

Table of Contents 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)

EXHIBIT 31.1

Certification of Chief Executive Officer

Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934

and Section 302 of the Sarbanes-Oxley Act of 2002

I, Fred L. Drake, certify that:

1. I have reviewed this quarterly report on Form 10-Q of HBT Financial, Inc.:

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) [Paragraph omitted in accordance with Exchange Act Rule 13a-14(a)];

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 6, 2020	/s/ Fred L. Drake
	Fred L. Drake
	Chairman and Chief Executive Officer
	(Principal Executive Officer)

EXHIBIT 31.2

Certification of Chief Financial Officer

Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934

and Section 302 of the Sarbanes-Oxley Act of 2002

I, Matthew J. Doherty, certify that:

1. I have reviewed this quarterly report on Form 10-Q of HBT Financial, Inc.:

b) [Paragraph omitted in accordance with Exchange Act Rule 13a-14(a)];

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: November 6, 2020	/s/ Matthew J. Doherty
	Matthew J. Doherty
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)

EXHIBIT 32.1

Certification Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of HBT Financial, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:

1. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Fred L. Drake
Fred L. Drake
Chairman and Chief Executive Officer
(Principal Executive Officer)
November 6, 2020

EXHIBIT 32.2

Certification Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

1. The Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


/s/ Matthew J. Doherty
Matthew J. Doherty
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
November 6, 2020