HBT Financial, Inc. Annual Report - Your Investment Snapshot

Considering an investment in HBT Financial, Inc.? This summary breaks down the company's performance over the past year in clear, accessible language, avoiding complex financial jargon. We'll cover the essential details to help you assess if HBTF aligns with your investment goals.

1. Business Overview

HBT Financial, Inc. (HBTF) operates as a community-focused bank holding company, primarily through its subsidiary, Heartland Bank and Trust Company. The company serves individuals, businesses, and government entities across Central and Northeastern Illinois. HBTF generates revenue by lending to diverse customers and businesses and by offering a range of financial services.

Its diverse loan portfolio includes:

• Commercial & Industrial loans: Loans provided to businesses for their operations.
• Real Estate loans: This category includes commercial properties (both owner-occupied and investor-owned), multi-family housing, and single-family home loans.
• Construction & Land Development loans: Funding for new building projects.
• Agricultural & Farmland loans: Support for the farming community.
• Municipal, Consumer & Other loans: A mix of loans to local governments, individuals, and other categories.

HBTF also earns income from services such as card processing, wealth management fees, and service charges on deposit accounts.

2. Financial Performance

Overall Performance (Fiscal Year 2023): HBT Financial achieved solid performance in 2023, demonstrating strategic expansion and resilient financial results despite a challenging interest rate environment. The company reported net income of $65.2 million, an 8.7% increase from $60.0 million in 2022. Increased net interest income and the successful integration of a recent acquisition primarily drove this growth. Total assets grew 15.5% to $5.1 billion by year-end 2023, up from $4.4 billion in 2022.

For the fiscal year ended December 31, 2023:

• Net Interest Income (NII): NII, a bank's core revenue, reached $178.5 million, up 12.3% from $158.9 million in 2022. Higher average earning assets, boosted by the Town & Country acquisition, primarily drove this increase, though rising funding costs partially offset it.
• Non-Interest Income: This includes fees from services like wealth management, card services, and service charges. It totaled $28.1 million, a slight increase from $27.5 million in 2022.
• Total Revenue: Combined, total revenue (NII + Non-Interest Income) was $206.6 million, up 11.2% year-over-year.
• Net Income: Net income grew to $65.2 million, resulting in Diluted Earnings Per Share (EPS) of $2.58, compared to $2.35 in 2022.
• Return on Average Assets (ROAA): ROAA, a key profitability metric, was 1.35%, a slight decrease from 1.38% in 2022, reflecting the larger asset base after the acquisition.
• Loan Growth: The total loan portfolio expanded 18.0% to $3.8 billion, driven by strong commercial real estate and agricultural lending, in addition to the acquired loan portfolio.
• Deposit Growth: Total deposits increased 16.5% to $4.2 billion, with a focus on growing lower-cost core deposits.

3. Risk Factors

Investors should be aware of the following key risks:

• Credit Risk: The potential for borrowers to default on their loans, particularly in sectors sensitive to economic downturns like commercial real estate or agriculture. While current asset quality is strong, a significant economic recession could lead to higher loan losses.
• Interest Rate Risk: Fluctuations in interest rates can significantly impact the bank's Net Interest Margin. A prolonged period of high funding costs or a rapid decline in interest rates could reduce profitability.
• Economic Downturn: An economic slowdown could reduce loan demand, increase defaults, and negatively impact asset values, affecting the bank's financial performance.
• Integration Risk: While the Town & Country integration was successful, future acquisitions, such as CNB Bank Shares Inc., carry risks related to combining operations, retaining customers, and achieving expected synergies.
• Regulatory & Compliance Risk: The banking industry is heavily regulated. Changes in laws, regulations, or accounting standards (e.g., CECL) can increase compliance costs or restrict business activities.
• Competition: HBTF operates in a competitive market with larger regional banks, smaller community banks, and non-bank financial institutions. Intense competition for loans and deposits could pressure margins.

4. Management Discussion & Analysis (MD&A) Highlights

Management discusses the company's financial condition and operational results in this section, highlighting key performance drivers and challenges.

Key Performance Drivers and Challenges:

• Major Wins:
  • Successful Acquisition & Integration: The July 2023 acquisition of Town & Country Financial Corporation marked a significant achievement. This strategic move expanded HBT Financial's market presence, adding approximately $700 million in assets, $550 million in loans, and $600 million in deposits. The integration proved largely successful, contributing positively to earnings in the latter half of the year and achieving anticipated cost synergies ahead of schedule.
  • Robust Loan Growth: HBTF achieved strong organic loan growth despite economic uncertainties, particularly in its commercial and agricultural segments, demonstrating effective market penetration and client relationships.
  • Solid Asset Quality: The bank maintained strong asset quality metrics, with non-performing assets remaining low at 0.45% of total assets, reflecting prudent underwriting practices.
• Challenges:
  • Net Interest Margin Compression: The rapidly rising interest rate environment increased deposit competition, pressing the bank's Net Interest Margin (NIM). NIM decreased from 3.85% in 2022 to 3.60% in 2023 because funding costs rose faster than asset yields.
  • Increased Operating Expenses: Acquisition-related expenses, including integration and higher personnel costs, drove a 15% increase in non-interest expenses, impacting overall profitability.
  • Economic Uncertainty: Concerns about a potential economic slowdown and its impact on loan demand and credit quality remained a challenge, requiring careful monitoring of the loan portfolio.

Strategic Direction and Leadership:

• HBT Financial's core strategy focuses on prudent organic growth complemented by strategic, accretive acquisitions. The successful 2023 integration of Town & Country Financial Corporation underscores this commitment to expanding market reach and asset base. The planned acquisition of CNB Bank Shares Inc. further solidifies this expansion strategy.
• The executive leadership team remained stable in 2023, providing continuity in executing the bank's strategic initiatives. The board and management team prioritize enhancing shareholder value through disciplined capital management, including consistent dividend payouts and a share repurchase program.

Market Trends and Regulatory Environment:

• Regulatory Changes (ASU 2023-02 / CECL): The company fully implemented the Current Expected Credit Loss (CECL) accounting standard (ASU 2023-02) in early 2023. This standard requires banks to estimate and reserve for expected credit losses over the lifetime of their financial assets, rather than recognizing losses only when incurred. For HBTF, this initially increased its Allowance for Credit Losses, impacting capital at adoption, but it provides a more forward-looking view of credit risk.
• Interest Rate Environment: The Federal Reserve's monetary policy and interest rate trajectory will remain significant factors. While higher rates can boost loan yields, they also increase funding costs and may impact loan demand.
• Digital Transformation: The ongoing shift to digital banking services continues to influence customer expectations. HBTF invests in technology to enhance its online and mobile platforms, ensuring competitiveness and efficient customer service.
• Deposit Competition: Competition for deposits remains intense, with customers seeking higher yields. HBTF focuses on growing its core, lower-cost deposit base through strong customer relationships and competitive product offerings.
• Commercial Real Estate (CRE) Scrutiny: Regulators are increasing scrutiny of banks' commercial real estate exposure, particularly in certain segments. HBTF carefully manages its CRE portfolio with a diversified approach and strong underwriting standards.

5. Financial Health

HBT Financial maintains a strong, stable financial position:

• Total Assets: As of December 31, 2023, total assets stood at $5.1 billion.
• Total Deposits: Total deposits of $4.2 billion provide a stable funding base.
• Capital Ratios: The bank's capital ratios remain well above regulatory minimums, indicating robust financial strength. At year-end 2023, the Common Equity Tier 1 (CET1) ratio was 11.5%, and the Total Capital Ratio was 14.2%. These ratios provide a strong buffer against potential losses and support future growth.
• Asset Quality: Non-performing loans (NPLs) stood at 0.62% of total loans, and the Allowance for Credit Losses (ACL) covered NPLs by 180%, demonstrating adequate provisioning for potential loan losses.
• Liquidity: HBTF maintains a healthy liquidity position with a significant portion of its investment securities portfolio available for sale and access to various wholesale funding sources, ensuring it can meet its obligations.

6. Future Outlook

Looking ahead to 2024 and beyond, HBT Financial is optimistic about its continued growth trajectory:

• CNB Bank Shares Inc. Acquisition: The bank anticipates closing the CNB Bank Shares Inc. acquisition in the first half of 2025. This acquisition is expected to add approximately $600 million in assets and further strengthen HBTF's presence in Central Illinois, creating a combined entity with over $5.7 billion in assets. Management projects this acquisition will be accretive to earnings per share within the first year post-closing, excluding one-time integration costs.
• Continued Loan Growth: HBTF expects mid-single-digit loan growth in 2024, driven by strong pipelines in commercial and agricultural lending.
• Net Interest Margin Stabilization: While NIM compression challenged HBTF in 2023, management anticipates stabilization or slight improvement in NIM in 2024 as deposit costs moderate and asset yields adjust.
• Expense Management: After acquisition integration, the bank expects to realize additional cost synergies and maintain disciplined expense management.
• Capital Deployment: HBTF plans to continue its balanced approach to capital deployment, supporting organic growth, funding strategic acquisitions, and returning capital to shareholders through dividends and potential share repurchases.

7. Competitive Position

HBT Financial positions itself as a strong community bank deeply rooted in its local markets across Central and Northeastern Illinois. Key competitive advantages include:

• Local Expertise & Relationships: A long-standing presence and strong community ties enable personalized service and tailored financial solutions, differentiating it from larger, more impersonal institutions.
• Diversified Loan Portfolio: Its balanced mix of commercial, agricultural, and real estate loans provides resilience across different economic cycles.
• Strategic Growth: The bank's pursuit of strategic acquisitions allows it to efficiently expand its geographic footprint and market share.
• Customer-Centric Approach: A focus on building long-term customer relationships and offering a comprehensive suite of banking, wealth management, and digital services. While competing with larger regional banks that possess greater resources, HBTF leverages its agility and local focus to maintain a strong market presence in its core operating areas.