HBT FINANCIAL, INC. Unless the context requires otherwise, references in this report to the
"Company," "we," "us" and "our" refer to
The following is management's discussion and analysis of the financial condition as ofMarch 31, 2023 (unaudited), as compared withDecember 31, 2022 , and the results of operations for the three months endedMarch 31, 2023 and 2022 (unaudited). Management's discussion and analysis should be read in conjunction with the Company's unaudited consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q, as well as the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2022 , filed with theSEC onMarch 8, 2023 . Results of operations for the three months endedMarch 31, 2023 and 2022 are not necessarily indicative of results to be attained for the year endedDecember 31, 2023 or for any other period.
OVERVIEW
HBT Financial, Inc. , headquartered inBloomington, Illinois , is the holding company forHeartland Bank andTrust Company , and has banking roots that can be traced back to 1920. We provide a comprehensive suite of business, commercial, wealth management, and retail banking products and services to businesses, families, and local governments throughoutIllinois andEastern Iowa . As ofMarch 31, 2023 , the Company had total assets of$5.0 billion , loans held for investment of$3.2 billion , and total deposits of$4.3 billion .
Market Area
As ofMarch 31, 2023 , our branch network included 68 full-service branch locations throughoutIllinois andEastern Iowa . We hold a leading deposit share in many of ourCentral Illinois markets, which we define as a top three deposit share rank, providing the foundation for our strong deposit base. The stability provided by this low-cost funding is a key driver of our strong track record of financial performance. Below is a summary of our loan and deposit balances
by
geographic region:
March 31, 2023 December 31, 2022
Loans Deposits Loans Deposits
(dollars in thousands)
Central Illinois $ 1,436,524 $ 2,870,680 $ 1,024,015 $ 2,239,030
Chicago MSA 1,282,595 1,232,421 1,294,327 1,216,423
St. Louis Metro East 180,171 75,771 - -
Illinois 2,899,290 4,178,872 2,318,342 3,455,453
Iowa 296,250 131,649 301,911 131,571
Total $ 3,195,540 $ 4,310,521 $ 2,620,253 $ 3,587,024
Town and Country Acquisition
On February 1, 2023 , HBT Financial completed its acquisition of Town and
Country, the holding company for Town and Country Bank . The acquisition of Town
and Country further enhanced HBT Financial's footprint in Central Illinois and
expanded our footprint into metro-east St. Louis . At the time of acquisition,
Town and Country Bank operated 10 full-service branch locations which began
operating as branches of Heartland Bank . The core system conversion was
successfully completed in April 2023 . After considering business combination
accounting adjustments, Town and Country added total assets of $906 million ,
total loans held for investment of $635 million , and total deposits of
$720 million .
Total consideration consisted of 3.4 million shares of HBT Financial's common
stock and $38.0 million in cash. Based upon the closing price of HBT Financial
common stock of $21.12 on February 1, 2023 , the aggregate consideration was
approximately $109.4 million . Goodwill of $30.6 million was recorded in the
acquisition.
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Acquisition-related expenses totaled$13.1 million during the first quarter of 2023, including the recognition of an allowance for credit losses on non-PCD loans of$5.2 million and an allowance for credit losses on unfunded commitments of$0.7 million through provision for credit losses.
FACTORS AFFECTING OUR RESULTS OF OPERATIONS
Economic Conditions
The Company's business and financial performance are affected by economic conditions generally in theU.S. and more directly in theIllinois andIowa 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 theU.S. and in the Company's markets (including the effect of inflationary pressures and supply chain constraints), unemployment rates, real estate markets, and interest rates.
Interest Rates
Net interest income is our primary source of revenue. Net interest income is equal to the excess of interest income earned on interest earning assets (including discount accretion on purchased loans plus certain loan fees) over interest expense incurred on interest-bearing liabilities. The level of interest rates as well as the volume of interest-earning assets and interest-bearing liabilities both impact net interest income. Net interest income is also influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of theFederal Reserve Board ("FRB") and market interest rates. The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the FRB's actions. The yields generated by our loans and securities are typically driven by short-term and long-term interest rates, which are set by the market and, to some degree, by the FRB's actions. Our net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur. Generally, we expect increases in market interest rates will increase our net interest income and net interest margin in future periods, while decreases in market interest rates may decrease our net interest income and net interest margin in future periods.
Credit Trends
We focus on originating loans with appropriate risk/reward profiles. We have a detailed loan policy that guides our overall loan origination philosophy and a well-established loan approval process that requires experienced credit officers to approve larger loan relationships. Although we believe our loan approval and credit review processes are strengths that allow us to maintain a high quality loan portfolio, we recognize that credit trends in the markets in which we operate and in our loan portfolio can materially impact our financial condition and performance and that these trends are primarily driven by the economic conditions in our markets.
Competition
Our profitability and growth are affected by the highly competitive nature of
the financial services industry. We compete with community banks in all our
markets and, to a lesser extent, with money center banks, primarily in the
Chicago MSA. Additionally, we compete with non-bank financial services
companies, FinTechs and other financial institutions operating within the areas
we serve. We compete by emphasizing personalized service and efficient
decision-making tailored to individual needs. We do not rely on any individual,
group, or entity for a material portion of our loans or our deposits. We
continue to see increased competitive pressures on loan rates and terms which
may affect our financial results in the future.
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Digital Banking
Throughout the banking industry, in-person branch traffic is expected to
continue to decline as more customers turn to digital banking for routine
banking transactions. The COVID-19 pandemic has accelerated this transition, and
in-person branch traffic is not expected to return to pre-pandemic levels. We
plan to continue investing in our digital banking platforms, while maintaining
an appropriately sized branch network. An inability to meet evolving customer
expectations, with the appropriate level of security, for both digital and
in-person banking may adversely affect our financial results in the future.Regulatory Environment and Trends
We are subject to federal and state regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment includes extensive regulation and supervision in areas such as consumer compliance, the Bank Secrecy Act and anti-money laundering compliance, risk management and internal audit. We anticipate that this environment of extensive regulation and supervision will continue for the industry. As a result, changes in the regulatory environment may result in additional costs for additional compliance, risk management and audit personnel or professional fees associated with advisors and consultants.
FACTORS AFFECTING COMPARABILITY OF FINANCIAL RESULTS
JOBS Act Accounting Election
We qualify as an "emerging growth company" under the JOBS Act. The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. The Company may remain an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, which isDecember 31, 2024 , (2) the last day of the fiscal year in which the Company has$1.235 billion or more in annual revenues, (3) the date on which the Company is deemed to be a "large accelerated filer" under the Exchange Act or (4) the date on which the Company has, during the previous three year period, issued, publicly or privately, more than$1.0 billion in non-convertible debt securities. We have elected to use the extended transition period until we are no longer an emerging growth company or until we choose to affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies. 59 Table of Contents RESULTS OF OPERATIONS
Overview of Recent Financial Results
The following table presents selected financial results and measures:
Three Months Ended March 31,
2023 2022
(dollars in thousands, except per share amounts)
Total interest and dividend income $ 51,779 $ 33,335
Total interest expense 4,942 1,407
Net interest income 46,837 31,928
Provision for credit losses 6,210 (584)
Net interest income after provision for
credit losses 40,627 32,512
Total noninterest income 7,437 10,043
Total noninterest expense 35,933 24,157
Income before income tax expense 12,131 18,398
Income tax expense 2,923 4,794
Net income $ 9,208 $ 13,604
Adjusted net income (1) $ 19,859 $ 12,227
Net interest income (tax-equivalent basis)
(1) (2) $ 47,539 $ 32,457
Share and Per Share Information
Earnings per share - Diluted $ 0.30 $ 0.47
Adjusted earnings per share - Diluted (1) 0.64 0.42
Weighted average shares of common stock
outstanding 30,977,204 28,986,593
Summary Ratios
Net interest margin 4.20 % 3.08 %
Net interest margin (tax-equivalent basis)
(1) (2) 4.26 3.13
Yield on loans 5.80 4.44
Yield on interest-earning assets 4.64 3.22
Cost of interest-bearing liabilities 0.63 0.20
Cost of total deposits 0.24 0.06
Cost of funds 0.47 0.15
Efficiency ratio 65.27 % 56.97 %
Efficiency ratio (tax-equivalent basis) (1)
(2) 64.43 56.26
Return on average assets 0.78 % 1.27 %
Return on average stockholders' equity 8.84 13.58
Return on average tangible common equity (1) 10.45 14.71
Adjusted return on average assets (1) 1.69 % 1.14 %
Adjusted return on average stockholders'
equity (1) 19.08 12.20
Adjusted return on average tangible common
equity (1) 22.55 13.22
* Annualized measure.
(1) See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure
to their most closely 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%.
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Comparison of the Three Months Ended
For the three months ended
A
? higher yields on interest-earning assets and the increase in average
interest-earning assets following the Town and Country merger;
Town and Country acquisition-related expenses totaled
three months ended
? for credit losses on non-PCD loans of
losses on unfunded commitments of
losses;
Excluding Town and Country acquisition-related expenses, noninterest expense
? increased by
completion of the Town and Country merger on
Realized losses on sales of securities totaled
? months ended
from Town and Country were sold with the sales proceeds used to reduce FHLB
borrowings.
Net Interest Income
Net interest income equals the excess of interest income on interest earning
assets (including discount accretion on acquired loans plus certain loan fees)
over interest expense incurred on interest-bearing liabilities. Interest rate
spread and net interest margin are utilized to measure and explain changes in
net interest income. Interest rate spread is the difference between the yield on
interest-earning assets and the rate paid for interest-bearing liabilities that
fund those assets. The net interest margin is expressed as the percentage of net
interest income to average interest-earning assets. The net interest margin
exceeds the interest rate spread because noninterest-bearing sources of funds,
principally noninterest-bearing demand deposits and stockholders' equity, also
support interest-earning assets.
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The following table sets forth average balances, average yields and costs, and certain other information for the three months endedMarch 31, 2023 and 2022. Average balances are daily average balances. Nonaccrual loans are included in the computation of average balances but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees and costs, discounts and premiums, as well as purchase accounting adjustments that are accreted or amortized to interest income or expense. Three Months Ended March 31, 2023 March 31, 2022 Average Average Balance Interest Yield/Cost * Balance Interest Yield/Cost * (dollars in thousands) ASSETS Loans$ 3,012,320 $ 43,111 5.80 %$ 2,507,006 $ 27,468 4.44 % Securities 1,411,613 7,813 2.24 1,321,918 5,689 1.75 Deposits with banks 92,363 739 3.24 370,130 159 0.17 Other 7,425 116 6.33 2,739 19 2.80
Total interest-earning assets 4,523,721$ 51,779
4.64 % 4,201,793$ 33,335 3.22 % Allowance for credit losses (33,301) (24,099) Noninterest-earning assets 274,870 165,752 Total assets$ 4,765,290 $ 4,343,446 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Interest-bearing deposits: Interest-bearing demand$ 1,230,644 $ 458 0.15 %$ 1,143,829 $ 142 0.05 % Money market 634,608 935 0.60 598,271 121 0.08 Savings 709,862 178 0.10 649,563 50 0.03 Time 356,779 803 0.91 310,675 256 0.33
Total interest-bearing deposits 2,931,893 2,374 0.33 2,702,338 569 0.09 Securities sold under agreements to repurchase 39,619 38 0.38 53,054 9 0.07 Borrowings 113,896 1,297 4.62 500 1 0.71 Subordinated notes 39,403 470 4.83 39,325 470 4.84 Junior subordinated debentures issued to capital trusts 47,586 763 6.50 37,721 358 3.85 Total interest-bearing liabilities 3,172,397$ 4,942 0.63 % 2,832,938$ 1,407 0.20 % Noninterest-bearing deposits 1,121,365 1,077,917 Noninterest-bearing liabilities 49,316
26,302
Total liabilities 4,343,078 3,937,157
Stockholders' Equity 422,212 406,289
Total liabilities and stockholders'
equity $ 4,765,290 $ 4,343,446
Net interest income/Net interest margin
(1) $ 46,837 4.20 % $ 31,928 3.08 %
Tax-equivalent adjustment (2) 702 0.06 529 0.05
Net interest income (tax-equivalent
basis)/ Net interest margin
(tax-equivalent basis) (2) (3) $ 47,539 4.26 % $ 32,457 3.13 %
Net interest rate spread (4) 4.01 % 3.02 %
Net interest-earning assets (5) $ 1,351,324 $ 1,368,855
Ratio of interest-earning assets to
interest-bearing liabilities 1.43 1.48
Cost of total deposits 0.24 % 0.06 %
Cost of funds 0.47 0.15
* Annualized measure.
(1) Net interest margin represents net interest income divided by average total
interest-earning assets.
(2) On a tax-equivalent basis assuming a federal income tax rate of 21% and a
state income tax rate of 9.5%.
(3) See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure
to their most closely comparable GAAP measures.
Net interest rate spread represents the difference between the yield on (4) average interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest-earning assets represents total interest-earning assets less
total interest-bearing liabilities.
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The following table sets forth the components of loan interest income and their contributions to the total loan yield.
Three Months Ended March 31,
2023 2022
Yield Yield
Interest Contribution * Interest Contribution *
(dollars in thousands)
Contractual interest $ 40,976 5.51 % $ 24,742 3.99 %Loan fees (excluding PPP loans) 1,106 0.15 1,155 0.19 PPP loan fees 1 - 739 0.12 Accretion of acquired loan discounts 813 0.11 120 0.02 Nonaccrual interest recoveries 215 0.03
712 0.12
Total loan interest income $ 43,111 5.80 % $ 27,468 4.44 %
* Annualized measure.
The following table sets forth the components of net interest income and their contributions to the net interest margin.
Three Months Ended March 31,
2023 2022
Net Interest Net Interest
Margin Margin
Interest Contribution * Interest Contribution *
(dollars in thousands)
Interest income:
Contractual interest on loans $ 40,976 3.67 % $ 24,742 2.39 %Loan fees (excluding PPP loans) 1,106 0.10
1,155 0.11 PPP loan fees 1 - 739 0.07 Accretion of acquired loan discounts 813 0.07 120 0.01
Nonaccrual interest recoveries 215 0.02
712 0.07 Securities 7,813 0.70 5,689 0.55 Deposits with banks 739 0.07 159 0.02 Other 116 0.01 19 - Total interest income 51,779 4.64 33,335 3.22 Interest expense: Deposits 2,374 0.21 569 0.06
Other interest-bearing liabilities 2,568 0.23
838 0.08 Total interest expense 4,942 0.44 1,407 0.14 Net interest income 46,837 4.20 31,928 3.08
Tax equivalent adjustment (1) 702 0.06
529 0.05 Net interest income (tax equivalent) (1) (2)$ 47,539 4.26 %$ 32,457 3.13 % * 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 closely comparable GAAP measures.
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Rate/Volume Analysis
The following table sets forth the dollar amount of changes in interest income
and interest expense for the major categories of our interest-earning assets and
interest-bearing liabilities. Information is provided for each category of
interest-earning assets and interest-bearing liabilities with respect to changes
attributable to 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 March 31, 2023
vs.
Three Months Ended March 31, 2022
Increase (Decrease) Due to
Volume Rate Total
(dollars in thousands)
Interest-earning assets:
Loans $ 6,209 $ 9,434 $ 15,643
Securities 407 1,717 2,124
Deposits with banks (205) 785 580
Other 56 41 97
Total interest-earning assets 6,467 11,977 18,444
Interest-bearing liabilities:
Interest-bearing deposits:
Interest-bearing demand 11 305 316
Money market 8 806 814
Savings 5 123 128
Time 43 504 547Total interest-bearing deposits 67 1,738 1,805 Securities sold under agreements to repurchase (3)
32 29 Borrowings 1,265 31 1,296 Subordinated notes 1 (1) - Junior subordinated debentures issued to capital trusts 111 294 405 Total interest-bearing liabilities 1,441 2,094 3,535 Change in net interest income$ 5,026 $
9,883
Comparison of the Three Months Ended
Net interest income for the three months endedMarch 31, 2023 was$46.8 million , increasing$14.9 million , or 46.7%, from the three months endedMarch 31, 2022 . The increase is primarily attributable to higher yields on interest-earning assets and the increase in average interest-earning assets following the Town and Country merger. Net interest margin increased to 4.20% for the three months endedMarch 31, 2023 , compared to 3.08% for the three months endedMarch 31, 2022 . The increase was primarily attributable to higher yields on interest-earning assets, driven by significant increases in market rates since early 2022. Additionally, the contribution of acquired loan discount accretion to net interest margin increased to 7 basis points during the three months endedMarch 31, 2023 , from 1 basis point during the three months endedMarch 31, 2022 . 64
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The quarterly net interest margins were as follows:
2023 2022
Three months ended:
March 31 4.20 % 3.08 %
June 30 - 3.34
September 30 - 3.65
December 31 - 4.10
In March 2022 , the Federal Open Markets Committee ("FOMC") raised the target
range for the federal funds rate to 0.25% to 0.50%, the first rate hike since
December 2018 . Since March 2022 , the FOMC has raised the target range for the
federal funds rate several times, setting the target range for the federal funds
rate to 4.75% to 5.00% at the March 2023 meeting.
As a result, market interest rates have also risen since March 2022 which has
led to improvements in our net interest margin. In general, we believe that
increases in market interest rates will lead to improved net interest margins
while decreases in market interest rates will result in lower net interest
margins. Additionally, these recent increases in market interest rates have
increased competition for deposits. As a result, we expect deposit costs to
increase during 2023 and deposits balances may decrease and be replaced by
higher cost funding sources, such as FHLB advances, brokered deposits, or other
wholesale funding.
Provision for Credit Losses
The following table sets forth the components of provision for credit losses for
the periods indicated:
Three Months Ended March 31,
2023 2022
(dollars in thousands)
Provision for credit losses
Loans $ 5,101 $ (584)Unfunded lending-related commitments 509 - Debt securities 600 -
Total provision for credit losses $ 6,210 $ (584)
In connection with the Town and Country merger, we recognized an allowance for credit losses on non-PCD loans of$5.2 million and an allowance for credit losses on unfunded commitments of$0.7 million . The remaining provision for credit losses primarily reflects the establishment of an allowance for credit losses of$0.6 million on debt securities available-for-sale, related to one bank subordinated debt security, a$0.2 million decrease in specific reserves on individually evaluated loans, and net recoveries of$0.1 million . Credit losses are highly dependent on current and forecast economic conditions. Potential deterioration of economic conditions may lead to higher credit losses and adversely impact our financial condition and results of operations. The economic forecasts utlized in estimating the allowance for credit losses on loans include the unemployment rate and changes in GDP as macroeconomic variables, although other economic metrics are considered on a qualitative
basis.
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Noninterest Income
The following table sets forth the major categories of noninterest income for
the periods indicated:
Three Months Ended March 31,
2023 2022 $ Change
(dollars in thousands)
Card income $ 2,658 $ 2,404 $ 254
Wealth management fees 2,338 2,289 49Service charges on deposit accounts 1,871 1,652
219
Mortgage servicing 1,099 658
441
Mortgage servicing rights fair value adjustment (624) 1,729
(2,353)
Gains on sale of mortgage loans 276 587
(311)
Realized gains (losses) on sales of securities (1,007) -
(1,007)
Unrealized gains (losses) on equity securities (22) (187)
165
Gains (losses) on foreclosed assets (10) 40
(50)
Gains (losses) on other assets - 193
(193)
Income on bank owned life insurance 115 40
75
Other noninterest income 743 638 105
Total noninterest income $ 7,437 $ 10,043 $ (2,606) Comparison of the Three Months Ended
Total noninterest income for the three months ended
? A
primarily due to changes in valuation assumptions;
The vast majority of the securities portfolio acquired from Town and Country
? was sold during the first quarter of 2023, with the sales proceeds used to
reduce FHLB borrowings. Net losses of
A
? addition of the Town and Country servicing portfolio which nearly doubled the
size of our existing mortgage servicing portfolio;
A
? attributable to a lower level of mortgage refinancing activity due to interest
rate increases since the beginning of 2022; and
? A
activity on deposit accounts acquired from Town and Country.
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Noninterest Expense
The following table sets forth the major categories of noninterest expense for
the periods indicated:
Three Months Ended March 31,
2023 2022 $ Change
(dollars in thousands)
Salaries $ 19,411 $ 12,801 $ 6,610
Employee benefits 2,335 2,444 (109)
Occupancy of bank premises 2,102 2,060 42
Furniture and equipment 659 552 107
Data processing 4,323 1,653 2,670Marketing and customer relations 836 851 (15) Amortization of intangible assets 510 245 265 FDIC insurance 563 288 275 Loan collection and servicing 278 157 121
Foreclosed assets 61 132 (71) Other noninterest expense 4,855 2,974 1,881 Total noninterest expense$ 35,933 $ 24,157 $ 11,776
Comparison of the Three Months Ended
Total noninterest expense for the three months ended
Town and Country acquisition-related noninterest expenses totaled
? including
The
? Country acquisition-related expenses was primarily attributable to a higher
base level of noninterest expense, primarily related to personnel costs.
Income Taxes
Comparison of the Three Months Ended
During the three months endedMarch 31, 2023 and 2022, we recorded income tax expense of$2.9 million , or an effective tax rate of 24.1%, and$4.8 million , or an effective tax rate of 26.1%, respectively. The decrease in effective tax rate was primarily attributable to a slightly higher proportion of federally tax-exempt interest income and slightly lower combined state income tax rates. 67 Table of Contents
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