What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-08 compared with 2022-03-11 · 202 added, 346 removed, 717 unchanged (43% of the section changed)

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HBT Financial, Inc., headquartered in Bloomington, Illinois, is the holding company for Heartland Bank and Trust Company, and has banking roots that can be traced back to 1920.

HBT provides a comprehensive suite of business, commercial, wealth management, and retail banking products and services to businesses, families, and local governments throughout Central and Northeastern Illinois and Eastern Iowa.

We provide a comprehensive suite of business, commercial, wealth management, and retail banking products and services to businesses, families, and local governments throughout Central and Northeastern Illinois and Eastern Iowa.

As of December 31, 2022, the Company had total assets of $4.3 billion, loans held for investment of $2.6 billion and total deposits of $3.6 billion.

We currently operate 61 branch locations in Central and Northeastern Illinois and Eastern Iowa.

As of December 31, 2022, our branch network included 58 full-service branch locations in Central and Northeastern Illinois and Eastern Iowa.

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 geographic region.

Below is a summary of our loan and deposit balances by geographic region.

December 31, 2022

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Total deposits

NXT Bancorporation, Inc.

On October 1, 2021, the Company completed its acquisition of NXT, the holding company for NXT Bank, which was previously announced on June 7, 2021.

The acquisition expands the Company’s footprint into Eastern Iowa with four locations that began operating as branches of Heartland Bank following the merger and system conversion of NXT Bank into Heartland Bank in December 2021.

After considering business combination accounting adjustments, NXT added total assets of $234 million, total loans of $195 million, and total deposits of $182 million.

Cash consideration of approximately $10.6 million and stock consideration of approximately 1.8 million shares of HBT common stock resulted in aggregate consideration of $39.9 million.

Goodwill of $5.7 million was recorded in the acquisition.

The acquisition of NXT provides an opportunity to utilize the Company’s existing excess liquidity to replace NXT’s higher cost funding.

Additionally, Heartland Bank’s broader range of products and services and greater ability to meet larger borrowing needs provides an opportunity to expand NXT customer relationships.

The Company incurred the following pre-tax acquisition expenses related to the acquisition of NXT during the year ended December 31, 2021 (dollars in thousands):

The Company incurred the following pre-tax acquisition expenses during the years ended December 31:

Year Ended December 31,

(dollars in thousands)

Furniture and equipment

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Legal fees and other noninterest expense

Total NXT acquisition-related expenses

Total acquisition-related expenses

Town and Country Financial Corporation

On February 1, 2023, HBT Financial completed its acquisition of Town and Country Financial Corporation (“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.

At the time of acquisition, Town and Country Bank operated ten full-service branch locations which began operating as branches of Heartland Bank.

The core system conversion is expected to occur in April 2023.

As of December 31, 2022, Town and Country Bank had total assets of $923.1 million, total loans of $662.0 million, and total deposits of $762.2 million.

This acquisition is a subsequent event and the financial results of Town and Country are not recognized in this Form 10-K.

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.

NXT Bancorporation, Inc.

On October 1, 2021, HBT Financial completed its acquisition of NXT Bancorporation, Inc.

(“NXT”), the holding company for NXT Bank.

The acquisition expanded our footprint into Eastern Iowa with four locations that began operating as branches of Heartland Bank following the merger and system conversion of NXT Bank into Heartland Bank in December 2021.

After considering business combination accounting adjustments, NXT added total assets of $234.1 million, total loans of $194.6 million, and total deposits of $181.6 million.

Total consideration consisted of 1.8 million shares of HBT Financial’s common stock and $10.6 million in cash.

Based upon the closing price of HBT Financial common stock of $16.27 on October 1, 2021, the aggregate consideration was approximately $39.9 million.

Goodwill of $5.7 million was recorded in the acquisition.

The acquisition of NXT provided an opportunity to utilize our excess liquidity at the time to replace NXT’s higher cost funding.

Additionally, Heartland Bank’s broader range of products and services and greater ability to meet larger borrowing needs provides an opportunity to expand NXT customer relationships.

Branch Rationalization Plan

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One branch was consolidated during the second quarter of 2021, and the remaining five branches were closed during the third quarter of 2021.

The Company estimates annual pre-tax cost savings, net of associated revenue impacts, related to the branch rationalization plan to be approximately $1.1 million.

The Company estimated annual pre-tax cost savings, net of associated revenue impacts, related to the branch rationalization plan to be approximately $1.1 million.

The Company incurred the following pre-tax branch closure costs during the year ended December 31, 2021 (dollars in thousands):

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Total branch closure costs

COVID-19 Response and Impact Overview

The Company has taken a number of steps to support our employees and customers while prioritizing the health and safety of all involved, including, but not limited to:

● Continued to place the health of customers and employees first by maintaining enhanced cleaning protocols and other safety measures at all locations;

● Enabling work from home for many employees and social distancing for employees who need to report to the office;

● Maintaining regular business hours at our branches and call center to continue serving our customers throughout the pandemic;

● Participating in both rounds of the Small Business Administration’s Paycheck Protection Program;

● Offering loan payment modifications to customers experiencing financial hardship due to COVID-19.

Additionally, the Company recognized a net gain on sales of closed branch premises of $0.1 million during the year ended December 31, 2022.

Paycheck Protection Program Loans

In December 2020, the Paycheck Protection Program (PPP) was extended and allowed eligible borrowers to receive a second PPP loan.

During 2021, we funded $104.7 million of PPP loans as part of the second round of the program.

We continue to process forgiveness applications for PPP loans, with $185.3 million of PPP loans originated in round 1 and $75.8 million of PPP loans originated in round 2 receiving full or partial forgiveness by December 31, 2021.

The following table summarizes outstanding PPP loans as of December 31, 2021:

(dollars in thousands)

PPP loan balance, before net deferred origination fees

Net deferred origination fees

PPP loan balance

During the year ended December 31, 2021 and 2020, the deferred origination fees on PPP loans were reduced by direct origination costs of $0.5 million and $0.5 million, respectively, consisting primarily of salaries and benefits costs.

Net deferred origination fees on PPP loans of $9.2 million and $3.0 million during the years ended December 31, 2021 and 2020, respectively, were recognized as taxable loan interest income.

During 2021 and 2020, we funded a total of $290.1 million of Paycheck Protection Program (“PPP”) loans.

The vast majority of those loans have received full forgiveness, and outstanding PPP loans totaled $28 thousand as of December 31, 2022.

Income recognition for the fees collected at origination, net of associated origination costs, is deferred and recognized over the loan term on a level yield basis.

Recognition of net deferred origination fees is accelerated upon loan forgiveness or repayment prior to contractual maturity.

Payment Modifications Related to COVID-19

Loan payment modifications were 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 to be a troubled debt restructuring.

The volume of loan modification requests related to a COVID-19 financial hardship have declined significantly from its height during the second quarter of 2020.

As of December 31, 2021 and 2020, the total outstanding balance of loans with an existing payment modification related to a COVID-19 financial hardship were $0.2 million and $28.0 million, respectively.

Industries Adversely Impacted by COVID-19

While many industries have been and may continue to be adversely impacted by the COVID-19 pandemic, the restaurant and hotel industries have been particularly susceptible to significant adverse impacts.

While many areas of consumer and business spending have rebounded in recent months, there is uncertainty about the longer lasting impact on the restaurant and hotel industries resulting from the COVID-19 pandemic.

Adverse impacts in these and other industries may result in a deterioration of the loan portfolio’s credit quality or an increase in loan losses.

The below table summarizes loan balances within the restaurant and hotel industries, along with risk rating information, as of December 31, 2021:

Carrying Balance

Non-PPP Loans

(dollars in thousands)

Commercial and industrial

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Construction and land development

Commercial and industrial

Commercial real estate - non-owner occupied

Construction and land development

As of December 31, 2021, there were no loans within the restaurant and hotel industries that were granted a loan payment modification related to a COVID-19 financial hardship that had not returned to regular payments.

Net deferred origination fees on PPP loans recognized as taxable loan interest income totaled $1.5 million, $9.2 million, and $3.0 million during the years ended December 31, 2022, 2021, and 2020, respectively.

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 and Iowa markets where we primarily operate.

The Company's business and financial performance are affected by economic conditions generally in the U.S.

and more directly in the Illinois and Iowa 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 had continuous business operations since the beginning of the COVID-19 pandemic, the pandemic has caused significant economic disruption throughout the United States and the communities that we serve.

While the economic outlook generally improved in 2021 compared to 2020, uncertainty surrounding potential surges in COVID-19 infections with new virus variants and the longer lasting impact on specific industries remains.

As a result, the businesses we serve may continue to be adversely impacted and the ability of our customers to maintain historic deposit levels or to fulfill their contractual obligations to us may deteriorate.

This could adversely affect our asset valuations, financial condition, liquidity and results of operations, and the impacts may be material.

During 2020, we experienced 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 federal economic stimulus payments received by customers;

● Decrease in demand for loans, excluding PPP loans, as a result of the economic slow-down caused by the COVID-19 pandemic.

While some of these trends reversed in 2021, and have continued such reversal in the beginning of 2022, sustained improvements are highly dependent upon strengthening economic conditions.

The COVID-19 pandemic continues to cause economic uncertainties which may again result in these and other adverse impacts to our financial condition and results of operations.

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.

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

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The level of interest rates as well as the volume of interest-earning assets and interest-bearing liabilities both impact net interest income.

Net interest income is also influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the Federal Reserve Board and market interest rates.

The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the Federal Reserve Board’s actions.

The yields generated by our loans and securities are typically driven by short-term and long-term interest rates, which are set by the market and, to some degree, by the Federal Reserve Board’s actions.

The level of net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur.

Growth in deposit balances and the forgiveness of PPP loans has resulted in significant cash inflows and excess liquidity.

While some excess liquidity was invested into debt securities during 2021, the yields available were lower than existing portfolio yields.

Decreases in interest rates, as well as the ongoing economic uncertainty, may decrease our net interest income and net interest margin in future periods, while increases in interest rates are expected to increase our net interest income and net interest margin in future periods.

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’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’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

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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 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 and the impact of COVID-19 in our markets.

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.

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.

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.

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We continue to see increased competitive pressures on loan rates and terms which may affect our financial results in the future.

We have also observed an increase in competition for deposits during 2022 with increases short-term market interest rates.

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.

The COVID-19 pandemic 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.

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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.

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.

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FACTORS AFFECTING COMPARABILITY OF FINANCIAL RESULTS

S Corp Status

Prior to October 11, 2019, the Company elected to be taxed under sections of federal and state income tax law as an "S Corporation"

which provides that, in lieu of Company income taxes, except for state replacement taxes, the stockholders separately account for their pro rata shares of the Company’s items of income, deductions, losses and credits.

As a result of this election, no income taxes, other than state replacement taxes, had been recognized in the accompanying consolidated financial statements prior to October 11, 2019.

Effective October 11, 2019, the Company voluntarily revoked its S Corporation status and became a taxable entity (“C Corporation”).

As such, any periods prior to October 11, 2019 will only reflect an effective state replacement tax rate.

In connection with the conversion of tax status, the Company recognized a deferred tax asset, and the associated income tax benefit, of $0.5 million.

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

Year Ended December 31,

(dollars in thousands, except per share amounts)

Income before income tax expense

Income tax expense

Earnings per share - Basic

Earnings per share - Diluted

Effective tax rate

Unaudited Pro Forma C Corp Equivalent

Historical income before income tax expense

C Corp equivalent income tax expense

C Corp equivalent net income

C Corp equivalent earnings per share - Basic

C Corp equivalent earnings per share - Diluted

Effective tax rate

N/A Not applicable.

The C Corp equivalent effective rates reflect a federal tax rate of 21% and state income tax rate of 9.5%.

JOBS Act Accounting Election

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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 is December 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.

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Overview of Recent Financial Results

The following table presents selected financial results and measures as of and for the year ended December 31.

The following table presents selected financial results and measures for the years ended December 31.

As of or for the Year Ended December 31,

(dollars in thousands, except per share amounts)

Consolidated Statement of Income Information

Total interest and dividend income

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Income tax expense

C Corp equivalent net income (1)

Adjusted net income (1)

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Earnings per share - Diluted

C Corp equivalent earnings per share - Diluted (1)

Adjusted earnings per share - Diluted (1)

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Cost of total deposits

Cost of funds

Efficiency ratio

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Return on average tangible common equity (1)

C Corp equivalent return on average assets (1)

C Corp equivalent return on average stockholders' equity (1)

C Corp equivalent return on average tangible common equity (1) (2)

Adjusted return on average assets (1)

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Adjusted return on average tangible common equity (1)

(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.

(1) See "Non-GAAP Financial Information"

for reconciliation of non-GAAP measures to their most comparable GAAP measures.

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

N/A Not applicable.

for reconciliation of non-GAAP measures 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%.

Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

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Notable changes include the following:

● A $18.6 million improvement in the provision for loan losses, primarily reflecting the improvements in the economic environment from a year ago.

● A $4.8 million improvement in net interest income, due primarily to a $6.2 million increase in PPP loan fees recognized as loan interest income.

● A $4.3 million improvement in the mortgage servicing rights fair value adjustment, primarily resulting from slower mortgage prepayment speed assumptions.

● A $1.6 million improvement in card income, primarily due to the 2020 results reflecting a lower volume of debit and credit card transactions which coincided with the beginning of the COVID-19 pandemic and the related initial economic slowdown.

● A $1.4 million decrease in employee benefits expense, primarily due to the 2020 results including a $1.5 million charge for the supplemental executive retirement plan (SERP) which was terminated in June 2019 and paid out in June 2020.

● Partially offsetting these improvements was a $7.6 million increase in income tax expense, primarily as a result of higher pre-tax income.

● A $23.5 million increase in net interest income, primarily attributable to higher average balances of interest-earning assets following the NXT acquisition in the fourth quarter of 2021, a more favorable asset mix, and higher yields on interest-earning assets which more than offset a $7.7 million decrease in PPP loan fees recognized as loan interest income;

● A $13.9 million increase in noninterest expense, primarily reflecting accruals totaling $8.2 million related to pending legal matters and a higher base level of noninterest expense following the NXT acquisition;

● A negative provision for loan losses of $0.7 million was recognized during the year ended December 31, 2022, compared to a negative provision for loan losses of $8.1 million during the year ended December 31, 2021;

● A $4.4 million decrease in gains on sale of mortgage loans, primarily attributable to a lower level of mortgage refinancing activity due to increases in market interest rates.

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.

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.

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Cost of total deposits

(1) See "Non-GAAP Financial Information"

for reconciliation of non-GAAP measures to their most comparable GAAP measures.

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

Cost of funds

(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 measures to their most closely comparable GAAP measures.

(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.

The following table sets forth the components of loan interest income.

Loan interest income includes contractual interest on loans, loan fees, accretion of acquired loan discounts and net earnings on cash flow hedges.

The following table sets forth the components of loan interest income and their contributions to the total yield on loans.

Year Ended December 31,

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Accretion of acquired loan discounts

Nonaccrual interest recoveries

Net cash flow hedge earnings

Total loan interest income

The following table sets forth the components of net interest income.

Total interest income consists of contractual interest on loans, contractual interest on securities, contractual interest on interest-bearing deposits in banks, loan fees, accretion of acquired loan discounts, securities amortization, net, and other interest and dividend income.

Total interest expense consists of contractual interest on deposits, contractual interest on other interest-bearing liabilities and other interest expense.

The following table sets forth the components of net interest income and their contributions to the net interest margin.

Year Ended December 31,

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Accretion of acquired loan discounts

Nonaccrual interest recoveries

Securities amortization, net

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(2) See "Non-GAAP Financial Information"

for reconciliation of non-GAAP measures to their most comparable GAAP measures.

for reconciliation of non-GAAP measures to their most closely comparable GAAP measures.

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.

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.

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Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

Net interest income for the year ended December 31, 2021 increased $4.8 million, or 4.1%, to $122.4 million from $117.6 million for the year ended December 31, 2020.

Declines in benchmark interest rates drove lower yields on interest-earnings assets.

These declines were more than offset by an increase in PPP loan fees recognized as loan interest income which totaled $9.2 million and $3.0 million during the years ended December 31, 2021 and 2020, respectively.

Additionally, a substantial increase in interest-earning asset balances further supported net interest income, driven by the NXT acquisition, PPP loan originations, and federal economic stimulus payments received by our retail customers.

Net interest margin decreased to 3.18% for the year ended December 31, 2021 compared to 3.54% for the year ended December 31, 2020.

The decrease was primarily attributable to the decline in the average yield on earning assets and increased balances being held in cash and lower-yielding securities.

Additionally, the $40 million of subordinated notes issued during the third quarter of 2020 added downward pressure to net interest income and net interest margin in subsequent periods.

However, the proceeds from the issuance provided additional regulatory capital to buffer against higher than estimated credit losses and support organic and acquisitive growth.

For the year ended December 31, 2022, net interest income was $145.9 million, increasing $23.5 million, or 19.2%, when compared to the year ended December 31, 2021.

The increase is primarily attributable to higher average balances of interest-earning assets following the NXT acquisition and a more favorable asset mix.

These balance changes, as well as higher yields on interest-earning assets driven by recent increases in benchmark interest rates, more than offset a $7.7 million decrease in PPP loan fees recognized as loan interest income.

Net interest margin increased to 3.54% for the year ended December 31, 2022 compared to 3.18% for the year ended December 31, 2021.

The contribution of PPP loans to net interest margin decreased to 4 basis points during the year ended December 31, 2022 from 24 basis points during the year ended December 31, 2021.

This decrease was more than offset by an increase in contractual interest on loans, driven by recent increases in benchmark interest rates.

The quarterly net interest margins were as follows:

Three months ended:

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.

These rate cuts, as well as quantitative easing, have resulted in a lower interest rate environment which has put downward pressure on our net interest margin.

In general, we believe that potential rate increases will lead to improved net interest margins while rate decreases will result in lower net interest margins.

In March 2020, the Federal Open Markets Committee (“FOMC”), in response to the economic downturn caused by the COVID-19 pandemic, lowered the target range for the federal funds rate to 0% to 0.25% and announced the Federal Reserve would substantially increase its Treasury and agency mortgage-backed securities holdings.

This resulted in a historically low interest rate environment which lasted through the rest of 2020 and into 2021, putting downward pressure on our net interest margin.

In 2021, the FOMC began to taper the pace of its security purchases, and, in March 2022, the FOMC raised the target range for the federal funds rate to 0.25% to 0.50%.

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 4.50% to 4.75% at the February 2023 meeting and indicating that the Federal Reserve will continue reducing its security holdings.

As a result of these developments, market interest rates rose during 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 Loan Losses

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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 accounting for net charge-offs (recoveries).

The deterioration of economic conditions related to the COVID-19 pandemic adversely affected the communities that we serve beginning in 2020.

As a result, our allowance for loan losses initially increased at the onset of the COVID-19 pandemic, remained elevated during the remainder of 2020, and then gradually returned to near pre-pandemic levels during 2021 as economic conditions improved.

Credit losses in our loan portfolio are highly dependent on the economic conditions in the communities that we serve.

The broad deterioration in economic conditions initially caused by the COVID-19 pandemic adversely affected the communities that we serve beginning in 2020.

During 2022, our allowance for loan losses as a percentage of total loans remained relatively stable, primarily due to the stable economic conditions observed, as well as the low level of nonperforming loans maintained, throughout 2022.

Potential deterioration of economic conditions, whether due to the COVID-19 pandemic or other factors, may lead to higher credit losses and adversely impact our financial condition and results of operations.

On January 1, 2023, the Company adopted ASU 2016-13 (Topic 326), Measurement of Credit Losses on Financial Instruments, commonly referenced as the Current Expected Credit Loss (“CECL”) standard.

Management is finalizing macroeconomic conditions and forecast assumptions to be used in our CECL model;

however, we expect the initial allowance for credit losses and the reserve for unfunded commitments together to be approximately 30% to 50% above the existing allowance for loan loss levels.

When finalized, this one-time increase will be recorded, net of tax, as an adjustment to beginning retained earnings.

Ongoing impacts of the CECL methodology will be dependent upon changes in economic conditions and forecasts, the credit quality of our loan portfolio, originated and acquired loan portfolio composition, portfolio duration, and other factors.

Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

The Company recorded a negative provision for loan losses of $8.1 million during the year ended December 31, 2021, compared to a provision for loan losses of $10.5 million during the year ended December 31, 2020.

The negative provision was primarily due to a $4.4 million decrease in specific reserves on loans individually evaluated for impairment.

Additionally, changes to qualitative factors resulted in a $2.9 million decrease in required reserve, primarily reflecting the shrinking impact of the COVID-19 pandemic on our borrowers, an improved economic environment, and improved asset quality metrics.

The Company recorded a negative provision for loan losses of $0.7 million during the year ended December 31, 2022, compared to a negative provision for loan losses of $8.1 million during the year ended December 31, 2021.

During the year ended December 31, 2022, net recoveries of $2.1 million were mostly offset by a $1.4 million increase in required reserves, which included a $0.7 million increase in specific reserves on loans individually evaluated for impairment.

Noninterest Income

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(dollars in thousands)

Service charges on deposit accounts

Wealth management fees

Service charges on deposit accounts

Mortgage servicing

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Gains on sale of mortgage loans

Gains (losses) on securities

Unrealized gains (losses) on equity securities

Gains (losses) on foreclosed assets

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Income on bank owned life insurance

Title insurance activity

Other noninterest income

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Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

Total noninterest income for the year ended December 31, 2021, was $37.3 million, an increase of $2.9 million, or 8.3%, from the year ended December 31, 2020.

Total noninterest income for the year ended December 31, 2022, was $34.7 million, a decrease of $2.6 million, or 7.0%, from the year ended December 31, 2021.

Notable changes in noninterest income include the following:

● A $4.3 million improvement in the mortgage servicing rights fair value adjustment, primarily resulting from slower mortgage prepayment speed assumptions.

● A $1.6 million increase in card income was primarily due to increased debit and credit card transaction volume.

Additionally, the 2020 results were adversely impacted by the initial economic slowdown which coincided with the beginning of the COVID-19 pandemic, while the 2021 results were positively impacted by improved economic conditions and increased consumer demand.

● A $1.1 million increase in wealth management fees as a result of higher values of assets under management during the year ended December 31, 2021 relative to the year ended December 31, 2020.

● Partially offsetting these improvements was a $3.0 million decrease in gains on sale of mortgage loans due to a lower level of mortgage refinancing activity.

A lower level of mortgage refinancing activity and margin pressure are anticipated during 2022 and are expected to result in lower gains on sale of mortgage loans relative to 2021.

● Additionally, there were impairment losses of $0.6 million related to branches closed during 2021, pursuant to our branch rationalization plan, not present in the 2020 results.

● A $4.4 million decrease in gains on sale of mortgage loans, primarily attributable to a lower level of mortgage refinancing activity due to interest rate increases;

● A $1.0 million increase in service charges on deposit accounts;

● A $0.9 million improvement in gains (losses) on other assets, as the 2021 results include impairment losses of $0.7 million related to branches closed pursuant to our 2021 branch rationalization plan;

● A $0.8 million increase in wealth management fees, reflecting a $1.0 million increase in farm management and farmland brokerage fees;

● A $0.6 million increase in card income primarily due to increased debit and credit card transaction volume;

● A $0.5 million increase in the mortgage servicing rights fair value adjustment, primarily resulting from slower mortgage prepayment speed assumptions.

Noninterest Expense

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Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

Total noninterest expense for the year ended December 31, 2021, was $91.2 million, a decrease of $0.7 million, or 0.8%, from the year ended December 31, 2020.

Total noninterest expense for the year ended December 31, 2022, was $105.1 million, an increase of $13.9 million, or 15.2%, from the year ended December 31, 2021.

Notable changes in noninterest expense include following:

● A $1.2 million decrease in salaries expense, primarily due to a lower employee count during 2021 relative to 2020.

● A $0.6 million increase in data processing expenses, primarily due to $0.4 million of systems conversion expenses related to the NXT acquisition.

● A $0.8 million increase in other noninterest expenses, primarily due to $1.0 million of investment banker and legal fees related to the NXT acquisition.

Prior to October 11, 2019, the Company was taxed under sections of federal and state tax law as an "S corporation"

which provides that with the exception of certain state replacement and franchise taxes, current stockholders account separately for their share of the Company’s income, deductions, losses and credits.

For additional information, see “Factors Affecting Comparability of Financial Results:

S Corp Status ”.

Effective October 11, 2019, the Company voluntarily revoked its S Corporation status and became a taxable entity (C Corporation).

As such, any periods prior to October 11, 2019 will only reflect an effective state replacement tax rate.

In connection with the conversion of tax status, the Company recognized a deferred tax asset, and the associated income tax benefit, of $0.5 million.

● Following the NXT acquisition on October 1, 2021, there was a higher base level of noninterest expense, primarily related to personnel costs and branch operations;

● A $9.0 million increase in other noninterest expense, primarily attributable to accruals totaling $8.2 million related to pending legal matters included in the 2022 results;

● The $1.8 million increase in employee benefits expenses also included accelerated recognition of $0.6 million of stock compensation expense during February 2022 as a result of a modification to all outstanding restricted stock unit and performance restricted stock unit agreements to address treatment upon retirement.

Total compensation costs related to the modified agreements remains the same, and stock compensation expense in periods subsequent to the modification are reduced as a result.

The net impact of this modification was a $0.4 million increase in stock compensation expense during the year ended December 31, 2022;

● A $0.6 million decrease in foreclosed assets expense, primarily due to fewer foreclosed properties held during 2022 relative to 2021.

See “Note 23 – Commitments and Contingencies – Legal Contingencies” to the consolidated financial statements for additional information regarding certain legal actions and litigation to which we are subject, including a discussion of potential losses and related accruals.

Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

We recorded income tax expense of $20.3 million, or 26.5% effective tax rate, during the year ended December 31, 2021 compared to $12.7 million, or 25.7% effective tax rate during the year ended December 31, 2020.

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.

The effective income tax rate increased primarily due to tax exempt interest income making up a smaller portion of pre-tax net income during the year ended December 31, 2021 compared to the year ended December 31, 2020.

Additionally, the non-deductibility of certain acquisition-related contributed to a higher effective tax rate.

We recorded income tax expense of $19.7 million, or a 25.9% effective tax rate, during the year ended December 31, 2022 compared to $20.3 million, or a 26.5% effective tax rate during the year ended December 31, 2021.

The effective income tax rate was lower than the combined federal and state statutory rate primarily due to tax exempt interest income.

The slight decrease in effective tax rate was primarily due to slightly higher federally tax exempt interest income and slightly lower state income taxes.

FINANCIAL CONDITION

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for reconciliation of non-GAAP measures to their most comparable GAAP measures.

Total assets were $4.3 billion at December 31, 2021, an increase of $648.7 million, or 17.7%, from December 31, 2020.

Significant changes in our balance sheet include the following:

● Total deposits increased $607.7 million, primarily due to funds received by our commercial customers from round 2 PPP loans and federal economic stimulus payments received by retail customers.

Additionally, the NXT acquisition added $181.6 million of deposits.

● Cash and cash equivalents increased $96.8 million, primarily as a result of funds received from the forgiveness of PPP loans and federal economic stimulus received by retail customers.

● Excess liquidity was invested in debt securities which increased $287.1 million.

● Loans, before allowance for loan losses, increased $252.7 million, primarily as a result of the $194.6 million of loans acquired in the NXT acquisition.

NM Not meaningful.

Total assets were $4.29 billion at December 31, 2022, a decrease of $27.5 million, or 0.6%, from December 31, 2021.

Notable changes in our consolidated balance sheet include the following:

● Excess liquidity, including excess cash held at December 31, 2021, was reinvested into debt securities, which increased by $106.8 million, and loans held for investment which increased $120.6 million;

● Loans increased by $120.6 million despite a $29.5 million decrease in PPP loans due to forgiveness;

● Total deposits decreased by $151.2 million, primarily due to lower balances maintained in noninterest-bearing business accounts and continued run-off of higher cost time deposits;

● Borrowings, consisting of short-term FHLB advances, increased $160.0 million and were utilized to fund short-term liquidity needs;

● Increases in market interest rates during 2022 drove a decrease in fair value of debt securities resulting in $105.5 million of unrealized losses in the available-for-sale portfolio and substantially contributing to a total decrease of $73.2 million in accumulated other comprehensive income (loss).

Loan Portfolio

The Company focuses on originating loans with appropriate risk / reward profiles.

The Company has a detailed loan policy that guides the overall loan origination philosophy and a well-established loan approval process that requires experienced credit officers to approve larger loan relationships.

The Company also has an active credit department that underwrites and prepares annual reviews for larger and more complex loan relationships.

Management monitors credit quality closely with a series of monthly reports and a quarterly Credit Committee meeting where performance and trends within the loan portfolio are reviewed.

Portfolio diversification at the borrower, industry, and product levels is actively managed to mitigate concentration risk.

In addition, credit risk management includes an independent loan review process that assesses compliance with loan policy, compliance with loan documentation standards, accuracy of the risk rating and overall credit quality of the loan portfolio.

Loans by Category

The following table sets forth the composition of the loan portfolio by category, excluding loans held-for-sale.

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Notable changes include the following:

● The NXT acquisition, which closed on October 1, 2021, added $194.6 million of loans and expanded the Company’s footprint into Eastern Iowa.

● PPP loans decreased $134.0 million, with forgiveness far exceeding the $104.7 million of round 2 PPP loans originated during 2021.

● Utilization of revolving lines of credit improved during 2021, increasing from 40% at December 31, 2020 to 44% at December 31, 2021, driving a $56.6 million increase in revolving line of credit balances.

● The higher lending limits of HBT Financial allowed for the repurchase of $22.4 million of participations previously sold by NXT.

● Improved economic conditions, the expiration of certain federal economic stimulus programs, and our expansion into Eastern Iowa, drove increased loan demand across the majority of our loan categories.

The principal categories of our loan portfolio are described below:

Commercial and Industrial :

Consists of loans typically granted for working capital, asset acquisition and other business purposes.

These loans are underwritten primarily based on the borrower’s cash flow with most loans secondarily supported by collateral.

Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory, and equipment, and are typically supported by personal guarantees of the owners.

Cash flows and collateral values may fluctuate based on general economic conditions, specific industry conditions and specific borrower circumstances.

Agricultural and Farmland :

Consists of loans typically secured by farmland, agricultural operating assets, or a combination of both, and are generally underwritten to existing cash flows of operating agricultural businesses.

Debt repayment is provided by business cash flows.

Economic trends influenced by unemployment rates and other key economic indicators are not closely correlated to the credit quality of agricultural and farmland loans.

The credit quality of these loans is most correlated to changes in prices of corn and soybeans and, to a lesser extent, weather, which has been partially mitigated by federal crop insurance programs.

Commercial Real Estate - Owner Occupied :

Consists of loans secured by commercial real estate that is both owned and occupied by the same or a related borrower.

These loans are primarily underwritten based on the cash flow of the business occupying the property.

As with commercial and industrial loans, cash flows and collateral values may fluctuate based on general economic conditions, specific industry conditions, and specific borrower circumstances.

Commercial Real Estate - Non-owner Occupied :

Consists of loans secured by commercial real estate for which the primary source of repayment is the sale or rental cash flows from the underlying collateral.

These loans are underwritten based primarily on the historic or projected cash flow from the underlying collateral.

Adverse economic developments or an overbuilt market typically impact commercial real estate projects.

Trends in rental and vacancy rates of commercial properties impact the credit quality of these loans.

Multi-family :

Consists of loans secured by five or more unit apartment buildings.

Multi-family loans may be affected by demographic and population trends, unemployment or underemployment, and deteriorating market values of real estate.

Construction and Land Development :

Consists of loans for speculative and pre-sold construction projects for developers intending to either sell upon completion or hold for long term investment, as well as construction of projects to be owner occupied.

In addition, loans in this segment generally possess a higher inherent risk of loss than other portfolio segments due to risk of non-completion, changes in budgeted costs, and changes in market forces during the term of the construction period.

One-to-four Family Residential :

Consists of loans secured by one-to-four family residences, including both first and junior lien mortgage loans for owner occupied and non-owner occupied properties and home equity lines of credit.

The degree of risk in residential mortgage lending depends on the local economy, including the local real estate market and unemployment rates.

Municipal, Consumer and Other :

Loans to municipalities include obligations of municipal entities and loans sponsored by municipal entities for the benefit of a private entity where that private entity, rather than the municipal entity, is responsible for repayment of the obligation.

Consumer loans include loans to individuals for consumer purposes and typically consist of small balance loans.

Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of the consumer loans.

Loans to other financial institutions, as well as leases, are also included.

● Loan growth was partially offset by a $29.5 million decrease in PPP loans due to forgiveness;

● Loan growth excluding PPP loans was predominantly in the Chicago metropolitan statistical area with balances in our Iowa and Central Illinois markets also increasing;

● Our loan growth during 2022 was highest in the regulatory CRE categories, which includes construction and land development, commercial real estate – non-owner occupied, and multi-family loans.

Loan Portfolio Maturities

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Nonperforming Assets

Nonperforming loans consist of all loans past due 90 days or more or on nonaccrual.

Nonperforming loans consist of all loans 90 days or more past due or on nonaccrual.

Nonperforming assets consist of all nonperforming loans and foreclosed assets.

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Interest payments received on nonaccrual loans are recognized in accordance with our significant accounting policies.

Once a loan is placed on nonaccrual status, the borrower must generally demonstrate at least six months of payment performance and we believe that all remaining principal and interest is fully collectible, before the loan is eligible to return to accrual status.

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 are considered performing, even though they may be contractually past due, as any non-payment of contractual principal or interest is considered in the periodic re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments.

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.

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 on which management can no longer estimate future cash flows.

When it appears likely that we will obtain title to real estate collateral, we develop an exit strategy by assessing overall market conditions, the current use and condition of the asset, and its highest and best use.

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Expenses for real estate taxes are accrued and repairs are expensed when incurred.

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

The following table sets forth information concerning nonperforming loans and nonperforming assets as of December 31.

December 31, 2022

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Nonperforming assets to loans, before allowance for loan losses, and foreclosed assets

(1) Excludes loans acquired with deteriorated credit quality that are past due 90 or more days totaling $32 thousand and $0.6 million as of December 31, 2021 and 2020, respectively.

(1) Excludes loans acquired with deteriorated credit quality that are past due 90 or more days totaling $145 thousand and $32 thousand as of December 31, 2022 and 2021, respectively.

Comparison of December 31, 2022 to December 31, 2021

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Commercial and industrial

Agricultural and farmland

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Construction and land development

One-to-four family residential

Municipal, consumer, and other

Total accrual troubled debt restructurings

Commercial and industrial

Agricultural and farmland

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Construction and land development

One-to-four family residential

Municipal, consumer, and other

Total nonaccrual troubled debt restructurings

Total troubled debt restructurings

TDRs have remained a small portion of our loan portfolio as loan modifications to borrowers with deteriorating financial condition are generally offered only as a part of an overall workout strategy to minimize losses to the Company.

The $5.4 million decrease, or 60.8%, from December 31, 2020 was primarily due to the pay down of one relationship by $3.6 million.

TDRs have remained a small portion of our loan portfolio as loan modifications to borrowers with deteriorating financial condition are generally offered only as part of an overall workout strategy to minimize losses to the Company.

Risk Classification of Loans

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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.

A doubtful loan 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;

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Additionally, substandard loans decreased $8.3 million, or 10.2%, from December 31, 2021 to December 31, 2022.

These improvements were primarily driven by improving economic conditions, which resulted in both risk rating upgrades and paydowns.

Additionally, the transfer of one larger loan to foreclosed assets further contributed to the decrease in substandard loans.

These overall improvements were primarily driven by better economic conditions, relative to 2021, which resulted in both risk rating upgrades and paydowns.

Net Charge-offs and Recoveries

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

Year Ended December 31,

(dollars in thousands)

Balance, beginning of year

Commercial and industrial

Agricultural and farmland

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Construction and land development

One-to-four family residential

Municipal, consumer, and other

Total charge-offs

Commercial and industrial

Agricultural and farmland

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

Construction and land development

One-to-four family residential

Municipal, consumer, and other

Total recoveries

Net recoveries (charge-offs)

Provision for loan losses

Balance, end of year

The following table summarizes net charge-offs (recoveries) to average loans, before allowance for loan losses by loan category.

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Comparison of the Year Ended December 31, 2022 to the Year Ended December 31, 2021

Net charge-offs (recoveries) to average total loans before allowance for loan losses have remained low for several years, including each of the years ended December 31, 2021 and 2020.

Our net charge-offs (recoveries) percentage has remained low for several years, including each of the years ended December 31, 2022, 2021, and 2020.

We believe our continuous credit monitoring and collection efforts have resulted in lower levels of loan losses, while also recognizing that favorable economic conditions prior to the COVID-19 pandemic and substantial federal economic stimulus during the pandemic have also contributed to reduced loan losses.

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Due in 1 year or less

government agency

Mortgage-backed:

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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 Bank continues 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.

Additionally, the Bank continues to add and improve digital banking services to solidify deposit relationships.

The following tables set forth the distribution of average deposits, by account type.

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Comparison of the Year Ended December 31 , 2022 to the Year Ended December 31 , 2021

The average balances of non-maturity deposits increased 19.6% from the year ended December 31, 2020 to the year ended December 31, 2021, with the increase primarily attributable to PPP loan proceeds received by commercial customers, federal economic stimulus received by retail customers, and $139.4 million of non-maturity deposits added through the NXT acquisition on October 1, 2021.

Partially offsetting the increase in non-maturity deposits was a 6.8% decline in the average balances of time deposits, which resulted in a 16.7% increase in average balances of total deposits from the year ended December 31, 2020 to the year ended December 31, 2021.

The average balances of non-maturity deposits increased 8.9% from the year ended December 31, 2021 to the year ended December 31, 2022, with the increase primarily attributable to higher balances maintained by deposit customers following the receipt of federal economic stimulus, in the form of PPP loan proceeds by commercial customers and direct payments received by retail customers, although this trend began to reverse in the second quarter of 2022.

Additionally, the NXT acquisition added $139.4 million of non-maturity deposits on October 1, 2021.

Time deposits decreased slightly due to the continued run-off of higher cost time deposits, although this was partially offset by the addition of $42.1 million of time deposits acquired from NXT.

The following table sets forth time deposits by remaining maturity as of December 31, 2022.

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Amounts less than $100,000

Amounts of $100,000 but less than $250,000

Amounts of $100,000 or more but less than $250,000

Amounts of $250,000 or more

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Average interest rate during year

Deposits are the primary source of funds for our lending activities and general business purposes.

However, we may also obtain advances from the Federal Home Loan Bank of Chicago (“FHLB”), purchase federal funds, and engage in overnight borrowing from the Federal Reserve.

We may also use these sources of funds as part of our asset liability management process to control our long-term interest rate risk exposure, even if it may increase our short-term cost of funds.

Our level of short-term borrowing can fluctuate on a daily basis depending on funding needs and the source of funds to satisfy the needs.

Our use of FHLB advances and other borrowings was nominal during 2020 and 2021, but increased during the second half of 2022 to fund increases in loan demand and to offset a decrease in deposits.

The following table sets forth information concerning balances and interest rates on our borrowings.

As of or for the Years Ended December 31,

(dollars in thousands)

Balance at end of year

FHLB advances

Federal funds purchased

Total borrowings

Average balance during year

FHLB advances

Federal funds purchased

Total borrowings

Maximum outstanding at any month end

FHLB advances

Federal funds purchased

Total borrowings

Weighted average interest rate at end of year

FHLB advances

Federal funds purchased

Total borrowings

Average interest rate during year

FHLB advances

Federal funds purchased

Total borrowings

Bank Liquidity

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The Bank manages 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 Bank continuously monitors its liquidity position 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 Bank manages its 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 Bank also monitors 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, and regulatory capital requirements.

The Bank continuously monitors its 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 Bank manages its liquidity position to meet our daily cash flow needs, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives.

The Bank also monitors liquidity requirements in light of interest rate trends, changes in the economy, the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits, and regulatory capital requirements.

As part of the Bank’s liquidity management strategy, the Bank is also focused on minimizing costs of liquidity and attempts 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 Bank does 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).

Additional sources of liquidity include unpledged securities, federal funds purchased, and borrowings from the 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.

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 Bank from the FHLB at December 31, 2021 was $316.7 million.

As of December 31, 2021, management believed adequate liquidity existed to meet all projected cash flow obligations of the Bank.

Funds available through federal funds purchased and FHLB borrowings are used primarily to meet daily liquidity needs.

The total remaining credit available to the Bank from the FHLB at December 31, 2022 was $409.9 million.

As of December 31, 2022, the Bank’s liquidity and available sources of liquidity were adequate to meet all of the reasonably foreseeable short-term and intermediate-term demands of the Bank .

As of December 31, 2022, the Bank had no material commitments for capital expenditures.

Holding Company Liquidity

The Company is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity.

As of December 31, 2021, HBT Financial, Inc.

had cash and cash equivalents of $25.8 million.

The Company’s main source of funding is dividends declared and paid to it by the Bank.

Due to state banking laws, the Bank may not declare dividends in any calendar year in an amount that would exceed accumulated retained earnings, after giving effect to any unrecognized losses and bad debts, without the prior approval of the IDFPR.

In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

Management believes that these limitations will not impact the Company’s ability to meet its ongoing short-term cash obligations.

During the years ended December 31, 2021, 2020, and 2019, the Bank paid $20.0 million, $17.6 million, and $110.0 million, in dividends to the Company, respectively.

The liquidity needs of the Company on an unconsolidated basis consist primarily of interest payments on the subordinated notes and junior subordinated debentures, operating expenses, and dividends to stockholders.

During the years ended December 31, 2021, 2020, and 2019, holding company operating expenses consisted of interest expense of $3.3 million, $2.2 million, and $1.9 million, respectively;

other operating expenses of $3.7 million, $2.5 million, and $1.0 million, respectively;

and dividends to stockholders of $16.8 million, $16.5 million, and $225.0 million, respectively.

As of December 31, 2021, management was not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on the Company’s liquidity.

As of December 31, 2021, management believed adequate liquidity existed to meet all projected cash flow obligations of the Company.

As of December 31, 2021, the Company had no material commitments for capital expenditures.

The Holding Company, or HBT Financial, Inc.

on an unconsolidated basis, is a corporation separate and apart from the Bank and, therefore, it must provide for its own liquidity.

As of December 31, 2022, the Holding Company had cash and cash equivalents of $24.3 million.

The Holding Company’s main source of funding is dividends declared and paid to it by the Bank.

In addition, dividends paid by the Bank to the Holding Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

Management believes that these limitations will not impact the Holding Company’s ability to meet its ongoing short-term and intermediate-term cash obligations.

During the years ended December 31, 2022, 2021, and 2020, the Bank paid dividends of $28.0 million, $20.0 million, and $17.6 million to the Holding Company, respectively.

The liquidity needs of the Holding Company on an unconsolidated basis consist primarily of operating expenses, interest payments on the subordinated notes and junior subordinated debentures, and shareholder distributions in the form of dividends and stock repurchases.

During the years ended December 31, 2022, 2021, and 2020, holding company operating expenses consisted of interest expense of $3.7 million, $3.3 million, and $2.2 million, respectively, and other operating expenses of $5.3 million, $3.7 million, and $2.5 million, respectively.

Additionally, the Holding Company paid $18.6 million, $16.8 million, and $16.5 million of dividends to stockholders during the years ended December 31, 2022, 2021, and 2020, respectively.

As of December 31, 2022, management was not aware of any known trends, events or uncertainties that had or were reasonably likely to have a material impact on the Holding Company’s liquidity.

As of December 31, 2022, the Holding Company’s liquidity and available sources of liquidity were adequate to meet all of the reasonably foreseeable short-term and intermediate-term demands of the Holding Company .

As of December 31, 2022, the Holding Company had no material commitments for capital expenditures.

CAPITAL RESOURCES

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As of those dates, the Bank was “well capitalized” under the regulatory prompt corrective action provisions.

The following table sets forth actual capital ratios of the Company and the Bank 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.

The following table sets forth actual capital ratios of the Company and the Bank as of the dates indicated, as well as 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.

Adequacy Purposes

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N/A Not applicable.

As of December 31 , 2022, 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 capital resources.

Cash Dividends

During the 2021 and 2020, the Company paid quarterly cash dividend of $0.15 per share.

The Company paid quarterly cash dividends of $0.16 during 2022 and $0.15 per share during 2021 and 2020.

On January 24, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.17 per share.

During 2019, the Company paid a $170.0 million dividend to shareholders of record prior to the Company’s IPO.

The dividend was paid using net proceeds from the IPO and the proceeds of dividends received from Heartland Bank and State Bank of Lincoln.

Stock Repurchase Program

The Company repurchased 290,486 shares of its common stock at a weighted average price of $16.89 during the year ended December 31, 2021 under the Company’s stock repurchase program which expired on December 31, 2021.

Repurchases were conducted in compliance with Rule 10b-18 and in compliance with Regulation M under the Securities Exchange Act of 1934, as amended.

The Company repurchased 265,379 shares of its common stock at a weighted average price of $18.02 during 2022 and 290,486 shares at a weighted average price of $16.89 during 2021.

Repurchases were conducted in compliance with Rule 10b-18 and in compliance with Regulation M under the Exchange Act.

On December 21, 2022, the Company’s Board of Directors approved a new stock repurchase program which authorizes the Company to repurchase up to $15.0 million of its common stock.

1 unchanged sentence

OFF-BALANCE SHEET ARRANGEMENTS

As a financial services provider, the Bank is routinely 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.

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Further, changes in accounting standards could impact the Company’s critical accounting estimates.

The following accounting estimates could be deemed critical:

The following accounting estimate could be deemed critical:

Allowance for Loan losses

The allowance for loan losses (“allowance”) is an estimate of loan losses inherent in the Company’s loan portfolio.

The allowance for loan losses represents amounts that have been established to recognize incurred credit losses in the loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements.

The allowance represents amounts that have been established to recognize incurred credit losses in the loan portfolio that are both probable and reasonably estimable at the date of the consolidated financial statements.

The allowance is established through a provision for loan losses which is charged to expense.

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Determinations as to the risk classification of loans and the amount of the allowance for loan losses are subject to review by regulatory agencies, which can require that the Company establish additional loss allowances.

Fair Value of Assets Acquired and Liabilities Assumed in Business Combinations

Business combinations are accounted for using the acquisition method of accounting.

Under the acquisition method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair value on the acquisition date.

Estimating such fair values may require highly subjective assumptions or the use of a valuation specialist.

In the NXT acquisition, the fair value for loans was most significant estimate and relatively small changes in assumptions used in this estimate could result in a materially different conclusion.

The fair value for loans was based on a discounted cash flow methodology that considered credit loss and prepayment expectations, market interest rates and other market factors, such as liquidity, from the perspective of a market participant.

Loan cash flows were generated on an individual loan basis.

The probability of default, loss given default, exposure at default, and prepayment assumptions are key factors in this analysis.

NON-GAAP FINANCIAL MEASURES

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nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies.

See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures below.

See our reconciliation of non-GAAP financial measures to their most closely comparable GAAP financial measures below.

Non-GAAP Financial Measure

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Net income, with the following adjustments:

adds additional C Corp equivalent tax expense for periods prior to October 11, 2019,

excludes acquisition expenses,

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excludes net earnings (losses) from closed or sold operations,

excludes realized gains (losses) on sales of closed branch premises,

excludes realized gains (losses) on sales of securities,

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That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue.

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

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

Non-GAAP Financial Measure

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(dollars in thousands)

C Corp equivalent adjustment (1)

C Corp equivalent net income (1)

Acquisition expenses

Branch closure expenses

Gains (losses) on sales of closed branch premises

Charges related to termination of certain employee benefit plans

Net earnings from sold operations, including gains on sale (2)

Mortgage servicing rights fair value adjustment

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Return on average assets

C Corp equivalent return on average assets (2)

Adjusted return on average assets

(1) Reflects adjustment to our historical net income for each period to give effect to the C Corp equivalent provision for income tax for such year.

(2) Sold operations include HBT Insurance and First Community Title Services, Inc.

N/A Not applicable.

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

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Numerator for earnings per share - basic and diluted

C Corp equivalent net income (2)

Earnings allocated to unvested restricted stock units (1)(2)

Numerator for C Corp equivalent earnings per share - basic and diluted (2)

Adjusted net income

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Earnings per share - Diluted

C Corp equivalent earnings per share - Basic (2)

C Corp equivalent earnings per share - Diluted (2)

Adjusted earnings per share - Basic

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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) 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.

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

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Average interest-earning assets

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

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

Reconciliation of Non-GAAP Financial Measure - Efficiency Ratio (Tax Equivalent Basis)

12 unchanged sentences

Efficiency ratio (tax equivalent basis) (1)

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

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

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

14 unchanged sentences

Tangible book value per share

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

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

Year Ended December 31,

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Average tangible common equity

C Corp equivalent net income (1)

Adjusted net income

1 unchanged sentence

Return on average tangible common equity

C Corp equivalent return on average stockholders' equity (1)

C Corp equivalent return on average tangible common equity (1)

Adjusted return on average stockholders' equity

Adjusted return on average tangible common equity

(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.

Reconciliation of Non-GAAP Financial Measure - Core Deposits

9 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis