What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-06 compared with 2023-03-08 · 416 added, 368 removed, 551 unchanged (59% of the section changed)

1 unchanged sentence

Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to HBT Financial, Inc.

and its consolidated subsidiaries.

and its subsidiaries.

Management’s discussion and analysis should be read in conjunction with the following parts of this Annual Report on Form 10-K:

2 unchanged sentences

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.

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.

We provide a comprehensive suite of financial products and services to businesses, families, and local governments throughout Illinois and Eastern Iowa.

As of December 31, 2023, the Company had total assets of $5.1 billion, loans held for investment of $3.4 billion, and total deposits of $4.4 billion.

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.

As of December 31, 2023, our branch network included 67 full-service branch locations throughout Illinois and Eastern Iowa.

We hold a leading deposit share in many of our Central 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:

December 31, 2022

December 31, 2021

(dollars in thousands)

Illinois by metropolitan and micropolitan statistical areas

Bloomington-Normal

Champaign-Urbana

Total Illinois

Total deposits

Illinois by metropolitan and micropolitan statistical areas

Bloomington-Normal

Champaign-Urbana

Total Illinois

Total deposits

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

December 31, 2023 December 31, 2022

(dollars in thousands) Loans Deposits Loans Deposits

Central $ 1,693,794 $ 3,094,305 $ 1,024,015 $ 2,239,030

Chicago MSA 1,406,348 1,197,865 1,294,327 1,216,423

Illinois 3,100,142 4,292,170 2,318,342 3,455,453

Iowa 304,275 109,267 301,911 131,571

Total $ 3,404,417 $ 4,401,437 $ 2,620,253 $ 3,587,024

The Company incurred the following pre-tax acquisition expenses:

Year Ended December 31,

(dollars in thousands) 2023 2022 2021

PROVISION FOR CREDIT LOSSES (1)

$ 5,924 $ — $ —

NONINTEREST EXPENSE

Salaries 3,584 — 65

Furniture and equipment 39 — 18

3 unchanged sentences

Legal fees and other noninterest expense 1,964 788 955

Total noninterest expense 7,767 1,092 1,416

Total acquisition-related expenses $ 13,691 $ 1,092 $ 1,416

_________________________________________________

(1) Includes recognition of an allowance for credit losses on non-purchase credit deteriorated ("non-PCD") loans of $5.2 million and an allowance for credit losses on unfunded commitments of $0.7 million in connection with the Town and Country merger during the first quarter of 2023 in accordance with ASC 326 which was adopted on January 1, 2023.

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.

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.

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.

The core system conversion was successfully completed in April 2023.

After considering business combination accounting adjustments, Town and Country added total assets of $937.2 million, total loans held for investment of $635.4 million, and total deposits of $720.4 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 $30.5 million was recorded in the acquisition.

NXT Bancorporation, Inc.

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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

10 unchanged sentences

Total branch closure costs $ 748

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

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.

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

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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 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’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.

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.

9 unchanged sentences

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.

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

We continue to see significant competitive pressure on loan rates and terms, as well as deposit pricing, which may affect our financial results in the future.

Digital Banking

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The COVID-19 pandemic accelerated this transition, and in-person branch traffic is not expected to return to pre-pandemic levels.

Additionally, widespread adoption of faster payment and instant payment technologies could require us to substantially increase our expenditures on technology infrastructure, increase our regulatory compliance costs, and adversely impact the stability of our deposit base.

We plan to continue investing in our digital banking platforms, while maintaining an appropriately sized branch network.

15 unchanged sentences

Overview of Recent Financial Results

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

As of or for the Year Ended December 31,

The following table presents selected financial results and measures:

Year Ended December 31,

(dollars in thousands, except per share amounts) 2023 2022 2021

2 unchanged sentences

Net interest income 191,072 145,874 122,403

Provision for loan losses

Net interest income after provision for loan losses

Provision for credit losses 7,573 (706) (8,077)

Net interest income after provision for credit losses 183,499 146,580 130,480

Total noninterest income 36,046 34,717 37,328

2 unchanged sentences

Income tax expense 22,739 19,734 20,291

Net income $ 65,842 $ 56,456 $ 56,271

Adjusted net income (1)

$ 78,182 $ 55,805 $ 56,840

Net interest income (tax-equivalent basis) (1) (2)

$ 193,830 $ 148,373 $ 124,431

Share and Per Share Information

1 unchanged sentence

Adjusted earnings per share - Diluted (1)

2.46 1.93 2.04

Weighted average shares of common stock outstanding 31,626,308 28,853,697 27,795,806

2 unchanged sentences

Net interest margin (tax-equivalent basis) (1) (2)

4.15 3.60 3.23

Yield on loans 6.04 4.91 4.68

5 unchanged sentences

Efficiency ratio (tax-equivalent basis) (1) (2)

55.81 56.93 55.76

Return on average assets 1.34 % 1.32 % 1.41 %

1 unchanged sentence

Return on average tangible common equity (1)

17.63 16.02 15.95

Adjusted return on average assets (1)

1.59 % 1.31 % 1.43 %

Adjusted return on average stockholders' equity (1)

17.34 14.56 14.95

Adjusted return on average tangible common equity (1)

(1) See "Non-GAAP Financial Information"

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

20.94 15.83 16.12

_________________________________________________

(1) See "Non-GAAP Financial Information" 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%.

2 unchanged sentences

Notable changes include the following:

● 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.

• A $45.2 million increase in net interest income, primarily attributable to the increase in average interest-earning assets following the Town and Country merger and higher yields on interest-earning assets, partially offset by higher funding costs;

• Town and Country acquisition-related expenses totaled $13.7 million during the year ended December 31, 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, compared to $1.1 million of acquisition-related expenses during the year ended December 31, 2022;

• Net losses of $1.8 million on the sale of $185.3 million of securities were realized during the year ended December 31, 2023 with the sales proceeds used to reduce FHLB borrowings and fund loan growth;

• Excluding Town and Country acquisition-related expenses, noninterest expense increased by $19.2 million primarily due to the addition of Town and Country’s operations.

Net Interest Income

4 unchanged sentences

The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and stockholders’ equity, also support interest-earning assets.

The following tables set forth average balances, average yields and costs, and certain other information for the years ended December 31, 2022, 2021, and 2020.

The following table sets forth average balances, average yields and costs, and certain other information.

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, and purchase accounting adjustments that are accreted or amortized to interest income or expense.

December 31, 2022

December 31, 2021

December 31, 2020

(dollars in thousands)

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.

December 31, 2023 December 31, 2022 December 31, 2021

(dollars in thousands) Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost

Loans $ 3,231,736 $ 195,197 6.04 % $ 2,514,549 $ 123,478 4.91 % $ 2,271,544 $ 106,284 4.68 %

Securities 1,350,528 30,187 2.24 1,403,016 27,937 1.99 1,148,900 21,348 1.86

Deposits with banks 84,544 3,020 3.57 197,030 1,541 0.78 422,828 527 0.12

Other 8,217 595 7.24 3,529 98 2.77 3,201 64 2.01

Total interest-earning assets 4,675,025 $ 228,999 4.90 % 4,118,124 $ 153,054 3.72 % 3,846,473 $ 128,223 3.33 %

Allowance for loan losses

Allowance for credit losses (37,504) (24,703) (27,999)

Noninterest-earning assets 290,383 176,452 162,064

Total assets $ 4,927,904 $ 4,269,873 $ 3,980,538

LIABILITIES AND STOCKHOLDERS' EQUITY

1 unchanged sentence

Interest-bearing demand $ 1,188,680 $ 3,130 0.26 % $ 1,141,402 $ 607 0.05 % $ 1,024,888 $ 518 0.05 %

Money market 669,118 7,352 1.10 582,514 813 0.14 521,366 437 0.08

Savings 661,424 1,033 0.16 650,385 208 0.03 595,887 188 0.03

Time 481,466 10,784 2.24 283,232 883 0.31 295,788 1,329 0.45

Brokered 52,724 2,836 5.38 — — — — — —

Total interest-bearing deposits 3,053,412 25,135 0.82 2,657,533 2,511 0.09 2,437,929 2,472 0.10

Securities sold under agreements to repurchase 35,450 255 0.72 51,554 36 0.07 50,104 34 0.07

Borrowings 139,817 7,128 5.10 26,468 967 3.65 1,653 9 0.54

Subordinated notes 39,434 1,879 4.76 39,355 1,879 4.77 39,275 1,879 4.78

7 unchanged sentences

Net interest income/Net interest margin (1)

$ 191,072 4.09 % $ 145,874 3.54 % $ 122,403 3.18 %

Tax-equivalent adjustment (2)

Net interest income (tax-equivalent basis)/ Net interest margin (tax-equivalent basis) (2) (3)

2,758 0.06 2,499 0.06 2,028 0.05

Net interest income (tax-equivalent basis)/

Net interest margin (tax-equivalent basis) (2) (3)

$ 193,830 4.15 % $ 148,373 3.60 % $ 124,431 3.23 %

Net interest rate spread (4)

3.76 % 3.46 % 3.10 %

Net interest-earning assets (5)

$ 1,355,423 $ 1,305,468 $ 1,279,832

Ratio of interest-earning assets to interest-bearing liabilities 1.41 1.46 1.50

1 unchanged sentence

Cost of funds 0.86 0.19 0.16

_________________________________________________

(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.

(3) See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure 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 and their contributions to the total yield on loans.

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

Year Ended December 31,

(dollars in thousands)

2023 2022 2021

(dollars in thousands) Interest Yield Contribution Interest Yield Contribution Interest Yield

Contractual interest $ 185,772 5.75 % $ 113,775 4.52 % $ 90,647 3.99 %

3 unchanged sentences

Nonaccrual interest recoveries 703 0.02 2,828 0.11 1,514 0.07

Net cash flow hedge earnings

Total loan interest income $ 195,197 6.04 % $ 123,478 4.91 % $ 106,284 4.68 %

1 unchanged sentence

Year Ended December 31,

(dollars in thousands)

2023 2022 2021

(dollars in thousands) Interest Net Interest Margin Contribution Interest Net Interest Margin Contribution Interest Net Interest Margin Contribution

Interest income:

Contractual interest on loans $ 185,772 3.97 % $ 113,775 2.76 % $ 90,647 2.35 %

Contractual interest on securities

Contractual interest on deposits with banks

Loan fees (excluding PPP loans) 4,584 0.10 4,454 0.11 3,840 0.10

2 unchanged sentences

Nonaccrual interest recoveries 703 0.02 2,828 0.07 1,514 0.04

Securities amortization, net

Securities 30,187 0.65 27,937 0.68 21,348 0.56

Interest-bearing deposits in bank 3,020 0.06 1,541 0.04 527 0.01

Other 595 0.01 98 — 64 —

Total interest income 228,999 4.90 153,054 3.72 128,223 3.33

Interest expense:

Contractual interest on deposits

Contractual interest on other interest-bearing liabilities

Deposits 25,135 0.54 2,511 0.07 2,472 0.06

Other interest-bearing liabilities 12,792 0.27 4,669 0.11 3,348 0.09

Total interest expense 37,927 0.81 7,180 0.18 5,820 0.15

1 unchanged sentence

Tax-equivalent adjustment (1)

2,758 0.06 2,499 0.06 2,028 0.05

Net interest income (tax-equivalent) (1) (2)

$ 193,830 4.15 % $ 148,373 3.60 % $ 124,431 3.23 %

_________________________________________________

(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 measures to their most closely comparable GAAP measures.

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

Rate/Volume Analysis

8 unchanged sentences

Year Ended December 31, 2021

Increase (Decrease) Due to

(dollars in thousands)

Increase (Decrease) Due to Total Increase (Decrease) Due to Total

(dollars in thousands) Volume Rate Volume Rate

Interest-earning assets:

Loans $ 39,701 $ 32,018 $ 71,719 $ 11,755 $ 5,439 $ 17,194

Securities (1,075) 3,325 2,250 4,977 1,612 6,589

Deposits with banks (1,312) 2,791 1,479 (418) 1,432 1,014

Other 224 273 497 7 27 34

Total interest-earning assets 37,538 38,407 75,945 16,321 8,510 24,831

2 unchanged sentences

Interest-bearing demand 26 2,497 2,523 61 28 89

Money market 139 6,400 6,539 56 320 376

Savings 4 821 825 17 3 20

Time 1,007 8,894 9,901 (54) (392) (446)

Brokered 2,836 — 2,836 — — —

Total interest-bearing deposits 4,012 18,612 22,624 80 (41) 39

Securities sold under agreements to repurchase (15) 234 219 1 1 2

Borrowings 5,640 521 6,161 694 264 958

Subordinated notes 4 (4) — 4 (4) —

3 unchanged sentences

Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022

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 income for the year ended December 31, 2023 was $191.1 million, increasing $45.2 million, or 31.0%, from the year ended December 31, 2022.

The increase is primarily attributable to the increase in average interest-earning assets following the Town and Country merger and higher yields on interest-earning assets, partially offset by higher funding costs.

Net interest margin increased to 4.09% for the year ended December 31, 2023, compared to 3.54% for the year ended December 31, 2022.

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 increase was primarily attributable to higher yields on interest-earning assets which were partially offset by increased funding costs, driven by significant increases in market rates since early 2022.

Additionally, the contribution of acquired loan discount accretion to net interest margin increased to 9 basis points during the year ended December 31, 2023, from 2 basis points during the year ended December 31, 2022.

The quarterly net interest margins were as follows:

2023 2022 2021

Three months ended:

March 31 4.20 % 3.08 % 3.25 %

June 30 4.16 3.34 3.14

September 30 4.07 3.65 3.18

December 31 3.93 4.10 3.17

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

Provisions for loan losses are charged to operations in order to maintain the allowance for loan losses at a level we consider necessary to absorb probable incurred credit losses in the loan portfolio.

In determining the level of the allowance for loan losses, management considers past and current loss experience, evaluations of collateral, current economic conditions, volume and type of lending, adverse situations that may affect a borrower’s ability to repay a loan and the levels of nonperforming and other classified loans.

The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates as more information becomes available or as events change.

We assess the allowance for loan losses on a quarterly basis and make provisions for loan losses in order to maintain the allowance.

The provision for loan losses is a function of the allowance for loan loss methodology we use to determine the appropriate level of the allowance for inherent loan losses after accounting for net charge-offs (recoveries).

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.

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 in our market areas.

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 $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

The following table outlines the amount of and changes to the various noninterest income line items as of the dates indicated.

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 over the same period.

The FOMC began raising interest rates in March 2022 and continued raising interest rates until setting the target range for the federal funds rate at 5.25% to 5.50% in its July 2023 meeting.

As a result, market interest rates have also risen since March 2022 which led to improvements in our net interest margin through the first quarter of 2023.

Our net interest margin decreased modestly beginning in the second quarter of 2023 as increased competition for deposits drove an increase in our funding costs.

Competition for deposits continues to be elevated relative to 2022.

As a result, deposit and funding costs have increased during 2023 compared to such costs in 2022 and could continue to increase.

Additionally, core deposits balances may decrease and be replaced by higher cost funding sources, such as FHLB advances and brokered deposits.

Provision for Credit Losses

The following table sets forth the components of provision for credit losses for the periods indicated:

Year Ended December 31,

(dollars in thousands) 2023 2022 2021

PROVISION FOR CREDIT LOSSES

Loans $ 6,665 $ (706) $ (8,077)

Unfunded lending-related commitments 908 — —

Total provision for credit losses $ 7,573 $ (706) $ (8,077)

Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022

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.

Excluding the impact of the Town and Country merger, the remaining provision for credit losses primarily reflects a $2.4 million increase in required reserves driven by growth of and changes in the loan portfolio and unfunded commitments, a $1.4 million increase in required reserves resulting from changes in economic and qualitative factors, and a $2.1 million decrease in specific reserves on individually evaluated loans.

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 utilized in estimating the allowance for credit losses on loans and lending-related unfunded commitments include the unemployment rate and changes in GDP as macroeconomic variables, although other economic metrics are considered on a qualitative basis.

Noninterest Income

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

Year Ended December 31, Year Ended December 31,

(dollars in thousands) 2023 2022 $ Change % Change 2022 2021 $ Change % Change

Card income $ 11,043 $ 10,329 $ 714 6.9 % $ 10,329 $ 9,734 $ 595 6.1 %

Wealth management fees 9,883 9,155 728 8.0 9,155 8,384 771 9.2

1 unchanged sentence

Mortgage servicing 4,678 2,609 2,069 79.3 2,609 2,825 (216) (7.6)

Mortgage servicing rights fair value adjustment

Mortgage servicing rights fair value adjustment (1,615) 2,153 (3,768) NM 2,153 1,690 463 27.4

Gains on sale of mortgage loans 1,526 1,461 65 4.4 1,461 5,846 (4,385) (75.0)

Unrealized gains (losses) on equity securities

Gains (losses) on foreclosed assets

Gains (losses) on other assets

Realized gains (losses) on sales of securities (1,820) — (1,820) NM — — — —

Unrealized gains (losses) on equity securities 160 (414) 574 NM (414) 107 (521) NM

Gains (losses) on foreclosed assets 501 (314) 815 NM (314) 310 (624) NM

Gains (losses) on other assets 166 136 30 22.1 136 (723) 859 NM

Income on bank owned life insurance 573 164 409 249.4 164 41 123 300.0

Other noninterest income 3,105 2,366 739 31.2 2,366 3,034 (668) (22.0)

Total noninterest income

Total $ 36,046 $ 34,717 $ 1,329 3.8 % $ 34,717 $ 37,328 $ (2,611) (7.0) %

_________________________________________________

NM Not meaningful.

Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022

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.

Total noninterest income for the year ended December 31, 2023, was $36.0 million, an increase of $1.3 million, or 3.8%, from the year ended December 31, 2022.

Notable changes in noninterest income include the following:

● 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.

• A $3.8 million decrease in the mortgage servicing rights fair value adjustment, primarily due to changes in prepayment assumptions utilized in the valuations;

• Net losses of $1.8 million were realized on the sale of $185.3 million of debt securities during the year ended December 31, 2023.

The vast majority of the securities portfolio acquired from Town and Country was sold during the first quarter of 2023 with an additional $39.4 million of municipal debt securities sold during the third quarter of 2023;

• The addition of Town and Country's operations in the first quarter of 2023 contributed to a $2.1 million increase in mortgage servicing revenue, with the size of our existing mortgage servicing portfolio nearly doubling, a $0.8 million increase in service charges on deposit accounts, a $0.7 million increase in wealth management fees, and a $0.7 million increase in card income;

• A $0.5 million gain on foreclosed assets was recognized during 2023, primarily related to the sale of one property, compared to a $0.3 million loss on foreclosed assets during 2022.

Noninterest Expense

The following table outlines the amount of and changes to the various noninterest expense line items as of the dates indicated.

Year Ended December 31,

(dollars in thousands)

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

Year Ended December 31, Year Ended December 31,

(dollars in thousands) 2023 2022 $ Change % Change 2022 2021 $ Change % Change

Salaries $ 67,453 $ 51,767 $ 15,686 30.3 % $ 51,767 $ 48,972 $ 2,795 5.7 %

Employee benefits 10,037 8,325 1,712 20.6 8,325 6,513 1,812 27.8

8 unchanged sentences

Other noninterest expense 16,768 20,243 (3,475) (17.2) 20,243 11,270 8,973 79.6

Total noninterest expense

Total $ 130,964 $ 105,107 $ 25,857 24.6 % $ 105,107 $ 91,246 $ 13,861 15.2 %

Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022

Total noninterest expense for the year ended December 31, 2023, was $131.0 million, an increase of $25.9 million, or 24.6%, from the year ended December 31, 2022.

Notable changes in noninterest expense include following:

● 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 $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.

Notable changes in noninterest expense include the following:

• Town and Country acquisition-related noninterest expenses totaled $7.8 million and $1.1 million for the years ended December 31, 2023 and 2022, respectively;

• Excluding Town and Country acquisition-related expenses, the $19.2 million increase in noninterest expense was mainly attributable to the addition of Town and Country’s operations, primarily related to personnel costs, occupancy of bank premises, and data processing;

• Legal accruals totaled $1.0 million during the year ended December 31, 2023 and $8.2 million during the year ended December 31, 2022 relating to legal matters disclosed in Note 22 - Commitments and Contingencies - Legal Contingencies to the consolidated financial statements;

• A $1.8 million increase in amortization of intangible assets related to the addition of $22.3 million of intangible assets recognized through the Town and Country acquisition.

During the year ended December 31, 2023 and 2022, we recorded income tax expense of $22.7 million, or an effective tax rate of 25.7%, and $19.7 million, or an effective tax rate of 25.9%, respectively.

The fluctuations in effective tax rate are primarily attributable to changes in state income taxes and changes in the proportion of federally tax-exempt interest income to pre-tax income.

FINANCIAL CONDITION

(dollars in thousands, except per share data) December 31,

2023 December 31,

2022 $ Change % Change

Consolidated Balance Sheet Information

(dollars in thousands, except per share data)

Cash and cash equivalents $ 141,252 $ 114,159 $ 27,093 23.7 %

2 unchanged sentences

Loans held for sale 2,318 615 1,703 276.9

Loans, before allowance for loan losses

allowance for loan losses

Loans, net of allowance for loan losses

Core deposit intangible assets, net

Loans, before allowance for credit losses 3,404,417 2,620,253 784,164 29.9

allowance for credit losses 40,048 25,333 14,715 58.1

Loans, net of allowance for credit losses 3,364,369 2,594,920 769,449 29.7

Goodwill 59,820 29,322 30,498 104.0

Intangible assets, net 20,682 1,070 19,612 1,832.9

Other assets 203,829 161,524 42,305 26.2

Total assets $ 5,073,170 $ 4,286,734 $ 786,436 18.3 %

Total deposits $ 4,401,437 $ 3,587,024 $ 814,413 22.7 %

Securities sold under agreements to repurchase 42,442 43,081 (639) (1.5)

Borrowings 12,623 160,000 (147,377) (92.1)

Subordinated notes 39,474 39,395 79 0.2

5 unchanged sentences

Tangible assets (1)

$ 4,992,668 $ 4,256,342 $ 736,326 17.3 %

Tangible common equity (1)

408,994 343,240 65,754 19.2

Core deposits (1)

$ 4,126,374 $ 3,559,866 $ 566,508 15.9 %

Share and Per Share Information

7 unchanged sentences

Tangible common equity to tangible assets (1)

(1) See "Non-GAAP Financial Information"

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

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.

_________________________________________________

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

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).

• The Town and Country merger added $937.2 million in total assets, $635.4 million in loans held for investment, and $720.4 million in deposits;

• Excluding the impact of the Town and Country merger, loan growth since December 31, 2022 was broad-based with total loans increasing $148.8 million;

• Following the Town and Country merger, the vast majority of the securities acquired from Town and Country were sold and an additional $39.4 million of municipal securities sold during the third quarter of 2023.

The proceeds were used to reduce FHLB borrowings and fund loan growth;

• Additionally, paydowns, maturities and calls of debt securities generated another $102.6 million of proceeds which were also used to reduce FHLB borrowings and fund loan growth;

• Excluding the impact of the Town and Country merger, total deposits increased $94.0 million with the addition of $144.9 million of brokered deposits and $144.0 million of wealth management customer money market deposits brought on balance sheet in December 2023.

These increases were partially offset by reduced balances held in existing customer deposit accounts.

Loan Portfolio

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

December 31, 2022

December 31, 2021

(dollars in thousands)

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

December 31, 2023 December 31, 2022

(dollars in thousands) Balance Percent Balance Percent

Commercial and industrial $ 427,800 12.6 % $ 266,757 10.2 %

Agricultural and farmland

Commercial real estate - owner occupied 295,842 8.7 218,503 8.3

1 unchanged sentence

Construction and land development 363,983 10.7 360,824 13.8

Multi-family 417,923 12.3 287,865 11.0

One-to-four family residential 491,508 14.4 338,253 12.9

Municipal, consumer, and other

Loans, before allowance for loan losses

Allowance for loan losses

Loans, net of allowance for loan losses

PPP loans (included above)

Commercial and industrial

Agricultural and farmland 287,294 8.4 237,746 9.1

Municipal, consumer, and other 239,386 7.0 197,103 7.5

Total PPP loans

Loans, before allowance for loan losses were $2.62 billion at December 31, 2022, an increase of $120.6 million, or 4.8%, from December 31, 2021.

Notable changes include the following:

● 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.

Loans, before allowance for credit losses 3,404,417 100.0 % 2,620,253 100.0 %

Allowance for credit losses (40,048) (25,333)

Loans, net of allowance for credit losses $ 3,364,369 $ 2,594,920

Loans, before allowance for credit losses were $3.40 billion at December 31, 2023, an increase of $784.2 million, or 29.9%, from December 31, 2022.

Excluding the impact of the Town and Country merger, total loans increased $148.8 million, or 5.7%, with the following notable changes:

• The relative percent decrease in construction and land development loans was generally driven by the completion of a number of sizeable projects that are now amortizing and have been moved into other real estate loan categories, including the commercial real estate - non-owner occupied and multi-family categories;

• The increase in commercial and industrial loans was driven by new loan fundings and the purchase of four pools of loans totaling $61.0 million.

Three pools include equipment finance loans purchased from a bank that originated the loans through its equipment finance division.

These loans are to borrowers across multiple industries and geographic regions.

The remaining pool is a 50% participation in a pool of loans originated by a financial services company with a long-standing history of originating loans to healthcare and professional service borrowers.

These loans are to borrowers across multiple geographic regions.

As of December 31, 2023, office commercial real estate loans totaled $169.2 million, with 2.0% rated pass-watch, less than 0.1% rated substandard, and less than 0.1% past due 30 days or more.

Management regularly monitors office and other industry concentrations within the loan portfolio.

Loan Portfolio Maturities

1 unchanged sentence

Demand loans (loans having no stated repayment schedule or maturity) and overdraft loans are reported as being due in one year or less.

After 5 Years

December 31, 2022

(dollars in thousands)

(dollars in thousands) 1 Year

or Less After 1 Year

5 Years After 5 Years

15 Years After

15 Years Total

Commercial and industrial $ 227,363 $ 164,321 $ 36,116 $ — $ 427,800

Agricultural and farmland

Commercial real estate - owner occupied 34,833 150,564 102,031 8,414 295,842

1 unchanged sentence

Construction and land development 184,446 161,107 17,897 533 363,983

Multi-family 35,946 308,127 72,477 1,373 417,923

One-to-four family residential 51,263 199,194 115,943 125,108 491,508

Agricultural and farmland 126,318 114,042 42,438 4,496 287,294

Municipal, consumer, and other 72,837 65,994 72,532 28,023 239,386

Total $ 857,390 $ 1,708,856 $ 664,317 $ 173,854 $ 3,404,417

The following table summarizes loans maturing after one year, segregated into variable and fixed interest rates.

Variable Interest Rates

Predetermined

December 31, 2022

Interest Rates

(dollars in thousands)

(dollars in thousands) Repricing

or Less Repricing

Interest Rates Predetermined

Interest Rates Total

Commercial and industrial $ 47,458 $ 7,083 $ 54,541 $ 145,896 $ 200,437

Agricultural and farmland

Commercial real estate - owner occupied 37,056 38,869 75,925 185,084 261,009

1 unchanged sentence

Construction and land development 64,812 1,675 66,487 113,050 179,537

Multi-family 36,373 45,522 81,895 300,082 381,977

One-to-four family residential 81,534 73,104 154,638 285,607 440,245

Agricultural and farmland 3,445 11,345 14,790 146,186 160,976

Municipal, consumer, and other 38,587 22,293 60,880 105,669 166,549

Total $ 424,077 $ 230,618 $ 654,695 $ 1,892,332 $ 2,547,027

Nonperforming Assets

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.

Typically, loans are placed on nonaccrual when they reach 90 days past due, or when, in management’s opinion, there is reasonable doubt regarding the collection of the amounts due through the normal means of the borrower.

Interest accrued and unpaid at the time a loan is placed on nonaccrual status is reversed from interest income.

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

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

Management believes the Company’s lending practices and active approach to managing nonperforming assets has resulted in timely resolution of problem assets.

Loans acquired with deteriorated credit quality are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement remains unpaid after the due date of the scheduled payment.

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

The accrual of interest is discontinued on loans acquired with deteriorated credit quality if management can no longer estimate future cash flows on the loan.

Therefore, interest revenue, through accretion of the difference between the carrying value of the loans and the expected cash flows, is being recognized on all loans acquired with deteriorated credit quality, except those 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.

If determined necessary to maximize value, we complete the necessary improvements or tenant stabilization tasks, with the applicable time value discount and improvement expenses incorporated into our estimates of the expected costs to sell.

Substantially all foreclosed real estate is valued on an "as-is"

Estimates of the net realizable value of real estate collateral also include a deduction for the expected selling costs.

For most real estate collateral and foreclosed real estate, we apply a 7.0% deduction to the value of the asset to account for the expected costs to sell the asset.

This estimate includes sales commissions and closing costs.

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 December 31.

December 31, 2022

December 31, 2021

(dollars in thousands)

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

(dollars in thousands) December 31, 2023 December 31, 2022

NONPERFORMING ASSETS

Nonaccrual $ 7,820 $ 2,155

Past due 90 days or more, still accruing (1)

2 unchanged sentences

Total nonperforming assets $ 8,709 $ 5,186

Allowance for loan losses

Loans, before allowance for loan losses

Nonperforming loans that are wholly or partially guaranteed by the U.S.

Government $ 2,641 $ 133

Allowance for credit losses $ 40,048 $ 25,333

Loans, before allowance for credit losses 3,404,417 2,620,253

CREDIT QUALITY RATIOS

Allowance for loan losses to loans, before allowance for loan losses

Allowance for loan losses to nonaccrual loans

Allowance for loan losses to nonperforming loans

Nonaccrual loans to loans, before allowance for loan losses

Nonperforming loans to loans, before allowance for loan losses

Allowance for credit losses to loans, before allowance for credit losses 1.18 % 0.97 %

Allowance for credit losses to nonaccrual loans 512.12 1,175.55

Allowance for credit losses to nonperforming loans 509.71 1,175.00

Nonaccrual loans to loans, before allowance for credit losses 0.23 0.08

Nonperforming loans to loans, before allowance for credit losses 0.23 0.08

Nonperforming assets to total assets 0.17 0.12

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 $145 thousand and $32 thousand as of December 31, 2022 and 2021, respectively.

Comparison of December 31, 2022 to December 31, 2021

Total nonperforming assets were $5.2 million as of December 31, 2022, a decrease of $0.9 million, or 14.4%, from December 31, 2021.

Our level of nonperforming assets has remained low in recent years, representing only 0.12% of total assets as of December 31, 2022 and 0.14% of total assets as of December 31, 2021.

We believe our continuous credit monitoring and collection efforts have resulted in lower levels of nonperforming assets, 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 these lower levels.

Troubled Debt Restructurings

In general, if the Company grants a troubled debt restructuring (“TDR”) that involves either the absence of principal amortization or a material extension of an existing loan amortization period in excess of our underwriting standards, the loan will be placed on nonaccrual status.

However, if a TDR is well secured by an abundance of collateral and the collectability of both interest and principal is probable, the loan may remain on accrual status.

A nonaccrual TDR in full compliance with the payment requirements specified in the loan modification for at least six months may return to accrual status, if the collectability of both principal and interest is probable.

All TDRs are individually evaluated for impairment.

The following table presents TDRs by loan category.

December 31, 2022

December 31, 2021

(dollars in thousands)

Commercial and industrial

Commercial real estate - owner occupied

Commercial real estate - non-owner occupied

One-to-four family residential

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 part of an overall workout strategy to minimize losses to the Company.

Nonperforming assets to loans, before allowance for credit losses, and foreclosed assets 0.26 0.20

_________________________________________________

(1) Prior to 2023, excludes loans acquired with deteriorated credit quality that are past due 90 or more days and accruing.

Such loans totaled $145 thousand as of December 31, 2022.

Total nonperforming assets were $8.7 million at December 31, 2023, increasing by $3.5 million since December 31, 2022.

The increase was primarily attributable to the Town and Country merger, which added $3.8 million in nonaccrual loans and $0.3 million of foreclosed assets, and one commercial real estate - non-owner occupied retail credit moved to nonaccrual.

These increases were partially offset by the sale of one larger foreclosed property.

Additionally, of the $7.9 of nonperforming loans held as of December 31, 2023, $2.6 million are either wholly or partially guaranteed by the U.S.

Risk Classification of Loans

Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as pass-watch, substandard, doubtful, or loss.

A pass-watch loan is still considered a "pass"

credit and is not a classified or criticized asset, but is a reflection of a borrower who exhibits credit weaknesses or downward trends warranting close attention and increased monitoring.

These potential weaknesses may result in deterioration of the repayment prospects for the loan.

No loss of principal or interest is expected, and the borrower does not pose sufficient risk to warrant classification.

A substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt.

They are characterized as probable that the borrower will not pay principal and interest in accordance with the contractual terms.

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;

such balances are promptly charged-off as required by applicable federal regulations.

As of December 31, 2022 and 2021, our risk classifications of loans were as follows:

December 31, 2022

December 31, 2021

(dollars in thousands)

Pass-watch loans decreased $81.4 million, or 54.9% from December 31, 2021 to December 31, 2022.

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

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

Our risk classifications of loans were as follows:

(dollars in thousands) December 31, 2023 December 31, 2022

Pass $ 3,241,889 $ 2,479,488

Pass-watch 98,206 66,934

Substandard 64,322 73,831

Total $ 3,404,417 $ 2,620,253

Pass-watch loans increased $31.3 million, or 46.7%, and substandard loans decreased $9.5 million, or 12.9%, from December 31, 2022 to December 31, 2023.

The increase in pass-watch loans was primarily attributable to

pass-watch loans acquired from Town and Country.

The decrease in substandard loans was primarily attributable to $12.4 million substandard relationship in the commercial real estate – non-owner occupied category which paid off during the second quarter of 2023, as well as several other smaller paydowns and payoffs, partially offset by substandard loans acquired from Town and Country.

Net Charge-offs and Recoveries

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

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

Year Ended December 31,

2 unchanged sentences

Commercial and industrial $ 369 $ (751) $ 15

Agricultural and farmland

Commercial real estate - owner occupied (13) (1,006) 21

1 unchanged sentence

Construction and land development (53) (1) (342)

Multi-family (281) — —

One-to-four family residential (152) (302) 18

Agricultural and farmland (6) — —

Municipal, consumer, and other 382 240 137

Average loans, before allowance for loan losses

Total $ 180 $ (2,103) $ (175)

Average loans

Commercial and industrial $ 370,255 $ 268,765 $ 347,547

Agricultural and farmland

Commercial real estate - owner occupied 290,489 219,127 204,148

1 unchanged sentence

Construction and land development 368,111 340,831 226,035

Multi-family 372,201 258,490 227,736

One-to-four family residential 476,856 328,656 314,871

Agricultural and farmland 254,106 233,349 230,364

Municipal, consumer, and other 225,057 170,101 137,759

Net charge-offs (recoveries) to average loans, before allowance for loan losses

Total $ 3,231,736 $ 2,514,549 $ 2,271,544

Charge-offs (recoveries) to average loans

Commercial and industrial 0.10 % (0.28) % — %

Agricultural and farmland

Commercial real estate - owner occupied — (0.46) 0.01

1 unchanged sentence

Construction and land development (0.01) — (0.15)

Multi-family (0.08) — —

One-to-four family residential (0.03) (0.09) 0.01

Agricultural and farmland — — —

Municipal, consumer, and other 0.17 0.14 0.10

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

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

Total 0.01 % (0.08) % (0.01) %

The net charge-offs (recoveries) to average total loans ratio has remained low for several years.

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.

The Company’s investment policy emphasizes safety of the principal, liquidity needs, expected returns, cash flow targets and consistency with our interest rate risk management strategy.

The composition and maturities of the debt securities portfolio as of December 31, 2022 is summarized in the following table.

The composition and maturities of the debt securities portfolio as of December 31, 2023, are summarized in the following table.

Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.

1 unchanged sentence

December 31, 2023

Available-for-Sale

Held-to-Maturity

(dollars in thousands)

Available-for-Sale Held-to-Maturity Total

(dollars in thousands) Amortized

Cost Weighted

Yield Amortized

Cost Weighted

Yield Amortized

Cost Weighted

Due in 1 year or less

Treasury $ 40,020 1.39 % $ — — % $ 40,020 1.39 %

government agency 3,367 2.59 — — 3,367 2.59

Municipal 3,147 2.96 2,138 3.67 5,285 3.24

Mortgage-backed:

1 unchanged sentence

Agency commercial 6,348 3.38 — — 6,348 3.38

Total $ 52,932 1.80 % $ 2,138 3.67 % $ 55,070 1.87 %

Due after 1 year through 5 years

Treasury $ 89,513 1.30 % $ — — % $ 89,513 1.30 %

government agency 42,943 2.58 17,420 1.94 60,363 2.40

Municipal 54,203 1.85 18,170 3.09 72,373 2.16

Mortgage-backed:

1 unchanged sentence

Agency commercial 63,422 1.73 32,163 2.85 95,585 2.11

Corporate 21,922 4.97 — — 21,922 4.97

Total $ 285,402 2.05 % $ 76,005 2.57 % $ 361,407 2.16 %

Due after 5 years through 10 years

Treasury $ 30,182 1.55 % $ — — % $ 30,182 1.55 %

government agency 9,049 2.27 67,935 2.60 76,984 2.56

Municipal 126,721 1.78 15,553 3.48 142,274 1.96

Mortgage-backed:

1 unchanged sentence

Agency commercial 32,256 1.76 225,442 1.88 257,698 1.86

Corporate 33,743 4.14 — — 33,743 4.14

Total $ 300,588 2.11 % $ 312,369 2.13 % $ 612,957 2.12 %

Due after 10 years

government agency $ — — % $ 3,093 2.83 % $ 3,093 2.83 %

Municipal 44,959 1.73 2,581 3.39 47,540 1.82

Mortgage-backed:

1 unchanged sentence

Agency commercial 39,188 2.30 41,116 1.87 80,304 2.08

Corporate 2,000 4.50 — — 2,000 4.50

Total $ 192,702 2.49 % $ 130,927 3.06 % $ 323,629 2.72 %

Treasury $ 159,715 1.37 % $ — — % $ 159,715 1.37 %

government agency 55,359 2.53 88,448 2.48 143,807 2.50

Municipal 229,030 1.80 38,442 3.30 267,472 2.02

Mortgage-backed:

1 unchanged sentence

Agency commercial 141,214 1.97 298,721 1.98 439,935 1.98

Corporate 57,665 4.47 — — 57,665 4.47

Total $ 831,624 2.16 % $ 521,439 2.43 % $ 1,353,063 2.26 %

SOURCES OF FUNDS

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.

Management continues to focus on growing deposits through the Company’s relationship-driven banking philosophy and community-focused marketing programs.

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.

Year Ended December 31, 2022

Average Balance

Total Deposits

(dollars in thousands)

The following table sets forth the distribution of average deposits, by account type:

Year Ended December 31, 2023 Percent

Change in Average Balance

(dollars in thousands) Average

Balance Percent of

Total Deposits Weighted

Noninterest-bearing $ 1,113,300 26.7 % — % 5.9 %

Interest-bearing demand 1,188,680 28.5 0.26 4.1

Total non-maturity deposits

Total deposits

Year Ended December 31, 2021

Average Balance

Money market 669,118 16.1 1.10 14.9

Savings 661,424 15.9 0.16 1.7

Time 481,466 11.5 2.24 70.0

Brokered 52,724 1.3 5.38 100.0

Total deposits $ 4,166,712 100.0 % 0.60 % 12.3 %

(dollars in thousands)

Year Ended December 31, 2022 Percent

Change in Average Balance

(dollars in thousands) Average

Balance Percent of

Total Deposits Weighted

Noninterest-bearing $ 1,051,187 28.4 % — % 4.6 %

Interest-bearing demand 1,141,402 30.8 0.05 11.4

Total non-maturity deposits

Money market 582,514 15.7 0.14 11.7

Savings 650,385 17.5 0.03 9.1

Time 283,232 7.6 0.31 (4.2)

Brokered — — — —

Total deposits $ 3,708,720 100.0 % 0.07 % 7.7 %

Year Ended December 31, 2021

Total Deposits

(dollars in thousands)

(dollars in thousands) Average

Balance Percent of

Total Deposits Weighted

Noninterest-bearing $ 1,004,757 29.2 % — %

Interest-bearing demand 1,024,888 29.8 0.05

Total non-maturity deposits

Money market 521,366 15.1 0.08

Savings 595,887 17.3 0.03

Time 295,788 8.6 0.45

Brokered — — —

Total deposits $ 3,442,686 100.0 % 0.07 %

Comparison of the Year Ended December 31 , 2022 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 increase in average deposit balances in 2023 compared to 2022 was primarily attributable to the Town and Country merger which added $720.4 million of deposits on February 1, 2023.

Partially offsetting the additions from Town and Country was a decrease in balances held in existing customer accounts with recent increases in in market interest rates driving increased competition for deposits.

As a result, deposit costs increased during 2023, relative to 2022, with some lower cost deposits being replaced by higher cost funding sources, such as time deposits and wholesale funding.

As of December 31, 2023, the Company has $144.9 million of wholesale brokered deposits outstanding.

Brokered deposits are generally considered to be deposits that have been received from a third party who is engaged in the business of placing deposits on behalf of others.

A traditional deposit broker will direct deposits to the banking institution offering the highest interest rate available.

Federal banking laws and regulations place restrictions on depository institutions regarding brokered deposits because of the general concern that these deposits are not relationship based and are at a greater risk of being withdrawn and placed on deposit at another institution offering a higher interest rate, thus posing liquidity risk for institutions that gather brokered deposits in significant amounts.

The following table sets forth time deposits by remaining maturity as of December 31, 2023:

Over 3 through

Over 6 through

(dollars in thousands)

Time deposits:

(dollars in thousands) 3 Months or

Less Over 3 through

6 Months Over 6 through

12 Months Over

12 Months Total

Time and brokered time deposits:

Amounts less than $100,000 $ 141,825 $ 107,869 $ 125,348 $ 54,284 $ 429,326

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Amounts of $250,000 or more 36,659 39,899 42,576 11,049 130,183

Total time deposits

As of December 31, 2022 and 2021, the Bank’s uninsured deposits, including related accrued interest, were estimated to be $739.0 million and $845.7 million, respectively.

Total time and brokered time deposits $ 219,445 $ 204,323 $ 253,127 $ 95,238 $ 772,133

As of December 31, 2023 and December 31, 2022, the Bank’s uninsured deposits were estimated to be $867.7 million and $739.0 million, respectively.

Securities Sold Under Agreements to Repurchase

6 unchanged sentences

Average balance during year 35,450 51,554 50,104

Maximum outstanding at any month end

Weighted average interest rate at end of year

Average interest rate during year 0.72 % 0.07 % 0.07 %

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.

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

However, we may also obtain advances from the 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.

Our use of FHLB advances and other borrowings was nominal during 2021, but increased during the second half of 2022 and throughout 2023 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.

3 unchanged sentences

FHLB advances $ 12,623 $ 160,000 $ —

Federal Reserve discount window — — —

Federal funds purchased — — —

2 unchanged sentences

FHLB advances $ 139,554 $ 25,934 $ 1,310

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 Reserve discount window 3 — —

Federal funds purchased 260 534 343

2 unchanged sentences

FHLB advances 5.10 % 3.68 % 0.56 %

Federal Reserve discount window 5.25 — —

Federal funds purchased 5.56 2.11 0.48

6 unchanged sentences

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.

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.

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 FHLB.

Additional sources of liquidity include unpledged securities, federal funds purchased, borrowings from the FHLB and Federal Reserve, and brokered deposits.

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 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 .

Interest is charged at the prevailing market rate.

As of December 31, 2023, management believed the current liquidity and available sources of liquidity are adequate to meet all of the reasonably foreseeable short-term and intermediate-term demands of the Bank .

As of December 31, 2023, the Bank had no material commitments for capital expenditures.

Holding Company Liquidity

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.

The Holding Company, or HBT Financial 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, 2023, the Holding Company had cash and cash equivalents of $17.2 million.

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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.

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

During the years ended December 31, 2023, 2022, 2021, the Bank paid $64.0 million, $28.0 million, and $20.0 million in dividends 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.

1 unchanged sentence

Additionally, the Holding Company paid $21.9 million, $18.6 million, and $16.8 million of dividends to stockholders during the years ended December 31, 2023, 2022, and 2021, respectively.

The Holding Company also paid $38.0 million in cash consideration in the acquisition of Town and Country during the first quarter of 2023.

As of December 31, 2023, 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, 2023, the Holding Company had no material commitments for capital expenditures.

6 unchanged sentences

In addition to meeting minimum capital requirements, the Company and the Bank must also maintain a “capital conservation buffer” to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to management.

As of December 31, 2022 and 2021, the capital conservation buffer requirement was 2.5% of risk-weighted assets.

As of December 31, 2023 and December 31, 2022, the capital conservation buffer requirement was 2.5% of risk-weighted assets.

As of December 31, 2023 and 2022, the Company and the Bank met all capital adequacy requirements to which they were subject.

1 unchanged sentence

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.

2023 December 31,

2022 For Capital

Adequacy Purposes

Conversation Buffer (1)

Capitalized Under

Prompt Corrective

Conversation Buffer (1)

Action Provisions (2)

Total Capital (to Risk Weighted Assets)

Consolidated HBT Financial, Inc.

Total Capital (to Risk Weighted Assets) 15.33 % 16.27 % 10.50 % N/A

Tier 1 Capital (to Risk Weighted Assets) 13.42 14.23 8.50 N/A

Common Equity Tier 1 Capital (to Risk Weighted Assets) 12.12 13.07 7.00 N/A

Tier 1 Capital (to Average Assets) 10.49 10.48 4.00 N/A

Heartland Bank and Trust Company

Total Capital (to Risk Weighted Assets) 14.92 % 15.43 % 10.50 % 10.00 %

Tier 1 Capital (to Risk Weighted Assets) 14.01 14.63 8.50 8.00

Consolidated HBT Financial, Inc.

Heartland Bank and Trust Company

Common Equity Tier 1 Capital (to Risk Weighted Assets) 14.01 14.63 7.00 6.50

Consolidated HBT Financial, Inc.

Heartland Bank and Trust Company

Tier 1 Capital (to Average Assets) 10.96 10.78 4.00 5.00

Consolidated HBT Financial, Inc.

Heartland Bank and Trust Company

_________________________________________________

(1) The Tier 1 capital to average assets ratio (known as the “leverage ratio”) is not impacted by the capital conservation buffer.

3 unchanged sentences

Cash Dividends

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.

The Company paid quarterly cash dividends of $0.17 per share during 2023, $0.16 per share during 2022, and $0.15 per share during 2021.

On January 23, 2024, the Company’s Board of Directors increased the quarterly cash dividend by $0.02 per share to $0.19 per share.

Stock Repurchase Program

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.

The Company repurchased 479,005 shares of its common stock at a weighted average price of $18.43 during 2023, 265,379 shares 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.

2 unchanged sentences

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, commitments to sell loans, and interest rate swaps.

As a financial services provider, the Bank routinely is 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, commitments to sell loans, and interest rate swaps.

While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon.

Such commitments are subject to the same credit policies and approval process afforded to loans originated by the Bank.

Although commitments to extend credit are considered while evaluating our allowance for loan losses, at December 31, 2022 and 2021, there were no reserves for unfunded commitments.

For additional information, see “Note 22 – Commitments and Contingencies” to the consolidated financial statements.

4 unchanged sentences

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

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 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.

Additions to the allowance are expected to maintain the adequacy of the total allowance.

Loan losses are charged off against the allowance when the Company determines the loan balance to be uncollectible.

Cash received on previously charged off amounts is recorded as a recovery to the allowance.

The allowance consists of two primary components, general reserves and specific reserves related to impaired loans.

General reserves cover non-impaired loans, or loans collectively evaluated for impairment, and are based on historical losses adjusted for qualitative factors.

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 16-quarter period.

Qualitative factor adjustments primarily consider current economic metrics, such as national and regional unemployment rates, and current credit quality metrics of each portfolio segment, such as past due and risk rating percentages, relative to historical levels.

These qualitative factor adjustments are inherently subjective.

Specific reserves cover impaired loans, or loans individually evaluated for impairment, and are primarily measured based on the fair value of collateral.

Adjustments to the fair value of collateral are made for anticipated selling costs.

A specific reserve may be zero if the fair value of collateral on the measurement date is greater than the carrying balance of the impaired loan.

Additionally, the present value of expected future cash flows discounted at the original contractual interest rate may also be used, when practical.

While the Company uses the best information available to make evaluations, future adjustments to the allowance for loan losses may become necessary if conditions change substantially from the conditions used in previous evaluations.

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.

NON-GAAP FINANCIAL MEASURES

This Annual Report on Form 10-K contains certain financial information determined by methods other than in accordance with GAAP.

The following accounting estimates could be deemed critical:

Allowance for Credit Losses

The allowance for credit losses reflects an estimate of lifetime expected credit losses.

Measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts.

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

Additions to the allowance for credit losses are expected to maintain the adequacy of the total allowance for credit losses.

Loan losses are charged off against the allowance for credit losses when the Company determines the loan balance to be uncollectible.

Cash received on previously charged off amounts is recorded as a recovery to the allowance for credit losses.

Management uses the discounted cash flow method to estimate expected credit losses for all loan categories, except for consumer loans where the weighted average remaining maturity method is utilized.

The Company uses regression analysis of historical internal and peer data to determine which macroeconomic variables are most closely correlated with credit losses, such as the unemployment rate and changes in GDP.

Management leverages economic projections from a reputable third party to inform its economic forecasts with a reversion to historical averages for periods beyond a reasonable and supportable forecast period.

Nonaccrual loans and loans which do not share risk characteristics with other loans in the pool are individually evaluated to determine expected credit losses.

The allowance for credit losses on unfunded commitments is estimated in the same manner as the associated loans adjusted for anticipated funding rate.

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 Town and Country 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 INFORMATION

This Annual Report on Form 10-K contains certain financial information determined by methods other than those in accordance with GAAP.

Management believes that it is a standard practice in the banking industry to present these non-GAAP financial measures, and accordingly believes that providing these measures may be useful for peer comparison purposes.

2 unchanged sentences

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

Non-GAAP Financial Measure

How the Measure Provides Useful Information to Investors

Adjusted Net Income

Net income, with the following adjustments:

excludes acquisition expenses,

Non-GAAP Financial Measure Definition How the Measure Provides Useful Information to Investors

Adjusted Net Income • Net income, with the following adjustments:

- excludes acquisition expenses, including the day 2 provision for credit losses on non-PCD loans and unfunded commitments,

- excludes branch closure expenses,

excludes charges related to termination of certain employee benefit plans,

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

9 unchanged sentences

- Adjusted Earnings Per Share – Diluted, which is Adjusted Net Income allocated to common shares divided by weighted average common shares outstanding, including all dilutive potential shares.

Net Interest Income (Tax Equivalent Basis)

Net interest income adjusted for the tax-favored status of tax-exempt loans and securities.

Net Interest Income (Tax Equivalent Basis) • Net interest income adjusted for the tax-favored status of tax-exempt loans and securities.

• We believe the tax equivalent basis is the preferred industry measurement of net interest income.

1 unchanged sentence

• We also sometimes refer to Net Interest Margin (Tax Equivalent Basis), which is Net Interest Income (Tax Equivalent Basis) divided by average interest-earning assets.

Efficiency Ratio (Tax Equivalent Basis)

Noninterest expense less amortization of intangible assets divided by the sum of net interest income (tax equivalent basis) and noninterest income.

Efficiency Ratio (Tax Equivalent Basis) • Noninterest expense less amortization of intangible assets divided by the sum of net interest income (tax equivalent basis) and noninterest income.

• Provides a measure of productivity in the banking industry.

1 unchanged sentence

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 income tax rate of 9.5%.

Non-GAAP Financial Measure

How the Measure Provides Useful Information to Investors

Tangible Common Equity to Tangible Assets

Tangible Common Equity is total stockholders’ equity less goodwill and other intangible assets.

_________________________________________________

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

Non-GAAP Financial Measure Definition How the Measure Provides Useful Information to Investors

Tangible Common Equity to Tangible Assets • Tangible Common Equity is total stockholders’ equity less goodwill and other intangible assets.

• Tangible Assets is total assets less goodwill and other intangible assets.

5 unchanged sentences

- Adjusted Return on Average Tangible Common Equity, which is Adjusted Net Income divided by average Tangible Common Equity.

Core Deposits

Total deposits, excluding:

Core Deposits • Total deposits, excluding:

- Time deposits of $250,000 or more, and

5 unchanged sentences

(dollars in thousands) 2023 2022 2021

Net income $ 65,842 $ 56,456 $ 56,271

Acquisition expenses (1)

(13,691) (1,092) (1,416)

Branch closure expenses — — (748)

Gains (losses) on sales of closed branch premises 75 141 —

Charges related to termination of certain employee benefit plans

Realized gains (losses) on sales of securities (1,820) — —

Mortgage servicing rights fair value adjustment (1,615) 2,153 1,690

1 unchanged sentence

Tax effect of adjustments 4,711 (551) (95)

Less adjustments after tax effect

Total adjustments after tax effect (12,340) 651 (569)

Adjusted net income $ 78,182 $ 55,805 $ 56,840

2 unchanged sentences

Adjusted return on average assets 1.59 1.31 1.43

_________________________________________________

(1) Includes 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 in connection with the Town and Country merger during the first quarter of 2023 in accordance with ASC 326 which was adopted on January 1, 2023.

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

1 unchanged sentence

(dollars in thousands, except per share amounts) 2023 2022 2021

Net income $ 65,842 $ 56,456 $ 56,271

Earnings allocated to participating securities (1)

(36) (66) (104)

Numerator for earnings per share - basic and diluted $ 65,806 $ 56,390 $ 56,167

1 unchanged sentence

Earnings allocated to participating securities (1)

(42) (65) (105)

Numerator for adjusted earnings per share - basic and diluted $ 78,140 $ 55,740 $ 56,735

6 unchanged sentences

Adjusted earnings per share - Diluted $ 2.46 $ 1.93 $ 2.04

_________________________________________________

(1) The Company has granted certain restricted stock units that contain non-forfeitable rights to dividend equivalents.

2 unchanged sentences

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.

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

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

Year Ended December 31,

3 unchanged sentences

Tax-equivalent adjustment (1)

2,758 2,499 2,028

Net interest income (tax-equivalent basis) (1)

$ 193,830 $ 148,373 $ 124,431

Net interest margin (tax-equivalent basis)

1 unchanged sentence

Tax-equivalent adjustment (1)

0.06 0.06 0.05

Net interest margin (tax-equivalent basis) (1)

4.15 % 3.60 % 3.23 %

Average interest-earning assets $ 4,675,025 $ 4,118,124 $ 3,846,473

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

_________________________________________________

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

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

4 unchanged sentences

amortization of intangible assets 2,670 873 1,054

Adjusted noninterest expense

Noninterest expense excluding amortization of intangible assets $ 128,294 $ 104,234 $ 90,192

Net interest income $ 191,072 $ 145,874 $ 122,403

2 unchanged sentences

Tax-equivalent adjustment (1)

2,758 2,499 2,028

Operating revenue (tax-equivalent basis) (1)

$ 229,876 $ 183,090 $ 161,759

Efficiency ratio 56.49 % 57.72 % 56.46 %

Efficiency ratio (tax-equivalent basis) (1)

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

55.81 56.93 55.76

_________________________________________________

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

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

December 31, 2022

December 31, 2021

(dollars in thousands, except per share data)

(dollars in thousands, except per share data) December 31, 2023 December 31, 2022

Tangible Common Equity

Total stockholders' equity $ 489,496 $ 373,632

Core deposit intangible assets, net

Goodwill 59,820 29,322

Intangible assets, net 20,682 1,070

Tangible common equity $ 408,994 $ 343,240

Tangible Assets

Core deposit intangible assets, net

Total assets $ 5,073,170 $ 4,286,734

Goodwill 59,820 29,322

Intangible assets, net 20,682 1,070

Tangible assets $ 4,992,668 $ 4,256,342

9 unchanged sentences

Total stockholders' equity $ 450,928 $ 383,306 $ 380,080

Core deposit intangible assets, net

Goodwill 57,266 29,322 25,057

Intangible assets, net 20,272 1,480 2,333

Average tangible common equity $ 373,390 $ 352,504 $ 352,690

Net income $ 65,842 $ 56,456 $ 56,271

Adjusted net income 78,182 55,805 56,840

4 unchanged sentences

Reconciliation of Non-GAAP Financial Measure - Core Deposits

December 31, 2022

December 31, 2021

(dollars in thousands)

(dollars in thousands) December 31, 2023 December 31, 2022

Core Deposits

5 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