HBT Financial, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context requires otherwise, references in this report to the “Company,” “we,” “us” and “our” refer to HBT Financial, Inc. and its subsidiaries. Management’s discussion and analysis should be read in conjunction with the following parts of this Annual Report on Form 10-K: Part I, Item 1 “Business”, Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, and Part II, Item 8 “Financial Statements and Supplementary Data”. Detailed discussion and analysis of the financial condition and results of operation for 2023 as compared to 2022 can be found below. OVERVIEW 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 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. Market Area 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, 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 Acquisitions 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 Data processing 2,031 304 355 Marketing and customer relations 24 — 12 Loan collection and servicing 125 — 11 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. 43 Table of Contents Town and Country Financial Corporation On February 1, 2023, HBT Financial completed its acquisition of Town and Country, the holding company for Town and Country Bank. The acquisition of Town and Country further enhanced HBT Financial’s footprint in Central Illinois and expanded our footprint into metro-east St. Louis. At the time of acquisition, Town and Country Bank operated ten full-service branch locations which began operating as branches of Heartland Bank. The core system conversion was successfully completed in April 2023. After considering business combination accounting adjustments, Town and Country added total assets of $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. On October 1, 2021, HBT Financial completed its acquisition of NXT Bancorporation, Inc. (“NXT”), the holding company for NXT Bank. The acquisition expanded our footprint into Eastern Iowa with four locations that began operating as branches of Heartland Bank following the merger and system conversion of NXT Bank into Heartland Bank in December 2021. After considering business combination accounting adjustments, NXT added total assets of $239.9 million, total loans of $194.6 million, and total deposits of $181.6 million. Total consideration consisted of 1.8 million shares of HBT Financial’s common stock and $10.6 million in cash. Based upon the closing price of HBT Financial common stock of $16.27 on October 1, 2021, the aggregate consideration was approximately $39.9 million. Goodwill of $5.7 million was recorded in the acquisition. Branch Rationalization Plan In April 2021, the Company made plans to close or consolidate six branches. One branch was consolidated during the second quarter of 2021, and the remaining five branches were closed during the third quarter of 2021. The Company estimated annual pre-tax cost savings, net of associated revenue impacts, related to the branch rationalization plan to be approximately $1.1 million. The Company incurred the following pre-tax branch closure costs during the year ended December 31, 2021 (dollars in thousands): NONINTEREST INCOME Gains (losses) on other assets $ (682) NONINTEREST EXPENSE Salaries 53 Marketing and customer relations 6 Legal fees and other noninterest expense 7 Total noninterest expense 66 Total branch closure costs $ 748 44 Table of Contents FACTORS AFFECTING OUR RESULTS OF OPERATIONS Economic Conditions The Company's business and financial performance are affected by economic conditions generally in the U.S. and more directly in the Illinois and Iowa markets where we primarily operate. The significant economic factors that are most relevant to our business and our financial performance include the general economic conditions in the U.S. and in the Company's markets (including the effect of inflationary pressures and supply chain constraints), unemployment rates, real estate markets, and interest rates. Interest Rates Net interest income is our primary source of revenue. Net interest income is equal to the excess of interest income earned on interest earning assets (including discount accretion on purchased loans plus certain loan fees) over interest expense incurred on interest-bearing liabilities. The level of interest rates as well as the volume of interest-earning assets and interest-bearing liabilities both impact net interest income. Net interest income is also influenced by both the pricing and mix of interest-earning assets and interest-bearing liabilities which, in turn, are impacted by external factors such as local economic conditions, competition for loans and deposits, the monetary policy of the Federal Reserve Board (“FRB”) and market interest rates. The cost of our deposits and short-term wholesale borrowings is largely based on short-term interest rates, which are primarily driven by the FRB’s actions. The yields generated by our loans and securities are typically driven by short-term and long-term interest rates, which are set by the market and, to some degree, by the FRB’s actions. Our net interest income is therefore influenced by movements in such interest rates and the pace at which such movements occur. Generally, we expect increases in market interest rates will increase our net interest income and net interest margin in future periods, while decreases in market interest rates may decrease our net interest income and net interest margin in future periods. Credit Trends We focus on originating loans with appropriate risk/reward profiles. We have a detailed loan policy that guides our overall loan origination philosophy and a well-established loan approval process that requires experienced credit officers to approve larger loan relationships. Although we believe our loan approval and credit review processes are strengths that allow us to maintain a high-quality loan portfolio, we recognize that credit trends in the markets in which we operate and in our loan portfolio can materially impact our financial condition and performance and that these trends are primarily driven by the economic conditions in our markets. Competition Our profitability and growth are affected by the highly competitive nature of the financial services industry. We compete with community banks in all our markets and, to a lesser extent, with money center banks, primarily in the Chicago MSA. Additionally, we compete with non-bank financial services companies, FinTechs and other financial institutions operating within the areas we serve. We compete by emphasizing personalized service and efficient decision-making tailored to individual needs. We do not rely on any individual, group, or entity for a material portion of our loans or our deposits. We continue to see significant competitive pressure on loan rates and terms, as well as deposit pricing, which may affect our financial results in the future. Digital Banking Throughout the banking industry, in-person branch traffic is expected to continue to decline as more customers turn to digital banking for routine banking transactions. The COVID-19 pandemic 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. An inability to meet evolving customer expectations, with the appropriate level of security, for both digital and in-person banking may adversely affect our financial results in the future. 45 Table of Contents Regulatory Environment and Trends We are subject to federal and state regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment includes extensive regulation and supervision in areas such as consumer compliance, the Bank Secrecy Act and anti-money laundering compliance, risk management and internal audit. We anticipate that this environment of extensive regulation and supervision will continue for the industry. As a result, changes in the regulatory environment may result in additional costs for additional compliance, risk management and audit personnel or professional fees associated with advisors and consultants. FACTORS AFFECTING COMPARABILITY OF FINANCIAL RESULTS JOBS Act Accounting Election We qualify as an “emerging growth company” under the JOBS Act. The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. The Company may remain an emerging growth company until the earliest to occur of: (1) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, which is December 31, 2024, (2) the last day of the fiscal year in which the Company has $1.235 billion or more in annual revenues, (3) the date on which the Company is deemed to be a “large accelerated filer” under the Exchange Act or (4) the date on which the Company has, during the previous three year period, issued, publicly or privately, more than $1.0 billion in non-convertible debt securities. We have elected to use the extended transition period until we are no longer an emerging growth company or until we choose to affirmatively and irrevocably opt out of the extended transition period. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements applicable to public companies. 46 Table of Contents RESULTS OF OPERATIONS Overview of Recent Financial Results The following table presents selected financial results and measures: Year Ended December 31, (dollars in thousands, except per share amounts) 2023 2022 2021 Total interest and dividend income $ 228,999 $ 153,054 $ 128,223 Total interest expense 37,927 7,180 5,820 Net interest income 191,072 145,874 122,403 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 Total noninterest expense 130,964 105,107 91,246 Income before income tax expense 88,581 76,190 76,562 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 Earnings per share - Diluted $ 2.07 $ 1.95 $ 2.02 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 Summary Ratios Net interest margin 4.09 % 3.54 % 3.18 % Net interest margin (tax-equivalent basis) (1) (2) 4.15 3.60 3.23 Yield on loans 6.04 4.91 4.68 Yield on interest-earning assets 4.90 3.72 3.33 Cost of interest-bearing liabilities 1.14 0.26 0.23 Cost of total deposits 0.60 0.07 0.07 Cost of funds 0.86 0.19 0.16 Efficiency ratio 56.49 % 57.72 % 56.46 % Efficiency ratio (tax-equivalent basis) (1) (2) 55.81 56.93 55.76 Return on average assets 1.34 % 1.32 % 1.41 % Return on average stockholders' equity 14.60 14.73 14.81 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) 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%. 47 Table of Contents Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022 For the year ended December 31, 2023, net income was $65.8 million, increasing by $9.4 million, or 16.6%, when compared to net income for the year ended December 31, 2022. Notable changes include the following: • 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; and • 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 Net interest income equals the excess of interest income on interest earning assets (including discount accretion on acquired loans plus certain loan fees) over interest expense incurred on interest-bearing liabilities. Interest rate spread and net interest margin are utilized to measure and explain changes in net interest income. Interest rate spread is the difference between the yield on interest-earning assets and the rate paid for interest-bearing liabilities that fund those assets. The net interest margin is expressed as the percentage of net interest income to average interest-earning assets. The net interest margin exceeds the interest rate spread because noninterest-bearing sources of funds, principally noninterest-bearing demand deposits and stockholders’ equity, also support interest-earning assets. 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, as well as purchase accounting adjustments that are accreted or amortized to interest income or expense. 48 Table of Contents Year Ended 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 ASSETS 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 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 Liabilities Interest-bearing deposits: 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 Junior subordinated debentures issued to capital trusts 51,489 3,530 6.86 37,746 1,787 4.73 37,680 1,426 3.79 Total interest-bearing liabilities 3,319,602 $ 37,927 1.14 % 2,812,656 $ 7,180 0.26 % 2,566,641 $ 5,820 0.23 % Noninterest-bearing deposits 1,113,300 1,051,187 1,004,757 Noninterest-bearing liabilities 44,074 22,724 29,060 Total liabilities 4,476,976 3,886,567 3,600,458 Stockholders' Equity 450,928 383,306 380,080 Total liabilities and stockholders’ equity $ 4,927,904 4,269,873 3,980,538 Net interest income/Net interest margin (1) $ 191,072 4.09 % $ 145,874 3.54 % $ 122,403 3.18 % Tax-equivalent adjustment (2) 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 Cost of total deposits 0.60 % 0.07 % 0.07 % 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 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. 49 Table of Contents The following table sets forth the components of loan interest income and their contributions to the total loan yield. Year Ended December 31, 2023 2022 2021 (dollars in thousands) Interest Yield Contribution Interest Yield Contribution Interest Yield Contribution Contractual interest $ 185,772 5.75 % $ 113,775 4.52 % $ 90,647 3.99 % Loan fees (excluding PPP loans) 4,584 0.14 4,454 0.18 3,840 0.17 PPP loan fees 2 — 1,488 0.06 9,181 0.40 Accretion of acquired loan discounts 4,136 0.13 933 0.04 1,102 0.05 Nonaccrual interest recoveries 703 0.02 2,828 0.11 1,514 0.07 Total loan interest income $ 195,197 6.04 % $ 123,478 4.91 % $ 106,284 4.68 % The following table sets forth the components of net interest income and their contributions to the net interest margin. Year Ended December 31, 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 % Loan fees (excluding PPP loans) 4,584 0.10 4,454 0.11 3,840 0.10 PPP loan fees 2 — 1,488 0.04 9,181 0.24 Accretion of acquired loan discounts 4,136 0.09 933 0.02 1,102 0.03 Nonaccrual interest recoveries 703 0.02 2,828 0.07 1,514 0.04 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: 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 Net interest income 191,072 4.09 145,874 3.54 122,403 3.18 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 measure to their most closely comparable GAAP measures. 50 Table of Contents Rate/Volume Analysis The following table sets forth the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to changes attributable to volume ( i.e. , changes in average balances multiplied by the prior-period average rate), and changes attributable to rate ( i.e. , changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both volume and rate that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. Year Ended December 31, 2023 vs. Year Ended December 31, 2022 Year Ended December 31, 2022 vs. Year Ended December 31, 2021 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 Interest-bearing liabilities: Interest-bearing deposits: 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) — Junior subordinated debentures issued to capital trusts 781 962 1,743 3 358 361 Total interest-bearing liabilities 10,422 20,325 30,747 782 578 1,360 Change in net interest income $ 27,116 $ 18,082 $ 45,198 $ 15,539 $ 7,932 $ 23,471 Comparison of the Year Ended December 31, 2023 to the Year Ended December 31, 2022 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 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. 51 Table of Contents 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 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. 52 Table of Contents 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 Service charges on deposit accounts 7,846 7,072 774 10.9 7,072 6,080 992 16.3 Mortgage servicing 4,678 2,609 2,069 79.3 2,609 2,825 (216) (7.6) 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) 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 $ 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, 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 $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; and • 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. 53 Table of Contents Noninterest Expense 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 Occupancy of bank premises 9,918 7,673 2,245 29.3 7,673 6,788 885 13.0 Furniture and equipment 2,790 2,476 314 12.7 2,476 2,676 (200) (7.5) Data processing 12,352 7,441 4,911 66.0 7,441 7,329 112 1.5 Marketing and customer relations 5,043 3,803 1,240 32.6 3,803 3,376 427 12.6 Amortization of intangible assets 2,670 873 1,797 205.8 873 1,054 (181) (17.2) FDIC insurance 2,280 1,164 1,116 95.9 1,164 1,043 121 11.6 Loan collection and servicing 1,402 1,049 353 33.7 1,049 1,317 (268) (20.3) Foreclosed assets 251 293 (42) (14.3) 293 908 (615) (67.7) Other noninterest expense 16,768 20,243 (3,475) (17.2) 20,243 11,270 8,973 79.6 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 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; and • 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. Income Taxes 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. 54 Table of Contents FINANCIAL CONDITION (dollars in thousands, except per share data) December 31, 2023 December 31, 2022 $ Change % Change Consolidated Balance Sheet Information Cash and cash equivalents $ 141,252 $ 114,159 $ 27,093 23.7 % Debt securities available-for-sale, at fair value 759,461 843,524 (84,063) (10.0) Debt securities held-to-maturity 521,439 541,600 (20,161) (3.7) Loans held for sale 2,318 615 1,703 276.9 Loans, before allowance for credit losses 3,404,417 2,620,253 784,164 29.9 Less: 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 Junior subordinated debentures 52,789 37,780 15,009 39.7 Other liabilities 34,909 45,822 (10,913) (23.8) Total liabilities 4,583,674 3,913,102 670,572 17.1 Total stockholders' equity 489,496 373,632 115,864 31.0 Total liabilities and stockholders' equity $ 5,073,170 $ 4,286,734 $ 786,436 18.3 % 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 Book value per share $ 15.44 $ 12.99 Tangible book value per share (1) 12.90 11.94 Shares of common stock outstanding 31,695,828 28,752,626 Balance Sheet Ratios Loan to deposit ratio 77.35 % 73.05 % Core deposits to total deposits (1) 93.75 99.24 Stockholders' equity to total assets 9.65 8.72 Tangible common equity to tangible assets (1) 8.19 8.06 _________________________________________________ (1) See "Non-GAAP Financial Information" for reconciliation of non-GAAP measure to their most closely comparable GAAP measures. 55 Table of Contents Notable changes in our consolidated balance sheet include the following: • 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; and • 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, 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 % Commercial real estate - owner occupied 295,842 8.7 218,503 8.3 Commercial real estate - non-owner occupied 880,681 25.9 713,202 27.2 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 Agricultural and farmland 287,294 8.4 237,746 9.1 Municipal, consumer, and other 239,386 7.0 197,103 7.5 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. 56 Table of Contents Loan Portfolio Maturities The following table summarizes the scheduled maturities of the loan portfolio as of December 31, 2023. Demand loans (loans having no stated repayment schedule or maturity) and overdraft loans are reported as being due in one year or less. (dollars in thousands) 1 Year or Less After 1 Year Through 5 Years After 5 Years Through 15 Years After 15 Years Total Commercial and industrial $ 227,363 $ 164,321 $ 36,116 $ — $ 427,800 Commercial real estate - owner occupied 34,833 150,564 102,031 8,414 295,842 Commercial real estate - non-owner occupied 124,384 545,507 204,883 5,907 880,681 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 (dollars in thousands) Repricing 1 Year or Less Repricing After 1 Year Total Variable Interest Rates Predetermined (Fixed) Interest Rates Total Commercial and industrial $ 47,458 $ 7,083 $ 54,541 $ 145,896 $ 200,437 Commercial real estate - owner occupied 37,056 38,869 75,925 185,084 261,009 Commercial real estate - non-owner occupied 114,812 30,727 145,539 610,758 756,297 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 57 Table of Contents Nonperforming Assets 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) 37 1 Total nonperforming loans 7,857 2,156 Foreclosed assets 852 3,030 Total nonperforming assets $ 8,709 $ 5,186 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 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 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. Government. Risk Classification of Loans 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 Doubtful — — 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 58 Table of Contents 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 credit losses, by loan category. Year Ended December 31, (dollars in thousands) 2023 2022 2021 Net charge-offs (recoveries) Commercial and industrial $ 369 $ (751) $ 15 Commercial real estate - owner occupied (13) (1,006) 21 Commercial real estate - non-owner occupied (66) (283) (24) 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 Total $ 180 $ (2,103) $ (175) Average loans Commercial and industrial $ 370,255 $ 268,765 $ 347,547 Commercial real estate - owner occupied 290,489 219,127 204,148 Commercial real estate - non-owner occupied 874,661 695,230 583,084 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 Total $ 3,231,736 $ 2,514,549 $ 2,271,544 Charge-offs (recoveries) to average loans Commercial and industrial 0.10 % (0.28) % — % Commercial real estate - owner occupied — (0.46) 0.01 Commercial real estate - non-owner occupied (0.01) (0.04) — 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 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. 59 Table of Contents Securities 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, 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. Security yields have not been adjusted to a tax-equivalent basis. December 31, 2023 Available-for-Sale Held-to-Maturity Total (dollars in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Due in 1 year or less U.S. Treasury $ 40,020 1.39 % $ — — % $ 40,020 1.39 % U.S. 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: Agency residential 50 2.26 — — 50 2.26 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 U.S. Treasury $ 89,513 1.30 % $ — — % $ 89,513 1.30 % U.S. 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: Agency residential 13,399 2.80 8,252 1.62 21,651 2.35 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 U.S. Treasury $ 30,182 1.55 % $ — — % $ 30,182 1.55 % U.S. 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: Agency residential 68,637 2.13 3,439 3.51 72,076 2.20 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 U.S. 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: Agency residential 106,555 2.85 84,137 3.65 190,692 3.20 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 % Total U.S. Treasury $ 159,715 1.37 % $ — — % $ 159,715 1.37 % U.S. 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: Agency residential 188,641 2.58 95,828 3.47 284,469 2.88 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 % 60 Table of Contents SOURCES OF FUNDS 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 table sets forth the distribution of average deposits, by account type: Year Ended December 31, 2023 Percent Change in Average Balance 2023 vs. 2022 (dollars in thousands) Average Balance Percent of Total Deposits Weighted Average Cost Noninterest-bearing $ 1,113,300 26.7 % — % 5.9 % Interest-bearing demand 1,188,680 28.5 0.26 4.1 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 % Year Ended December 31, 2022 Percent Change in Average Balance 2022 vs. 2021 (dollars in thousands) Average Balance Percent of Total Deposits Weighted Average Cost Noninterest-bearing $ 1,051,187 28.4 % — % 4.6 % Interest-bearing demand 1,141,402 30.8 0.05 11.4 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 (dollars in thousands) Average Balance Percent of Total Deposits Weighted Average Cost Noninterest-bearing $ 1,004,757 29.2 % — % Interest-bearing demand 1,024,888 29.8 0.05 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 % 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. 61 Table of Contents 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: (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 Amounts of $100,000 or more but less than $250,000 40,961 56,555 85,203 29,905 212,624 Amounts of $250,000 or more 36,659 39,899 42,576 11,049 130,183 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 All securities sold under agreements to repurchase are sweep instruments, maturing daily. The securities underlying the agreements are held under our control in safekeeping at third-party financial institutions, and include debt securities. The following table sets forth information concerning balances and interest rates on our securities sold under agreements to repurchase. As of or for the Years Ended December 31, (dollars in thousands) 2023 2022 2021 Balance at end of year $ 42,442 $ 43,081 $ 61,256 Average balance during year 35,450 51,554 50,104 Average interest rate during year 0.72 % 0.07 % 0.07 % Borrowings 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 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. 62 Table of Contents The following table sets forth information concerning balances and interest rates on our borrowings. As of or for the Years Ended December 31, (dollars in thousands) 2023 2022 2021 Balance at end of year FHLB advances $ 12,623 $ 160,000 $ — Federal Reserve discount window — — — Federal funds purchased — — — Total borrowings $ 12,623 $ 160,000 $ — Average balance during year FHLB advances $ 139,554 $ 25,934 $ 1,310 Federal Reserve discount window 3 — — Federal funds purchased 260 534 343 Total borrowings $ 139,817 $ 26,468 $ 1,653 Average interest rate during year FHLB advances 5.10 % 3.68 % 0.56 % Federal Reserve discount window 5.25 — — Federal funds purchased 5.56 2.11 0.48 Total borrowings 5.10 3.65 0.54 LIQUIDITY Bank Liquidity The overall objective of bank liquidity management is to ensure the availability of sufficient cash funds to meet all financial commitments and to take advantage of investment opportunities. The Bank manages liquidity in order to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise. The Bank continuously monitors its liquidity positions to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. The Bank manages its liquidity position to meet our daily cash flow needs, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives. The Bank also monitors liquidity requirements in light of interest rate trends, changes in the economy, the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits, and regulatory capital requirements. As part of the Bank’s liquidity management strategy, the Bank is also focused on minimizing costs of liquidity and attempts to decrease these costs by promoting noninterest-bearing and low-cost deposits. 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, 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. 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. 63 Table of Contents Holding Company 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. The Holding Company’s main source of funding is dividends declared and paid to it by the Bank. Due to state banking laws, the Bank may not declare dividends in any calendar year in an amount that would exceed accumulated retained earnings, after giving effect to any unrecognized losses and bad debts, without the prior approval of the Illinois Department of Financial and Professional Regulation. 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 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. During the years ended December 31, 2023, 2022, and 2021, holding company operating expenses consisted of interest expense of $5.4 million, $3.7 million, and $3.3 million, respectively, and other operating expenses of $5.5 million, $5.3 million, and $3.7 million, respectively. 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, 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 Holding Company . As of December 31, 2023, the Holding Company had no material commitments for capital expenditures. CAPITAL RESOURCES The overall objectives of capital management are to ensure the availability of sufficient capital to support loan, deposit and other asset and liability growth opportunities and to maintain capital to absorb unforeseen losses or write-downs that are inherent in the business risks associated with the banking industry. The Company seeks to balance the need for higher capital levels to address such unforeseen risks and the goal to achieve an adequate return on the capital invested by our stockholders. Regulatory Capital Requirements The Company and Bank are each subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Company and the Bank. 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, 2023 and December 31, 2022, the capital conservation buffer requirement was 2.5% of risk-weighted assets. 64 Table of Contents As of December 31, 2023 and 2022, the Company and the Bank met all capital adequacy requirements to which they were subject. As of those dates, the Bank was “well capitalized” under the regulatory prompt corrective action provisions. The following table sets forth actual capital ratios of the Company and the Bank 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. December 31, 2023 December 31, 2022 For Capital Adequacy Purposes With Capital Conversation Buffer (1) To Be Well Capitalized Under Prompt Corrective Action Provisions (2) 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 Common Equity Tier 1 Capital (to Risk Weighted Assets) 14.01 14.63 7.00 6.50 Tier 1 Capital (to Average Assets) 10.96 10.78 4.00 5.00 _________________________________________________ (1) The Tier 1 capital to average assets ratio (known as the “leverage ratio”) is not impacted by the capital conservation buffer. (2) The prompt corrective action provisions are not applicable to bank holding companies. N/A Not applicable. 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 Company’s capital resources. Cash Dividends 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 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. On December 19, 2023, the Company’s Board of Directors approved a new stock repurchase program which authorizes the Company to repurchase up to $15.0 million of its common stock. The new stock repurchase program took effect upon the expiration of the prior stock repurchase program and expires on January 1, 2025. 65 Table of Contents OFF-BALANCE SHEET ARRANGEMENTS 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. For additional information, see “Note 22 – Commitments and Contingencies” to the consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES Critical accounting estimates are those that are critical to the portrayal and understanding of the Company’s financial condition and results of operations and require management to make assumptions that are difficult, subjective or complex. These estimates involve judgments, assumptions and uncertainties that are susceptible to change. In the event that different assumptions or conditions were to prevail, and depending on the severity of such changes, the possibility of a materially different financial condition or materially different results of operations is a reasonable likelihood. Further, changes in accounting standards could impact the Company’s critical accounting estimates. 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. 66 Table of Contents 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. These disclosures should not be viewed as substitutes for the results determined to be in accordance with GAAP; nor are they necessarily comparable to non-GAAP financial measures that may be presented by other companies. See our reconciliation of non-GAAP financial measures to their most closely comparable GAAP financial measures below. 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 net earnings (losses) from closed or sold operations, - excludes realized gains (losses) on sales of closed branch premises, - excludes realized gains (losses) on sales of securities, - excludes mortgage servicing rights fair value adjustment, and - the income tax effect of these pre-tax adjustments. • Enhances comparisons to prior periods and, accordingly, facilitates the development of future projections and earnings growth prospects. • We also sometimes refer to ratios that include Adjusted Net Income, such as: - Adjusted Return on Average Assets, which is Adjusted Net Income divided by average assets. - Adjusted Return on Average Equity, which is Adjusted Net Income divided by average equity. - Adjusted Earnings Per Share - Basic, which is Adjusted Net Income allocated to common shares divided by weighted average common shares outstanding. - 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. (1) • We believe the tax equivalent basis is the preferred industry measurement of net interest income. • Enhances comparability of net interest income arising from taxable and tax-exempt sources. • 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. (1) • Provides a measure of productivity in the banking industry. • Calculated to measure the cost of generating one dollar of revenue. That is, the ratio is designed to reflect the percentage of one dollar which must be expended to generate that dollar of revenue. _________________________________________________ (1) Tax-equivalent basis assuming a federal income tax rate of 21% and a state tax rate of 9.5%. 67 Table of Contents 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. • Generally used by investors, our management, and banking regulators to evaluate capital adequacy. • Facilitates comparison of our earnings with the earnings of other banking organization with significant amounts of goodwill or intangible assets. • We also sometimes refer to ratios that include Tangible Common Equity, such as: - Tangible Book Value Per Share, which is Tangible Common Equity divided by shares of common stock outstanding. - Return on Average Tangible Common Equity, which is net income divided by average Tangible Common Equity. - Adjusted Return on Average Tangible Common Equity, which is Adjusted Net Income divided by average Tangible Common Equity. Core Deposits • Total deposits, excluding: - Time deposits of $250,000 or more, and - Brokered deposits • Provides investors with information regarding the stability of the Company’s sources of funds. • We also sometimes refer to the ratio of Core Deposits to total deposits. 68 Table of Contents Reconciliation of Non-GAAP Financial Measure - Adjusted Net Income and Adjusted Return on Average Assets Year Ended December 31, (dollars in thousands) 2023 2022 2021 Net income $ 65,842 $ 56,456 $ 56,271 Adjustments: Acquisition expenses (1) (13,691) (1,092) (1,416) Branch closure expenses — — (748) Gains (losses) on sales of closed branch premises 75 141 — Realized gains (losses) on sales of securities (1,820) — — Mortgage servicing rights fair value adjustment (1,615) 2,153 1,690 Total adjustments (17,051) 1,202 (474) Tax effect of adjustments 4,711 (551) (95) Total adjustments after tax effect (12,340) 651 (569) Adjusted net income $ 78,182 $ 55,805 $ 56,840 Average assets $ 4,927,904 $ 4,269,873 $ 3,980,538 Return on average assets 1.34 % 1.32 % 1.41 % 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. 69 Table of Contents Reconciliation of Non-GAAP Financial Measure - Adjusted Earnings Per Share Year Ended December 31, (dollars in thousands, except per share amounts) 2023 2022 2021 Numerator: 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 Adjusted net income $ 78,182 $ 55,805 $ 56,840 Earnings allocated to participating securities (1) (42) (65) (105) Numerator for adjusted earnings per share - basic and diluted $ 78,140 $ 55,740 $ 56,735 Denominator: Weighted average common shares outstanding 31,626,308 28,853,697 27,795,806 Dilutive effect of outstanding restricted stock units 111,839 65,619 15,487 Weighted average common shares outstanding, including all dilutive potential shares 31,738,147 28,919,316 27,811,293 Earnings per share - Basic $ 2.08 $ 1.95 $ 2.02 Earnings per share - Diluted $ 2.07 $ 1.95 $ 2.02 Adjusted earnings per share - Basic $ 2.47 $ 1.93 $ 2.04 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. Such restricted stock units are considered participating securities. As such, we have included these restricted stock units in the calculation of basic earnings per share and calculate basic earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. 70 Table of Contents Reconciliation of Non-GAAP Financial Measure – Net Interest Income and Net Interest Margin (Tax Equivalent Basis) Year Ended December 31, (dollars in thousands) 2023 2022 2021 Net interest income (tax-equivalent basis) Net interest income $ 191,072 $ 145,874 $ 122,403 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) Net interest margin 4.09 % 3.54 % 3.18 % 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 tax rate of 9.5%. Reconciliation of Non-GAAP Financial Measure - Efficiency Ratio (Tax Equivalent Basis) Year Ended December 31, (dollars in thousands) 2023 2022 2021 Efficiency ratio (tax-equivalent basis) Total noninterest expense $ 130,964 $ 105,107 $ 91,246 Less: amortization of intangible assets 2,670 873 1,054 Noninterest expense excluding amortization of intangible assets $ 128,294 $ 104,234 $ 90,192 Net interest income $ 191,072 $ 145,874 $ 122,403 Total noninterest income 36,046 34,717 37,328 Operating revenue 227,118 180,591 159,731 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) 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%. 71 Table of Contents Reconciliation of Non-GAAP Financial Measure - Tangible Common Equity to Tangible Assets and Tangible Book Value Per Share (dollars in thousands, except per share data) December 31, 2023 December 31, 2022 Tangible Common Equity Total stockholders' equity $ 489,496 $ 373,632 Less: Goodwill 59,820 29,322 Less: Intangible assets, net 20,682 1,070 Tangible common equity $ 408,994 $ 343,240 Tangible Assets Total assets $ 5,073,170 $ 4,286,734 Less: Goodwill 59,820 29,322 Less: Intangible assets, net 20,682 1,070 Tangible assets $ 4,992,668 $ 4,256,342 Total stockholders' equity to total assets 9.65 % 8.72 % Tangible common equity to tangible assets 8.19 8.06 Shares of common stock outstanding 31,695,828 28,752,626 Book value per share $ 15.44 $ 12.99 Tangible book value per share 12.90 11.94 Reconciliation of Non-GAAP Financial Measure – Return on Average Tangible Common Equity, Adjusted Return on Average Stockholders’ Equity, and Adjusted Return on Average Tangible Common Equity Year Ended December 31, (dollars in thousands) 2023 2022 2021 Average Tangible Common Equity Total stockholders' equity $ 450,928 $ 383,306 $ 380,080 Less: Goodwill 57,266 29,322 25,057 Less: 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 Return on average stockholders' equity 14.60 % 14.73 % 14.81 % Return on average tangible common equity 17.63 16.02 15.95 Adjusted return on average stockholders' equity 17.34 % 14.56 % 14.95 % Adjusted return on average tangible common equity 20.94 15.83 16.12 72 Table of Contents Reconciliation of Non-GAAP Financial Measure - Core Deposits (dollars in thousands) December 31, 2023 December 31, 2022 Core Deposits Total deposits $ 4,401,437 $ 3,587,024 Less: time deposits of $250,000 or more 130,183 27,158 Less: brokered deposits 144,880 — Core deposits $ 4,126,374 $ 3,559,866 Core deposits to total deposits 93.75 % 99.24 % 73 Table of Contents