Executive Summary / Key Takeaways

• HBT Financial delivered robust first-quarter 2025 results, with net income increasing 25% year-over-year, significantly benefiting from net interest margin expansion and the absence of prior-year non-recurring losses.
• Net interest margin rose notably to 4.12% in Q1 2025, driven by higher asset yields, decreased funding costs, and increased contributions from loan fees and nonaccrual recoveries, underscoring effective balance sheet management in a dynamic rate environment.
• Asset quality remains a key strength, with nonperforming assets decreasing significantly to just 0.11% of total assets and annualized net charge-offs remaining exceptionally low at 0.05%, reflecting disciplined credit risk management and favorable economic conditions.
• The company maintains a strong and stable deposit base, with core deposits representing over 95% of the total, providing a low-cost funding advantage relative to peers and supporting liquidity.
• Solid capital ratios, including a tangible common equity to tangible assets ratio of 9.73%, coupled with shareholder-friendly actions like a dividend increase and stock repurchase authorization, highlight financial strength and commitment to shareholder returns.

Setting the Scene: A Midwest Banking Story Rooted in Relationships

HBT Financial, Inc. (NASDAQ: HBT) is a regional bank holding company with roots tracing back to 1920, operating primarily through its subsidiary, Heartland Bank and Trust Company. Headquartered in Bloomington, Illinois, HBT serves consumers, businesses, and municipal entities across Illinois and eastern Iowa through a network of 66 full-service branches as of March 31, 2025. The company's strategic foundation is built upon a relationship-driven banking philosophy and deep community ties, which management emphasizes as crucial for cultivating a stable and low-cost deposit base. This local focus is a core element of its competitive strategy within the Midwest banking landscape.

The competitive environment in HBT's market areas is characterized by a mix of regional peers like First Busey Corporation (BUSE) and MidWestOne Financial Group (MOFG), as well as larger institutions such as Wintrust Financial Corporation (WTFC) and Huntington Bancshares Incorporated (HBAN). While larger banks often possess advantages in scale and technological investment, HBT aims to differentiate itself through personalized service and local market expertise. Indirect competition from fintech companies offering digital payment and lending solutions also presents a challenge to traditional banking models.

HBT's history includes periods of growth, notably evidenced by increases in goodwill and intangible assets around 2022-2023, suggesting strategic acquisitions played a role in shaping its current scale and market presence. Integrating these acquisitions and realizing their anticipated benefits remain ongoing operational considerations.

In terms of operational technology, the company is focused on adding and improving digital banking services to enhance customer relationships and solidify its deposit base. While the company does not appear to detail a specific, unique technological differentiator akin to a manufacturing process, it highlights the strategic importance of digital capabilities in modern banking and the operational risks associated with IT systems and cybersecurity. Compared to larger peers like HBAN, which may have more efficient digital platforms leading to lower operating costs per transaction, HBT's focus appears to be on leveraging technology to support its relationship-based model rather than achieving scale-driven efficiency leadership through technology alone. The company acknowledges the need to manage risks related to information technology and cybersecurity, particularly in the face of increasingly sophisticated threats.

Financial Performance: A Strong Start to 2025

HBT Financial delivered a compelling financial performance in the first quarter of 2025. Net income reached $19.1 million, a significant 25.0% increase compared to $15.3 million in the first quarter of 2024. This translated to diluted earnings per share of $0.60, up from $0.48 in the prior-year period.

A primary driver of this improvement was the expansion of the net interest margin (NIM), which rose to 4.12% in Q1 2025 from 3.94% in Q1 2024. Net interest income increased by $2.0 million, or 4.3%, reaching $48.7 million. This growth was fueled by a combination of factors: higher average loan balances ($3.46 billion in Q1 2025 vs. $3.37 billion in Q1 2024), a decrease in deposit costs (cost of total deposits fell to 1.21% from 1.26%), and higher yields on debt securities. Additionally, nonaccrual interest recoveries and loan fees contributed positively, adding 17 basis points to the NIM in Q1 2025, up from 11 basis points in Q1 2024. While acquired loan discount accretion's contribution slightly decreased, the overall trend in asset yields outpacing funding costs drove the margin expansion. The company notes that future changes in market interest rates, particularly decreases, could pressure NIM as floating-rate loan yields decline faster than deposit costs.

Total noninterest income saw a substantial increase, rising 65.4% to $9.3 million in Q1 2025 from $5.6 million in Q1 2024. This significant jump was largely attributable to the absence of $3.4 million in realized losses on securities sales and $0.6 million in impairment losses on bank premises that impacted the Q1 2024 results. Excluding these items, noninterest income growth was more modest but still positive, supported by a $0.3 million increase in wealth management fees, reflecting growth in assets under management and farm management income. A negative $0.3 million MSR fair value adjustment partially offset these gains in Q1 2025.

Total noninterest expense increased by a modest 2.1%, or $0.7 million, to $31.9 million. This was primarily due to higher employee benefits expense ($0.5 million increase, driven by increased medical costs) and salaries expense ($0.4 million increase, reflecting annual merit increases), partially offset by a decrease in data processing expense ($0.2 million decrease). The adjusted efficiency ratio (tax-equivalent basis) improved to 53.12% in Q1 2025 from 53.77% in Q1 2024, indicating better operational efficiency excluding certain items.

The effective income tax rate was 25.2% in Q1 2025, slightly lower than 25.6% in Q1 2024, benefiting from a larger tax benefit related to stock-based compensation. The company anticipates recognizing an additional $0.3 million in tax expense in Q2 2025 related to a stranded tax effect from a derivative maturity.

Asset Quality: A Foundation of Strength

A cornerstone of HBT's investment thesis is its consistently strong asset quality. As of March 31, 2025, nonperforming assets totaled $5.6 million, a notable 30.6% decrease from $8.0 million at December 31, 2024. Nonperforming loans stood at $5.1 million, down from $7.7 million, primarily due to the payoff of a $1.6 million nonaccrual commercial real estate non-owner occupied credit. Nonperforming assets represented a mere 0.11% of total assets at quarter-end.

The allowance for credit losses stood at $42.1 million at March 31, 2025, representing 1.22% of total loans, before the allowance. This coverage ratio is robust, standing at 825.38% of nonaccrual loans. Net charge-offs remained exceptionally low, totaling $0.4 million or 0.05% of average loans on an annualized basis in Q1 2025. While this was an increase from the 0.02% seen in Q1 2024, the overall level remains very low by historical standards. The increase in Q1 2025 was primarily attributed to charge-offs within the commercial and industrial segment related to an equipment finance loan pool purchased in 2023.

Management attributes the sustained low level of credit losses to its disciplined credit risk management practices, including robust underwriting policies, account administration standards, and portfolio diversification. The company actively monitors commercial real estate concentrations by property class and industry, utilizing a centralized credit underwriting group for larger exposures and a robust internal review process covering over 45% of loan commitments on a rolling 24-month basis. Quarterly stress testing is performed on commercial real estate non-owner occupied and multi-family loans over $1 million maturing within the next five quarters to identify potential stress points early.

The economic forecast used in estimating the allowance for credit losses anticipates a mild economic slowdown over the next four quarters, but not a recession, with stable unemployment and slightly slowing GDP growth before increasing. Management applies qualitative adjustments to these forecasts to reflect other factors influencing credit losses. While credit losses are highly dependent on economic conditions, HBT's current asset quality metrics suggest a well-managed portfolio.

Balance Sheet and Liquidity: Stability and Growth

HBT's balance sheet grew modestly in the first quarter of 2025, with total assets increasing by 1.2% to $5.09 billion from $5.03 billion at December 31, 2024. This growth was significantly supported by an increase in cash and cash equivalents, which rose by $73.9 million to $211.6 million.

The deposit base remains a core strength and a key focus area for management. Total deposits increased by $66.3 million, or 1.5%, to $4.38 billion at March 31, 2025. This growth was primarily driven by higher balances in existing retail accounts, underscoring the effectiveness of the company's relationship-driven strategy. Core deposits, which exclude larger time deposits and brokered deposits, increased by $59.3 million and represented a strong 95.23% of total deposits, highlighting the stability and low-cost nature of HBT's funding. The company successfully transitioned the vast majority of repurchase agreement balances to reciprocal interest-bearing demand deposit accounts during the quarter, leading to a significant decrease in outstanding repurchase agreements. Uninsured deposits were estimated at $894.4 million as of March 31, 2025.

The loan portfolio, before the allowance for credit losses, was nearly unchanged at $3.46 billion compared to $3.47 billion at December 31, 2024. Growth in commercial and industrial loans (particularly grain elevator lines of credit due to seasonality) and municipal, consumer, and other segments was largely offset by payoffs in residential, multi-family, and commercial real estate non-owner occupied segments. The portfolio composition remains diversified across commercial, real estate, agricultural, and consumer segments.

HBT maintains robust liquidity. On-balance sheet liquidity, consisting of cash and unpledged securities, totaled $955.4 million at March 31, 2025. Additional available borrowing capacity from the FHLB, Federal Reserve, and federal funds lines provided a further $1.21 billion in liquidity. Management believes these sources are adequate to meet foreseeable short-term and intermediate-term demands for both the bank and the holding company.

Capital Strength and Shareholder Returns

HBT demonstrates solid capital strength, with all regulatory capital ratios for both the company and the bank exceeding minimum requirements and the capital conservation buffer as of March 31, 2025. Heartland Bank and Trust Company was classified as "well capitalized" under regulatory prompt corrective action provisions. The tangible common equity to tangible assets ratio, a key metric for assessing capital quality, improved to 9.73% at March 31, 2025, from 9.42% at December 31, 2024.

The company continues to prioritize returning capital to shareholders. In January 2025, the quarterly cash dividend was increased to $0.21 per share. Furthermore, the board authorized a new $15 million stock repurchase program effective January 1, 2025, valid until January 1, 2026, signaling confidence in the company's valuation and future prospects, although no repurchases were made under this program in Q1 2025.

Risks and Challenges

While HBT's performance is strong, potential risks warrant consideration. Interest rate risk remains prominent; while rising rates have benefited NIM, future rate decreases could reverse this trend. Credit risk is inherent in lending, and although current asset quality is excellent, a significant deterioration in economic conditions beyond the mild slowdown anticipated in management's forecast could lead to higher credit losses. Concentration risk, particularly within commercial real estate portfolios, is actively managed but remains a sensitivity point. Liquidity risk, while currently well-managed with ample capacity, could be impacted by large, unexpected deposit outflows, especially from uninsured deposits. Operational risks related to IT systems, third-party servicers, and cybersecurity threats are ongoing concerns. Legal proceedings, although the specific Meadows case has been settled in principle, represent a general risk inherent in the banking business. Increased competition from both traditional banks and fintech firms could pressure margins and market share over time.

Conclusion

HBT Financial's first quarter 2025 results underscore the strength of its core banking model, driven by a stable, low-cost deposit base, disciplined credit risk management, and effective balance sheet positioning that has capitalized on the interest rate environment to expand net interest margin. The significant increase in net income and strong profitability metrics, coupled with robust asset quality and capital levels, paint a picture of a financially healthy institution.

While the company faces ongoing challenges from interest rate fluctuations, competitive pressures, and the need for continued investment in digital capabilities, its foundational strengths in relationship banking within its core Midwest markets provide resilience. The strategic focus on growing deposits, maintaining asset quality, and returning capital to shareholders positions HBT to continue delivering value, making it a compelling consideration for investors seeking exposure to a well-managed regional bank with a clear path forward.