KBRA Affirms Ratings for HBT Financial, Inc.

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Bloomington, Illinois based HBT Financial, Inc. (NASDAQ: HBT) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Heartland Bank & Trust Company ("the bank"), the lead subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are underpinned by management’s conservative balance sheet stewardship, as evidenced by the consistently managed loan-to-deposit ratio, which generally remains in the 75% - 80% range. In addition, following the acquisition of Town and Country Financial Corporation in 1H23, the company’s regulatory CET1 ratio has rebounded to an above peer level and is on track to improve to historical levels (consolidated CET1 ratio of 13%).

The ratings are also underpinned by HBT’s low-cost and granular deposit franchise (top 100 depositors accounted for 13% of total deposits; cost of interest-bearing deposits was 1.72% for 2Q24). Furthermore, the company’s strong funding profile is supported by the relatively robust volume of noninterest-bearing deposits (24% of total deposits for 2Q24) and essentially no reliance on wholesale funding sources (1% of total liabilities, including brokered deposits).

The company’s relatively strong NIM performance since YE22, when FRB’s interest rate policy was reversed, was anchored off of an asset sensitive balance sheet, driven by the combination of a higher-than-peer yielding loan portfolio and a durable funding profile.

The company’s noninterest income typically constitutes around 15% of total revenue (or 75 bps of average assets) and is considered relatively diversified. Card income, wealth management fees, service charges, and mortgage servicing income comprise the majority of the fee income base and are considered higher quality, given that these are less correlated with lending activities (e.g., gain-on-sale), which are dependent upon the interest rate environment.

HBT’s asset quality metrics are sound, supported by proactive credit administration standards and conservative underwriting criteria, as evidenced by the de minimis NCO rate on a historical basis.

On-balance sheet liquidity sources remain adequate, with cash and cash equivalents and the total investment securities portfolio comprising 4% and 24% of total assets, respectively, as of 2Q24. In addition, the bank maintains borrowing capacity with the FHLB and FRB (including Fed Funds Line) amounting to $1.2 billion, which remains largely undrawn. Total uninsured deposits amounted to around 21% of total deposits as of 2Q24 and around 53% are public funds which are collateralized by investment securities ($558 million, or 47% of total securities). Total on-balance sheet liquidity sources (cash and cash equivalents and unpledged investment securities) amounted to around 175% of uninsured deposits.

Rating Sensitivities

Positive rating momentum would mostly likely be driven by consistently managed regulatory capital ratios at levels above similarly rated peer averages and on-balance sheet liquidity sources that are maintained at the current range or above through the near- to intermediate-term. Conversely, a shift to aggressive regulatory capital management or a significant deterioration in loan quality metrics such that earnings performance become highly volatile (including episodes of net losses) could drive a rating reassessment.

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