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 lead subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by HBT’s peer leading funding profile, underpinned by a historically strong retail-based deposit franchise that has experienced low betas across various interest rate cycles. HBT’s cost of deposits remained very attractive at just 33 bps in 1H23, stemming from the rich deposit market share in the majority of its legacy markets, as well as a solid noninterest-bearing deposit component—tracking above 25% of total deposits. HBT’s loan to core deposit ratio of ~80% remains well below peers, and further supports the company’s balance sheet flexibility, in our view. Having benefited from an asset sensitive balance sheet, HBT’s NIM has proven resilient through 1H23, driven by comparatively higher loan yields (5.84%) and the aforementioned low total deposit cost. While, we anticipate HBT's NIM to be moderately compressed through 2H23, it is expected to perform better than the average of rated peers. HBT’s earnings performance in 1H23 reflected the impact of merger related expenses in connection with Town and Country Financial Corporation (Town and Country) transaction that closed in February 2023, in addition to lower noninterest income due to losses from sale of securities. Core ROA (excluding merger related expenses, losses on securities, and MSR adjustments) was strong, at 1.60% in 1H23. HBT’s asset quality metrics are sound, supported by proactive credit administration standards and conservative credit underwriting criteria. We also attribute the company’s healthy credit quality performance to its relationship-based business model. We consider the management team as highly experienced with a strong understanding of its operating markets, which we believe has also contributed to the company’s low credit loss experience. HBT’s capital remained well managed and continued to track above the average of rated peers, though regulatory capital, measured by the CET1 ratio (11.8% at 2Q23), reflected a 130 bp decline from YE22 stemming from impacts from the merger with Town and Country, in addition to moderate share repurchases totaling $5.7 million in 1H23. Furthermore, the TCE ratio (7.5%) at 2Q23 reflected the negative impact of accumulated other comprehensive income (AOCI) markdowns. Considering HBT’s overall risk profile, and its internal capital generation capacity, we view the company’s capital protection as adequate as of 2Q23.

Rating Sensitivities

Better than peer profitability measures reflecting greater fee income diversification along with the maintenance of above average asset quality metrics, comparatively strong capitalization, and increased geographic scale could lead to positive rating momentum over time. Deterioration in asset quality metrics beyond peer experience leading to a significant decline in earnings performance, or substantial capital depletion could negatively impact ratings.

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Methodologies