Hawthorn Bancshares, Inc. (HWBK) - Q2 2024 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2024. Hawthorn Bancshares, Inc. operates Hawthorn Bank, a community bank serving Missouri communities including Jefferson City, Columbia, and Kansas City. The company focuses on commercial banking, retail mortgage lending, and personal banking services. As of June 30, 2024, the company held total assets of $1.85 billion.
Key Financial Metrics
| Metric | Q2 2024 (3 Months) | YTD 2024 (6 Months) | Q2 2023 (3 Months) | YTD 2023 (6 Months) |
|---|---|---|---|---|
| Net Income | $4.63 million | $9.09 million | $2.55 million | $5.82 million |
| Earnings Per Share (Diluted) | $0.66 | $1.29 | $0.36 | $0.83 |
| Net Interest Income | $14.17 million | $28.92 million | $14.20 million | $28.15 million |
| Net Interest Margin (FTE) | 3.33% | 3.36% | 3.19% | 3.17% |
| Non-Interest Income | $4.00 million | $7.02 million | $1.60 million | $4.78 million |
| Non-Interest Expense | $12.03 million | $24.61 million | $12.73 million | $25.20 million |
| Efficiency Ratio | 66.2% | 68.5% | 80.5% | 80.5% |
| Return on Assets (ROA) | 1.02% | 0.99% | 0.54% | 0.62% |
| Return on Equity (ROE) | 13.75% | 13.43% | 7.99% | 9.10% |
| Total Loans (Held for Investment) | $1.50 billion | N/A | $1.56 billion | N/A |
| Total Deposits | $1.55 billion | N/A | $1.54 billion | N/A |
| Cash and Cash Equivalents | $75.84 million | N/A | $24.65 million | N/A |
Material Changes vs. Prior Period
- Profitability Surge: Net income for Q2 2024 increased 81.6% year-over-year, driven by a significant jump in non-interest income and improved operational efficiency.
- Non-Interest Income: Increased 150.4% to $4.0 million in Q2 2024. This was primarily due to earnings on bank-owned life insurance (BOLI) and a $0.45 million gain on the sale of other real estate owned (OREO), contrasting with a $1.79 million loss on OREO in Q2 2023.
- Expense Management: Non-interest expenses decreased 5.4% year-over-year to $12.0 million, aided by a reduction in full-time employees and lower advertising costs. The efficiency ratio improved significantly from 80.5% to 66.2%.
- Asset Quality: Non-performing loans decreased to $4.44 million (0.30% of total loans) from $6.41 million at year-end 2023, largely due to a $1.8 million charge-off of a commercial loan relationship and the foreclosure of a $2.7 million commercial real estate loan.
- Balance Sheet: Loans held for investment decreased $40.6 million from December 2023, while total deposits decreased $20.6 million. Cash and cash equivalents increased significantly to $75.8 million.
Guidance, Outlook, and Risks
- Strategic Shifts: The company sold its mortgage servicing rights (MSR) portfolio in Q1 2024, closing the transaction in Q2. Management is focusing on core banking lines and operational efficiencies.
- Capital Position: The company maintains a "well-capitalized" status. Total risk-based capital ratio was 14.30%, and Tier 1 leverage ratio was 10.94% as of June 30, 2024.
- Liquidity: Management reports adequate liquidity with $314.8 million in available funding capacity from the FHLB, Federal Reserve, and federal funds lines.
- Risks: Key risks include competitive pressures, interest rate volatility affecting net interest margins, general economic conditions in Missouri, and potential increases in non-performing assets. The company also notes risks related to cyber-security and integration of business targets.
- Share Repurchases: The company repurchased 51,692 shares in the first six months of 2024. Approximately $4.0 million remains available under the 2019 Repurchase Plan.
Investor Verification Checklist
- Non-Interest Income Sustainability: Verify the sustainability of the $0.5 million BOLI earnings and the one-time nature of the OREO gain compared to the prior year's OREO loss.
- Loan Portfolio Concentration: Review the composition of the $1.5 billion loan portfolio, specifically the 53.2% concentration in commercial real estate mortgages.
- Asset Quality Trends: Monitor the allowance for credit losses (1.47% of loans) against the reduction in non-performing loans to ensure reserves remain adequate.
- Deposit Stability: Assess the impact of the $20.6 million deposit outflow and the increase in brokered deposits to $30.4 million on future funding costs.
- Interest Rate Sensitivity: Review the interest rate risk model showing a potential 1.97% decrease in net interest income under a 200 basis point rate increase scenario.