Hawthorn Bancshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021 unless otherwise noted. Hawthorn Bancshares, through Hawthorn Bank, provides community banking, lending, mortgage, and trust services in Missouri. Amounts below are in millions except per-share data and ratios.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net interest income | $14.1 | $14.4 | Down $0.2 |
| Non-interest income | $3.7 | $4.6 | Down $0.8 |
| Non-interest expense | $12.2 | $11.8 | Up $0.4 |
| Release of loan-loss provision | $2.5 | — | — |
| Net income | $6.6 | $5.8 | Up $0.8 |
| Diluted EPS | $1.00 | $0.88 | Up $0.12 |
| Net interest margin, FTE | 3.50% | 3.61% | Down 0.11 percentage points |
Net income increased 13% year over year despite lower net interest and non-interest income. The $2.5 million negative provision (release) materially supported earnings; management attributed it primarily to releasing $2.8 million of specific reserves as significant loans returned to accrual status or collateral values were adjusted. Mortgage-loan sale gains fell to $0.9 million from $2.5 million as secondary-market sales declined. The efficiency ratio increased to 68.4% from 62.1%.
Balance sheet, liquidity, and capital
- Assets: $1.736 billion, down $95.9 million from year-end. Loans held for investment grew $31.8 million to $1.334 billion; commercial real estate mortgage loans were 50.8% of the portfolio.
- Deposits: $1.456 billion, down $60.7 million from year-end, primarily reflecting a reduction in interest-bearing transaction balances and public-fund deposits. Deposits were up 4.5% year over year. Core deposits were $1.351 billion, or 92.8% of deposits; estimated uninsured deposits were $430.4 million.
- Cash and cash equivalents: $50.5 million, down $109.4 million from year-end. Operating activities provided $4.4 million; investing and financing activities used $33.1 million and $80.7 million, respectively. Management attributed much of the financing outflow to public-fund deposit movements and lower repurchase-agreement balances.
- Liquidity: Reported liquid assets totaled $319.4 million, including $286.8 million of available-for-sale securities. Management said liquidity was more than adequate, citing $270.4 million of additional estimated funding capacity across FHLB, Federal Reserve, and federal-funds lines.
- Borrowings: $132.4 million, including $77.4 million of FHLB advances, $49.5 million of subordinated notes, and $5.5 million of repurchase agreements; total was down from $150.7 million at year-end.
- Capital: Stockholders’ equity was $134.4 million, down from $149.0 million. The decline principally reflected a $19.6 million after-tax unrealized securities loss in other comprehensive income, partly offset by earnings. The company reported a 14.66% total risk-based capital ratio, 10.36% CET1 ratio, and 10.99% Tier 1 leverage ratio; it stated regulatory capital remained above required well-capitalized levels.
Material changes, risks, and outlook
- Available-for-sale securities fell to $286.8 million from $310.9 million. Gross unrealized losses rose to $24.6 million from $2.5 million, which management attributed to interest-rate movements rather than credit deterioration. The filing says the company did not intend, and was not more likely than not required, to sell the securities before recovery.
- Asset-quality indicators improved: non-performing loans fell to $17.1 million from $25.5 million at year-end, and non-performing assets fell to $26.9 million from $36.0 million. The allowance declined to $14.3 million, or 1.07% of loans, from $16.9 million, or 1.30%.
- Potential problem loans classified as substandard (including performing TDRs) rose to approximately $21.9 million from $13.8 million. Management said the allowance was sufficient, but collateral values and borrower performance remain important uncertainties.
- Management provided no specific earnings or growth guidance. It cautioned that competition, interest-rate changes, economic conditions in Missouri and nationally, credit quality, securities markets, regulation, and COVID-19 developments could affect results. A 200-basis-point rate increase was modeled to raise projected net interest income 1.84%; a 200-basis-point decrease was modeled to reduce it 3.28%. These are estimates based on assumptions, not forecasts.
- The company reported $418.5 million of off-balance-sheet commitments, including $398.5 million to extend credit and $4.3 million of standby letters of credit; it had accrued no estimated losses on these instruments. Management did not believe pending litigation would materially adversely affect financial condition or results in the near term. No material change in previously disclosed risk factors was reported.
- The company repurchased 23,536 shares for $0.6 million during the quarter and declared a $0.15 per-share dividend. It said it expected to continue quarterly dividends subject to board discretion and regulatory requirements; $4.4 million remained under the repurchase authorization.
Important facts for investors to verify
- Whether the $2.5 million loan-loss release is repeatable, and whether returning loans remain current and well collateralized.
- Trends in substandard and commercial real estate loans, the allowance for loan losses, and non-performing assets.
- The effect of interest rates on net interest margin, deposit costs, securities valuations, and the company’s ability to avoid realizing securities losses.
- Deposit stability and liquidity, including public-fund and uninsured-deposit movements and actual availability of stated borrowing capacity.
- Future mortgage originations and loan-sale gains, which were substantially lower year over year, and the trajectory of operating expenses.