Hawthorn Bancshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited consolidated results. Hawthorn Bancshares provides community banking, lending and trust services primarily in Missouri through Hawthorn Bank.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period |
|---|---|---|
| Net interest income | $13.9 million | $14.1 million, Q1 2022 |
| Net interest margin, FTE | 3.16% | 3.50%, Q1 2022 |
| Net income / diluted EPS | $3.3 million / $0.48 | $6.6 million / $0.97, Q1 2022 |
| Non-interest income / expense | $3.2 million / $12.5 million | $3.7 million / $12.2 million, Q1 2022 |
| Efficiency ratio | 72.84% | 68.42%, Q1 2022 |
| Total assets | $1.896 billion | $1.924 billion, Dec. 31, 2022 |
| Loans held for investment | $1.542 billion | $1.521 billion, Dec. 31, 2022; $1.334 billion, March 31, 2022 |
| Total deposits | $1.608 billion | $1.632 billion, Dec. 31, 2022; up 10.4% year over year |
| Cash and cash equivalents | $33.8 million | $83.7 million, Dec. 31, 2022 |
| Total borrowings | $147.6 million | $152.7 million, Dec. 31, 2022 |
| Stockholders’ equity | $128.4 million; 6.77% of assets | $127.4 million and 6.62%, Dec. 31, 2022 |
| Regulatory capital | Company total risk-based ratio 13.81%; CET1 9.77%; Tier 1 leverage 10.43% | Company ratios were 13.85%, 9.89% and 10.76%, respectively, at Dec. 31, 2022 |
Operating activities provided $3.4 million of cash; investing activities used $23.1 million and financing activities used $30.3 million. The resulting $49.9 million decrease brought period-end cash and cash equivalents to $33.8 million. Financing outflows reflected a $115.4 million decline in demand and interest-bearing transaction accounts, partly offset by a $91.4 million increase in time deposits.
Material changes and credit quality
- Net income fell 50.5% year over year. Higher asset yields and loan growth lifted FTE interest income by $5.3 million, but interest expense rose $5.7 million as deposit and borrowing costs increased; FTE net interest income declined $0.4 million.
- Mortgage-loan sale gains declined $0.4 million to $0.5 million, primarily reflecting lower sales volume. Non-interest expense increased 2.1% year over year; loan expense included an adjustment to dealers’ reserves related to prior-year activity.
- Non-performing loans were $19.6 million, or 1.27% of loans, versus $18.7 million at year-end and $17.1 million a year earlier. Management attributed the year-over-year increase primarily to four large non-accrual loan relationships; non-accrual commercial real estate mortgage loans were $18.4 million.
- The allowance for credit losses was $22.0 million, or 1.43% of loans, versus $15.6 million, or 1.02%, at year-end. Net charge-offs were $52,000 in Q1 2023. Classified assets were $91.6 million, down from $95.1 million at year-end.
- Available-for-sale securities had $40.8 million of gross unrealized losses at quarter-end, which the company attributed to interest rates rather than credit deterioration. The company reported no related credit-loss allowance and said it did not intend, and was not expected, to be required, to sell the securities before recovery.
Liquidity, capital, outlook and risks
- On January 1, 2023, Hawthorn adopted CECL. Adoption increased the loan allowance by $5.8 million, established a $1.3 million liability for unfunded commitments and reduced retained earnings by $5.6 million after tax. Q1 provision for loan and unfunded-commitment losses was $0.7 million, compared with a $2.5 million release in Q1 2022; the accounting change limits direct comparability.
- Management stated that liquidity was more than adequate, citing $301.0 million of estimated available capacity across FHLB, Federal Reserve and federal-funds lines. However, cash fell substantially, unpledged available-for-sale securities declined to approximately $54.4 million from $139.2 million at year-end, and estimated uninsured deposits rose to $463.7 million. Uninsured and uncollateralized deposits were 17% of total deposits. Core deposits were $1.393 billion, or 86.6% of deposits.
- Regulatory capital ratios remained above applicable well-capitalized thresholds. The company paid $1.2 million in common dividends and said it expected to continue quarterly dividends subject to board discretion and regulatory requirements. No shares were repurchased in the quarter.
- The filing provides no numerical earnings or operating guidance. Management identifies sensitivity to interest rates, funding costs, deposit liquidity, economic conditions, credit quality, inflation, regulatory changes and banking-industry disruption. It specifically added risks related to recent bank failures and possible effects on customer confidence, funding, liquidity and industry costs.
- The balance sheet is described as liability-sensitive: modeled net interest income rises 0.58% under an immediate 200-basis-point rate increase and 2.79% under a 200-basis-point decrease. These are model estimates, not forecasts, and depend on assumptions about rates, deposits and customer behavior.
- Management said pending litigation was not expected to materially adversely affect financial condition or results in the near term. The filing also notes ongoing LIBOR transition work.
Important facts for investors to verify
- Whether deposit balances and mix stabilize, particularly given the decline in transaction accounts, increase in large time deposits and higher uninsured deposits.
- Whether deposit repricing and borrowing costs continue to pressure net interest margin and earnings.
- Developments in the four large non-accrual relationships, commercial real estate exposure and the adequacy of the CECL allowance.
- Liquidity available in practice, including collateral availability and the market value of securities, given the decline in unpledged securities and sizable unrealized losses.
- Future capital ratios, dividend capacity and actual results versus the company’s interest-rate sensitivity assumptions.