Hawthorn Bancshares, Inc. (HWBK) - Q3 2024 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended September 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 trust services. As of the reporting date, the company held $1.81 billion in total assets.
Key Financial Metrics
| Metric | Q3 2024 (3 Months) | Q3 2023 (3 Months) | YTD 2024 (9 Months) | YTD 2023 (9 Months) |
|---|---|---|---|---|
| Net Income | $4.57 million | $2.58 million | $13.66 million | $8.40 million |
| Earnings Per Share (Diluted) | $0.66 | $0.36 | $1.95 | $1.19 |
| Net Interest Income | $14.33 million | $15.15 million | $43.25 million | $43.30 million |
| Non-Interest Income | $3.78 million | $0.61 million | $10.80 million | $5.38 million |
| Non-Interest Expense | $11.99 million | $12.57 million | $36.60 million | $37.77 million |
| Net Interest Margin (FTE) | 3.36% | 3.35% | 3.36% | 3.23% |
| Efficiency Ratio | 66.23% | 79.79% | 67.73% | 79.79% |
| Return on Assets (ROA) | 1.00% | 0.54% | 1.00% | 0.59% |
| Return on Equity (ROE) | 12.87% | 8.05% | 13.24% | 8.73% |
| Total Loans (Held for Investment) | $1.47 billion | $1.56 billion | $1.47 billion | $1.56 billion |
| Total Deposits | $1.50 billion | $1.58 billion | $1.50 billion | $1.58 billion |
| Cash and Cash Equivalents | $54.22 million | $27.85 million | $54.22 million | $27.85 million |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased 77.4% year-over-year for Q3 and 62.6% year-over-year for the nine-month period. This was driven by a significant increase in non-interest income and improved expense management.
- Non-Interest Income Volatility: Non-interest income jumped 524% in Q3 2024 compared to Q3 2023. This was primarily due to a $0.26 million gain on other real estate owned (OREO) and $0.52 million in earnings on bank-owned life insurance (BOLI), contrasting with a $2.8 million loss on OREO in the prior year quarter.
- Expense Reduction: Non-interest expenses decreased 4.6% in Q3 and 3.1% YTD, attributed to workforce reductions and the transition to an in-house marketing team. The efficiency ratio improved significantly to 66.2% from 79.8%.
- Asset Quality: Non-performing assets (NPA) increased to $8.45 million (0.58% of loans) from $7.41 million in the prior year. This increase was driven by a $2.0 million commercial loan moving to non-accrual and a $1.1 million commercial real estate loan foreclosure. Net charge-offs were $0.64 million for the quarter.
- Balance Sheet Contraction: Total loans decreased $72.4 million from year-end 2023 due to normal amortization and weaker demand. Total deposits decreased $67.3 million, primarily due to a reduction in public funds.
Guidance, Outlook, and Risks
- Capital Position: The company maintains a "well-capitalized" status. Total risk-based capital ratio is 14.91%, and Tier 1 leverage ratio is 11.33%.
- Liquidity: Management reports adequate liquidity with $324.5 million in available funding capacity from the FHLB, Federal Reserve, and federal funds lines. Cash and cash equivalents increased to $54.2 million.
- Shareholder Returns: The company repurchased 56,692 shares in the first nine months of 2024. $3.9 million remains available under the repurchase plan. Quarterly dividends of $0.19 per share were declared in Q3.
- Risk Factors: Key risks include interest rate fluctuations affecting net interest margin, potential increases in non-performing assets due to economic conditions, and competitive pressures. The company noted that forward-looking statements are subject to uncertainties regarding inflation, geopolitical conflicts, and regulatory changes.
- Unusual Items: The sale of the mortgage servicing rights portfolio in Q1 2024 eliminated related valuation volatility. The significant gain on OREO sales in Q3 2024 was a non-recurring item that boosted earnings.
Investor Verification Checklist
- Sustainability of Non-Interest Income: Verify if the $3.8 million non-interest income run rate is sustainable given the one-time nature of the OREO gains and the specific timing of BOLI earnings.
- Asset Quality Trends: Monitor the $2.0 million commercial loan that moved to non-accrual in Q3 and the $1.1 million CRE foreclosure to assess if credit deterioration is accelerating.
- Deposit Stability: Review the composition of the $67 million deposit outflow to determine if the loss of public funds impacts long-term funding costs.
- Loan Demand: Assess the impact of the $72 million loan portfolio contraction on future revenue growth in a high-interest-rate environment.
- Capital Deployment: Evaluate the remaining $3.9 million share repurchase authorization and dividend policy in the context of the "well-capitalized" regulatory status.