Hawthorn Bancshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Hawthorn is a Missouri community bank holding company operating through Hawthorn Bank. All dollar amounts below are U.S. dollars; financial statement amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net interest income | $14.75 | $13.95 |
| Net interest margin, fully taxable equivalent | 3.39% | 3.16% |
| Non-interest income | $3.02 | $3.18 |
| Non-interest expense | $12.58 | $12.48 |
| Credit loss provision (release) | ($0.23) | $0.68 |
| Net income | $4.46 | $3.27 |
| Diluted earnings per share | $0.63 | $0.47 |
| Efficiency ratio | 70.78% | 72.84% |
Net income increased 36.2% year over year. Higher loan yields and interest income more than offset increased funding costs: interest expense rose to $9.30 million from $6.99 million. The reported effective tax rate was 17.8% in both periods. Return on average assets was 0.97% and return on average equity was 13.12%.
Balance sheet, liquidity and capital
- At March 31, 2024, total assets were $1.834 billion, down from $1.875 billion at December 31, 2023. Loans held for investment were $1.519 billion, down $20.3 million from year-end.
- Deposits were $1.528 billion, down $43.0 million, or 2.7%, from year-end. Management attributed the decline primarily to reducing public-fund exposure. Brokered deposits rose to $30.3 million from $0.2 million at year-end.
- Cash and cash equivalents fell $50.0 million to $43.5 million. The company reported $5.6 million of operating cash inflow, $13.0 million of investing cash outflow and $42.6 million of financing cash outflow for the quarter.
- Outstanding FHLB advances and other borrowings were $109.0 million; subordinated notes were $49.5 million. Management reported $320.1 million of available borrowing capacity across identified facilities and said liquidity was adequate.
- Core deposits were $1.397 billion, or 91.5% of deposits. Estimated uninsured deposits were $345.3 million; $96.1 million of public-fund deposits above the insurance limit were collateralized.
- Stockholders’ equity was $136.6 million, or 7.45% of assets. Company regulatory ratios included total risk-based capital of 13.92%, Tier 1 risk-based capital of 12.51%, CET1 of 9.68%, and Tier 1 leverage of 10.71%. Management reported that the company and bank met capital requirements; the bank met the ratios for “well-capitalized” status.
Asset quality and notable changes
- Non-performing loans increased to $8.5 million from $6.4 million at December 31, 2023; non-performing assets rose to $10.5 million from $8.2 million. Non-performing loans were 0.56% of loans, versus 0.42% at year-end. They were lower than the $19.6 million reported at March 31, 2023, partly because three large non-accrual relationships returned to accrual status.
- The allowance for credit losses on loans was $23.7 million, or 1.56% of loans, compared with 1.54% at year-end. Net charge-offs were approximately $69,000. The quarterly $230,000 release in credit-loss provision mainly reflected lower unfunded commitments and reduced pooled reserves.
- Commercial real estate mortgage loans were $807.7 million, 53.2% of the loan portfolio. The available-for-sale securities portfolio had a $30.1 million gross unrealized loss at quarter-end, attributed by management to interest rates rather than credit quality. The company said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- The company purchased $35.0 million of bank-owned life insurance during the quarter; its carrying value reached $37.8 million from $2.6 million at year-end. The purchase was a major use of investing cash.
- The company sold its mortgage servicing rights portfolio on January 31, 2024; serviced loans were scheduled to transfer to the buyer on April 30. Q1 real estate servicing fees and mortgage-loan sale gains were lower year over year. The company also repurchased 20,995 shares for $0.4 million and declared a $0.17-per-share dividend.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management emphasized core-business profitability, operational efficiency and investment in technology and consulting. It expects to continue quarterly cash dividends, subject to board approval, liquidity and regulatory capital requirements. Interest-rate sensitivity modeling estimated that an immediate, sustained 200-basis-point increase would reduce projected net interest income by 3.11%; management cautioned that actual results could differ materially because the model depends on assumptions.
Disclosed risks include deposit competition and funding costs, interest-rate changes, economic and credit deterioration, loan delinquencies and allowance estimates, regulation, inflation, securities-market changes, and cybersecurity or technology disruptions. The company reported no material changes to the risk factors in its 2023 Form 10-K. It has $283.1 million of commitments to extend credit and $36.6 million of standby letters of credit; these contractual amounts are not necessarily expected cash requirements. Management said pending litigation was not expected to materially adversely affect near-term financial condition or results, while noting some matters were too early to assess for probable loss or estimate an amount. A settlement related to termination of a canceled digital account-opening project contributed to higher legal and professional fees; the filing does not provide a clear value for that settlement.
Important facts for investors to verify
- Deposit trends, including the rise in brokered deposits, uninsured deposit exposure and the company’s strategy to reduce public funds.
- Commercial real estate credit performance, including the increase in non-performing loans since year-end and the movement in criticized or classified credits.
- Funding-cost trends and the effect of interest rates on net interest margin, securities values and modeled earnings sensitivity.
- Liquidity and capital capacity after the $35.0 million life-insurance purchase, alongside planned dividends and share repurchases.
- Completion and financial effects of the mortgage-servicing transfer, and any costs or obligations remaining from the canceled digital account-opening project.