Hawthorn Bancshares, Inc. — Q3 2022 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2022. Hawthorn is a Missouri community banking company whose primary revenue source is net interest income; its lending includes commercial, commercial real estate and residential mortgage loans.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $15.1 million | $15.4 million | $43.8 million | $43.4 million |
| Provision (release) for loan losses | $0.3 million | $0.3 million | ($1.0 million) | $0.7 million |
| Non-interest income | $3.5 million | $3.8 million | $10.9 million | $13.0 million |
| Non-interest expense | $12.2 million | $11.8 million | $36.0 million | $35.4 million |
| Net income | $4.9 million | $5.8 million | $16.0 million | $16.5 million |
| Diluted earnings per share | $0.73 | $0.84 | $2.36 | $2.40 |
| Net interest margin, FTE | 3.56% | 3.78% | 3.57% | 3.60% |
| Efficiency ratio | 65.7% | 61.4% | 65.8% | 62.7% |
- Q3 net income declined 15.0% year over year; nine-month net income declined 3.0%. Q3 net interest income was down $0.3 million year over year, while nine-month net interest income rose $0.3 million.
- Q3 and nine-month non-interest income fell 7.7% and 16.5%, respectively, chiefly because mortgage loan sale gains declined. Nine-month gains on mortgage loan sales were $2.3 million, versus $5.9 million a year earlier.
- Higher funding costs pressured margins: Q3 interest expense was $2.8 million versus $1.4 million, and the average cost of interest-bearing liabilities rose to 0.93% from 0.50%.
- Nine-month operating cash flow was $14.2 million; investing used $180.3 million, primarily reflecting $190.2 million of net loan growth. Financing provided $47.6 million. Cash and cash equivalents ended at $41.4 million, down from $159.9 million at December 31, 2021.
Financial position, credit and liquidity
- Total assets were $1.848 billion at September 30, 2022, versus $1.832 billion at December 31, 2021. Loans held for investment were $1.492 billion, up $189.9 million; deposits were $1.593 billion, up $76.0 million.
- Stockholders’ equity was $115.4 million, down from $149.0 million. Accumulated other comprehensive loss reached $40.1 million, largely reflecting $54.5 million of unrealized losses on available-for-sale securities attributed by the company to interest-rate movements. The company stated it did not intend, and was not more likely than not required, to sell these securities before recovery.
- Borrowings totaled $128.4 million: $73.0 million of FHLB advances, $49.5 million of subordinated notes and $5.9 million of repurchase agreements. The company reported $261.2 million of additional borrowing capacity across listed facilities and said liquidity was adequate.
- Core deposits were $1.446 billion, or 90.8% of deposits. Estimated uninsured deposits were $538.5 million; brokered deposits were $36.1 million.
- Non-performing loans were $17.3 million, or 1.16% of loans, versus $25.5 million at December 31, 2021. Non-performing assets were $26.6 million. The allowance for loan losses was $15.5 million, or 1.04% of loans, compared with $16.9 million, or 1.30%, at year-end. The nine-month $1.0 million provision release primarily reflected the return of one large loan relationship to accrual status.
- Regulatory capital ratios remained above well-capitalized thresholds, including a 13.84% total risk-based capital ratio and 10.60% Tier 1 leverage ratio at the holding company.
Outlook, risks and notable items
- The filing gives no specific earnings or financial guidance. Management identifies interest-rate changes, inflation, competition, local and national economic conditions, loan quality and securities-market changes as risks. Rate-sensitivity modeling estimated net interest income changes of +0.88% under an immediate +200 basis-point shock and -2.11% under a -200 basis-point shock; actual outcomes may differ.
- CECL was scheduled for adoption January 1, 2023. Management expected a one-time retained-earnings adjustment to increase the loan-loss allowance, but the amount was not stated; it did not expect a material impact on capital adequacy or business strategies.
- The company paid a 4% special stock dividend in July 2022; share and EPS data were retroactively adjusted. It repurchased 108,724 shares for $2.9 million during the first nine months, with $2.1 million remaining under the authorization.
- Off-balance-sheet commitments totaled $426.3 million, including $362.6 million of commitments to extend credit and $56.2 million of standby letters of credit. No estimated losses were accrued. Management said pending litigation was not expected to materially adversely affect near-term financial condition or results.
Key facts for investors to verify
- Whether loan growth and deposit costs sustain or further pressure net interest margin and earnings.
- Credit performance and collateral values, especially the large commercial real estate non-accrual exposure; assess the allowance against loan growth and potential economic deterioration.
- The duration and liquidity implications of securities unrealized losses, alongside uninsured and brokered deposit trends.
- The size and capital effect of the CECL adoption adjustment once determined.
- Whether mortgage banking income, expenses and the company’s capital distributions remain consistent with future operating needs and regulatory requirements.