Hawthorn Bancshares, Inc. — 2021 Q2 Form 10-Q
Business context and reporting period. Hawthorn Bancshares is a Missouri community banking holding company operating through Hawthorn Bank, with commercial, real estate, consumer, mortgage, and trust businesses. This unaudited filing covers the quarter and six months ended June 30, 2021. Income statement comparisons are with the same 2020 periods; balance sheet comparisons are primarily with December 31, 2020.
Financial performance and position
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net interest income | $13.67 | $13.34 in Q2 2020 |
| Non-interest income | $4.59 | $2.86 in Q2 2020 |
| Net income; diluted EPS | $4.89; $0.74 | $3.28; $0.49 in Q2 2020 |
| Net interest margin, fully taxable equivalent | 3.40% | 3.46% in Q2 2020 |
| Efficiency ratio | 64.45% | 69.59% in Q2 2020 |
| Total assets | $1,708.97 | $1,733.73 at December 31, 2020 |
| Loans held for investment | $1,293.89 | $1,286.97 at December 31, 2020 |
| Total deposits | $1,381.00 | $1,383.61 at December 31, 2020 |
| Stockholders’ equity | $136.50 | $130.59 at December 31, 2020 |
- Six-month results: net interest income was $28.06 million versus $25.87 million; net income was $10.73 million versus $4.15 million; diluted EPS was $1.62 versus $0.61. Return on average assets was 1.26%, return on average equity 16.31%, and efficiency ratio 63.14%.
- Revenue and margins: Q2 net interest income plus non-interest income was approximately $18.26 million, up from $16.20 million a year earlier. Lower funding costs and higher average earning assets supported net interest income, while lower asset yields weighed on the quarterly margin. Mortgage loan sale gains contributed materially to non-interest income.
- Credit provision: provision for loan losses was $0.40 million in Q2 2021 versus $0.90 million in Q2 2020; the six-month provision was $0.40 million versus $4.20 million. The allowance was $18.74 million, or 1.45% of loans, compared with $18.11 million, or 1.41%, at year-end 2020.
- Cash flow and liquidity: operating activities provided $12.99 million in the first six months; investing activities used $84.24 million, largely reflecting $114.52 million of securities purchases; financing activities used $32.68 million. Cash and cash equivalents fell $103.93 million to $76.43 million. Management reported $341.69 million of liquid assets, including available-for-sale securities, and approximately $259.11 million in additional stated funding capacity from FHLB, Federal Reserve, and federal funds lines.
- Debt and capital: borrowings totaled approximately $175.06 million, down from $201.31 million at year-end, including $49.49 million of subordinated notes. Company capital ratios were 14.66% total risk-based, 13.20% Tier 1 risk-based, 9.91% common equity Tier 1, and 10.49% Tier 1 leverage. Management said the Company and Bank met applicable capital requirements; the Bank was reported as well capitalized.
Material changes versus comparable periods
- Q2 net income increased 49.1%; first-half net income increased 158.6%. Lower loan-loss provision and higher mortgage-related and fee income were significant contributors.
- Non-interest income rose 60.7% in Q2 and 75.5% in the first half. Mortgage loan sale gains were $2.04 million for Q2 and $4.51 million for the first half, compared with $0.92 million and $1.34 million, respectively, in 2020.
- Non-interest expense increased 4.4% in Q2 and 7.6% in the first half. Salary, employee benefits, and processing/network costs were among the increases; management cited staffing for the mortgage unit and higher benefit and processing costs.
- Total loans rose modestly from year-end, while the securities portfolio increased to $276.01 million from $198.03 million. Cash and cash equivalents declined as securities were purchased and funding balances changed.
- Non-performing loans were $33.79 million, or 2.61% of loans, at June 30, 2021, versus $34.58 million, or 2.69%, at year-end 2020, but were substantially above $8.91 million, or 0.70%, at June 30, 2020. Non-performing assets were $45.73 million, including $11.94 million of other real estate owned.
Outlook, risks, contingencies, and unusual items
- Outlook: No quantified earnings or margin guidance is provided. Management expected short-term liquidity needs from daily operations not to vary significantly during 2021, and intended to continue growing the investment portfolio subject to available liquidity. It said pandemic effects remained uncertain and would be monitored.
- COVID-19 and credit: At June 30, $42.8 million of loans remained under pandemic-related modifications, including $26.4 million on full deferral; $23.5 million of the full-deferral balance was non-accrual. The filing also reports $19.2 million of loans accepting CARES Act forbearance, whose delinquency status was not changed during the forbearance period. Management warned that borrower distress, especially in hotel/lodging, restaurants, entertainment, retail, healthcare, and commercial real estate, could lead to downgrades, increased provision, reversal of uncollected interest, or charge-offs. Criticized loan levels remained elevated versus pre-pandemic levels.
- PPP: Net PPP loans were $49.6 million at quarter-end. Management recorded no allowance for these loans, citing the SBA’s 100% credit guarantee, and expected most to be repaid or forgiven over the following six to twelve months.
- Interest-rate exposure: The model showed projected net interest income declining 1.02% under an immediate sustained 200-basis-point increase and 3.07% under a 200-basis-point decrease. Management considered the modeled exposure acceptable; actual results may differ due to assumptions and actions taken.
- Commitments and litigation: Off-balance-sheet commitments totaled $297.23 million, including $271.12 million to extend credit, $22.49 million to originate residential mortgage loans, and $3.63 million of standby letters of credit. No estimated losses were accrued. The Company is involved in ordinary-course legal actions; management did not believe they were reasonably likely to materially adversely affect near-term financial condition or results.
- Shareholder items: A 4% special stock dividend was paid July 1, 2021, with share and EPS data restated retrospectively. The Company repurchased $2.15 million of stock in Q1, none in Q2, and reported $5.0 million available under its repurchase authorization. Cash dividends paid in the first half were $1.67 million.
- Other reporting matters: Management reported effective disclosure controls and no material change in internal control over financial reporting. CECL adoption was planned for January 1, 2023; the impact had not yet been determined.
Important facts for investors to verify
- Whether the sharp year-over-year improvement in earnings is sustainable as mortgage loan sale gains, PPP fee income, and unusually low provision levels change.
- Credit performance of the $42.8 million modified-loan balance, particularly the $23.5 million non-accrual portion, and the elevated non-performing loan level versus June 2020.
- Whether allowance coverage and collateral valuations remain adequate as pandemic-related support and forbearance expire or borrowers’ conditions change.
- How continued securities purchases, deposit movements, PPP forgiveness, and pledged collateral affect liquidity and funding needs.
- Actual sensitivity of net interest income to rate movements and the effect of changing asset yields, deposit costs, and subordinated-note repricing.
- The filing’s cash flow and liquidity figures, capital ratios, and share-repurchase authorization against subsequent filings and regulatory reports.