Hawthorn Bancshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Hawthorn Bancshares operates Hawthorn Bank, a Missouri community bank serving individuals and businesses. Comparisons below are to Q2 or first-half 2021 unless otherwise noted; balance-sheet comparisons are to December 31, 2021.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $14.6 million | $13.7 million | $28.7 million | $28.1 million |
| Net income | $4.5 million | $4.9 million | $11.1 million | $10.7 million |
| Diluted EPS | $0.66 | $0.71 | $1.63 | $1.56 |
| Net interest margin, FTE | 3.64% | 3.40% | 3.57% | 3.51% |
| Efficiency ratio | 63.38% | 64.59% | 65.87% | 63.34% |
Q2 net income was down 8% year over year despite higher net interest income; the company attributed the revenue pressure mainly to lower mortgage-loan sale gains. First-half net income rose 3%. Q2 return on average assets was 1.04% and return on average equity was 14.00%; first-half figures were 1.28% and 16.33%, respectively.
Financial position, cash flow and credit
- Assets and lending: Total assets were $1.790 billion, versus $1.832 billion at year-end. Loans held for investment were $1.428 billion, up $125.7 million (about 9.6%) from year-end; commercial real estate mortgages represented 49.5% of loans.
- Deposits and borrowings: Deposits totaled $1.531 billion, up $14.0 million from year-end. Borrowings were $124.4 million, including $68.0 million of FHLB advances, $49.5 million of subordinated notes and $6.9 million in repurchase agreements; total borrowings were $150.7 million at year-end.
- Liquidity and cash flow: Cash and cash equivalents fell to $28.2 million from $159.9 million at year-end. First-half operating activities provided $6.5 million; investing activities used $121.0 million, principally reflecting $125.8 million of net loan growth; financing activities used $17.2 million. Management reported $291.2 million of available borrowing capacity and considered liquidity adequate. Liquid assets listed by the company totaled $279.7 million, including available-for-sale securities.
- Credit quality: Non-performing loans were $17.8 million, versus $25.5 million at year-end; non-performing assets were $27.0 million, versus $36.0 million. The allowance for loan losses was $15.4 million, or 1.08% of loans, compared with $16.9 million, or 1.30%, at year-end. First-half results included a $1.3 million net release of loan-loss provision; Q2 alone recorded $1.2 million of provision expense.
- Capital and securities: Stockholders’ equity was $124.1 million, down from $149.0 million at year-end. The company reported a 13.97% total risk-based capital ratio, 12.53% Tier 1 risk-based ratio and 9.85% CET1 ratio; management said regulatory capital requirements were met. Available-for-sale securities had a $38.9 million gross unrealized loss at quarter-end, primarily attributed to interest-rate changes; accumulated other comprehensive loss was $27.7 million, versus $3.3 million of income at year-end.
Material changes and notable items
- Q2 net interest income increased 6.5% year over year, supported by loan and securities growth; FTE net interest margin rose to 3.64% from 3.40%.
- Non-interest income fell 21.7% in Q2 and 20.1% in the first half. Mortgage-loan sale gains declined 60.5% in Q2 and 62.4% year to date as secondary-market loan sales slowed.
- First-half loan-loss provision was a net release of $1.3 million, including $2.8 million of specific-reserve releases in Q1 as certain loans returned to accrual status or had collateral valuation adjustments. Q2’s provision expense partly offset that release.
- The company paid a 4% special stock dividend on July 1, 2022, and repurchased $2.9 million of shares in the first half. The regular cash dividend declared was $0.32 per share for the first half.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management said it expects to continue quarterly cash dividends, subject to board approval and regulatory capital requirements. It described liquidity as adequate, while noting that actual interest-rate exposure and results may differ from modeled estimates. Reported risks include changing interest rates, inflation, economic weakness in Missouri, loan-credit deterioration, competition, regulatory or tax changes, securities-market changes and possible renewed COVID-19 impacts. The company was evaluating CECL adoption, expected January 1, 2023; the amount of any initial allowance adjustment had not been determined. Management said pending legal matters were not expected to materially adversely affect near-term financial condition or results; some matters were too early to assess for probable or estimable losses.
Important facts for investors to verify
- Whether loan growth and improving reported non-performing-loan levels persist, and whether the allowance remains adequate as credit conditions change.
- How rising rates affect deposit costs, net interest margin, loan demand and the value or potential saleability of the securities portfolio.
- Whether slower mortgage originations and loan sales continue to pressure non-interest income.
- The realized impact of CECL adoption, including the opening allowance adjustment and related disclosures.
- Liquidity and funding trends, including uninsured deposits, brokered deposits, and the company’s use of pledged collateral and borrowing capacity.