Hawthorn Bancshares, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021. The unaudited consolidated statements cover Hawthorn Bancshares and its subsidiaries, including Hawthorn Bank, a Missouri community bank. Amounts below are in millions of dollars unless otherwise stated.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $15.4 | $13.8 | $43.4 | $39.7 |
| Provision for loan losses | $0.3 | $1.2 | $0.7 | $5.4 |
| Non-interest income | $3.7 | $5.1 | $12.7 | $10.3 |
| Non-interest expense | $11.7 | $11.7 | $35.1 | $33.4 |
| Net income | $5.8 | $5.0 | $16.5 | $9.1 |
| Diluted EPS | $0.88 | $0.74 | $2.50 | $1.35 |
- Q3 return on average assets was 1.33%, return on average equity 16.49%, and efficiency ratio 61.2%. Nine-month figures were 1.28%, 16.37%, and 62.5%, respectively.
- Fully taxable equivalent net interest margin was 3.78% for Q3 and 3.60% year to date, compared with 3.50% for both prior-year periods. Net interest spread was 3.62% and 3.43%, respectively.
- At September 30, total assets were $1,738.7, loans held for investment $1,282.8, net loans $1,263.9, and deposits $1,411.1. At December 31, 2020, those balances were $1,733.7, $1,287.0, $1,268.9, and $1,383.6, respectively.
- Cash and cash equivalents were $113.3 at September 30, down from $180.4 at year-end 2020. Available-for-sale securities increased to $278.5 from $198.0.
- Total borrowings were $170.4 at September 30, including $93.5 of FHLB advances, $27.4 of repurchase agreements, and $49.5 of subordinated notes; year-end borrowings totaled $201.3. Stockholders’ equity was $139.1, versus $130.6.
- For the first nine months, operating activities provided $19.5 cash; investing activities used $78.4 and financing activities used $8.2. Cash and cash equivalents decreased $67.1 overall.
- September 30 capital ratios included total risk-based capital of 15.01%, Tier 1 risk-based capital of 13.64%, common equity Tier 1 of 10.26%, and Tier 1 leverage of 10.82%. Management reported that the Company and Bank met applicable capital requirements; the Bank met the well-capitalized thresholds based on its most recently filed call report.
Material changes versus comparable periods
- Net income rose 16.9% in Q3 and 81.4% for the nine months year over year. Net interest income increased 11.1% and 9.4%, respectively, while interest expense fell as deposit and borrowing costs declined.
- Management attributed higher net interest income and margin in part to PPP loan fees: $2.1 in Q3 and $4.4 year to date in 2021, versus $0.7 and $1.2 in 2020.
- Lower loan-loss provisions reflected net recoveries and an improved economic outlook. Nine-month net recoveries were $0.1, compared with net charge-offs of $0.1 in the prior-year period.
- Non-interest income fell 28.2% in Q3, primarily because mortgage-loan sale gains declined to $1.4 from $3.0 as third-quarter sale volumes slowed. Year-to-date non-interest income rose 23.8%, with mortgage-sale gains of $5.9 versus $4.4.
- Year-to-date non-interest expense increased 5.0%, including higher employee benefits and processing/network/bank-card costs. Q3 expense was essentially unchanged.
- Non-performing loans were $32.8, or 2.56% of loans, at September 30, compared with $34.6, or 2.69%, at December 31, 2020, but $5.8, or 0.45%, a year earlier. Non-performing assets totaled $44.4, or 3.46% of loans, compared with $46.9 at year-end and $18.4 a year earlier.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management said it anticipated continued economic improvement if the pandemic continued to subside, but noted that commercial activity had not returned to pre-pandemic levels and expected varying degrees of customer distress to continue into Q4 2021.
- COVID-19-related exposure remains relevant, particularly for borrowers in hotel/lodging, restaurants, entertainment, retail, long-term healthcare, and commercial real estate. Remaining modified loans were $11.3, or 0.9% of loans, at September 30, compared with $86.7 at December 31, 2020. The remaining modifications included two interest-only loans. Net PPP loans were $26.0.
- Criticized loan levels remained elevated compared with pre-pandemic levels. Management cautioned that pandemic effects or resurgence could lead to further downgrades, higher provisions, reversals of uncollected interest, or charge-offs. The allowance for loan losses was $18.9, or 1.48% of loans, and covered 57.65% of non-performing loans.
- The available-for-sale securities portfolio had $3.0 of gross unrealized losses at September 30, compared with $0.3 at year-end 2020. Management attributed the declines to interest-rate movements, not credit quality, and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Interest-rate sensitivity modeling estimated net interest income changes of +1.35% for a 200-basis-point increase and −3.09% for a 200-basis-point decrease at September 30. Management described the balance sheet as slightly asset-sensitive; actual results may differ from model estimates.
- The Company declared cash dividends of $0.43 per share for the first nine months, including $0.15 per share in Q3, and paid $2.6 in cash dividends year to date. It paid a 4% special stock dividend on July 1. It repurchased 117,632 shares for $2.1 in Q1; no Q3 repurchases occurred. The repurchase authorization had $5.0 remaining at quarter-end.
- Off-balance-sheet commitments totaled $385.5, including $355.0 of commitments to extend credit, $23.0 of residential mortgage origination commitments, and $7.5 of standby letters of credit. No loss accrual was recorded for these instruments. The filing says pending legal actions are not expected to materially adversely affect near-term financial condition or results, while noting that some matters are too early to estimate.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing identifies adoption of CECL on January 1, 2023 as under evaluation; the impact had not been determined.
Important facts for investors to verify
- Whether credit quality improves or worsens, especially in commercial real estate and industries affected by COVID-19; track non-performing loans, criticized loans, modifications, and allowance coverage.
- How much future earnings depend on PPP fee recognition, deposit-cost trends, and mortgage-sale activity as refinancing slows.
- Whether unrealized securities losses, interest-rate changes, and the reported asset sensitivity affect future margins, liquidity, or capital.
- How the substantial unused credit commitments behave if customers draw on them, and whether the Company’s liquidity and funding capacity remain adequate.
- The eventual CECL adoption impact and any significant developments in litigation or pandemic-related borrower performance.