Hawthorn Bancshares(HWBK) - 2022 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements for the quarter ended March 31, 2022, show a decrease in total assets to $1.74 billion from $1.83 billion at year-end 2021, primarily due to a reduction in cash and cash equivalents, while net income increased to $6.6 million from $5.8 million, driven by a $2.5 million release of provision for loan losses, despite a significant total comprehensive loss of $13.0 million from unrealized losses on investment securities Consolidated Balance Sheets - Total assets decreased by $95.9 million from December 31, 2021, to March 31, 2022, mainly driven by a $109.4 million decrease in cash and cash equivalents, while net loans increased by $34.4 million[7] - Stockholders' equity declined by $14.6 million during the first quarter of 2022, significantly impacted by a swing in Accumulated Other Comprehensive Income from a positive $3.3 million to a negative $16.3 million[7] Consolidated Balance Sheet Highlights (Unaudited) | Metric | March 31, 2022 (In thousands) | December 31, 2021 (In thousands) | | :--- | :--- | :--- | | Total Assets | $1,735,683 | $1,831,550 | | Cash and cash equivalents | $50,515 | $159,909 | | Net loans | $1,319,644 | $1,285,230 | | Total investment securities | $292,244 | $316,278 | | Total Liabilities | $1,601,296 | $1,682,594 | | Total deposits | $1,456,143 | $1,516,820 | | Total Stockholders' Equity | $134,387 | $148,956 | Consolidated Statements of Income - Net income increased by 13.2% year-over-year, primarily due to a $2.5 million release of provision for loan losses in Q1 2022, which offset a slight decline in net interest income and a decrease in non-interest income[9] - Non-interest income decreased by $0.8 million year-over-year, mainly because the gain on sale of mortgage loans fell from $2.5 million in Q1 2021 to $0.9 million in Q1 2022[9] Consolidated Income Statement Summary (Unaudited) | Metric | Three Months Ended March 31, 2022 (In thousands) | Three Months Ended March 31, 2021 (In thousands) | | :--- | :--- | :--- | | Net Interest Income | $14,145 | $14,390 | | (Release of) provision for loan losses | $(2,500) | $— | | Non-interest Income | $3,726 | $4,572 | | Non-interest Expense | $12,227 | $11,780 | | Net Income | $6,609 | $5,839 | | Diluted Earnings Per Share | $1.00 | $0.88 | Consolidated Statements of Comprehensive (Loss) Income - The company reported a total comprehensive loss of $13.0 million for Q1 2022, a stark contrast to the $3.1 million comprehensive income in Q1 2021, driven by a significant $19.6 million after-tax unrealized loss on available-for-sale investment securities[10] Comprehensive (Loss) Income (Unaudited) | Metric | Three Months Ended March 31, 2022 (In thousands) | Three Months Ended March 31, 2021 (In thousands) | | :--- | :--- | :--- | | Net Income | $6,609 | $5,839 | | Other comprehensive loss, net of tax | $(19,582) | $(2,745) | | Total comprehensive (loss) income | $(12,973) | $3,094 | Consolidated Statements of Cash Flows - Cash and cash equivalents decreased by $109.4 million in Q1 2022, primarily due to a significant cash outflow of $80.7 million from financing activities, mainly from a net decrease in deposits and repurchase agreements[14] Cash Flow Summary (Unaudited) | Cash Flow Category | Three Months Ended March 31, 2022 (In thousands) | Three Months Ended March 31, 2021 (In thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,407 | $3,557 | | Net cash used in investing activities | $(33,149) | $(32,407) | | Net cash used in financing activities | $(80,652) | $(4,810) | | Net decrease in cash and cash equivalents | $(109,394) | $(33,660) | Notes to the Consolidated Financial Statements - The company's loan portfolio grew to $1.33 billion, with commercial real estate and residential real estate mortgages comprising the largest segments, while the allowance for loan losses decreased to $14.3 million from $16.9 million at year-end 2021[22][26] - Available-for-sale debt securities had a fair value of $286.8 million, with gross unrealized losses of $24.6 million at March 31, 2022, a significant increase from $2.5 million at year-end 2021, attributed to interest rate fluctuations[57] - During Q1 2022, the company repurchased 23,536 common shares for $0.6 million, with $4.4 million remaining available under the share repurchase authorization as of March 31, 2022[109] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management reported a net income of $6.6 million for Q1 2022, an increase from both the linked quarter and the prior year quarter, driven by a $2.5 million release of the provision for loan losses, while net interest margin decreased to 3.50% due to lower PPP fee income, and non-interest income fell year-over-year due to a significant drop in gains from mortgage loan sales, despite improved asset quality with non-performing loans decreasing to $17.1 million, and the company maintaining a strong liquidity position and well-capitalized regulatory capital ratios, despite a decrease in total assets and stockholders' equity impacted by unrealized losses on the securities portfolio Executive Summary - Net interest income decreased to $14.1 million in Q1 2022 from $14.4 million in Q1 2021, primarily due to a significant reduction in PPP loan fee income, which was $0.3 million in Q1 2022 compared to $1.5 million in Q1 2021[171][184] - Non-performing loans decreased significantly to $17.1 million at March 31, 2022, down from $25.5 million at the end of Q4 2021 and $34.2 million at the end of Q1 2021[175] Key Performance Indicators | Metric | Q1 2022 | Q4 2021 | Q1 2021 | | :--- | :--- | :--- | :--- | | Net Income (in thousands) | $6,609 | $5,990 | $5,839 | | Diluted EPS | $1.00 | $0.90 | $0.88 | | Return on average total assets | 1.51% | 1.35% | 1.38% | | Return on average stockholders' equity | 18.41% | 16.70% | 18.03% | | Net interest margin | 3.50% | 3.67% | 3.61% | | Efficiency ratio | 68.42% | 71.75% | 62.12% | Lending and Credit Management - The company recognized a negative provision for loan losses of $2.5 million in Q1 2022, compared to no provision in Q1 2021, primarily due to the release of $2.8 million in specific reserves as significant loans returned to accrual status[230] Loan Portfolio Composition (in thousands) | Loan Category | March 31, 2022 | % of Loans | | :--- | :--- | :--- | | Commercial, financial, and agricultural | $221,015 | 16.6% | | Real estate construction | $124,993 | 9.4% | | Real estate mortgage | $965,418 | 72.4% | | Installment and other consumer | $22,497 | 1.7% | | Total loans held for investment | $1,333,923 | 100.0% | Asset Quality Ratios | Metric | March 31, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Non-performing assets to total assets | 1.55% | 1.97% | | Allowance for loan losses to total loans | 1.07% | 1.30% | | Allowance for loan losses to non-performing loans | 83.51% | 66.36% | Liquidity and Capital Resources - Core deposits, a primary source of funding, totaled $1.4 billion and represented 92.8% of total deposits at March 31, 2022[239] - The company has significant available liquidity, with an estimated future funding capacity of $270.4 million from the FHLB, Federal Reserve Bank, and Federal funds purchased lines as of March 31, 2022[245] Regulatory Capital Ratios (Company) | Ratio | March 31, 2022 | Minimum Required (with buffer) | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 10.36% | 7.00% | | Tier 1 Capital | 13.44% | 8.50% | | Total Capital | 14.66% | 10.50% | | Tier 1 Leverage | 10.99% | 4.00% | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk through its Asset/Liability Committee (ALCO), using net interest income simulations and market value of portfolio equity analyses, with its balance sheet modeled to be slightly asset sensitive as of March 31, 2022, projecting a 0.96% increase in net interest income from a hypothetical 100 basis point rate increase and a 2.16% decrease from a 100 basis point rate decrease, a level of risk management considers acceptable - The company's interest rate risk profile became less asset sensitive from year-end 2021 to March 31, 2022, primarily due to a decrease in short-term assets like Federal funds sold and other interest-bearing deposits[268] Interest Rate Sensitivity Analysis on Net Interest Income | Hypothetical Rate Shift (bps) | % Change in Projected NII (March 31, 2022) | | :--- | :--- | | +200 | 1.84% | | +100 | 0.96% | | -100 | (2.16)% | | -200 | (3.28)% | Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2022, concluding they were effective at a reasonable assurance level, with no material changes to internal control over financial reporting during the quarter, and the company is currently evaluating the impact of adopting new accounting standards, notably ASU 2016-13 (CECL), effective January 1, 2023 - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of March 31, 2022[273] - No changes in internal control over financial reporting occurred during Q1 2022 that materially affected, or are likely to materially affect, the company's internal controls[274] - The company is preparing for the adoption of the Current Expected Credit Losses (CECL) standard (ASU 2016-13) on January 1, 2023, and is continuing to evaluate its impact on the consolidated financial statements[276][277] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal actions incidental to its business but does not believe they will have a material adverse effect on its financial condition or results of operations - The company is a defendant in various legal actions incidental to its business activities, but management does not expect these to have a material adverse effect[153][280] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - No material changes in risk factors were reported since the company's 2021 Form 10-K[280] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of 2022, the company repurchased 23,536 shares of its common stock at an average price of $25.75 per share, for a total cost of approximately $0.6 million, with about $4.4 million remaining available for future repurchases under its authorized plan as of March 31, 2022 - As of March 31, 2022, approximately $4.4 million remained available for share repurchases under the company's publicly announced plan[281] Common Stock Repurchases (Q1 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2022 | — | $— | | February 2022 | 14,062 | $25.56 | | March 2022 | 9,474 | $26.04 | | Total | 23,536 | $25.75 |