Hawthorn Bancshares, Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018; balance-sheet comparisons are with December 31, 2018 unless noted. Hawthorn is a Missouri community banking company operating through Hawthorn Bank, with commercial, real estate, consumer, mortgage and trust businesses.
Financial performance and position
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Net income; diluted EPS | $4.666 million; $0.77 | Q1 2018: $2.090 million; $0.35 |
| Net income excluding Branson branch gain (company non-GAAP) | $3.028 million; $0.50 diluted EPS | Q1 2018: $2.090 million; $0.35 |
| Net interest income; net interest margin (FTE) | $11.629 million; 3.26% | Q1 2018: $10.754 million; 3.30% |
| Provision for loan losses; net recoveries | $0.150 million; $0.043 million recoveries | Q1 2018: $0.300 million provision; $0.205 million net charge-offs |
| Noninterest income; noninterest expense | $2.091 million; $9.888 million | Q1 2018: $2.215 million; $10.266 million |
| Efficiency ratio; return on average assets; return on average equity | 72.07%; 1.23%; 18.41% | Q1 2018: 79.16%; 0.60%; 9.32% |
| Total assets; loans; deposits | $1,538.3 million; $1,154.7 million; $1,250.6 million | December 31, 2018: $1,481.7 million; $1,146.6 million; $1,198.5 million |
| Cash and cash equivalents | $90.7 million | December 31, 2018: $42.1 million |
| Stockholders’ equity; equity-to-assets | $104.9 million; 6.82% | December 31, 2018: $99.4 million; 6.71% (period-end balance-sheet calculation) |
| Total borrowings | $166.7 million | December 31, 2018: $169.3 million |
Cash flow for Q1 2019 was $3.7 million provided by operations, $14.5 million used in investing and $59.5 million provided by financing; cash and cash equivalents increased $48.6 million. The financing inflow primarily reflected deposit growth.
At March 31, regulatory capital ratios included company total risk-based capital of 13.39%, Tier 1 risk-based capital of 11.41%, common equity Tier 1 of 8.65% and Tier 1 leverage of 9.38%. The filing states the Company and Bank met applicable capital adequacy requirements.
Material changes and unusual items
- Reported net income rose 123.3% year over year, but included a $2.074 million pretax gain from the February 8 sale of the Branson branch. The company’s non-GAAP presentation excludes $1.638 million after tax; on that basis net income was $3.028 million.
- The branch sale transferred approximately $10.6 million in deposits and excluded loans assigned to the branch. The company sold the land and building and received a 4.1% deposit premium, subject to stated adjustments.
- Net interest income increased 8.1%, supported by growth in average earning assets and higher loan yields. The margin nevertheless declined as deposit and other funding costs rose faster than asset yields. Average cost of interest-bearing deposits increased to 1.25% from 0.79%.
- Noninterest expense fell 3.7%, including lower salaries and a reduction of 53 full-time equivalent employees year over year. Noninterest income declined 5.6%, notably due to lower mortgage servicing income.
- The allowance for loan losses was $11.845 million, or 1.03% of loans, versus $11.652 million, or 1.02%, at year-end. Management extended the historical loss look-back period from five years to begin in Q1 2012, citing the prolonged economic recovery.
- Adoption of the lease accounting standard added $2.3 million each of operating right-of-use assets and lease liabilities; management reported no material impact on other financial statements.
Liquidity, credit, outlook and risks
- Reported liquid assets totaled $306.3 million, including $75.0 million of overnight interest-bearing deposits, $12.7 million of certificates of deposit at other banks and $218.5 million of available-for-sale securities. Unpledged available-for-sale securities were approximately $42.6 million. Core deposits were $1.081 billion, or 86.5% of deposits; brokered deposits were $40.0 million.
- Nonperforming loans were $5.6 million, or 0.48% of loans. Nonperforming assets were $19.1 million, or 1.66% of loans, including $13.5 million of other real estate owned and repossessed assets. Total TDRs were $5.0 million; $1.9 million were nonperforming.
- Off-balance-sheet commitments totaled $371.3 million, comprising $254.7 million of commitments to extend credit, $4.4 million of mortgage origination commitments and $112.2 million of standby letters of credit. No estimated losses were accrued. Management says commitments are managed under its risk processes and that current liquidity is adequate, while noting actual draws may differ.
- Management gave no specific earnings or financial guidance. It said near-term liquidity needs from daily operations were not expected to vary significantly during 2019. Forward-looking risks include competition, interest-rate changes and margin pressure, economic weakness affecting credit quality, possible higher loan-loss provisions, regulatory or tax changes, securities-market changes and acquisition integration risks.
- Management did not believe pending litigation was reasonably likely to materially adversely affect near-term financial condition or results; some matters were too early to assess for probable loss or estimate. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- How much of reported earnings growth is repeatable after excluding the Branson branch gain, and what are the sale’s final adjustments?
- Whether continued deposit repricing and funding-cost increases further pressure net interest margin.
- Credit quality trends, collateral values and the effect of the expanded loan-loss look-back period; also monitor nonperforming assets and other real estate owned.
- Liquidity and funding composition, including large time deposits, brokered deposits, pledged securities and the use of available borrowing capacity.
- The potential effect of the forthcoming CECL credit-loss standard; the filing says impact and any initial adjustment had not yet been determined.