Hawthorn Bancshares, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Hawthorn Bancshares is a Missouri community bank holding company operating through Hawthorn Bank, serving communities in Missouri. Financial statement amounts below are in millions unless noted; comparisons are with Q1 2014 for income and cash flow, and December 31, 2014 for balance-sheet items.
Financial performance and condition
- Revenue and earnings: Net interest income was $9.98 million, up 3.4% from $9.65 million. Noninterest income fell 4.7% to $1.99 million. Net income rose 7.6% to $2.14 million; diluted EPS was $0.41 versus $0.38. The income statement reports net interest income of $9.98 million and $9.65 million; MD&A also describes both periods as approximately $10 million.
- Margins and returns: Net interest margin was 3.71%, versus 3.72% (fully taxable equivalent). Return on average assets was 0.73%, return on average equity 10.60%, and the efficiency ratio improved to 72.78% from 74.17%.
- Expenses and credit costs: Noninterest expense was essentially unchanged at $8.71 million. There was no loan-loss provision in either period. Net recoveries were $662,000, compared with net charge-offs of $874,000 in Q1 2014.
- Balance sheet: Total assets were $1.20 billion, up from $1.17 billion at year-end. Loans were $863.2 million, nearly unchanged, while investment securities increased to $239.6 million from $203.7 million. Deposits rose to $993.1 million from $969.5 million. Stockholders’ equity was $83.0 million, up from $80.6 million.
- Credit quality: Nonperforming loans were $29.2 million, or 3.38% of loans, down from $36.0 million, or 4.18%, at year-end. Nonperforming assets totaled $40.9 million versus $47.9 million. The allowance for loan losses was $9.76 million, or 1.13% of loans, compared with $9.10 million, or 1.06%. Troubled debt restructurings totaled $13.4 million, down from $19.3 million.
- Cash flow and liquidity: Operating activities provided $1.63 million; investing activities used $33.40 million, principally reflecting $52.63 million of securities purchases; financing activities provided $24.73 million. Cash and cash equivalents decreased $7.05 million to $35.76 million. Management reported $252.65 million of cash equivalents and available-for-sale securities, and $259.04 million of additional borrowing capacity across disclosed facilities.
- Debt and capital: At quarter-end, the balance sheet showed $22.36 million of repurchase-agreement borrowings, $40.0 million of FHLB advances and $49.49 million of subordinated notes. The company’s total capital ratio was 15.49%, Tier 1 risk-based capital ratio 12.16%, and leverage ratio 9.24%; management said the company and bank met capital adequacy requirements.
Material changes versus comparable periods
- Net income and EPS increased, supported by higher net interest income and no loan-loss provision. The margin edged down, while interest expense declined as deposit costs fell.
- Noninterest income declined, mainly because real estate servicing fees, net, shifted from $177,000 of income to a $5,000 loss. Mortgage-loan sale gains increased to $308,000 from $191,000.
- Nonperforming loans and total nonperforming assets improved from year-end; net recoveries replaced the prior-year quarter’s net charge-offs. The allowance increased from year-end despite the absence of a provision, reflecting recoveries and allowance allocation changes.
- Compared with year-end, securities and deposits increased, cash declined, and the loan portfolio grew modestly. Core deposits increased to $674.1 million, or 67.9% of deposits.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said short-term liquidity needs were not expected to vary significantly during 2015 and considered current liquidity sufficient for commitments; this is not a broader performance forecast.
- Key stated risks include competition, interest-rate changes that could compress margins, economic weakness affecting Missouri borrowers and asset quality, potential increases in credit-loss provisions, regulatory changes, and securities-market changes. The company’s lending is concentrated in its Missouri communities and includes substantial commercial real estate exposure.
- Off-balance-sheet commitments totaled $141.2 million, including $129.3 million of credit commitments and $10.4 million of residential mortgage origination commitments. No loss accrual was recorded for these instruments. Management said pending litigation was not expected to materially adversely affect near-term financial condition or results, while noting uncertainty in early-stage matters.
- Mortgage servicing rights declined to $2.66 million; management cited faster prepayment assumptions, lower long-term rates and regulatory compliance costs as factors affecting valuations. Available-for-sale securities had $1.02 million of gross unrealized losses, which the company attributed to interest rates rather than credit quality.
- The 2015 minimum pension contribution of $716,000 was paid April 15, 2015. Management stated it would have been approximately $1.03 million without applicable pension relief provisions.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Track the direction and composition of nonperforming loans, TDRs, potential problem loans, collateral values and allowance coverage; reported improvement includes significant recoveries and transfers to foreclosed assets.
- Assess whether deposit growth, funding costs and borrowing levels can support liquidity and loan growth, particularly given the size of time deposits and off-balance-sheet commitments.
- Monitor net interest margin sensitivity to rate changes and the effect of prepayments and market rates on securities and mortgage servicing rights.
- Review subsequent-period performance and the detailed statements when reconciling MD&A’s rounded description of net interest income with the income statement’s reported amounts.
- Confirm that capital ratios remain adequate as Basel III requirements phase in, and monitor the company’s pension funding, repurchase-reserve liability and litigation disclosures.