Hawthorn Bancshares, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Hawthorn Bancshares is a Missouri community bank holding company operating through Hawthorn Bank. Financial amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2017 / Sept. 30, 2017 | Comparable period / prior year-end |
|---|---|---|
| Quarterly net income | $1.77; diluted EPS $0.30 | Q3 2016: $1.88; diluted EPS $0.32 |
| Nine-month net income | $5.79; diluted EPS $0.99 | Nine months 2016: $5.29; diluted EPS $0.90 |
| Net interest income | Q3: $10.75; nine months: $32.06 | Q3 2016: $10.15; nine months 2016: $29.97 |
| Net interest margin, fully taxable equivalent | Q3: 3.35%; nine months: 3.44% | Q3 2016: 3.44%; nine months 2016: 3.48% |
| Total assets | $1,386.5 | Dec. 31, 2016: $1,287.0 |
| Total loans / allowance | $1,045.0 / $11.0 | Dec. 31, 2016: $974.0 / $9.9 |
| Total deposits | $1,108.0 | Dec. 31, 2016: $1,010.7 |
| Cash and cash equivalents | $60.4 | Dec. 31, 2016: $27.0 |
| Borrowings | $171.4 | Dec. 31, 2016: $173.9 |
| Stockholders’ equity | $96.1; 6.93% of assets | Dec. 31, 2016: $91.0; 7.26% of assets |
For the first nine months, operating cash flow was $8.6 million, investing activities used $68.3 million, and financing activities provided $93.2 million, resulting in a $33.4 million increase in cash. Loan growth used $70.6 million of cash; financing included $179.6 million of new FHLB advances and $183.1 million of repayments of FHLB advances and other borrowings.
At September 30, the company reported total risk-based capital of 13.42%, Tier 1 risk-based capital of 11.17%, common equity Tier 1 of 8.39%, and Tier 1 leverage of 9.62%. Management stated that the company and bank exceeded applicable well-capitalized thresholds.
Changes versus comparable periods
- Q3 net income fell 6.3% year over year, although nine-month net income rose 9.3%. Q3 pre-tax income declined 9.5% as expenses and loan-loss provision increased; lower quarterly tax expense partly offset the decline.
- Net interest income increased 6.0% for Q3 and 7.0% year to date, supported by loan growth. Margin nevertheless compressed: management cited higher deposit and borrowing costs. Nine-month interest expense rose to $5.66 million from $4.17 million.
- Loans grew $71.0 million from year-end, with commercial real estate mortgage loans up $35.5 million and commercial construction loans up $35.4 million. Deposits grew $97.3 million, chiefly in savings, interest checking, and money-market accounts.
- Non-interest expense rose 7.5% in Q3 and 4.7% year to date. Higher salaries, benefits, furniture/equipment, and technology/network costs contributed; lower FDIC assessments partly offset the increases.
- Nonperforming loans increased to $11.1 million, or 1.06% of loans, from $9.2 million, or 0.95%, at year-end. Nonaccrual loans rose to $6.2 million from $3.4 million, including a $2.0 million increase in commercial, financial, and agricultural nonaccrual loans. Net charge-offs were low: $0.12 million year to date versus $0.11 million in 2016.
- Other real estate and repossessed assets declined to $13.2 million from $14.2 million. Available-for-sale securities were $212.7 million, down from $214.5 million, and their net unrealized loss narrowed to $1.5 million.
Outlook, risks, contingencies, and notable items
- Outlook: No earnings or financial guidance was provided. Management said it expected short-term liquidity needs from daily operations not to vary significantly during 2017 and considered current liquidity adequate for commitments.
- Key risks: Interest-rate changes may pressure margins; economic weakness could affect loan quality and provisions; competition, regulation, securities-market changes, and execution of growth initiatives may affect results. Commercial real estate mortgage loans represented 44.2% of loans. Management noted geographic exposure to its Missouri markets and no concentration in any one economic sector.
- Liquidity and commitments: Core deposits were $977.1 million, or 88.2% of deposits. Available liquidity included $41.2 million in overnight interest-bearing deposits and $212.7 million in available-for-sale securities; $173.1 million of securities were pledged. Undrawn credit commitments, mortgage-origination commitments, and standby letters of credit totaled $244.1 million, with no estimated losses accrued. The filing says not all commitments are expected to be drawn.
- Contingencies: The company and subsidiaries face ordinary-course legal actions. Management did not believe these would materially adversely affect near-term financial condition or results, while noting some matters were too early to assess. A $0.16 million reserve for mortgage-loan repurchase claims remained unchanged.
- Unusual or notable items: The company paid a 4% special stock dividend in July; share and EPS data were adjusted retroactively. It repurchased 26,000 shares in Q3 and had about $2.2 million remaining under its repurchase authorization. The pension plan was soft-frozen to new hires after September 30, 2017; a $1.2 million pension contribution was made in September. Technology infrastructure and network upgrades contributed to higher expenses.
- The company adopted share-based compensation guidance in 2017 with no significant reported effect. It expected to adopt the revenue-recognition standard in 2018 and had identified no material timing changes in its preliminary review; the expected credit-loss standard was still under evaluation, with the eventual effect not determined.
Important facts for investors to verify
- Whether rising funding costs continue to outpace asset-yield improvement and further compress net interest margin.
- Whether nonaccrual commercial and agricultural loans, nonperforming loans, and the allowance remain manageable as the loan portfolio expands.
- The sustainability of loan and deposit growth, particularly commercial real estate exposure and reliance on FHLB advances.
- Whether technology and personnel cost increases moderate, and how expense trends affect efficiency and profitability.
- Potential liquidity needs from $244.1 million of off-balance-sheet commitments, collateral availability, and the status of legal or mortgage repurchase claims.
- Future effects of the new revenue and credit-loss accounting standards, as the filing states the credit-loss impact had not yet been determined.