Hawthorn Bancshares, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparisons are with the third quarter and first nine months of 2014 unless stated otherwise. Balance-sheet comparisons are with December 31, 2014. Hawthorn Bank serves communities in Missouri. Financial amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 / Sept. 30, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $10.6 million; fully taxable equivalent margin 3.78% | $10.0 million; margin 3.71% in Q3 2014 |
| Net income | $2.54 million; diluted EPS $0.47 | $1.57 million; diluted EPS $0.29 in Q3 2014 |
| Nine-month net income | $6.61 million; diluted EPS $1.21 | $5.65 million; diluted EPS $1.04 in 2014 |
| Non-interest income / expense | Q3: $2.34 million / $8.98 million; nine months: $6.79 million / $26.95 million | Q3 2014: $2.31 million / $9.90 million; nine months 2014: $6.58 million / $27.42 million |
| Efficiency ratio | 69.62% Q3; 72.25% nine months | 80.68% Q3 2014; 76.08% nine months 2014 |
| Total assets / loans | $1.228 billion / $879.5 million | $1.170 billion / $861.2 million at Dec. 31, 2014 |
| Deposits / stockholders’ equity | $972.2 million / $87.1 million | $969.5 million / $80.6 million at Dec. 31, 2014 |
| Cash and cash equivalents | $32.1 million | $42.8 million at Dec. 31, 2014 |
For the first nine months, operating cash flow was $11.6 million, investing activities used $70.9 million, and financing activities provided $48.7 million, resulting in a $10.7 million decrease in cash. Investing outflows mainly reflected $81.6 million of securities purchases and a $21.9 million increase in loans; financing inflows included $37.0 million net additional FHLB advances.
Borrowings totaled $157.2 million at September 30: $80.0 million of FHLB advances, $27.8 million of repurchase agreements, and $49.5 million of subordinated notes. The company reported regulatory capital ratios of 14.91% total capital, 12.01% Tier 1, 9.02% common equity Tier 1, and 9.70% Tier 1 leverage; management said the company and bank met capital adequacy requirements. Core deposits were $662.6 million, or 68.2% of deposits. Available-for-sale securities and overnight interest-bearing deposits totaled $258.7 million; $208.9 million of securities were pledged.
Material changes versus comparable periods
- Q3 net income rose 61.9%; nine-month net income rose 16.8%. Management attributed stronger net interest income primarily to higher average earning assets; the quarterly margin improvement also reflected interest recognized on two construction loans.
- Q3 non-interest expense fell 9.3%, including a $690,000 year-over-year improvement in foreclosure expense and gains. Nine-month expense fell 1.7%. Employee benefits rose, partly because of higher pension and 401(k) costs.
- Nonperforming loans declined to $14.6 million, or 1.66% of loans, from $36.0 million, or 4.18%, at year-end 2014. Total nonperforming assets fell to $29.7 million from $47.9 million. The allowance was $9.25 million, 1.05% of loans.
- Other real estate and repossessed assets increased to $15.1 million from $11.9 million. The company transferred $4.5 million of nonaccrual loans, net of charge-offs, into these assets during the nine-month period.
- Net charge-offs were $740,000 in Q3 2015 versus $117,000 in Q3 2014, largely due to one commercial relationship. Nine-month net charge-offs were $103,000 versus $1.69 million in 2014, reflecting increased recoveries and lower charge-offs.
- On July 1, 2015, the company paid a 4% stock dividend; share data and EPS were adjusted retroactively. Nine-month securities purchases increased substantially, and FHLB advances rose by $37.0 million net.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or financial guidance. Management said future short-term liquidity needs from daily operations were not expected to vary significantly during 2015.
- Management identified sensitivity to interest-rate changes, competitive pressures, economic conditions in Missouri and nationally, loan quality and provisions, regulatory changes, securities markets, and acquisition integration risks. Interest-rate modeling used immediate and gradual rate shocks of up to 400 basis points; results depend on assumptions about loan repayments and deposit repricing.
- Credit risk remains material: commercial real estate mortgage loans were 44.1% of the loan portfolio, and total impaired loans were $14.2 million. The allowance includes $2.0 million of specific reserves. Management noted collateral valuations and loan-loss estimates are judgmental and may change.
- Off-balance-sheet commitments totaled $153.9 million, including $147.3 million of credit commitments. No estimated losses were accrued; management said current liquidity was adequate and many commitments may expire undrawn.
- Pending litigation was described as incidental to the business; management did not believe it would materially adversely affect near-term financial condition or results. A $160,000 repurchase reserve covered estimated losses on sold residential mortgage loans.
- Unusual items included a $176,000 impairment write-down on a building held for sale, partially offset by the absence of a $136,000 employee-fraud loss recorded in Q3 2014. Q3 2015 foreclosure-related results included net gains on other real estate sales.
Most important facts for investors to verify
- Whether the sharp improvement in nonperforming loans and TDR balances is durable, given the increase in other real estate assets and the Q3 rise in net charge-offs.
- The adequacy of the $9.25 million loan-loss allowance and the sensitivity of collateral-dependent reserves to updated appraisals and local economic conditions.
- The sustainability of earnings improvement, including the benefit from interest recognized on two construction loans and gains from foreclosed-property sales.
- Funding and liquidity trends: cash declined, FHLB borrowing increased, and a substantial portion of the securities portfolio was pledged.
- The effect of interest-rate movements on margins, deposit costs, securities values, and mortgage servicing rights; the filing does not provide a clear quantified earnings impact for the modeled rate shocks.