Hawthorn Bancshares, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance-sheet comparisons are to December 31, 2013 unless noted. Hawthorn Bancshares is a Missouri community bank holding company operating through Hawthorn Bank.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Total assets | $1.165 billion | $1.140 billion at Dec. 31, 2013 |
| Total loans | $845.3 million | $839.5 million at Dec. 31, 2013 |
| Total deposits | $987.7 million | $956.5 million at Dec. 31, 2013 |
| Net interest income | $9.654 million | $9.729 million in Q1 2013 |
| Net interest margin, fully taxable equivalent | 3.72% | 3.65% in Q1 2013 |
| Net income (loss) | $1.987 million; diluted EPS $0.39 | $(0.136) million; diluted EPS $(0.09) in Q1 2013 |
| Operating cash flow | $4.937 million | $6.335 million in Q1 2013 |
| Cash and cash equivalents | $41.234 million | $28.439 million at Dec. 31, 2013 |
| Total borrowings | $94.247 million | $104.570 million at Dec. 31, 2013 |
| Stockholders’ equity | $76.682 million | $74.380 million at Dec. 31, 2013 |
- Q1 total revenue (net interest income plus non-interest income) was $11.739 million, down from $12.736 million. Non-interest income fell 30.7% to $2.085 million; non-interest expense fell 27.0% to $8.707 million.
- Reported return on average assets was 0.70%; return on average common equity was 10.67%. The efficiency ratio was 74.17%, versus 93.70% in Q1 2013; excluding other real estate expense and securities-sale gains, it was 73.10% versus 73.20%.
- At March 31, regulatory capital ratios were 15.51% total risk-based and 11.67% Tier 1 risk-based for the Company; the Bank reported 14.52% and 13.26%, respectively. Management said both entities met capital requirements.
Material changes and credit quality
- Net income improved by $2.123 million year over year, from a loss to a profit. The comparison benefited substantially from no loan-loss provision in Q1 2014 versus $1.0 million in Q1 2013, and from other real estate expense of $124,000 versus $2.821 million. The 2013 ORE charge was largely related to two Branson hotels sold at auction in 2013.
- Net interest income was nearly flat, while the fully taxable equivalent margin improved. Management attributed the margin increase mainly to lower certificate-of-deposit costs, including the maturity of a high-rate deposit special.
- Mortgage-loan sale gains declined to $191,000 from $720,000; loans sold were $6.0 million versus $29.3 million. The filing cites slower refinancing activity, primarily due to rising interest rates. There were no investment-security sale gains in Q1 2014, compared with $294,000 in Q1 2013.
- Net charge-offs were $874,000, or 0.10% of average loans, versus $1.297 million, or 0.15%, in Q1 2013. No loan-loss provision was recorded. The allowance declined to $12.845 million, or 1.52% of loans, from $13.719 million, or 1.63%, at year-end.
- Nonperforming loans were $36.242 million, or 4.29% of loans, versus $35.318 million, or 4.21%, at year-end. Non-accrual loans rose to $24.804 million from $23.680 million. Total nonperforming assets were $50.296 million, essentially unchanged from $50.185 million.
- Impaired loans totaled $36.038 million; troubled debt restructurings totaled $22.219 million, including $10.985 million on non-accrual. Other real estate owned and repossessed assets, net, were $14.054 million.
Liquidity, outlook, risks and contingencies
- Cash increased $12.795 million during the quarter: operating activities provided $4.937 million, investing activities used $12.832 million, and financing activities provided $20.690 million. Financing inflows included a $34.639 million increase in interest-bearing transaction accounts, partly offset by a $10.323 million decline in repurchase-agreement and federal-funds funding.
- Available-for-sale securities were $213.227 million; $186.164 million were pledged, leaving approximately $27.0 million unpledged. Core deposits were $643.649 million, 65.2% of deposits. The Bank had $24.0 million of FHLB advances and $49.486 million of subordinated notes outstanding.
- Unused commitments included $121.1 million to extend credit, $1.866 million to originate residential mortgage loans, and $1.591 million of standby letters of credit. The filing says no loss accrual was recorded for these instruments and management considered liquidity adequate; not all commitments are expected to be drawn.
- Management said expected short-term liquidity needs from daily operations were not expected to vary significantly during 2014. The filing gives no earnings or revenue guidance. Management did not expect Basel III changes to materially affect regulatory ratios, capital, operations, or earnings.
- Key risks identified include competition, interest-rate changes and possible margin pressure, economic weakness affecting loan and asset quality, higher nonperforming assets and possible loan-loss provisions, regulatory changes, and acquisition integration risks. Management noted that Dodd-Frank-related regulations could reduce revenue or increase expense.
- A $160,000 reserve covered estimated mortgage-loan repurchase or make-whole exposure. Freddie Mac had reviewed 15 foreclosures; three were settled for $119,000 in reimbursement, and the remaining twelve were settled without additional cost. Management said pending litigation was not expected to materially adversely affect near-term financial condition or results, while noting uncertainty in some matters.
- The company had made no pension contributions for the current plan year; the estimated minimum required contribution for 2014 was $1.3 million, and the company had not determined whether it would contribute more than the minimum.
Important facts for investors to verify
- Reconcile the loan balance: the financial statements and credit-quality tables report $845.307 million, while one MD&A loan-composition table reports $846.307 million and labels commercial loans $133.346 million rather than $132.346 million.
- Assess the sustainability of earnings given the absence of a loan-loss provision and the sharp reduction in ORE expense versus Q1 2013, alongside the increase in non-accrual loans and nonperforming-loan ratio.
- Review allowance adequacy and collateral valuations, especially for impaired loans, commercial real estate exposure, and ORE; these involve management estimates and appraisals.
- Monitor deposit mix and funding concentration, pledged securities and borrowing capacity, as well as potential draws on off-balance-sheet commitments.
- Evaluate sensitivity to interest rates, mortgage refinancing volumes, and the timing and amount of required pension funding.