Hawthorn Bancshares, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet figures are as of March 31, 2017, compared with December 31, 2016 unless otherwise noted. Hawthorn Bancshares provides community banking, lending, mortgage servicing, and trust services in Missouri.
Financial performance and position
- Earnings: Net income was $2.10 million, up 5.1% from $2.00 million in Q1 2016. Diluted EPS was $0.37 versus $0.35. Income before taxes increased 7.8% to $3.19 million.
- Revenue and margins: Net interest income rose 6.5% to $10.49 million; fully taxable-equivalent net interest margin eased to 3.48% from 3.51%. Non-interest income was $2.41 million, down 1.7%; total non-interest expense increased 3.0% to $9.35 million. The efficiency ratio improved to 72.51% from 73.87%.
- Drivers: Average loans grew 14.5% year over year, supporting higher loan interest income. Deposit and borrowing costs increased, contributing to lower net interest margin. Mortgage-servicing revenue rose, while the prior-year period included a $472,000 gain on securities sales that did not recur.
- Assets and funding: Total assets were $1.320 billion, up $32.6 million from year-end. Loans were $1.010 billion, up $36.2 million; deposits were $1.043 billion, up $32.3 million. Stockholders’ equity was $93.1 million. Reported total borrowings were approximately $172.9 million, compared with $173.9 million at year-end.
- Credit quality: The allowance for loan losses was $10.3 million, or 1.02% of loans, versus $9.9 million, or 1.01%, at year-end. The quarter included a $350,000 provision, compared with $250,000 a year earlier, and $26,000 of net recoveries versus $223,000 of net charge-offs in Q1 2016. Nonperforming loans were $9.4 million, or 0.93% of loans; nonperforming assets were $23.0 million, or 2.24% of loans plus other real estate and repossessed assets.
- Cash flow and liquidity: Operating activities provided $2.0 million; investing activities used $36.8 million, chiefly from loan growth and securities purchases; financing activities provided $31.0 million. Cash and cash equivalents declined $3.8 million to $23.2 million. The filing reports $222.6 million of federal funds/overnight deposits and available-for-sale securities. Core deposits were $758.4 million, or 72.7% of total deposits; available borrowing capacity was reported at $276.1 million.
- Capital: At March 31, the Company reported total risk-based capital of 13.37%, Tier 1 risk-based capital of 11.06%, Common Equity Tier 1 of 8.33%, and Tier 1 leverage of 9.74%. The filing says the Company and Bank exceeded applicable capital adequacy requirements and the Bank met well-capitalized thresholds.
Material changes and notable items
- Total assets, loans, and deposits increased from year-end; quarterly average loans were also substantially higher than in Q1 2016.
- Furniture and equipment expense rose 45.5% and processing/network/bank-card expense rose 35.4% year over year. Management attributed increases primarily to a cloud-based data-processing transition, network upgrades, and provider changes.
- Other real estate and repossessed assets declined to $13.6 million from $14.2 million at year-end. The allowance ratio rose slightly, while nonperforming loans as a percentage of loans improved from 0.95% at year-end.
- Available-for-sale securities had $2.95 million of gross unrealized losses at quarter-end. Management attributed the declines to interest-rate changes, not credit quality, and said it did not intend, and was not more likely than not required, to sell the securities before recovery.
- The Company adopted updated stock-compensation guidance in Q1; adoption had no significant financial-statement effect. It expects future revenue-recognition guidance to affect the timing or presentation of some trust, bank-card, and real-estate revenue, but does not expect a significant overall impact.
Outlook, risks, and contingencies
- The filing provides no earnings or revenue guidance. Management said short-term liquidity needs from daily operations were not expected to vary significantly during 2017.
- Key stated risks include competitive pressure, interest-rate changes that could reduce margins, weaker national or Missouri economic conditions affecting loan and asset quality, higher credit-loss provisions, regulatory or legislative changes, securities-market movements, and acquisition integration costs or difficulties.
- Off-balance-sheet commitments totaled $265.7 million: $238.4 million to extend credit, $3.8 million to originate residential mortgages, and $23.6 million of standby letters of credit. The filing says no losses were accrued for these items and that commitments may expire undrawn.
- The Company is involved in ordinary-course litigation. Management did not believe the matters were reasonably likely to materially adversely affect near-term consolidated financial condition or results; some matters were too early to assess for probable loss or a reliable estimate.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth and deposit mix can be sustained without further pressure on funding costs and net interest margin.
- Trends in commercial real-estate exposure, watch-list and substandard credits, nonperforming loans, TDRs, and the adequacy of the loan-loss allowance.
- Whether elevated technology and processing costs continue, and whether the stated infrastructure changes deliver expected benefits.
- Liquidity and funding capacity under stress, including the use of pledged collateral, borrowing availability, and potential draws on $265.7 million of commitments.
- The quality and valuation sensitivity of mortgage-servicing rights and securities, and the effect of interest-rate changes on earnings, liquidity, and capital.
- Debt classification and balances across the filing’s balance-sheet and liquidity disclosures should be checked against the full filing; the presented line-item descriptions and amounts do not align consistently for year-end borrowings.