Hawthorn Bancshares, Inc. - Q1 2010 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2010. Hawthorn Bancshares, Inc. is a community-based bank holding company headquartered in Lee's Summit, Missouri, operating primarily through its subsidiary, Hawthorn Bank. The bank serves communities in central and southern Missouri with 24 full-service offices. As of March 31, 2010, the company held $1.26 billion in total assets.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net Income | $493,768 | $1,056,631 |
| Net Income Available to Common Shareholders | $4,866 | $563,527 |
| Earnings Per Share (Diluted) | $0.00 | $0.13 |
| Net Interest Income | $10,311,034 | $9,530,457 |
| Net Interest Margin | 3.61% | 3.32% |
| Provision for Loan Losses | $2,505,000 | $1,750,000 |
| Net Charge-offs | $2,643,927 | $1,257,121 |
| Total Assets | $1,260,410,845 | N/A (Balance Sheet) |
| Total Loans | $974,187,039 | N/A (Balance Sheet) |
| Total Deposits | $989,795,262 | N/A (Balance Sheet) |
| Cash and Cash Equivalents | $58,874,328 | $51,558,974 |
| Efficiency Ratio | 74.13% | 73.16% |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 53.3% year-over-year. Net income available to common shareholders plummeted 99.1% to $4,866, driven by preferred stock dividends and accretion totaling $489,000.
- Credit Quality Deterioration: Nonperforming loans increased significantly from $42.3 million (4.27% of loans) at Dec 31, 2009, to $62.8 million (6.44% of loans) at March 31, 2010. Nonaccrual loans rose $20.3 million to $54.4 million.
- Provision Increase: The provision for loan losses increased 43.1% to $2.5 million to cover rising net charge-offs, which doubled to $2.6 million.
- Revenue Mix: While Net Interest Income increased 8.2% due to a lower cost of funds, Non-Interest Income dropped 27.5% primarily due to a $796,000 decrease in gains on mortgage loan sales.
- Asset Composition: Total loans decreased 1.8% from the prior quarter, while investment securities increased. Other Real Estate Owned (OREO) assets rose 33.9% to $11.4 million.
Outlook, Risks, and Management Commentary
- Capital Position: The company remains well-capitalized. Total risk-based capital ratio was 16.68% and Tier 1 risk-based capital ratio was 14.19%, exceeding "Well-Capitalized" regulatory requirements.
- Liquidity: Liquidity is strong with $58.9 million in cash and cash equivalents and $199.9 million in total liquid assets. The company has significant unused borrowing capacity with the Federal Home Loan Bank and Federal Reserve.
- Preferred Stock Obligations: The company holds $30.3 million in preferred stock issued to the U.S. Treasury under the Capital Purchase Program (CPP). Dividends on this stock are cumulative and must be paid before common dividends.
- Risk Factors: Management highlights risks related to the general economic downturn in Missouri, potential increases in non-performing assets, and the impact of interest rate changes on net interest margins. The allowance for loan losses coverage of nonperforming loans decreased to 23.36%.
- Guidance: The filing contains no specific forward-looking financial guidance for the full year 2010, noting that operating results for the quarter are not necessarily indicative of future results.
Investor Verification Checklist
- Asset Quality Trend: Verify the trajectory of nonaccrual loans, which jumped $20M in one quarter, and the adequacy of the allowance for loan losses relative to the 6.44% nonperforming loan ratio.
- Common Shareholder Value: Confirm the impact of preferred stock dividends and accretion on common earnings, which reduced net income available to common shareholders to near zero.
- OREO Exposure: Review the $11.4 million in Other Real Estate Owned assets and the associated $506k in expenses to assess the cost of resolving foreclosed properties.
- Deposit Stability: Analyze the composition of deposits, noting that 46.2% are time deposits (more volatile) compared to 53.8% core deposits.
- Regulatory Capital: Confirm that the company maintains capital ratios above the "Well-Capitalized" threshold to avoid regulatory restrictions.