Hawthorn Bancshares, Inc. - 10-Q Summary (Period Ended Sept 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Hawthorn Bancshares, Inc., a Missouri-based bank holding company, for the period ended September 30, 2009. The company operates 24 full-service banking offices in Missouri, focusing on commercial, commercial real estate, and mortgage lending. The report covers the three and nine months ended September 30, 2009, compared to the same periods in 2008.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2009 | Nine Months Ended Sept 30, 2009 |
|---|---|---|
| Net Income | $1,906,778 | $4,167,697 |
| Net Income Available to Common Shareholders | $1,409,472 | $2,675,779 |
| Diluted EPS (Common) | $0.33 | $0.62 |
| Total Assets | $1,240,227,674 | N/A (Balance Sheet Item) |
| Total Loans | $993,452,421 | N/A (Balance Sheet Item) |
| Total Deposits | $968,134,872 | N/A (Balance Sheet Item) |
| Net Interest Income | $10,435,981 | $29,983,841 |
| Provision for Loan Losses | $1,250,000 | $4,404,000 |
| Net Cash Provided by Operating Activities | N/A | $13,002,301 |
| Stockholders' Equity | $108,491,553 | N/A (Balance Sheet Item) |
Material Changes vs. Prior Period
- Profitability: Net income decreased 5.4% for the quarter and 5.7% for the nine-month period compared to 2008. Net income available to common shareholders dropped significantly (30.0% for the quarter, 39.4% for nine months) due to preferred stock dividends of $497,306 (quarter) and $1,491,918 (nine months) resulting from the Treasury Capital Purchase Program (CPP).
- Asset Quality: Nonperforming loans increased to $33.9 million (3.41% of total loans) from $24.9 million (2.46%) at year-end 2008. Impaired loans rose to $37.9 million. Net charge-offs for the nine months were $3.14 million.
- Expense Growth: Non-interest expense increased 8.0% for the nine months. A significant driver was the FDIC insurance assessment, which rose $1.92 million due to higher rates and the depletion of assessment credits.
- Balance Sheet: Total assets decreased 3.1% to $1.24 billion. Loans decreased 1.6%, driven by a reduction in real estate construction loans ($15.2 million decrease). Deposits increased 1.3% to $968 million.
Outlook, Risks, and Management Commentary
- Capital Purchase Program: The company participated in the U.S. Treasury's CPP in December 2008, issuing preferred stock and warrants. This provides capital but imposes dividend obligations and restrictions on common dividends until preferred dividends are paid.
- Asset Quality Risks: Management notes increased delinquencies and nonperforming assets, particularly in real estate construction and mortgage categories, reflecting broader economic conditions. The allowance for loan losses was increased to 1.40% of total loans.
- Interest Rate Environment: Net interest margin for the nine months decreased slightly to 3.44% from 3.51% in 2008, as lower yields on earning assets partially offset lower costs of funds.
- Liquidity: The company maintains strong liquidity with $163.8 million in liquid assets (cash, federal funds, and available-for-sale securities). Borrowings from the Federal Home Loan Bank decreased significantly as advances were repaid.
- Regulatory Capital: The company remains well-capitalized, with a Total Risk-Based Capital ratio of 16.50% and a Tier 1 ratio of 14.01%, well above regulatory minimums.
Key Facts for Investor Verification
- Preferred Stock Dividends: Verify the impact of the $1.49 million in preferred dividends paid in the first nine months of 2009 on common shareholder returns.
- Nonperforming Assets: Monitor the trend of nonperforming loans, which rose to 3.41% of the portfolio, and the adequacy of the allowance for loan losses (1.40% of loans).
- FDIC Assessments: Confirm the sustainability of the increased FDIC insurance costs, which surged $1.92 million year-over-year.
- Construction Loan Exposure: Review the specific performance of the real estate construction portfolio, which saw a $15.2 million decline and significant charge-offs ($1.28 million for nine months).
- Capital Ratios: Verify that the company maintains its "Well-Capitalized" status despite the economic downturn and increased loan loss provisions.