Hawthorn Bancshares, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results cover Hawthorn Bancshares and subsidiaries, including Hawthorn Bank, which serves communities in Missouri. Unless noted, amounts are in millions of dollars.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $9.9 | $10.1 | $29.4 | $31.1 |
| Provision for loan losses | $0 | $4.7 | $2.0 | $7.9 |
| Noninterest income | $2.4 | $2.7 | $8.5 | $7.1 |
| Noninterest expense | $10.0 | $10.4 | $31.2 | $30.0 |
| Net income (loss) | $1.6 | $(1.6) | $3.2 | $0.6 |
| Net income (loss) available to common shareholders | $1.6 | $(1.9) | $2.6 | $(0.9) |
| Diluted EPS | $0.31 | $(0.37) | $0.52 | $(0.17) |
- Fully taxable-equivalent net interest margin was 3.74% for Q3 and 3.68% for the first nine months, down from 3.80% and 3.85% in the comparable 2012 periods. Lower earning-asset yields and balances were partly offset by lower funding costs.
- Efficiency ratio was 81.0% for Q3 and 82.2% year to date, compared with 81.1% and 78.4%, respectively. Return on average assets was 0.54% for Q3 and 0.37% year to date.
Financial position, liquidity and capital
- At September 30, 2013, total assets were $1,131.3 million, down from $1,181.6 million at December 31, 2012. Loans were $823.0 million, down 2.8%; deposits were $951.5 million, down 4.0%.
- Cash and cash equivalents fell to $25.8 million from $58.9 million. For the nine months, operating activities provided $15.6 million and investing activities provided $3.3 million; financing activities used $51.9 million, principally reflecting deposit outflows and redemption of preferred stock.
- Stockholders’ equity was $71.8 million versus $92.2 million at year-end. The company redeemed its remaining $18.3 million of Treasury preferred stock and repurchased its warrant during 2013; accumulated other comprehensive income also declined by $3.7 million, primarily reflecting securities valuation changes.
- Borrowings totaled $98.5 million: $49.5 million subordinated notes, $24.0 million Federal Home Loan Bank advances and $25.0 million in repurchase agreements. Reported capital ratios at September 30 included total risk-based capital of 15.36%, Tier 1 risk-based capital of 11.39%, and leverage of 8.56% for the company. Management stated the company and bank met applicable capital requirements.
- Core deposits were $592.8 million, or 62.3% of deposits. The filing reported $276.6 million of total available capacity across the disclosed FHLB, Federal Reserve and federal-funds facilities, subject to collateral and facility terms.
Material changes and credit quality
- Year-to-date net income rose to $3.2 million from $0.6 million, while income available to common shareholders improved from a loss to $2.6 million of income. Lower loan-loss provision was a major factor; 2012 included a $7.9 million year-to-date provision versus $2.0 million in 2013.
- Net charge-offs were $2.6 million, or 0.40% of average loans, for the first nine months, versus $4.8 million, or 0.57%, in 2012. The allowance was $14.3 million, 1.73% of loans, compared with $14.8 million, 1.75%, at year-end. No provision was recorded in Q3.
- Nonperforming loans totaled $36.6 million, or 4.44% of loans, at September 30. Nonperforming assets were $52.5 million, down from $63.0 million at year-end. The decline included lower foreclosed real estate, following sales that included two Branson-area hotels.
- Impaired loans were $36.2 million, including $28.6 million on nonaccrual status. Troubled debt restructurings totaled $19.3 million, down from $22.4 million at year-end. Management identified $26.7 million in substandard loans outside the reported nonperforming-asset table as potential problem loans.
- Other real estate expense was $4.4 million year to date, up 39.8%, including a $3.0 million provision for valuation write-downs. Management attributed significant 2013 write-downs primarily to Branson-area commercial properties sold at auction.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said future short-term liquidity needs from daily operations were not expected to vary significantly during 2013, and described current liquidity resources as adequate for outstanding commitments.
- Mortgage banking income faced pressure as rising rates slowed refinancing and reduced Q3 mortgage loan sales. The company added a $150,000 reserve for possible repurchase or make-whole claims; one investor was reviewing 15 foreclosed loans, with balances of $1.5 million at foreclosure. The ultimate exposure was uncertain.
- Off-balance-sheet commitments included $137.3 million to extend credit, $4.3 million to originate residential mortgages and $2.2 million of standby letters of credit. The filing says these amounts are not necessarily expected cash requirements; no losses were accrued for these instruments.
- Management cited interest-rate changes, competition, economic conditions in Missouri, loan quality and potential increases in credit-loss provisions, regulatory changes, and securities-market changes as risks. The company was assessing the effect of Basel III rules, with community-bank phase-in beginning in 2015. Its interest-rate sensitivity analysis depends on assumptions about loan repayments and deposit behavior.
- Management did not believe pending litigation would materially adversely affect near-term financial condition or results, while noting that some early-stage matters could not yet be estimated. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
- The company completed its exit from the U.S. Treasury Capital Purchase Program by redeeming the remaining preferred shares and repurchasing the warrant. It also paid a 4% common-stock dividend; per-share data were adjusted retroactively. Year-to-date investment-security sales produced $554,000 in gains. The filing also discusses prior-period immaterial corrections affecting 2012 interest expense, mortgage-servicing-rights amortization and tax comparisons.
Important facts for investors to verify
- Whether improvement in earnings and credit metrics is sustainable, especially given continued margin compression and identified potential problem loans.
- The adequacy of the loan-loss allowance and real-estate valuation reserves, and the timing and proceeds of remaining foreclosed-property dispositions.
- The outcome of the investor’s review of the 15 foreclosed loans and whether the $150,000 repurchase reserve is sufficient.
- The effects of deposit outflows, reduced cash balances, funding availability and upcoming regulatory-capital requirements on liquidity and capital flexibility.
- How much recurring revenue can offset lower mortgage refinancing activity and higher year-to-date other-real-estate costs; the filing does not provide a quantified earnings outlook.