Business context and reporting period
Hawthorn Bancshares, Inc., through Hawthorn Bank, provides commercial and consumer banking services in communities in and around Missouri. This unaudited Form 10-Q covers the quarter ended March 31, 2013; income and cash flow comparisons are with the three months ended March 31, 2012, while balance-sheet comparisons are with December 31, 2012. Amounts below are in millions unless stated otherwise.
Financial performance and position
- Earnings: Net interest income was $9.729 million, down 10.0% from $10.815 million. Total noninterest income was $3.007 million, up 52.6%, including a $0.294 million securities-sale gain. Net loss was $0.136 million versus net income of $1.451 million; after preferred dividends and discount accretion, loss available to common shareholders was $0.432 million, or $0.09 per share, versus earnings of $0.962 million, or $0.20 per share.
- Margins and expenses: Tax-equivalent net interest margin fell to 3.65% from 3.98%; net interest spread declined to 3.51% from 3.85%. Noninterest expense rose 25.9% to $11.934 million, and the efficiency ratio increased to 93.7% from 74.1%. The $2.310 million increase in other real estate expense was the largest expense driver.
- Credit: Loans were $834.256 million, down 1.5% from year-end. The loan-loss provision fell to $1.000 million from $1.700 million, while net charge-offs increased to $1.297 million from $0.869 million. The allowance was $14.545 million, or 1.74% of loans. Nonperforming loans were $38.624 million (4.63% of loans), and nonperforming assets were $61.752 million, down from $62.961 million at year-end.
- Liquidity and funding: Cash and cash equivalents were $43.862 million, down $15.015 million during the quarter. Operating activities generated $6.335 million; investing activities used $25.911 million; financing activities generated $4.561 million. Deposits totaled $999.880 million. Reported borrowings totaled $87.096 million, including $49.486 million of subordinated notes, $20.071 million of FHLB advances, and $17.539 million in repurchase agreements. Management reported $293.942 million of available borrowing capacity across listed facilities.
- Capital and assets: Total assets were $1.186 billion, up 0.4% from year-end; stockholders’ equity was $90.910 million, down from $92.220 million. At March 31, the Company’s total risk-based capital ratio was 16.84%, Tier 1 risk-based ratio 13.55%, and leverage ratio 10.09%. The Bank’s corresponding ratios were 15.23%, 13.98%, and 10.40%; management stated both Company and Bank met capital adequacy requirements.
Material changes, outlook, and risks
- Management attributed weaker net interest income mainly to lower asset yields: earning-asset yield fell to 4.32% from 4.64%, while the cost of interest-bearing liabilities edged up to 0.81% from 0.79%. Average earning assets declined 0.8% year over year.
- Other real estate expense included a $2.343 million provision for foreclosed property valuation losses, primarily relating to two Branson-area hotels. Other real estate owned and foreclosed assets were $23.128 million net at quarter-end; gross assets were $31.472 million, offset by an $8.344 million valuation allowance.
- Management described loan demand as soft and the economic recovery as modest, while noting improving housing prices and sales. It anticipated moderate improvement over the next several quarters, with continued slow growth. It cited local and national economic conditions, interest-rate changes, credit quality, competition, regulation, and securities markets as risks. No quantified earnings or financial guidance was provided.
- The Company had approval to redeem its remaining 18,255 Treasury CPP preferred shares on May 15, 2013, after quarter-end. Preferred dividends and discount accretion totaled $0.295 million for the quarter.
- Pending litigation includes a class-action suit challenging overdraft fees; management could not determine the likelihood of a material adverse outcome or estimate a potential loss. In a separate loan-commitment lawsuit, the Company expected a net loss of approximately $0.275 million after insurance, with reserves already included in the December 2012 balance sheet.
- The filing reports $112.039 million of unused loan commitments and standby letters of credit. Management considered current liquidity resources adequate and expected short-term operating liquidity needs to remain broadly stable in 2013.
Important facts for investors to verify
- Whether net interest margin and core earnings stabilize, given the quarter’s 10% decline in net interest income and common-shareholder loss.
- Whether the Branson hotel valuations and other foreclosed-property costs lead to further write-downs or elevated expenses.
- Credit trends, including commercial real estate exposures, nonperforming loans, charge-offs, TDRs, and the adequacy of loan-loss reserves.
- Completion and capital/liquidity effects of the planned May 15, 2013 redemption of the remaining CPP preferred shares.
- Developments in the overdraft-fee class action and the final cost of the separate loan-commitment litigation.