Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HWBK > SEC Filings for HWBK > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for HAWTHORN BANCSHARES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for HAWTHORN BANCSHARES, INC.


14-Aug-2013

Quarterly Report


Item 2 - Management's Discussion and Analysis of Financial Condition

And Results of Operations

Forward-Looking Statements

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of the Company and its subsidiaries, including, without limitation:

statements that are not historical in nature, and

statements preceded by, followed by or that include the words believes, expects, may, will, should, could, anticipates, estimates, intends or similar expressions.

Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

competitive pressures among financial services companies may increase significantly,

changes in the interest rate environment may reduce interest margins,

general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

increases in non-performing assets in the loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,

costs or difficulties related to the integration of the business of the Company and its acquisition targets may be greater than expected,

legislative or regulatory changes may adversely affect the business in which the Company and its subsidiaries are engaged, and

changes may occur in the securities markets.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, was enacted on July 21, 2010. Provisions of the Act address many issues including, but not limited to, capital, interchange fees, compliance and risk management, debit card overdraft fees, the establishment of a new consumer regulator, healthcare, incentive compensation, expanded disclosures and corporate governance. While many of the new regulations under the Act are expected to primarily impact financial institutions with assets greater than $10 billion, the Company expects these new regulations could reduce revenues and increase expenses in the future. Management is currently assessing the impact of the Act and of the regulations anticipated to be promulgated under the Act.

The Company has described under the caption Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 and in other reports filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.

Overview

Through the branch network of its subsidiary bank, the Company provides a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts, and money market accounts. The Company also provides a wide range of lending services, including real estate, commercial, installment, and other consumer loans. Other financial services that the Company provides include automated teller machines, trust services, credit-related insurance, and safe-deposit boxes. The geographic areas in which the Company provides products and services include the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee's Summit, Missouri.


The Company's primary source of revenue is net interest income derived primarily from lending and deposit taking activities. A secondary source of revenue is investment income. The Company also derives income from trust, brokerage, credit card and mortgage banking activities and service charge income.

Much of the Company's business is commercial, commercial real estate development, and mortgage lending. The Company has experienced soft loan demand in the communities within which we operate during the current economic slowdown. The Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancings.

The success of the Company's growth strategy depends primarily on the ability of the banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company's financial performance also depends, in part, on the ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends on the ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.

Hawthorn Bank (the Bank), the Company's subsidiary bank, is a full-service bank conducting a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the Bank provides trust services.

The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination by the Federal Reserve Board.

CRITICAL ACCOUNTING POLICIES

The following accounting policies are considered most critical to the understanding of the Company's financial condition and results of operations. These critical accounting policies require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to the critical accounting policies on the business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect the reported and expected financial results.

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the Company's results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the business operations is provided in Note 1 to the Company's consolidated financial statements and is also discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of the Company.


Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Judgment is required in addressing the Company's future tax consequences of events that have been recognized in the consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forwards and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, the Company would adjust the recorded value of the deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Likewise, the Company would reverse the valuation allowance when it is expected to realize the deferred tax asset. In addition, the Company is subject to the continuous examination of its tax returns by the Internal Revenue Service and other taxing authorities. The Company accrues for penalties and interest related to income taxes in income tax expense. As of June 30, 2013, the Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The write-downs are recorded as other real estate expense. The Company establishes a valuation allowance related to other real estate owned on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the cost of the property.


SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for the Company as of and for each of the three and six months ended June 30, 2013 and 2012, respectively. The selected consolidated financial data should be read in conjunction with the consolidated financial statements of the Company, including the accompanying notes, presented elsewhere herein.

                                                Three Months       Six Months
                                                   Ended              Ended
Selected Financial Data                           June 30,          June 30,
(In thousands, except per share data)          2013      2012     2013     2012
Per Share Data
Basic earnings per common share               $  0.30   $ 0.01   $ 0.21   $ 0.20
Diluted earnings per common share                0.30     0.01     0.21     0.20
Dividends paid on preferred stock                 228      368      456      746
Accretion of discount on preferred stock          206      396      278      515
Dividends paid on common stock                    242      232      484      465
Book value per common share                                       14.59    14.77
Market price per common share                                     12.50     8.88
Selected Ratios
(Based on average balance sheets)
Return on total assets                           0.62 %   0.25 %   0.29 %   0.37 %
Return on common stockholders' equity            8.13 %   0.26 %   2.88 %   2.73 %
Common stockholders' equity to total assets      6.99 %   6.30 %   7.42 %   6.26 %

Efficiency ratio (1)                            71.93 %  80.05 %  82.75 %  77.08 %

(Based on end-of-period data)
Common stockholders' equity to assets                              6.06 %   6.26 %
Stockholders' equity to assets                                     6.06 %   7.76 %
Total risk-based capital ratio                                    14.89 %  16.90 %
Tier 1 risk-based capital ratio                                   10.92 %  13.63 %
Leverage ratio                                                     8.18 %  10.17 %



(1) Efficiency ratio is calculated as non-interest expense as a percent of total revenue. Total revenue includes net interest and non-interest income.


RESULTS OF OPERATIONS ANALYSIS

The Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.

                        Three Months Ended June 30,                 Six Months Ended June 30,
                                           $         %                                $         %
(In thousands)      2013       2012     Change    Change       2013       2012      Change    Change
Net interest
income             $ 9,815   $ 10,172   $  (357 )    (3.5 )% $ 19,544   $ 20,987   $ (1,443 )   (6.9 )%
Provision for
loan losses          1,000      1,500      (500 )   (33.3 )     2,000      3,200     (1,200 )  (37.5 )
Noninterest
income               2,828      2,443       385      15.8       5,542      4,413      1,129     25.6
Investment
securities
gains, net             260          -       260        NM         554          -        554       NM
Total
noninterest
income               3,088      2,443       645      26.4       6,096      4,413      1,683     38.1
Noninterest
expense              9,281     10,098      (817 )    (8.1 )    21,216     19,578      1,638      8.4
Income before
income taxes         2,622      1,017     1,605    (157.8 )     2,424      2,622       (198 )    7.6
Income tax
expense                810        277       533    (192.4 )       748        431        317    (73.5 )
Net income         $ 1,812   $    740   $ 1,072     144.9 %  $  1,676   $  2,191   $   (515 )  (23.5 )%
Less: preferred
dividends and          114        296      (182 )   (61.5 )       337        666       (329 )  (49.4 )
accretion of
discount               206        396      (190 )   (48.0 )       278        515       (237 )  (46.0 )
Total                  320        692      (372 )   (53.8 )       615      1,181       (566 )  (47.9 )
Net income
available to
common
shareholders       $ 1,492   $     48   $ 1,444   3,008.3 %  $  1,061   $  1,010   $     51      5.0 %

The Company's consolidated net income of $1,812,000 for the three months ended June 30, 2013 increased $1,072,000 compared to consolidated net income of $740,000 for the three months ended June 30, 2012. The Company recorded preferred stock dividends and accretion on preferred stock of $320,000 for the three months ended June 30, 2013, resulting in $1,492,000 of net income available for common shareholders compared to $48,000 of net income available for common shareholders for the three months ended June 30, 2012. Diluted earnings per share increased from $0.01 per common share for the three months ended June 30, 2012 to $0.30 per common share for the three months ended June 30, 2013. The Company's net interest income, on a tax equivalent basis, decreased $366,000, or 3.6%, to $9,943,000 for the three months ended June 30, 2013 compared to $10,309,000 for the three months ended June 30, 2012. This decrease was primarily due to a 0.11% decrease in the net interest margin from 3.77% for the three months ended June 30, 2012 to 3.66% for the three months ended June 30, 2013, and a period over period decrease in average earning assets of $9.2 million, or 0.8%. The provision for loan losses decreased $500,000, or 33.3%, from the three months ended June 30, 2012 to the three months ended June 30, 2013 due to reduced levels of nonperforming assets in 2013 compared to 2012. Total noninterest income increased $645,000, or 26.4%, for the three months ended June 30, 2013 compared to June 30, 2012 primarily due to a $145,000 increase in gain on sales of mortgage loans, a $271,000 increase in mortgage servicing income related to changes in the fair value of mortgage servicing rights, and $260,000 gains on the sale of investment securities. Noninterest expense decreased $817,000, or 8.1%, from the three months ended June 30, 2012 to 2013. Included in this decrease was a $575,000 decrease in other real estate (ORE) expense due to $300,000 recovery of an ORE valuation write-down related to the sale of land that was held in foreclosed assets at the Company's real estate subsidiary. The $533,000 increase in income tax expense for the three months ended June 30, 2013 compared to the three months ended June 30, 2012 is largely attributable to a $371,000 immaterial correction of a prior period error. For the three months ended June 30, 2013, the return on average assets was 0.62%, the return on average common stockholders' equity was 8.13%, and the efficiency ratio was 71.93%.

The Company's consolidated net income of $1,676,000 for the six months ended June 30, 2013 decreased $515,000 compared to consolidated net income of $2,191,000 for the six months ended June 30, 2012. The Company recorded preferred stock dividends and accretion on preferred stock of $615,000 for the six months ended June 30, 2013, resulting in $1,061,000 of net income available for common shareholders compared to $1,010,000 of net income available for common shareholders for the six months ended June 30, 2012. Diluted earnings per share increased from $0.20 per common share for the six months ended June 30, 2012 to $0.21 per common share for the six months ended June 30, 2013. The Company's net interest income,


on a tax equivalent basis, decreased $1,462,000, or 6.87%, to $19,804,000 for the six months ended June 30, 2013 compared to $21,266,000 for the six months ended June 30, 2012. This decrease was primarily due to a 0.21% decrease in the net interest margin from 3.87% for the six months ended June 30, 2012 to 3.66% for the six months ended June 30, 2013, and a period over period decrease in average earning assets of $9.2 million, or 0.8%. The provision for loan losses decreased $1,200,000, or 37.5%, from the six months ended June 30, 2012 to the six months ended June 30, 2013 due to reduced levels of nonperforming assets in 2013 compared to 2012. Total noninterest income increased $1,683,000, or 38.1%, for the six months ended June 30, 2013 compared to June 30, 2012 primarily due to a $346,000 increase in gain on sales of mortgage loans, a $708,000 increase in mortgage servicing income related to changes in the fair value of mortgage servicing rights, and $554,000 gains on the sale of investment securities. Noninterest expense increased $1,638,000, or 8.4%, from the six months ended June 30, 2012 to June 30, 2013 primarily due to a $1,723,000 increase in ORE expenses resulting from higher operating costs on foreclosed properties and an increase in the ORE expense provision primarily related to the sale of two hotels in the Branson area. Partially offsetting this increase was a $387,000 decrease in other non-interest expenses primarily due to the donation of two properties during 2012 that were held in ORE as further discussed below. The $317,000 increase in income tax expense for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 is largely attributable to a $371,000 immaterial correction of a prior period error recorded in 2012. For the six months ended June 30, 2013, the return on average assets was 0.29%, the return on average common stockholders' equity was 2.88%, and the efficiency ratio was 82.7%.

Total assets at June 30, 2013 were $1,165,536,000, compared to $1,181,606,000 at December 31, 2012, a decrease of $16,070,000, or 1.4%. On July 1, 2013, the Company distributed a four percent stock dividend for the fifth consecutive year to common shareholders of record at the close of business on June 15, 2013. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect the stock dividend. On May 15, 2013, the Company redeemed the remaining 18,255 shares of preferred stock issued under the U.S. Treasury's CPP program, and on June 11, 2013 the common stock warrant was repurchased by the Company pursuant to a letter agreement between the Treasury and the Company for a total repurchase price of $540,000, or $1.88 per warrant share. The repurchase price was based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ends the Company's participation in the U.S Treasury Department's CPP.

Net Interest Income

Net interest income is the largest source of revenue resulting from the Company's lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities.

Average Balance Sheets

The following table presents average balance sheets, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three month and six month periods ended June 30, 2013 and June 30, 2012, respectively.


Three Months Ended June 30,

                                           2013                                     2012
                                            Interest      Rate                       Interest      Rate
                             Average        Income/      Earned/      Average        Income/      Earned/
(In thousands)               Balance       Expense(1)    Paid(1)      Balance       Expense(1)    Paid(1)
ASSETS
Loans: (2) (4)
Commercial                 $    132,087   $      1,645      5.00 %  $    128,451   $      1,638      5.11 %
Real estate construction
- residential                    23,966            275      4.60          18,753            243      5.20
Real estate construction
- commercial                     46,115            609      5.30          42,257            437      4.15
Real estate mortgage -
residential                     216,485          2,747      5.09         219,785          3,062      5.59
Real estate mortgage -
commercial                      393,355          4,813      4.91         409,017          5,133      5.03
Consumer                         23,638            370      6.28          28,759            457      6.37
Total loans                $    835,646   $     10,459      5.02 %  $    847,022   $     10,970      5.19 %
Investment securities:
(3)
U.S. treasury              $      1,483   $          6      1.62 %  $      2,046   $          8      1.57 %
Government sponsored
enterprises                      68,119            198      1.17          75,886            268      1.42
Asset backed securities         124,440            695      2.24         117,440            798      2.73
State and municipal              35,447            328      3.71          34,172            349      4.10
Total investment
securities                 $    229,489   $      1,227      2.14 %  $    229,544   $      1,423      2.49 %
Restricted investments            4,106             19      1.86           4,303             25      2.33
Federal funds sold and
other overnight
interest-bearing
deposits                         19,568             15      0.31          17,177             16      0.38
Total interest earning
assets                     $  1,088,809   $     11,720      4.32 %  $  1,098,046   $     12,434      4.54 %
All other assets                102,847                                  101,753
Allowance for loan
losses                          (14,992 )                                (14,758 )
Total assets               $  1,176,664                             $  1,185,041
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts               $    197,120   $        137      0.28 %  $    188,236   $        204      0.43 %
Savings                          75,810             20      0.11          66,894             18      0.11
Money market                    158,377             95      0.24         149,723            107      0.29
Time deposits of
$100,000 and over               118,107            233      0.79         129,612            308      0.95
Other time deposits             266,340            857      1.29         281,454          1,004      1.43
Total time deposits        $    815,754   $      1,342      0.66 %  $    815,919   $      1,641      0.81 %
Federal funds purchased
and securities sold
under agreements to
repurchase                       19,069              5      0.11          23,104              5      0.09
Subordinated notes               49,486            321      2.60          49,486            345      2.80
Federal Home Loan Bank
advances                         24,014            109      1.82          28,323            134      1.90
Total borrowings           $     92,569   $        435      1.88 %  $    100,913   $        484      1.92 %
Total interest bearing
liabilities                $    908,323   $      1,777      0.78 %  $    916,832   $      2,125      0.93 %
Demand deposits                 178,587                                  162,681
Other liabilities                 7,452                                    8,153
Total liabilities             1,094,362                                1,087,666
Stockholders' equity             82,302                                   97,375
Total liabilities and
stockholders' equity       $  1,176,664                             $  1,185,041
Net interest income
(FTE)                                            9,943                                   10,309
Net interest spread                                         3.54 %                                   3.61 %
Net interest margin                                         3.66 %                                   3.77 %


. . .
  Add HWBK to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HWBK - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.