Hawthorn Bancshares, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 16, 2020. Hawthorn is a Missouri bank holding company whose principal banking subsidiary, Hawthorn Bank, operates 23 offices and provides commercial and consumer banking, lending, and trust services, primarily in central and west-central Missouri.
Financial position and performance
- Revenue, net income, cash flow, margins, debt, and liquidity: The supplied filing text does not provide clear values for these metrics. The 10-K incorporates the consolidated financial statements and management’s discussion from the 2019 Annual Report to Shareholders, which are not included in the supplied text.
- Capital: At December 31, 2019, the Company reported Common Equity Tier 1 capital of 10.73%, Tier 1 risk-based capital of 9.86%, total risk-based capital of 13.04%, and a Tier 1 leverage ratio of 14.89%. The Company said it complied with applicable capital guidelines.
- Bank capital: Hawthorn Bank was classified as “well-capitalized.” Its reported ratios were 11.18% Tier 1 leverage, 13.55% Common Equity Tier 1, 13.55% Tier 1 risk-based capital, and 14.60% total risk-based capital.
- Interest-rate sensitivity: Management’s models estimated annual net interest income could increase by up to 1.07% if rates rose 200 basis points, or decrease by 0.51% if rates fell 200 basis points, over one year. Management considered the modeled exposure within board limits.
- HB Realty: The real-estate subsidiary held mortgage loans and participation interests with approximate aggregate book value of $482.3 million at year-end, compared with approximately $404.7 million at formation.
Changes and notable items
- Management identified a material weakness in controls over the completeness and accuracy of information used for the qualitative component of the allowance for loan losses. The weakness caused an immaterial overstatement of the allowance, corrected in the reported financial statements; no prior-period restatement was required.
- Management concluded disclosure controls were ineffective at year-end, and KPMG issued an adverse opinion on internal control over financial reporting. KPMG separately issued an unqualified opinion on the consolidated financial statements.
- During first-quarter 2020, the Company began a remediation plan. The weakness will not be considered remediated until the revised controls have operated effectively for a sufficient period and have been tested.
- The board authorized up to $5.0 million of common-stock repurchases in September 2019. No shares were repurchased in the fourth quarter; the full authorization remained available at December 31, 2019.
- The Company and Bank qualified to elect the Community Bank Leverage Ratio framework but said they had no immediate plans to elect it.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or revenue guidance. Management highlights sensitivity to interest rates, local economic conditions, competition, credit quality, real-estate values, funding costs, and regulatory changes.
- Management was evaluating the expected-credit-loss (CECL) standard, with adoption stated to be in January 2023. The filing says the adoption impact was not yet estimable and could include an increase in the allowance for credit losses.
- Other disclosed risks include cybersecurity and technology disruptions, dependence on third-party service providers and key executives, and potential limits on capital distributions under regulatory requirements.
- The supplied text refers to legal proceedings and commitments in Note 19 but does not provide their details or a clear quantified exposure.
Most important facts to verify
- Review the incorporated 2019 Annual Report for actual year-over-year revenue, earnings, net interest margin, credit quality, allowance, cash flows, and balance-sheet liquidity figures.
- Assess remediation and independent testing of the material weakness in allowance-estimation controls, including whether any new deficiencies were identified.
- Verify the loan portfolio’s concentrations, nonperforming assets, charge-offs, and allowance adequacy against the full financial statements and notes.
- Check Note 19 for the nature and potential financial impact of litigation, commitments, and contingencies.
- Confirm any subsequent election of the community bank leverage ratio framework and any use of the remaining $5.0 million repurchase authorization.