Hawthorn Bancshares, Inc. — 2020 Form 10-K
Business and period: Bank holding company operating Hawthorn Bank, a full-service Missouri community bank with 23 banking offices. The filing covers the fiscal year ended December 31, 2020; the supplied text also reports fourth-quarter 2020 share repurchase activity. Hawthorn primarily serves central and west-central Missouri.
Financial condition and performance
- Revenue, earnings, cash flow, margins, debt and liquidity: The filing incorporates its financial statements and MD&A by reference to the 2020 Annual Report to Shareholders, which was not included in the supplied text. Accordingly, clear values and year-over-year comparisons for these measures are not available here.
- Capital: At December 31, 2020, the Company reported Common Equity Tier 1, Tier 1 risk-based, total risk-based and Tier 1 leverage ratios of 10.19%, 10.00%, 13.37% and 14.97%, respectively. The Bank’s corresponding ratios were 13.62%, 13.62%, 14.87% and 10.41%. The Bank was classified as well-capitalized.
- Interest-rate sensitivity: Management’s one-year, 200-basis-point rate-shock models indicated net interest income could change by as much as +0.73% if rates rose or −1.81% if rates fell. Management considered this within board limits; actual outcomes may differ.
- Repurchases: No shares were repurchased in the fourth quarter. Of the $2.5 million authorization approved in the third quarter, approximately $2.4 million remained at year-end.
Material changes and notable items
- Management said it remediated a material weakness identified in 2019 involving controls over information used in the qualitative component of the allowance for loan losses. Management and the independent auditor concluded internal control over financial reporting was effective at December 31, 2020.
- In December 2020, Hawthorn Bank was notified that certain mortgage loans and participation interests held by HB Realty would no longer qualify as collateral at the Federal Home Loan Bank. A five-year runoff period applies to affected collateral pledged as of September 30, 2020; the Bank was evaluating alternatives to preserve borrowing capacity.
- The Company and Bank qualified to elect the community bank leverage ratio framework but had not elected it as of year-end.
- The filing states that adoption of the CECL credit-loss standard was expected in January 2023. The impact was not yet estimated and could include an increase in the allowance.
Outlook, risks and contingencies
The filing gives no quantified earnings or revenue guidance in the supplied text. Management emphasizes uncertainty from COVID-19, including possible weaker loan demand, delayed or missed payments, declining collateral values, credit losses, market volatility, lower interest rates and operational disruption. Other principal risks include local economic and real-estate conditions, credit quality and allowance estimates, interest-rate changes, competition, regulatory requirements, cybersecurity and reliance on third-party service providers. The filing refers to Note 19 for legal proceedings and contingencies, but that note was not included in the supplied text, so specific exposures are unclear.
Investor verification checklist
- Review the incorporated 2020 Annual Report for complete 2020 and comparative revenue, net income, EPS, net interest margin, cash flows, asset quality, allowance, deposits, borrowings and liquidity figures.
- Verify trends in delinquencies, nonperforming assets, charge-offs, loan concentrations and COVID-related loan modifications, as well as the assumptions underlying the allowance.
- Assess the amount and timing of FHLB borrowing capacity affected by the HB Realty collateral change and the viability of alternative funding.
- Check Note 19 and related disclosures for the nature and estimated exposure of legal proceedings and other contingencies.
- Confirm the CECL transition plan and estimated capital and earnings effects as the January 2023 adoption date approaches.