Hawthorn Bancshares, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 14, 2019. Although the request identifies 2018 Q4, this is an annual filing. Hawthorn is a Missouri bank holding company whose principal operating subsidiary, Hawthorn Bank, operates 23 banking offices and provides commercial, consumer, mortgage, trust, and deposit services, primarily in central and west-central Missouri.
Financial results and condition
- Revenue, earnings, cash flow, margins, debt, and liquidity: The supplied filing text incorporates the financial statements and MD&A by reference to the 2018 Annual Report, but does not provide clear values for these measures. Year-over-year changes in these results likewise cannot be determined from the supplied text.
- Capital: At December 31, 2018, Hawthorn Bancshares reported a 9.55% Tier 1 leverage ratio, 8.48% common equity Tier 1 ratio, 11.21% Tier 1 risk-based capital ratio, and 13.28% total risk-based capital ratio. Hawthorn Bank reported 10.43%, 12.24%, 12.24%, and 13.19%, respectively, and was classified as well-capitalized.
- Interest-rate sensitivity: Management’s one-year shock model indicated net interest income could change by up to 0.26% if rates rose 200 basis points or 4.17% if rates fell 200 basis points. Management considered this within board limits; actual effects may differ.
- HB Realty: Formed in 2018 to hold mortgage loans and participation interests. Their approximate aggregate book value was $445.4 million at year-end, up from approximately $404.7 million at initial capitalization. Hawthorn Bank retained indirect control.
Material changes and notable items
- HB Realty commenced operations in April 2018. The filing describes a plan to make up to 150 preferred shares available to selected employees, with transfers anticipated to begin in January 2019; each share generally carries a $30 annual dividend and $500 liquidation amount. Dividends are not guaranteed.
- The Company and Bank each had a community bank leverage ratio above 9% at year-end and could qualify under a proposed community-bank capital framework. The rule was not yet final; management said it would assess whether election would be advantageous if adopted.
- No Company or affiliate purchases of common stock were made in the fourth quarter of 2018. The Board’s prior repurchase authorization expired September 8, 2018.
- Management and KPMG reported effective internal control over financial reporting as of December 31, 2018; KPMG gave an unqualified opinion on the consolidated financial statements, which are incorporated by reference.
Outlook, risks, and contingencies
The filing gives no specific earnings or revenue guidance. Management identifies net interest income as the Bank’s primary earnings source and describes an interest-rate management strategy intended to stabilize net interest income and preserve capital. It also notes that the expected impact of adopting CECL, effective for the Company for reporting periods beginning after December 15, 2019, was not yet known and could include an increase in the allowance for credit losses.
Key risks include local economic and real-estate weakness; borrower defaults, collateral declines, and higher credit-loss provisions; changing interest rates and deposit competition; intense competition; regulatory and capital requirements; cybersecurity, technology, vendor, and operational risks; and dependence on key executives. The filing also describes the Company’s obligation to support its Bank subsidiary as a source of financial strength. It refers to Note 18 for legal proceedings and contingencies, but the supplied text does not state their details or a clear value.
Important facts for investors to verify
- Consult the incorporated 2018 Annual Report for full income statements, balance sheets, cash flows, loan and deposit trends, asset quality, margins, liquidity, and year-over-year comparisons.
- Review the financial-statement notes, including Note 18, for commitments, contingencies, and any legal matters.
- Verify the accounting, tax, governance, and employee-share arrangements for HB Realty, including the planned preferred-share transfers and actual dividend treatment.
- Assess the potential CECL transition effect and the Company’s and Bank’s capital and liquidity under changing economic and interest-rate conditions.