Hawthorn Bancshares(HWBK) - 2019 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Hawthorn Bancshares' Q1 2019 unaudited financial statements report total assets of $1.54 billion, net income of $4.7 million, boosted by a $2.1 million branch sale gain, and reflect new lease accounting standards Consolidated Balance Sheets Total assets grew to $1.54 billion by March 31, 2019, driven by increased cash and net loans, with deposits reaching $1.25 billion and equity rising to $104.9 million Consolidated Balance Sheet Highlights (Unaudited) | (In millions) | March 31, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $90.7 | $42.1 | | Net loans | $1,142.8 | $1,135.0 | | Total assets | $1,538.3 | $1,481.7 | | Liabilities & Equity | | | | Total deposits | $1,250.6 | $1,198.5 | | Total liabilities | $1,433.4 | $1,382.3 | | Total stockholders' equity | $104.9 | $99.4 | Consolidated Statements of Income Q1 2019 net income more than doubled to $4.7 million, driven by a $2.1 million branch sale gain and an 8.1% rise in net interest income, with diluted EPS at $0.77 Consolidated Income Statement Highlights (Unaudited) | (In millions, except per share) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net interest income | $11.6 | $10.8 | | Provision for loan losses | $0.15 | $0.30 | | Non-interest income | $2.1 | $2.2 | | Gain on branch sale, net | $2.1 | $— | | Non-interest expense | $9.9 | $10.3 | | Net income | $4.7 | $2.1 | | Diluted earnings per share | $0.77 | $0.35 | Consolidated Statements of Comprehensive Income Total comprehensive income surged to $6.1 million in Q1 2019, up from $0.4 million, due to higher net income and a $1.4 million gain from available-for-sale securities Consolidated Comprehensive Income (Unaudited) | (In millions) | Three Months Ended March 31, 2019 | Three Months Ended March 31, 2018 | | :--- | :--- | :--- | | Net income | $4.7 | $2.1 | | Other comprehensive income (loss) | $1.4 | $(1.7) | | Total comprehensive income | $6.1 | $0.4 | Consolidated Statements of Stockholders' Equity Stockholders' equity increased to $104.9 million by March 31, 2019, primarily from $4.7 million net income and $1.4 million other comprehensive income, offset by $603 thousand in dividends - Key drivers for the change in stockholders' equity in Q1 2019 were net income of $4.7 million and other comprehensive income of $1.4 million, which were partially offset by $603 thousand in common stock dividends[11] Consolidated Statements of Cash Flows Cash and cash equivalents increased by $48.6 million in Q1 2019, with $3.7 million from operations, $14.5 million used in investing, and $59.5 million provided by financing Summary of Cash Flows (Unaudited) | (In millions) | Three Months Ended March 31, 2019 | | :--- | :--- | | Net cash provided by operating activities | $3.7 | | Net cash used in investing activities | $(14.5) | | Net cash provided by financing activities | $59.5 | | Net increase in cash and cash equivalents | $48.6 | Notes to the Consolidated Financial Statements Notes detail accounting policies, including the 2019 lease standard adoption ($2.3 million ROU assets/liabilities), loan portfolio, ALL, and the $2.1 million pre-tax gain from a branch sale - On February 8, 2019, the Company completed the sale of its Branson, Missouri branch, which resulted in a pre-tax gain of approximately $2.1 million[20] - The Company adopted ASU No. 2016-02 (Leases) on January 1, 2019, resulting in the recognition of right-of-use assets and lease liabilities of $2.3 million each on the consolidated balance sheets[21][23] - Beginning in Q1 2019, management adjusted the look-back period for calculating the allowance for loan losses to start from Q1 2012 to better account for the extended economic cycle, moving away from the previous five-year look-back period[29] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes Q1 2019 net income of $4.7 million to a $2.1 million branch sale gain and 8.1% net interest income growth, with stable credit quality and strong capital ratios Q1 2019 vs Q1 2018 Performance Summary | (In millions) | Q1 2019 | Q1 2018 | | :--- | :--- | :--- | | Net interest income | $11.6 | $10.8 | | Gain on branch sale, net | $2.1 | $— | | Net income | $4.7 | $2.1 | - Excluding the after-tax gain of $1.6 million from the Branson branch sale, non-GAAP net income for Q1 2019 was $3.0 million, or $0.50 per diluted share[179] - The net interest margin (fully taxable equivalent basis) decreased slightly to 3.26% in Q1 2019 from 3.30% in Q1 2018, as the cost of interest-bearing liabilities repriced faster than the yield on interest-earning assets[183][199] Results of Operations Analysis Q1 2019 net income rose 123.3% to $4.7 million, primarily due to a $2.1 million branch sale gain, 8.1% net interest income growth, and a 3.7% decrease in non-interest expense - A key event in Q1 2019 was the sale of the Branson, MO branch, which resulted in a pre-tax gain of approximately $2.1 million ($1.6 million after tax)[188][217] - Non-interest expense decreased by $378 thousand (3.7%) YoY, largely due to a $580 thousand reduction in salary expenses resulting from a lower employee count and a one-time bonus paid in Q1 2018[189][218][220] - The effective tax rate increased to 18.9% in Q1 2019 from 16.4% in Q1 2018, primarily due to higher taxable income which included the gain from the branch sale[226] Lending and Credit Management Total loans reached $1.15 billion by March 31, 2019, with stable credit quality, non-performing loans at 0.48%, and an allowance for loan losses of $11.8 million (1.03% of total loans) Loan Portfolio Composition | (In millions) | March 31, 2019 | % of Total | | :--- | :--- | :--- | | Commercial, financial, and agricultural | $204.8 | 17.7% | | Real estate construction | $135.8 | 11.8% | | Real estate mortgage | $782.2 | 67.7% | | Installment and other consumer | $31.9 | 2.8% | | Total loans | $1,154.7 | 100.0% | Non-Performing Assets Summary | (In millions) | March 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Non-performing loans | $5.6 | $5.6 | | Other real estate owned | $13.5 | $13.7 | | Total non-performing assets | $19.1 | $19.3 | | Non-performing loans to total loans | 0.48% | 0.49% | - The allowance for loan losses increased to $11.8 million at March 31, 2019, representing 1.03% of total loans, up slightly from 1.02% at year-end 2018[241] Liquidity and Capital Resources The company maintained strong liquidity with $306.3 million in liquid assets and $1.1 billion in core deposits, while capital ratios exceeded regulatory minimums, confirming its well-capitalized status - Core deposits, a stable funding source, totaled $1.1 billion and represented 86.5% of total deposits at March 31, 2019[256][257] - As of March 31, 2019, the Company had an estimated total available future funding capacity of $156.4 million from the FHLB, Federal Reserve Bank, and Federal Funds lines[261] Regulatory Capital Ratios (Company) | Ratio | March 31, 2019 | Well-Capitalized Standard | Minimum Requirement | | :--- | :--- | :--- | :--- | | Total risk-based capital | 13.39% | N/A | 10.50% | | Tier 1 risk-based capital | 11.41% | N/A | 8.50% | | Common Equity Tier 1 | 8.65% | N/A | 7.00% | | Tier 1 leverage | 9.38% | N/A | 4.00% | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company actively manages interest rate risk, with simulations showing a 100 bps rate increase would boost net interest income by 2.90%, indicating an asset-sensitive position Net Interest Income Sensitivity Analysis | Hypothetical shift in interest rates (bps) | % Change in projected net interest income (March 31, 2019) | | :--- | :--- | | +200 | 2.93% | | +100 | 2.90% | | -100 | 2.76% | | -200 | 2.13% | - The company's interest rate risk profile shifted from December 31, 2018, to become more asset-sensitive, leading to higher projected net interest income in a rising rate environment[279] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2019, with no material changes to internal control over financial reporting during Q1 2019 - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of March 31, 2019[283] - No material changes to internal control over financial reporting occurred during the quarter ended March 31, 2019[284] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal actions incidental to its business, which management does not expect to materially affect financial condition or results - The company is a defendant in various legal actions incidental to its business, but management does not expect them to have a material adverse effect on financial results[157][292] Item 6. Exhibits Exhibits filed with the Form 10-Q include articles of incorporation, bylaws, CEO/CFO certifications under Sarbanes-Oxley, and interactive data files (XBRL) - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Act Sections 302 and 906, and interactive data files (XBRL)[293][295]