Hawthorn Bancshares(HWBK) - 2019 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements The consolidated financial statements for Hawthorn Bancshares, Inc. as of September 30, 2019, show a slight decrease in total assets to $1.45 billion, while stockholders' equity increased to $112.8 million, and net income for the first nine months of 2019 rose significantly to $12.0 million Consolidated Balance Sheets As of September 30, 2019, total assets were $1.449 billion, a slight decrease from $1.482 billion at December 31, 2018, primarily due to reduced available-for-sale debt securities, while stockholders' equity increased to $112.8 million Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,449,338 | $1,481,682 | | Net Loans | $1,139,340 | $1,134,975 | | Total Investment Securities | $187,480 | $223,880 | | Total Liabilities | $1,336,524 | $1,382,268 | | Total Deposits | $1,137,407 | $1,198,468 | | Total Stockholders' Equity | $112,814 | $99,414 | Consolidated Statements of Income For the nine months ended September 30, 2019, net income rose 48.8% to $12.0 million, significantly boosted by a $2.2 million pre-tax gain on a branch sale and a 9.2% increase in net interest income Income Statement Summary (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $12,361 | $11,308 | $36,147 | $33,090 | | Provision for Loan Losses | $450 | $250 | $850 | $1,000 | | Gain on branch sale, net | $109 | $— | $2,183 | $— | | Net Income | $3,860 | $3,098 | $12,046 | $8,095 | | Diluted EPS | $0.62 | $0.49 | $1.92 | $1.29 | Consolidated Statements of Comprehensive Income Total comprehensive income for the nine months ended September 30, 2019, was $15.5 million, a substantial increase from $5.1 million in the prior year, driven by higher net income and a $3.4 million positive swing in other comprehensive income Comprehensive Income (in thousands) | Metric | Q3 2019 | Q3 2018 | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $3,860 | $3,098 | $12,046 | $8,095 | | Other Comprehensive Income (Loss) | $327 | $(892) | $3,435 | $(2,964) | | Total Comprehensive Income | $4,187 | $2,206 | $15,481 | $5,131 | Consolidated Statements of Stockholders' Equity Total stockholders' equity increased from $99.4 million at December 31, 2018, to $112.8 million at September 30, 2019, primarily due to net income and other comprehensive income - Key drivers for the increase in stockholders' equity during the first nine months of 2019 were net income of $12.0 million and other comprehensive income of $3.4 million[11] Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, cash and cash equivalents increased by $2.3 million, with net cash provided by operating activities of $11.1 million and investing activities of $29.2 million, offset by $38.0 million used in financing activities Cash Flow Summary - Nine Months Ended Sep 30 (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $11,109 | $11,250 | | Net Cash from (used in) Investing Activities | $29,215 | $(55,229) | | Net Cash (used in) from Financing Activities | $(37,992) | $17,919 | | Net Increase (Decrease) in Cash | $2,332 | $(26,060) | Notes to the Consolidated Financial Statements The notes detail significant accounting policies, including the adoption of a new lease standard in 2019, the sale of the Branson, MO branch for a $2.2 million pre-tax gain, and a decrease in impaired loans to $7.3 million - On February 8, 2019, the company completed the sale of its Branson, Missouri branch, which resulted in a pre-tax gain of approximately $2.2 million[20] - The company adopted a new lease standard (ASU No. 2016-02) on January 1, 2019, resulting in the recording of right-of-use assets and lease liabilities of $2.3 million each on the consolidated balance sheets[21][23] - Impaired loans, comprising non-accrual loans and Troubled Debt Restructurings (TDRs), decreased to $7.3 million at September 30, 2019, from $8.5 million at December 31, 2018[35] - The effective income tax rate for the nine months ended September 30, 2019 was 19.3%, up from 11.8% in the prior year period, primarily due to the final impacts of the Tax Cuts and Jobs Act and higher taxable income, including the gain on the branch sale[94][95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes strong performance in the first nine months of 2019 to a $3.1 million increase in net interest income and a $2.2 million pre-tax gain from a branch sale, with improved credit quality and strong capital ratios - Consolidated net income for the nine months ended September 30, 2019, increased by $3.9 million to $12.0 million compared to the prior year, driven by higher net interest income and a significant gain on a branch sale[186] - The net interest margin (on a fully taxable equivalent basis) increased to 3.47% for the nine months ended September 30, 2019, up from 3.29% in the same period of 2018[187] - Non-performing loans decreased to $4.8 million (0.41% of total loans) at September 30, 2019, from $5.6 million (0.49% of total loans) at December 31, 2018[190] Results of Operations Analysis Net income for the nine months ended September 30, 2019, increased 48.8% to $12.0 million, primarily due to a 9.2% rise in net interest income and a $2.2 million pre-tax gain on a branch sale, alongside a 3.3% decrease in non-interest expense Key Performance Indicators | Metric | 9 Months 2019 | 9 Months 2018 | | :--- | :--- | :--- | | Return on average total assets | 1.09% | 0.75% | | Return on average stockholders' equity | 15.03% | 11.69% | | Efficiency ratio | 68.13% | 75.23% | | Net interest margin | 3.47% | 3.29% | - The sale of the Branson branch in February 2019 resulted in a pre-tax gain of approximately $2.2 million, or $1.7 million after tax, for the nine months ended September 30, 2019[193] - Non-interest expense decreased by 3.3% for the nine-month period, driven by a $901,000 (7.0%) reduction in salaries and a $292,000 (6.4%) decrease in employee benefits, primarily due to a reduction of 22 full-time equivalent employees[232][234][235] Lending and Credit Management Net loans constituted 78.6% of total assets, growing to $1.15 billion, with improved credit quality as total non-performing assets decreased to $17.6 million, and the allowance for loan losses increased to $12.2 million Non-Performing Assets (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | Sep 30, 2018 | | :--- | :--- | :--- | :--- | | Total non-performing loans | $4,761 | $5,576 | $6,280 | | Other real estate owned | $12,878 | $13,691 | $13,373 | | Total non-performing assets | $17,639 | $19,267 | $19,653 | | Non-performing assets to assets | 1.22% | 1.30% | 1.35% | - In Q1 2019, management adjusted the look-back period for calculating historical loss rates for the allowance for loan losses to begin with Q1 2012, extending it from the previous five-year period to better account for the current extended economic cycle[260] - Net charge-offs for the nine months ended September 30, 2019, decreased to $324,000 (0.03% of average loans) from $494,000 (0.05% of average loans) in the prior-year period, aided by higher recoveries[267][268] Liquidity and Capital Resources The company maintained a solid liquidity position with $214.4 million in liquid assets and $1.0 billion in core deposits, alongside strong capital levels well above regulatory requirements, including a Total risk-based capital ratio of 14.47% - Core deposits, a key source of liquidity, totaled $1.0 billion and represented 88.0% of total deposits as of September 30, 2019[274][275] - The company had total available future funding capacity of $174.2 million from the FHLB, Federal Reserve Bank, and other credit lines as of September 30, 2019[279] Company Capital Ratios | Ratio | Sep 30, 2019 | Well-Capitalized Standard | | :--- | :--- | :--- | | Common Equity Tier 1 Capital | 9.50% | 6.50% (Bank) | | Tier 1 Capital | 12.60% | 8.00% (Bank) | | Total Capital | 14.47% | 10.00% (Bank) | | Tier 1 Leverage | 10.69% | 5.00% (Bank) | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's interest rate risk is managed by the ALCO, with a balanced balance sheet and minimal projected net interest income change of no more than 1.04% under hypothetical +/- 200 basis point rate shifts Projected Change in Net Interest Income from Rate Shocks | Hypothetical Shift in Interest Rates (bps) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | +200 | (0.97)% | 0.26% | | +100 | 0.21% | 1.17% | | -100 | 1.04% | 3.39% | | -200 | 0.28% | 4.19% | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls, and the company is extending its evaluation of the new CECL accounting standard to align with the 2022 implementation deadline - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of September 30, 2019[299] - The company is evaluating the impact of the new credit loss standard (CECL) and plans to extend its evaluation process to align with the new implementation deadline of 2022[305] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal actions incidental to its business but does not believe these will have a material adverse effect on its financial condition or results of operations - The company and its subsidiaries are defendants in various legal actions, but management does not believe these will materially adversely affect the company's consolidated financial condition or results of operations[163] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds On September 18, 2019, the Board of Directors authorized a stock repurchase program for up to $5.0 million of common stock, though no shares were purchased under this authorization during the third quarter of 2019 - A stock repurchase plan of up to $5.0 million was authorized on September 18, 2019, but no shares were purchased during the third quarter of 2019[308] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including articles of incorporation, bylaws, officer certifications, and interactive data files (XBRL)