10-K: Hawthorn Bancshares Implements Change in Control Severance Agreement and Reports 2023 Financial Results

Hawthorn Bancshares, Inc. details a change in control severance agreement and reports its 2023 financial results, marked by a leadership transition and strategic balance sheet repositioning.

Summary

• Hawthorn Bancshares, Inc. reported a net income of $1 million for 2023, a significant decrease from $20.8 million in 2022.
• The company's net interest income remained relatively stable at $59.1 million in 2023, compared to $58.8 million in 2022.
• The net interest margin decreased to 3.29% in 2023 from 3.53% in 2022.
• A provision for credit losses of $2.3 million was recognized in 2023, compared to a release of $0.9 million in 2022.
• Non-interest income decreased by 46.1% to $7.5 million in 2023, while non-interest expense increased by 7.9% to $52.4 million.
• The company repositioned its balance sheet by selling $83.7 million in investment securities, resulting in an after-tax loss of $9.1 million.
• The company's total assets were $1.9 billion at the end of 2023.
• Loans held for investment increased slightly to $1.5 billion, while deposits decreased to $1.6 billion.
• The company's capital ratios remained strong, with a Tier 1 leverage ratio of 10.29% and a total risk-based capital ratio of 13.99%.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive aspects like strong capital ratios and reduced non-performing loans, but the significant decrease in net income and other negative financial metrics indicate a challenging year. The sentiment is therefore cautiously negative.

Positives

• The company's net interest income remained relatively stable year-over-year.
• Non-performing loans decreased significantly to 0.42% of total loans.
• The company's capital ratios remain well above regulatory requirements.
• The company repositioned its balance sheet to improve future earnings.

Negatives

• Net income decreased significantly year-over-year.
• The company experienced a decrease in net interest margin.
• Non-interest income declined significantly, while non-interest expenses increased.
• The company incurred a $9.1 million after-tax loss from the sale of investment securities.
• The adoption of ASU 2016-13 resulted in a $5.6 million decrease to retained earnings.

Risks

• The company's profitability is dependent on the economic conditions in central and west-central Missouri.
• Changes in interest rates may reduce the profitability of the company and the bank.
• The company's business depends on its ability to successfully manage credit risk.
• The company's profitability depends on the bank's asset quality and lending risks.
• The provision for probable credit losses may need to be increased.
• Adverse market conditions in the U.S. economy could negatively impact the company's business.
• Smaller commercial borrowers may have fewer financial resources, which may impair their ability to repay loans.
• The soundness of other financial institutions could adversely affect the company.
• Liquidity risk could impair the company's ability to fund operations.
• Deterioration in the housing market could cause further increases in delinquencies and non-performing assets.
• The FDIC's changes in the calculation of deposit insurance premiums could increase the company's non-interest expense.
• The company may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed.
• If the company is unable to successfully compete for customers in its market area, its financial condition and results of operations could be adversely affected.
• The company may experience difficulties in managing growth and in effectively integrating newly acquired companies.
• The company's success largely depends on the efforts of its executive officers.
• If the company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately report its financial results or prevent fraud.
• Severe weather, natural disasters, pandemics, and other external events could significantly impact the company's business.
• Climate change and responses to climate change may adversely impact the company's business.
• Public health threats or outbreaks of communicable diseases may adversely affect the company's operations and financial results.
• The company may be adversely affected by changes in laws and regulations affecting the financial services industry.
• The Federal Reserve may require the company to commit capital resources to support the bank.
• The short-term and long-term impact of the changing regulatory capital requirements and new capital rules is uncertain.
• Higher FDIC deposit insurance premiums and assessments could adversely affect the company's financial condition.
• Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Community Reinvestment Act, Fair Lending Laws or other laws and regulations could result in fines or sanctions, and curtail expansion opportunities.
• Regulations relating to privacy, information security and data protection could increase the company's costs.
• The company is subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
• The company may be subject to liability for potential violations of predatory lending laws.
• The company is subject to a number of other laws and regulations, which may adversely affect the operation of its business and increase its costs.
• The company is subject to security and operational risks relating to its use of technology that could damage its reputation and its business.
• The operation of the company's business, including customer interaction, is increasingly done via electronic means, and this has increased the company's risks related to cybersecurity.
• The company continually encounters technological change, and it cannot predict how changes in technology will affect its business.
• The company relies on others to provide key components of its business infrastructure.
• The price of the company's common stock could fluctuate significantly, and this could make it difficult to resell shares of the company's common stock at times or at prices you find attractive.
• The trading volume in the company's common stock has been low, and the sale of a substantial number of shares of the company's common stock in the public market could depress the price of the company's common stock and make it difficult to sell your shares.
• The company's common stock is not insured by any governmental entity.

Future Outlook

The year ahead is likely to include continued economic uncertainty and an interest rate environment which is difficult to predict, but the company is confident in its community-based banking approach.

Management Comments

• Transition and teamwork describe 2023 at Hawthorn Bancshares, Inc., and Hawthorn Bank.
• The teamwork displayed by everyone at the company to navigate the executive leadership transition while supporting the needs of our clients and communities during uncertain times was remarkable.
• We demonstrated our strength and stability provided by a healthy balance sheet anchored with the clients and partnerships in the communities we serve.
• The board and management collaborated on many initiatives to lay the groundwork to successfully navigate 2024 and beyond.
• We will rely on the proven principles of safe and sound banking as we strive to be the progressive and innovative community banking option for businesses and families throughout our footprint.
• Together, we are focused on delivering value to our clients, communities, and shareholders.

Industry Context

The document highlights the challenges faced by the banking industry in 2023, including economic uncertainty, interest rate volatility, and the impact of bank failures. It also reflects the ongoing trend of banks focusing on expense management and strategic balance sheet repositioning.

Comparison to Industry Standards

• The company's net interest margin of 3.29% is below the average for the banking industry, which has seen a slight increase in net interest margins in 2023 due to rising interest rates.
• The company's non-performing loan ratio of 0.42% is significantly better than the industry average, which has seen an increase in non-performing loans due to economic uncertainty.
• The company's capital ratios are well above the regulatory requirements, indicating a strong financial position compared to some other banks.
• The company's return on average assets (ROA) of 0.05% is significantly below the industry average, which has seen a slight increase in ROA in 2023 due to rising interest rates.
• The company's return on average equity (ROE) of 0.76% is significantly below the industry average, which has seen a slight increase in ROE in 2023 due to rising interest rates.
• The company's efficiency ratio of 78.5% is higher than the industry average, indicating that the company is spending more on operating expenses relative to its revenue.

Management Changes

Corporate Governance

Legal Proceedings

• The Company and its subsidiaries are defendants in various legal actions incidental to the Company's past and current business activities.
• Based on the Company's analysis, and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably possible that these legal actions will materially adversely affect the Company's consolidated financial condition or results of operations in the near term.

Related Party Transactions

• Loans to directors and executive officers totaled $9.6 million at December 31, 2023.

Stakeholder Impact

• Shareholders experienced a significant decrease in net income and earnings per share.
• Employees experienced a reduction in workforce and changes in leadership.
• Customers may be affected by changes in interest rates and the availability of credit.
• The company's strategic balance sheet repositioning may impact future financial performance.

Next Steps

• The company will continue to implement its strategic plan and focus on expense management.
• The company will continue to monitor the economic environment and adjust its strategies as needed.
• The company will continue to focus on delivering value to its clients, communities, and shareholders.

Key Dates

Keywords

bank, financial services, banking, loans, deposits, credit risk, interest rates, capital, regulatory, mortgage, financial results, severance agreement