Item 1. Financial Statements
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
|
Consolidated Balance Sheets
(unaudited)
|
|
|
|
March
31,
|
|
|
December
31,
|
|
(In
thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
16,746
|
|
|
$
|
25,589
|
|
Federal funds sold and other overnight interest-bearing deposits
|
|
|
6,427
|
|
|
|
1,406
|
|
Cash and cash equivalents
|
|
|
23,173
|
|
|
|
26,995
|
|
Investment in available-for-sale securities, at fair value
|
|
|
216,170
|
|
|
|
214,512
|
|
Other investments and securities, at cost
|
|
|
9,859
|
|
|
|
9,796
|
|
Total investment securities
|
|
|
226,029
|
|
|
|
224,308
|
|
Loans
|
|
|
1,010,182
|
|
|
|
974,029
|
|
Allowances for loan losses
|
|
|
(10,262
|
)
|
|
|
(9,886
|
)
|
Net loans
|
|
|
999,920
|
|
|
|
964,143
|
|
Premises and equipment - net
|
|
|
35,323
|
|
|
|
35,522
|
|
Mortgage servicing rights
|
|
|
2,877
|
|
|
|
2,584
|
|
Other real estate and repossessed assets - net
|
|
|
13,625
|
|
|
|
14,162
|
|
Accrued interest receivable
|
|
|
4,702
|
|
|
|
5,183
|
|
Cash surrender value - life insurance
|
|
|
2,430
|
|
|
|
2,409
|
|
Other assets
|
|
|
11,584
|
|
|
|
11,742
|
|
Total assets
|
|
$
|
1,319,663
|
|
|
$
|
1,287,048
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
239,059
|
|
|
$
|
235,975
|
|
Savings, interest checking and money market
|
|
|
519,379
|
|
|
|
468,731
|
|
Time deposits $100,000 and over
|
|
|
132,979
|
|
|
|
152,256
|
|
Other time deposits
|
|
|
151,587
|
|
|
|
153,704
|
|
Total deposits
|
|
|
1,043,004
|
|
|
|
1,010,666
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
31,512
|
|
|
|
31,015
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
93,392
|
|
Federal Home Loan Bank advances
|
|
|
91,900
|
|
|
|
49,486
|
|
Accrued interest payable
|
|
|
452
|
|
|
|
498
|
|
Other liabilities
|
|
|
10,232
|
|
|
|
10,974
|
|
Total liabilities
|
|
|
1,226,586
|
|
|
|
1,196,031
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, authorized 15,000,000 shares; issued 5,822,357 shares, respectively
|
|
|
5,822
|
|
|
|
5,822
|
|
Surplus
|
|
|
41,499
|
|
|
|
41,498
|
|
Retained earnings
|
|
|
53,435
|
|
|
|
51,671
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(3,481
|
)
|
|
|
(3,801
|
)
|
Treasury stock; 207,150 and 205,750 shares, at cost
|
|
|
(4,198
|
)
|
|
|
(4,173
|
)
|
Total stockholders’ equity
|
|
|
93,077
|
|
|
|
91,017
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,319,663
|
|
|
$
|
1,287,048
|
|
See accompanying notes to the consolidated financial statements
(unaudited)
.
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(unaudited)
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(In
thousands, except per share amounts)
|
|
2017
|
|
|
2016
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
11,050
|
|
|
$
|
9,987
|
|
Interest on investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
754
|
|
|
|
938
|
|
Nontaxable
|
|
|
157
|
|
|
|
143
|
|
Federal funds sold and other overnight interest-bearing deposits
|
|
|
48
|
|
|
|
32
|
|
Dividends on other securities
|
|
|
90
|
|
|
|
76
|
|
Total interest income
|
|
|
12,099
|
|
|
|
11,176
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
Interest on deposits:
|
|
|
|
|
|
|
|
|
Savings, interest checking and money market
|
|
|
389
|
|
|
|
295
|
|
Time deposit accounts $100,000 and over
|
|
|
254
|
|
|
|
209
|
|
Other time deposits
|
|
|
217
|
|
|
|
240
|
|
Interest on federal funds purchased and securities sold under agreements to repurchase
|
|
|
22
|
|
|
|
23
|
|
Interest on subordinated notes
|
|
|
408
|
|
|
|
354
|
|
Interest on Federal Home Loan Bank advances
|
|
|
322
|
|
|
|
207
|
|
Total interest expense
|
|
|
1,612
|
|
|
|
1,328
|
|
Net interest income
|
|
|
10,487
|
|
|
|
9,848
|
|
Provision for loan losses
|
|
|
350
|
|
|
|
250
|
|
Net interest income after provision for loan losses
|
|
|
10,137
|
|
|
|
9,598
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
|
836
|
|
|
|
834
|
|
Bank card income and fees
|
|
|
614
|
|
|
|
634
|
|
Trust department income
|
|
|
274
|
|
|
|
218
|
|
Real estate servicing fees, net
|
|
|
453
|
|
|
|
54
|
|
Gain on sale of mortgage loans, net
|
|
|
155
|
|
|
|
165
|
|
Gain on sale of investment securities
|
|
|
0
|
|
|
|
472
|
|
Other
|
|
|
75
|
|
|
|
71
|
|
Total non-interest income
|
|
|
2,407
|
|
|
|
2,448
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
5,454
|
|
|
|
5,350
|
|
Occupancy expense, net
|
|
|
619
|
|
|
|
634
|
|
Furniture and equipment expense
|
|
|
598
|
|
|
|
411
|
|
Processing, network, and bank card expense
|
|
|
1,045
|
|
|
|
772
|
|
Legal, examination, and professional fees
|
|
|
280
|
|
|
|
333
|
|
FDIC insurance assessment
|
|
|
101
|
|
|
|
176
|
|
Advertising and promotion
|
|
|
239
|
|
|
|
209
|
|
Postage, printing, and supplies
|
|
|
232
|
|
|
|
237
|
|
Real estate foreclosure expense (gains), net
|
|
|
27
|
|
|
|
141
|
|
Other
|
|
|
756
|
|
|
|
820
|
|
Total non-interest expense
|
|
|
9,351
|
|
|
|
9,083
|
|
Income before income taxes
|
|
|
3,193
|
|
|
|
2,963
|
|
Income tax expense
|
|
|
1,093
|
|
|
|
965
|
|
Net income
|
|
|
2,100
|
|
|
|
1,998
|
|
Basic earnings per share
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
Diluted earnings per share
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
See accompanying notes to the consolidated financial statements
(unaudited)
.
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
|
Consolidated Statements of Comprehensive Income
(unaudited)
|
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
(In
thousands)
|
|
2017
|
|
|
2016
|
|
Net income
|
|
$
|
2,100
|
|
|
$
|
1,998
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
Unrealized gain on investment securities available-for-sale, net of tax
|
|
|
306
|
|
|
|
1,245
|
|
Adjustment for gain on sale of investment securities, net of tax
|
|
|
0
|
|
|
|
(293
|
)
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
Amortization of prior service cost included in net periodic pension cost, net of tax
|
|
|
14
|
|
|
|
12
|
|
Total other comprehensive income
|
|
|
320
|
|
|
|
964
|
|
Total comprehensive income
|
|
$
|
2,420
|
|
|
$
|
2,962
|
|
See accompanying notes to the consolidated financial statements
(unaudited)
.
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
|
Consolidated Statements of Stockholders' Equity
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Stock
-
|
|
|
|
Common
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
holders'
|
|
(In
thousands)
|
|
Stock
|
|
|
Surplus
|
|
|
Earnings
|
|
|
Loss
|
|
|
Stock
|
|
|
Equity
|
|
Balance, December 31, 2015
|
|
$
|
5,605
|
|
|
$
|
38,549
|
|
|
$
|
48,700
|
|
|
$
|
(2,018
|
)
|
|
$
|
(3,550
|
)
|
|
$
|
87,286
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
1,998
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,998
|
|
Other comprehensive income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
964
|
|
|
|
0
|
|
|
|
964
|
|
Stock based compensation expense
|
|
|
0
|
|
|
|
5
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5
|
|
Purchase of treasury stock
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(129
|
)
|
|
|
(129
|
)
|
Cash dividends declared, common stock
|
|
|
0
|
|
|
|
0
|
|
|
|
(271
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(271
|
)
|
Balance, March 31, 2016
|
|
$
|
5,605
|
|
|
$
|
38,554
|
|
|
$
|
50,427
|
|
|
$
|
(1,054
|
)
|
|
$
|
(3,679
|
)
|
|
$
|
89,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
5,822
|
|
|
$
|
41,498
|
|
|
$
|
51,671
|
|
|
$
|
(3,801
|
)
|
|
$
|
(4,173
|
)
|
|
$
|
91,017
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
2,100
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,100
|
|
Other comprehensive income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
320
|
|
|
|
0
|
|
|
|
320
|
|
Stock based compensation expense
|
|
|
0
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
Purchase of treasury stock
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(25
|
)
|
|
|
(25
|
)
|
Cash dividends declared, common stock
|
|
|
0
|
|
|
|
0
|
|
|
|
(336
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(336
|
)
|
Balance, March 31, 2017
|
|
$
|
5,822
|
|
|
$
|
41,499
|
|
|
$
|
53,435
|
|
|
$
|
(3,481
|
)
|
|
$
|
(4,198
|
)
|
|
$
|
93,077
|
|
See accompanying notes to the consolidated financial statements
(unaudited)
.
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
|
Consolidated Statements of Cash Flows
(unaudited)
|
|
|
Three
Months Ended March 31,
|
|
(In
thousands)
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,100
|
|
|
$
|
1,998
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
350
|
|
|
|
250
|
|
Depreciation expense
|
|
|
473
|
|
|
|
485
|
|
Net amortization of investment securities, premiums, and discounts
|
|
|
406
|
|
|
|
365
|
|
Stock based compensation expense
|
|
|
1
|
|
|
|
5
|
|
Change in fair value of mortgage servicing rights
|
|
|
(244
|
)
|
|
|
155
|
|
Gain on sale of investment securities
|
|
|
0
|
|
|
|
(472
|
)
|
Loss (gain) on sales and dispositions of premises and equipment
|
|
|
1
|
|
|
|
(6
|
)
|
Gain on sales and dispositions of other real estate and repossessed assets
|
|
|
(50
|
)
|
|
|
(49
|
)
|
Provision for other real estate owned
|
|
|
32
|
|
|
|
38
|
|
Decrease in accrued interest receivable
|
|
|
481
|
|
|
|
343
|
|
Increase in cash surrender value - life insurance
|
|
|
(21
|
)
|
|
|
(13
|
)
|
Decrease in other assets
|
|
|
58
|
|
|
|
364
|
|
Decrease in accrued interest payable
|
|
|
(46
|
)
|
|
|
(3
|
)
|
(Decrease) increase in other liabilities
|
|
|
(742
|
)
|
|
|
619
|
|
Origination of mortgage loans for sale
|
|
|
(7,341
|
)
|
|
|
(7,707
|
)
|
Proceeds from the sale of mortgage loans
|
|
|
6,789
|
|
|
|
7,435
|
|
Gain on sale of mortgage loans, net
|
|
|
(155
|
)
|
|
|
(165
|
)
|
Other, net
|
|
|
(49
|
)
|
|
|
(52
|
)
|
Net cash provided by operating activities
|
|
|
2,043
|
|
|
|
3,590
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Net increase in loans
|
|
|
(35,523
|
)
|
|
|
(10,760
|
)
|
Purchase of available-for-sale debt securities
|
|
|
(15,346
|
)
|
|
|
(66,459
|
)
|
Proceeds from maturities of available-for-sale debt securities
|
|
|
9,750
|
|
|
|
9,120
|
|
Proceeds from calls of available-for-sale debt securities
|
|
|
4,025
|
|
|
|
4,175
|
|
Proceeds from sales of available-for-sale debt securities
|
|
|
0
|
|
|
|
44,087
|
|
Proceeds from sales of FHLB stock
|
|
|
200
|
|
|
|
0
|
|
Purchases of FHLB stock
|
|
|
(263
|
)
|
|
|
(43
|
)
|
Purchases of premises and equipment
|
|
|
(348
|
)
|
|
|
(248
|
)
|
Proceeds from sales of premises and equipment
|
|
|
0
|
|
|
|
6
|
|
Proceeds from sales of other real estate and foreclosed assets
|
|
|
658
|
|
|
|
1,274
|
|
Net cash used in investing activities
|
|
|
(36,847
|
)
|
|
|
(18,848
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase in demand deposits
|
|
|
3,084
|
|
|
|
8,851
|
|
Net increase in interest-bearing transaction accounts
|
|
|
50,648
|
|
|
|
44,679
|
|
Net decrease in time deposits
|
|
|
(21,394
|
)
|
|
|
(8,167
|
)
|
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
|
|
|
497
|
|
|
|
(15,311
|
)
|
Repayment of FHLB advances and other borrowings
|
|
|
(38,232
|
)
|
|
|
0
|
|
FHLB advances
|
|
|
36,740
|
|
|
|
0
|
|
Purchase of treasury stock
|
|
|
(25
|
)
|
|
|
(129
|
)
|
Cash dividends paid - common stock
|
|
|
(336
|
)
|
|
|
(271
|
)
|
Net cash provided by financing activities
|
|
|
30,982
|
|
|
|
29,652
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(3,822
|
)
|
|
|
14,394
|
|
Cash and cash equivalents, beginning of period
|
|
|
26,995
|
|
|
|
28,377
|
|
Cash and cash equivalents, end of period
|
|
$
|
23,173
|
|
|
$
|
42,771
|
|
See accompanying notes to the consolidated financial statements
(unaudited).
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
|
Consolidated Statements of Cash Flows (continued)
(unaudited)
|
|
|
Three
Months Ended March 31,
|
|
(In
thousands)
|
|
2017
|
|
|
2016
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
1,658
|
|
|
$
|
1,332
|
|
Income taxes
|
|
$
|
755
|
|
|
$
|
430
|
|
Noncash investing activities:
|
|
|
|
|
|
|
|
|
Other real estate and repossessed assets acquired in settlement of loans
|
|
$
|
103
|
|
|
$
|
742
|
|
See accompanying notes to the consolidated financial statements
(unaudited)
.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(1)
|
Summary of Significant Accounting Policies
|
Hawthorn Bancshares,
Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and
corporate customers located within the communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson,
and the greater Kansas City metropolitan area. The Company is subject to competition from other financial and nonfinancial institutions
providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory
agencies and undergo periodic examinations by those regulatory agencies.
The accompanying unaudited
consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles
(U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly,
the unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for
complete financial statements and should be read in conjunction with the consolidated financial statements and related notes included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The preparation of the
consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those
statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance
for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment
securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any
subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.
Stock Dividend
On July 1, 2016, the Company paid a special stock dividend of four percent to shareholders of record at the close of business
on June 15, 2016. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted
retroactively to reflect this change.
The following represents significant
new accounting principles adopted in 2017:
Stock Compensation
The FASB
issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, in March 2016, in order to reduce complexity
in this area and improve the usefulness of information provided to users. Amendments which will affect public companies include
the recognition of excess tax benefits and deficiencies in income tax expense or benefit in the income statement, guidance as to
the classification of excess tax benefits on the statement of cash flows, an election to account for award forfeitures as they
occur, and the ability to withhold taxes up to the maximum statutory rate in the applicable jurisdictions without triggering liability
classification of the award. The Company adopted the ASU on January 1, 2017 and elected to recognize forfeitures as they occur.
As allowed by the ASU, the Company’s adoption was prospective, therefore prior periods have not been adjusted. The adoption
of the ASU could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies
for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount
of employee share-based transactions and the stock price at the time of vesting or exercise. The adoption of the ASU did not have
a significant effect on the Company’s consolidated financial statements.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(2)
|
Loans and Allowance for Loan Losses
|
Loans
A summary of loans, by major class within
the Company’s loan portfolio, at March 31, 2017 and December 31, 2016 is as follows:
|
|
March
31,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
Commercial, financial, and agricultural
|
|
$
|
182,493
|
|
|
$
|
182,881
|
|
Real estate construction - residential
|
|
|
20,299
|
|
|
|
18,907
|
|
Real estate construction - commercial
|
|
|
70,143
|
|
|
|
55,653
|
|
Real estate mortgage - residential
|
|
|
263,882
|
|
|
|
259,900
|
|
Real estate mortgage - commercial
|
|
|
442,266
|
|
|
|
426,470
|
|
Installment and other consumer
|
|
|
31,099
|
|
|
|
30,218
|
|
Total loans
|
|
$
|
1,010,182
|
|
|
$
|
974,029
|
|
The Bank grants real estate, commercial,
installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton,
Warsaw, Springfield, Branson and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes in the
economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment
and other consumer loans consist primarily of the financing of automotive vehicles. At March 31, 2017, loans of $499.1 million
were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.
Allowance for Loan Losses
The following is a summary of the allowance
for loan losses during the periods indicated.
|
|
Three
Months Ended March 31, 2017
|
|
|
|
Commercial,
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
Financial,
&
|
|
|
Construction
-
|
|
|
Construction
-
|
|
|
Mortgage
-
|
|
|
Mortgage
-
|
|
|
and Other
|
|
|
Un-
|
|
|
|
|
(in
thousands)
|
|
Agricultural
|
|
|
Residential
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
Consumer
|
|
|
allocated
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
2,753
|
|
|
$
|
108
|
|
|
$
|
413
|
|
|
$
|
2,385
|
|
|
$
|
3,793
|
|
|
|
274
|
|
|
$
|
160
|
|
|
$
|
9,886
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(384
|
)
|
|
|
(59
|
)
|
|
|
166
|
|
|
|
(276
|
)
|
|
|
945
|
|
|
|
72
|
|
|
|
(114
|
)
|
|
|
350
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
28
|
|
|
|
0
|
|
|
|
0
|
|
|
|
20
|
|
|
|
14
|
|
|
|
51
|
|
|
|
0
|
|
|
|
113
|
|
Less recoveries on loans
|
|
|
(19
|
)
|
|
|
(50
|
)
|
|
|
0
|
|
|
|
(36
|
)
|
|
|
(7
|
)
|
|
|
(27
|
)
|
|
|
0
|
|
|
|
(139
|
)
|
Net loan charge-offs (recoveries)
|
|
|
9
|
|
|
|
(50
|
)
|
|
|
0
|
|
|
|
(16
|
)
|
|
|
7
|
|
|
|
24
|
|
|
|
0
|
|
|
|
(26
|
)
|
Balance at end of period
|
|
$
|
2,360
|
|
|
$
|
99
|
|
|
$
|
579
|
|
|
$
|
2,125
|
|
|
$
|
4,731
|
|
|
$
|
322
|
|
|
$
|
46
|
|
|
$
|
10,262
|
|
|
|
Three
Months Ended March 31, 2016
|
|
|
|
Commercial,
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
Financial,
&
|
|
|
Construction
-
|
|
|
Construction
-
|
|
|
Mortgage
-
|
|
|
Mortgage
-
|
|
|
and Other
|
|
|
Un-
|
|
|
|
|
(in
thousands)
|
|
Agricultural
|
|
|
Residential
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
Consumer
|
|
|
allocated
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
2,153
|
|
|
$
|
59
|
|
|
$
|
644
|
|
|
$
|
2,439
|
|
|
$
|
2,935
|
|
|
$
|
273
|
|
|
$
|
101
|
|
|
$
|
8,604
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(12
|
)
|
|
|
(15
|
)
|
|
|
33
|
|
|
|
32
|
|
|
|
276
|
|
|
|
(6
|
)
|
|
|
(58
|
)
|
|
|
250
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
103
|
|
|
|
0
|
|
|
|
1
|
|
|
|
206
|
|
|
|
82
|
|
|
|
56
|
|
|
|
0
|
|
|
|
448
|
|
Less recoveries on loans
|
|
|
(97
|
)
|
|
|
0
|
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
|
(61
|
)
|
|
|
(48
|
)
|
|
|
0
|
|
|
|
(225
|
)
|
Net loan charge-offs (recoveries)
|
|
|
6
|
|
|
|
0
|
|
|
|
(10
|
)
|
|
|
198
|
|
|
|
21
|
|
|
|
8
|
|
|
|
0
|
|
|
|
223
|
|
Balance at end of period
|
|
$
|
2,135
|
|
|
$
|
44
|
|
|
$
|
687
|
|
|
$
|
2,273
|
|
|
$
|
3,190
|
|
|
$
|
259
|
|
|
$
|
43
|
|
|
$
|
8,631
|
|
Loans, or portions of loans, are charged
off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries
of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts
due on a loan will not be collected under the original terms of the loan
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
agreement, the loan is considered to be
impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience,
specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics
and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies,
current economic conditions, loan risk ratings and industry concentration.
Beginning in the first quarter of 2016,
the Company began to lengthen its look-back period with the intent to increase such period from three to five years over the next
two years. The Company believes that the five-year look-back period, which is consistent with the Company’s practices prior
to the start of the economic recession in 2008, provides a representative historical loss period in the current economic environment.
The following table provides the balance
in the allowance for loan losses at March 31, 2017 and December 31, 2016, and the related loan balance by impairment methodology.
|
|
Commercial,
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Real
Estate
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
Financial,
and
|
|
|
Construction
-
|
|
|
Construction
-
|
|
|
Mortgage
-
|
|
|
Mortgage
-
|
|
|
and Other
|
|
|
Un-
|
|
|
|
|
(in
thousands)
|
|
Agricultural
|
|
|
Residential
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
Consumer
|
|
|
allocated
|
|
|
Total
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
446
|
|
|
$
|
0
|
|
|
$
|
7
|
|
|
$
|
354
|
|
|
$
|
284
|
|
|
$
|
12
|
|
|
$
|
0
|
|
|
$
|
1,103
|
|
Collectively evaluated for impairment
|
|
|
1,914
|
|
|
|
99
|
|
|
|
572
|
|
|
|
1,771
|
|
|
|
4,447
|
|
|
|
310
|
|
|
|
46
|
|
|
|
9,159
|
|
Total
|
|
$
|
2,360
|
|
|
$
|
99
|
|
|
$
|
579
|
|
|
$
|
2,125
|
|
|
$
|
4,731
|
|
|
$
|
322
|
|
|
$
|
46
|
|
|
$
|
10,262
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,655
|
|
|
$
|
0
|
|
|
$
|
49
|
|
|
$
|
5,575
|
|
|
$
|
1,986
|
|
|
$
|
59
|
|
|
$
|
0
|
|
|
$
|
9,324
|
|
Collectively evaluated for impairment
|
|
|
180,838
|
|
|
|
20,299
|
|
|
|
70,094
|
|
|
|
258,307
|
|
|
|
440,280
|
|
|
|
31,040
|
|
|
|
0
|
|
|
|
1,000,858
|
|
Total
|
|
$
|
182,493
|
|
|
$
|
20,299
|
|
|
$
|
70,143
|
|
|
$
|
263,882
|
|
|
$
|
442,266
|
|
|
$
|
31,099
|
|
|
$
|
0
|
|
|
$
|
1,010,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
469
|
|
|
$
|
0
|
|
|
$
|
7
|
|
|
$
|
319
|
|
|
$
|
277
|
|
|
$
|
8
|
|
|
$
|
0
|
|
|
$
|
1,080
|
|
Collectively evaluated for impairment
|
|
|
2,284
|
|
|
|
108
|
|
|
|
406
|
|
|
|
2,066
|
|
|
|
3,516
|
|
|
|
266
|
|
|
|
160
|
|
|
|
8,806
|
|
Total
|
|
$
|
2,753
|
|
|
$
|
108
|
|
|
$
|
413
|
|
|
$
|
2,385
|
|
|
$
|
3,793
|
|
|
$
|
274
|
|
|
$
|
160
|
|
|
$
|
9,886
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,617
|
|
|
$
|
0
|
|
|
$
|
49
|
|
|
$
|
5,471
|
|
|
$
|
1,918
|
|
|
$
|
89
|
|
|
$
|
0
|
|
|
$
|
9,144
|
|
Collectively evaluated for impairment
|
|
|
181,264
|
|
|
|
18,907
|
|
|
|
55,604
|
|
|
|
254,429
|
|
|
|
424,552
|
|
|
|
30,129
|
|
|
|
0
|
|
|
|
964,885
|
|
Total
|
|
$
|
182,881
|
|
|
$
|
18,907
|
|
|
$
|
55,653
|
|
|
$
|
259,900
|
|
|
$
|
426,470
|
|
|
$
|
30,218
|
|
|
$
|
0
|
|
|
$
|
974,029
|
|
Impaired Loans
Loans evaluated under ASC 310-10-35 include
loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20.
Impaired loans individually evaluated for impairment totaled $9.3 million and $9.1 million at March 31, 2017 and December 31, 2016,
respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings
(TDRs).
The net carrying value of impaired loans
is based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the
total expected future cash flows. At March 31, 2017 and December 31, 2016, $5.3 million and $4.5 million, respectively, of impaired
loans were evaluated based on the fair value less estimated selling costs of the loan’s collateral. Once the impairment amount
is calculated, a specific reserve allocation is recorded. At March 31, 2017, $1.1 million of the Company’s allowance for
loan losses was allocated to impaired loans totaling $9.3 million compared to $1.1 million of the Company's allowance for loan
losses allocated to impaired loans totaling approximately $9.1 million at December 31, 2016. Management determined that $1.6 million,
or 17%, of total impaired loans required no reserve allocation at March 31, 2017 compared to $2.1 million, or 23%, at December
31, 2016 primarily due to adequate collateral values
,
acceptable payment history and adequate
cash flow ability.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The categories of impaired loans at March
31, 2017 and December 31, 2016 are as follows:
|
|
March
31,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
Non-accrual loans
|
|
$
|
3,526
|
|
|
$
|
3,429
|
|
Performing TDRs
|
|
|
5,798
|
|
|
|
5,715
|
|
Total impaired loans
|
|
$
|
9,324
|
|
|
$
|
9,144
|
|
The following tables provide additional
information about impaired loans at March 31, 2017 and December 31, 2016, respectively, segregated between loans for which an allowance
has been provided and loans for which no allowance has been provided.
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
(in
thousands)
|
|
Investment
|
|
|
Balance
|
|
|
Reserves
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
406
|
|
|
$
|
561
|
|
|
$
|
0
|
|
Real estate - residential
|
|
|
811
|
|
|
|
822
|
|
|
|
0
|
|
Real estate - commercial
|
|
|
394
|
|
|
|
394
|
|
|
|
0
|
|
Total
|
|
$
|
1,611
|
|
|
$
|
1,777
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,249
|
|
|
$
|
1,279
|
|
|
$
|
446
|
|
Real estate - construction commercial
|
|
|
49
|
|
|
|
55
|
|
|
|
7
|
|
Real estate - residential
|
|
|
4,764
|
|
|
|
4,823
|
|
|
|
354
|
|
Real estate - commercial
|
|
|
1,592
|
|
|
|
1,802
|
|
|
|
284
|
|
Installment and other consumer
|
|
|
59
|
|
|
|
86
|
|
|
|
12
|
|
Total
|
|
$
|
7,713
|
|
|
$
|
8,045
|
|
|
$
|
1,103
|
|
Total impaired loans
|
|
$
|
9,324
|
|
|
$
|
9,822
|
|
|
$
|
1,103
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
(in
thousands)
|
|
Investment
|
|
|
Balance
|
|
|
Reserves
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
564
|
|
|
$
|
706
|
|
|
$
|
0
|
|
Real estate - residential
|
|
|
1,550
|
|
|
|
1,557
|
|
|
|
0
|
|
Total
|
|
$
|
2,114
|
|
|
$
|
2,263
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,053
|
|
|
$
|
1,078
|
|
|
$
|
469
|
|
Real estate - construction commercial
|
|
|
49
|
|
|
|
56
|
|
|
|
7
|
|
Real estate - residential
|
|
|
3,921
|
|
|
|
3,990
|
|
|
|
319
|
|
Real estate - commercial
|
|
|
1,918
|
|
|
|
1,988
|
|
|
|
277
|
|
Installment and other consumer
|
|
|
89
|
|
|
|
116
|
|
|
|
8
|
|
Total
|
|
$
|
7,030
|
|
|
$
|
7,228
|
|
|
$
|
1,080
|
|
Total impaired loans
|
|
$
|
9,144
|
|
|
$
|
9,491
|
|
|
$
|
1,080
|
|
The following table presents by class, information related to
the average recorded investment and interest income recognized on impaired loans during the periods indicated.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Average
|
|
|
Recognized
|
|
|
Average
|
|
|
Recognized
|
|
|
|
Recorded
|
|
|
For the
|
|
|
Recorded
|
|
|
For the
|
|
(in
thousands)
|
|
Investment
|
|
|
Period
Ended
|
|
|
Investment
|
|
|
Period
Ended
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
555
|
|
|
$
|
1
|
|
|
$
|
1,520
|
|
|
$
|
15
|
|
Real estate - construction commercial
|
|
|
0
|
|
|
|
0
|
|
|
|
118
|
|
|
|
0
|
|
Real estate - residential
|
|
|
807
|
|
|
|
4
|
|
|
|
1,513
|
|
|
|
39
|
|
Real estate - commercial
|
|
|
589
|
|
|
|
2
|
|
|
|
2,622
|
|
|
|
42
|
|
Installment and other consumer
|
|
|
40
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
1,991
|
|
|
$
|
7
|
|
|
$
|
5,773
|
|
|
$
|
96
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,192
|
|
|
$
|
11
|
|
|
$
|
984
|
|
|
$
|
12
|
|
Real estate - construction commercial
|
|
|
50
|
|
|
|
0
|
|
|
|
65
|
|
|
|
0
|
|
Real estate - residential
|
|
|
4,511
|
|
|
|
43
|
|
|
|
4,553
|
|
|
|
120
|
|
Real estate - commercial
|
|
|
1,494
|
|
|
|
15
|
|
|
|
764
|
|
|
|
0
|
|
Installment and other consumer
|
|
|
51
|
|
|
|
0
|
|
|
|
135
|
|
|
|
0
|
|
Total
|
|
$
|
7,298
|
|
|
$
|
69
|
|
|
$
|
6,501
|
|
|
$
|
132
|
|
Total impaired loans
|
|
$
|
9,289
|
|
|
$
|
76
|
|
|
$
|
12,274
|
|
|
$
|
228
|
|
The recorded investment varies from the
unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized
as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $76,000
and $228,000, for the three months ended March 31, 2017 and 2016, respectively. The average recorded investment in impaired loans
is calculated on a monthly basis during the periods reported.
Delinquent and Non-Accrual Loans
The delinquency status of loans is determined
based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more
past due. The Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management,
the ultimate collectability of interest or principal is no longer probable. In general, loans are placed on non-accrual when they
become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual, including the
delinquency status of the loan, the overall financial condition of the borrower, the progress of management’s collection
efforts and the value of the underlying collateral. Non-accrual loans are returned to accrual status when, in the opinion of management,
the financial condition of the borrower indicates that the timely collectability of interest and principal is probable and the
borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which
is generally six months.
The following table provides aging information
for the Company’s past due and non-accrual loans at March 31, 2017 and December 31, 2016.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Current
or
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
Less
Than
|
|
|
|
|
|
Past
Due
|
|
|
|
|
|
|
|
|
|
30 Days
|
|
|
30 -
89 Days
|
|
|
And Still
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Total
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
181,368
|
|
|
$
|
220
|
|
|
$
|
0
|
|
|
$
|
905
|
|
|
$
|
182,493
|
|
Real Estate Construction - Residential
|
|
|
20,299
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
20,299
|
|
Real Estate Construction - Commercial
|
|
|
69,997
|
|
|
|
97
|
|
|
|
0
|
|
|
|
49
|
|
|
|
70,143
|
|
Real Estate Mortgage - Residential
|
|
|
259,360
|
|
|
|
2,484
|
|
|
|
22
|
|
|
|
2,016
|
|
|
|
263,882
|
|
Real Estate Mortgage - Commercial
|
|
|
440,489
|
|
|
|
1,280
|
|
|
|
0
|
|
|
|
497
|
|
|
|
442,266
|
|
Installment and Other Consumer
|
|
|
30,877
|
|
|
|
154
|
|
|
|
9
|
|
|
|
59
|
|
|
|
31,099
|
|
Total
|
|
$
|
1,002,390
|
|
|
$
|
4,235
|
|
|
$
|
31
|
|
|
$
|
3,526
|
|
|
$
|
1,010,182
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
181,609
|
|
|
$
|
290
|
|
|
$
|
0
|
|
|
$
|
982
|
|
|
$
|
182,881
|
|
Real Estate Construction - Residential
|
|
|
18,681
|
|
|
|
226
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,907
|
|
Real Estate Construction - Commercial
|
|
|
55,603
|
|
|
|
0
|
|
|
|
0
|
|
|
|
50
|
|
|
|
55,653
|
|
Real Estate Mortgage - Residential
|
|
|
254,758
|
|
|
|
3,200
|
|
|
|
54
|
|
|
|
1,888
|
|
|
|
259,900
|
|
Real Estate Mortgage - Commercial
|
|
|
425,260
|
|
|
|
790
|
|
|
|
0
|
|
|
|
420
|
|
|
|
426,470
|
|
Installment and Other Consumer
|
|
|
29,920
|
|
|
|
198
|
|
|
|
11
|
|
|
|
89
|
|
|
|
30,218
|
|
Total
|
|
$
|
965,831
|
|
|
$
|
4,704
|
|
|
$
|
65
|
|
|
$
|
3,429
|
|
|
$
|
974,029
|
|
Credit Quality
The Company categorizes loans into risk
categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on
watch
status
when one or more weaknesses that may result in the deterioration of the repayment exits or the Company’s credit position
at some future date. Loans classified as
substandard
are inadequately protected by the current sound worth and paying capacity
of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses that jeopardize
the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the
deficiencies are not corrected. A loan is classified as a
troubled debt restructuring
(
TDR)
when a borrower is experiencing
financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring
that it would not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans
classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual
loans for presentation purposes. It is the Company’s policy to discontinue the accrual of interest income on loans when management
believes that the collection of interest or principal is doubtful. Loans are placed on
non-accrual
status when (1) deterioration
in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment
of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the
process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the
collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table presents the risk categories
by class at March 31, 2017 and December 31, 2016.
(in
thousands)
|
|
Commercial,
Financial, &
Agricultural
|
|
|
Real
Estate
Construction -
Residential
|
|
|
Real
Estate
Construction -
Commercial
|
|
|
Real
Estate
Mortgage -
Residential
|
|
|
Real
Estate
Mortgage -
Commercial
|
|
|
Installment
and Other
Consumer
|
|
|
Total
|
|
At March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
6,647
|
|
|
$
|
1,221
|
|
|
$
|
1,666
|
|
|
$
|
19,571
|
|
|
$
|
48,984
|
|
|
$
|
0
|
|
|
$
|
78,089
|
|
Substandard
|
|
|
689
|
|
|
|
640
|
|
|
|
97
|
|
|
|
2,546
|
|
|
|
425
|
|
|
|
22
|
|
|
|
4,419
|
|
Performing TDRs
|
|
|
750
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,559
|
|
|
|
1,489
|
|
|
|
0
|
|
|
|
5,798
|
|
Non-accrual
|
|
|
905
|
|
|
|
0
|
|
|
|
49
|
|
|
|
2,016
|
|
|
|
497
|
|
|
|
59
|
|
|
|
3,526
|
|
Total
|
|
$
|
8,991
|
|
|
$
|
1,861
|
|
|
$
|
1,812
|
|
|
$
|
27,692
|
|
|
$
|
51,395
|
|
|
$
|
81
|
|
|
$
|
91,832
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
10,295
|
|
|
$
|
665
|
|
|
$
|
1,113
|
|
|
$
|
16,577
|
|
|
$
|
44,611
|
|
|
$
|
0
|
|
|
$
|
73,261
|
|
Substandard
|
|
|
798
|
|
|
|
640
|
|
|
|
0
|
|
|
|
2,159
|
|
|
|
426
|
|
|
|
24
|
|
|
|
4,047
|
|
Performing TDRs
|
|
|
635
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,582
|
|
|
|
1,498
|
|
|
|
0
|
|
|
|
5,715
|
|
Non-accrual
|
|
|
982
|
|
|
|
0
|
|
|
|
50
|
|
|
|
1,888
|
|
|
|
420
|
|
|
|
89
|
|
|
|
3,429
|
|
Total
|
|
$
|
12,710
|
|
|
$
|
1,305
|
|
|
$
|
1,163
|
|
|
$
|
24,206
|
|
|
$
|
46,955
|
|
|
$
|
113
|
|
|
$
|
86,452
|
|
Troubled Debt Restructurings
At March 31, 2017, loans classified as TDRs totaled $6.4 million,
of which $573,000 were classified as nonperforming TDRs and included in non-accrual loans and $5.8 million were classified as performing
TDRs. At December 31, 2016, loans classified as TDRs totaled $6.3 million, of which $619,000 were classified as nonperforming TDRs
and included in non-accrual loans and $5.7 million were classified as performing TDRs. Both performing and nonperforming TDRs are
considered impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present
value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying
collateral less applicable selling costs. Accordingly, specific reserves of $473,000 and $410,000 related to TDRs were allocated
to the allowance for loan losses at March 31, 2017 and December 31, 2016, respectively.
The following table summarizes loans that were modified as TDRs
during the periods indicated.
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Recorded
Investment (1)
|
|
|
Recorded
Investment (1)
|
|
(in
thousands)
|
|
Number
of
Contracts
|
|
|
Pre-
Modification
|
|
|
Post-
Modification
|
|
|
Number
of
Contracts
|
|
|
Pre-
Modification
|
|
|
Post-
Modification
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
1
|
|
|
$
|
131
|
|
|
$
|
131
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Real estate mortgage - residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
78
|
|
|
|
78
|
|
Real estate mortgage - commercial
|
|
|
1
|
|
|
|
56
|
|
|
|
56
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
2
|
|
|
$
|
187
|
|
|
$
|
187
|
|
|
|
1
|
|
|
$
|
78
|
|
|
$
|
78
|
|
(1) The amounts reported post-modification
are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were
fully paid down, charged-off or foreclosed upon during the period ended are not reported.
The Company’s portfolio
of loans classified as TDRs include concessions for the borrower given financial condition such as interest rates below the current
market rate, deferring principal payments, and extending maturity dates. During the three months ended March 31, 2017, two loan
meeting the TDR criteria was modified compared to one loan during the three months ended March 31, 2016.
The Company considers a TDR to
be in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or it is the process of foreclosure.
There were no loans modified as a TDR that defaulted during the three months ended March 31, 2017 and 2016, respectively, and within
twelve months of their modification date. See
Lending and Credit Management
section for further information.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(3)
|
Other Real Estate and Repossessed Assets
|
|
|
March
31,
|
|
|
December
31,
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
Commercial
|
|
$
|
783
|
|
|
$
|
809
|
|
Real estate construction - commercial
|
|
|
12,380
|
|
|
|
12,380
|
|
Real estate mortgage - residential
|
|
|
584
|
|
|
|
647
|
|
Real estate mortgage - commercial
|
|
|
2,909
|
|
|
|
3,439
|
|
Repossessed assets
|
|
|
13
|
|
|
|
16
|
|
Total
|
|
$
|
16,669
|
|
|
$
|
17,291
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,044
|
)
|
|
|
(3,129
|
)
|
Total other real estate and repossessed assets
|
|
$
|
13,625
|
|
|
$
|
14,162
|
|
Changes in the net carrying amount of other real estate and
repossessed assets were as follows for the periods indicated:
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
17,291
|
|
|
$
|
19,225
|
|
Additions
|
|
|
103
|
|
|
|
742
|
|
Proceeds from sales
|
|
|
(658
|
)
|
|
|
(1,274
|
)
|
Charge-offs against the valuation allowance for other real estate owned, net
|
|
|
(117
|
)
|
|
|
(46
|
)
|
Net gain on sales
|
|
|
50
|
|
|
|
49
|
|
Total other real estate and repossessed assets
|
|
$
|
16,669
|
|
|
$
|
18,696
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,044
|
)
|
|
|
(3,225
|
)
|
Balance at end of period
|
|
$
|
13,625
|
|
|
$
|
15,471
|
|
At March 31, 2017 $194,000 of consumer
mortgage loans secured by residential real estate properties were in the process of foreclosure compared to $162,000 at December
31, 2016.
Activity in the valuation allowance for other real estate owned
was as follows for the periods indicated:
|
|
Three
Months Ended March 31,
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
Balance, beginning of period
|
|
$
|
3,129
|
|
|
$
|
3,233
|
|
Provision for other real estate owned
|
|
|
32
|
|
|
|
38
|
|
Charge-offs
|
|
|
(117
|
)
|
|
|
(46
|
)
|
Balance, end of period
|
|
$
|
3,044
|
|
|
$
|
3,225
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(4)
|
Investment Securities
|
The amortized cost and fair value of debt
securities classified as available-for-sale at March 31, 2017 and December 31, 2016 were as follows:
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross
Unrealized
|
|
|
Fair
|
|
(
in
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,560
|
|
|
$
|
0
|
|
|
$
|
(289
|
)
|
|
$
|
13,271
|
|
Government sponsored enterprises
|
|
|
35,521
|
|
|
|
0
|
|
|
|
(331
|
)
|
|
|
35,190
|
|
Obligations of states and political subdivisions
|
|
|
46,733
|
|
|
|
180
|
|
|
|
(516
|
)
|
|
|
46,397
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
121,996
|
|
|
|
132
|
|
|
|
(1,816
|
)
|
|
|
120,312
|
|
Commercial - government agencies
|
|
|
990
|
|
|
|
10
|
|
|
|
0
|
|
|
|
1,000
|
|
Total mortgage-backed securities
|
|
|
122,986
|
|
|
|
142
|
|
|
|
(1,816
|
)
|
|
|
121,312
|
|
Total available-for-sale securities
|
|
$
|
218,800
|
|
|
$
|
322
|
|
|
$
|
(2,952
|
)
|
|
$
|
216,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,667
|
|
|
$
|
0
|
|
|
$
|
(303
|
)
|
|
$
|
13,364
|
|
Government sponsored enterprises
|
|
|
32,786
|
|
|
|
2
|
|
|
|
(329
|
)
|
|
|
32,459
|
|
Obligations of states and political subdivisions
|
|
|
42,666
|
|
|
|
123
|
|
|
|
(757
|
)
|
|
|
42,032
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
127,527
|
|
|
|
124
|
|
|
|
(1,995
|
)
|
|
|
125,656
|
|
Commercial - government agencies
|
|
|
989
|
|
|
|
12
|
|
|
|
0
|
|
|
|
1,001
|
|
Total mortgage-backed securities
|
|
|
128,516
|
|
|
|
136
|
|
|
|
(1,995
|
)
|
|
|
126,657
|
|
Total available-for-sale securities
|
|
$
|
217,635
|
|
|
$
|
261
|
|
|
$
|
(3,384
|
)
|
|
$
|
214,512
|
|
All of the Company’s investment securities
are classified as available for sale. Agency bonds and notes, small business administration guaranteed loan certificates (SBA),
residential and commercial agency mortgage-backed securities, and agency collateralized mortgage obligations (CMO) include securities
issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB), which are U.S. government-sponsored
enterprises.
Other Investments and securities primarily
consist of Federal Home Loan Bank stock, subordinated debt equity securities, and the Company’s interest in statutory trusts.
These securities are reported at cost in other assets in the amount of $9.8 million and $9.8 million as of March 31, 2017 and December
31, 2016, respectively.
Debt securities with carrying values aggregating
approximately $176.8 million and $167.6 million at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public
funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt
securities classified as available-for-sale at March 31, 2017, by contractual maturity are shown below. Expected maturities may
differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Amortized
|
|
|
Fair
|
|
(
in
thousands)
|
|
Cost
|
|
|
Value
|
|
Due in one year or less
|
|
$
|
4,136
|
|
|
$
|
4,138
|
|
Due after one year through five years
|
|
|
59,006
|
|
|
|
58,628
|
|
Due after five years through ten years
|
|
|
26,630
|
|
|
|
26,123
|
|
Due after ten years
|
|
|
6,042
|
|
|
|
5,969
|
|
Total
|
|
|
95,814
|
|
|
|
94,858
|
|
Mortgage-backed securities
|
|
|
122,986
|
|
|
|
121,312
|
|
Total available-for-sale securities
|
|
$
|
218,800
|
|
|
$
|
216,170
|
|
Gross unrealized losses on debt securities
and the fair value of the related securities, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position, at March 31, 2017 and December 31, 2016 were as follows:
|
|
Less
than 12 months
|
|
|
12
months or more
|
|
|
Total
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(in
thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
At March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
8,362
|
|
|
$
|
(168
|
)
|
|
$
|
4,909
|
|
|
$
|
(121
|
)
|
|
$
|
13,271
|
|
|
$
|
(289
|
)
|
Government sponsored enterprises
|
|
|
34,190
|
|
|
|
(331
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
34,190
|
|
|
|
(331
|
)
|
Obligations of states and political subdivisions
|
|
|
28,205
|
|
|
|
(516
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
28,205
|
|
|
|
(516
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
81,414
|
|
|
|
(1,381
|
)
|
|
|
23,717
|
|
|
|
(435
|
)
|
|
|
105,131
|
|
|
|
(1,816
|
)
|
Total
|
|
$
|
152,171
|
|
|
$
|
(2,396
|
)
|
|
$
|
28,626
|
|
|
$
|
(556
|
)
|
|
$
|
180,797
|
|
|
$
|
(2,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,365
|
|
|
$
|
(303
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13,365
|
|
|
$
|
(303
|
)
|
Government sponsored enterprises
|
|
|
29,432
|
|
|
|
(329
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
29,432
|
|
|
|
(329
|
)
|
Obligations of states and political subdivisions
|
|
|
32,318
|
|
|
|
(757
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
32,318
|
|
|
|
(757
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
109,772
|
|
|
|
(1,848
|
)
|
|
|
3,742
|
|
|
|
(147
|
)
|
|
|
113,514
|
|
|
|
(1,995
|
)
|
Total
|
|
$
|
184,887
|
|
|
$
|
(3,237
|
)
|
|
$
|
3,742
|
|
|
$
|
(147
|
)
|
|
$
|
188,629
|
|
|
$
|
(3,384
|
)
|
The total
available for sale portfolio consisted of approximately 309 securities at March 31, 2017. The portfolio included 205 securities
having an aggregate fair value of $180.8 million that were in a loss position at March 31, 2017. Securities identified as temporarily
impaired which had been in a loss position for 12 months or longer totaled $28.6 million at fair value. The $3.0 million aggregate
unrealized loss included in accumulated other comprehensive income at March 31, 2017 was caused by interest rate fluctuations
.
The total available for sale portfolio
consisted of approximately 298 securities at December 31, 2016. The portfolio included 216 securities having an aggregate fair
value of $188.6 million that were in a loss position at December 31, 2016. Securities identified as temporarily impaired which
had been in a loss position for 12 months or longer had a fair value of $3.7 million at December 31, 2016. The $3.4 million aggregate
unrealized loss included in accumulated other comprehensive income at December 31, 2016 was caused by interest rate fluctuations.
Because the decline in fair value is attributable
to changes in interest rates and not credit quality, these investments were not considered other-than-temporarily impaired at March
31, 2017 and December 31, 2016, respectively. In the absence of changes in credit quality of these investments, the fair value
is expected to recover on all debt securities as they approach their maturity date or re-pricing date, or if market yields for
such investments decline. In addition, the Company does not have the intent to sell these investments over the period of recovery,
and it is not more likely than not that the Company will be required to sell such investment securities.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The table presents the components of investment
securities gains and losses, which have been recognized in earnings:
|
|
Three Months Ended March
31,
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
Gains realized on sales
|
|
$
|
0
|
|
|
$
|
472
|
|
Losses realized on sales
|
|
|
0
|
|
|
|
0
|
|
Other-than-temporary impairment recognized
|
|
|
0
|
|
|
|
0
|
|
Investment securities gains
|
|
$
|
0
|
|
|
$
|
472
|
|
Mortgage Servicing Rights
At March 31, 2017, the Company was servicing
approximately $291.0 million of loans sold to the secondary market compared to $294.4 million at December 31, 2016, and $308.1
million at March 31, 2016. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $209,000 for
the three ended March 31, 2017 compared to $210,000 for the three months ended March 31, 2016, respectively.
The table below presents changes in mortgage
servicing rights (MSRs) for the periods indicated.
|
|
Three
Months Ended March 31,
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
2,584
|
|
|
$
|
2,847
|
|
Originated mortgage servicing rights
|
|
|
49
|
|
|
|
53
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
Due to change in model inputs and assumptions (1)
|
|
|
375
|
|
|
|
(3
|
)
|
Other changes in fair value (2)
|
|
|
(131
|
)
|
|
|
(152
|
)
|
Balance at end of period
|
|
$
|
2,877
|
|
|
$
|
2,745
|
|
|
(1)
|
The change in fair value resulting from changes in valuation inputs or assumptions used in the
valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.
|
|
(2)
|
Other changes in fair value reflect changes due to customer payments and passage of time.
|
The following key data and assumptions
were used in estimating the fair value of the Company’s MSRs as of the three months ended March 31, 2017 and 2016:
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average constant prepayment rate
|
|
|
8.29
|
%
|
|
|
10.30
|
%
|
Weighted average note rate
|
|
|
3.85
|
%
|
|
|
3.91
|
%
|
Weighted average discount rate
|
|
|
9.72
|
%
|
|
|
9.19
|
%
|
Weighted average expected life (in years)
|
|
|
6.50
|
|
|
|
5.70
|
|
|
(6)
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2017
|
|
|
2016
|
|
Federal funds purchased
|
|
$
|
0
|
|
|
$
|
992
|
|
Repurchase agreements
|
|
|
31,512
|
|
|
|
30,023
|
|
Total
|
|
$
|
31,512
|
|
|
$
|
31,015
|
|
The Company offers a sweep account program
whereby amounts in excess of an established limit are “swept” from the customer’s demand deposit account on a
daily basis into retail repurchase agreements pursuant to individual repurchase agreements between the Company and its customers
.
Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities.
They are accounted for as collateralized financing transactions, not as
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
sales and purchases of the securities portfolio.
The securities collateral pledged for the repurchase agreements with customers is maintained by a designated third party custodian
.
The collateral amounts pledged to repurchase agreements by remaining maturity in the table below are limited to the outstanding
balances of the related asset or liability; thus amounts of excess collateral are not shown.
Repurchase
Agreements
|
|
Remaining
Contractual Maturity of the Agreements
|
|
|
|
Overnight
|
|
|
Less
|
|
|
Greater
|
|
|
|
|
|
|
and
|
|
|
than
|
|
|
than
|
|
|
|
|
(in
thousands)
|
|
continuous
|
|
|
90
days
|
|
|
90
days
|
|
|
Total
|
|
At March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
3,513
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,513
|
|
Government sponsored enterprises
|
|
|
7,291
|
|
|
|
0
|
|
|
|
0
|
|
|
|
7,291
|
|
Asset-backed securities
|
|
|
20,708
|
|
|
|
0
|
|
|
|
0
|
|
|
|
20,708
|
|
Total
|
|
$
|
31,512
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
31,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
3,489
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,489
|
|
Government sponsored enterprises
|
|
|
7,324
|
|
|
|
0
|
|
|
|
0
|
|
|
|
7,324
|
|
Asset-backed securities
|
|
|
19,210
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,210
|
|
Total
|
|
$
|
30,023
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
30,023
|
|
Income taxes as a percentage of earnings
before income taxes as reported in the consolidated financial statements were 34.2% for the three months ended March 31, 2017 compared
to 32.6% for the three months ended March 31, 2016. The increase in tax rates quarter over quarter is primarily due to an immaterial
return to provision adjustment made in 2016.
The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income of the appropriate character during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, taxable income available in carryback years, and tax planning strategies in making this assessment. With the exception
of certain capital losses generated during 2013 and 2014, it is management’s opinion that the Company will more likely than
not realize the benefits of these temporary differences as of March 31, 2017 and, therefore, only established a valuation
reserve against the Company’s capital loss carry forward. Management arrived at this conclusion based upon the level of historical
taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible. As indicated
above, the Company generated approximately $219,000 of capital losses during 2013 and 2014 as a result of disposing of certain
limited partnership interests. The capital losses will expire between 2018 and 2019, and it is management’s opinion that
the Company will not more likely than not generate the capital gain income necessary to utilize the capital loss carry forwards
before the capital losses expire. As such, the Company has established an $83,000 valuation reserve against its capital loss carry
forward deferred tax asset.
Accumulated Other Comprehensive Loss
The following details the change in the
components of the Company’s accumulated other comprehensive loss for the three months ended March 31, 2017 and 2016:
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three
months ended March 31, 2017
|
|
|
|
|
|
|
Unrecognized
Net
|
|
|
Accumulated
|
|
|
|
Unrealized
|
|
|
Pension
and
|
|
|
Other
|
|
|
|
Gain
(Loss)
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
(in
thousands)
|
|
on
Securities (1)
|
|
|
Costs
(2)
|
|
|
Loss
|
|
Balance at beginning of period
|
|
$
|
(1,936
|
)
|
|
$
|
(1,865
|
)
|
|
$
|
(3,801
|
)
|
Other comprehensive income, before reclassifications
|
|
|
493
|
|
|
|
22
|
|
|
|
515
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Current period other comprehensive income, before tax
|
|
|
493
|
|
|
|
22
|
|
|
|
515
|
|
Income tax expense
|
|
|
(187
|
)
|
|
|
(8
|
)
|
|
|
(195
|
)
|
Current period other comprehensive income, net of tax
|
|
|
306
|
|
|
|
14
|
|
|
|
320
|
|
Balance at end of period
|
|
$
|
(1,630
|
)
|
|
$
|
(1,851
|
)
|
|
$
|
(3,481
|
)
|
|
|
Three
months ended March 31, 2016
|
|
|
|
|
|
|
Unrecognized
Net
|
|
|
Accumulated
|
|
|
|
Unrealized
|
|
|
Pension
and
|
|
|
Other
|
|
|
|
Gain
(Loss)
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
(in
thousands)
|
|
on
Securities (1)
|
|
|
Costs
(2)
|
|
|
Loss
|
|
Balance at beginning of period
|
|
$
|
(591
|
)
|
|
$
|
(1,427
|
)
|
|
$
|
(2,018
|
)
|
Other comprehensive income, before reclassifications
|
|
|
2,006
|
|
|
|
21
|
|
|
|
2,027
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(472
|
)
|
|
|
0
|
|
|
|
(472
|
)
|
Current period other comprehensive income, before tax
|
|
|
1,534
|
|
|
|
21
|
|
|
|
1,555
|
|
Income tax expense
|
|
|
(583
|
)
|
|
|
(8
|
)
|
|
|
(591
|
)
|
Current period other comprehensive income, net of tax
|
|
|
951
|
|
|
|
13
|
|
|
|
964
|
|
Balance at end of period
|
|
$
|
360
|
|
|
$
|
(1,414
|
)
|
|
$
|
(1,054
|
)
|
(1) The pre-tax amounts reclassified from accumulated other
comprehensive loss are included in
gain on sale of investment securities
in the consolidated statements of income.
(2) The pre-tax
amounts
reclassified from accumulated other comprehensive loss are included in the computation of net periodic pension cost.
|
(9)
|
Employee Benefit Plans
|
Employee Benefits
Employee benefits charged to operating
expenses are summarized in the table below for the periods indicated.
|
|
Three
Months Ended March 31,
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
Payroll taxes
|
|
$
|
356
|
|
|
$
|
296
|
|
Medical plans
|
|
|
426
|
|
|
|
512
|
|
401k match and profit sharing
|
|
|
250
|
|
|
|
181
|
|
Pension plan
|
|
|
352
|
|
|
|
307
|
|
Other
|
|
|
16
|
|
|
|
16
|
|
Total employee benefits
|
|
$
|
1,400
|
|
|
$
|
1,312
|
|
The Company’s profit-sharing plan
includes a matching 401k portion, in which the Company matches the first 3% of eligible employee contributions. The Company made
annual contributions in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension
plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown.
In addition, employees were able to make additional tax-deferred contributions.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Pension
The Company provides a noncontributory
defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension
plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities
over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might
not be made in a particular year. The Company expects to make a pension contribution in the amount of $1.2 million on September
15, 2017. The minimum required contribution for 2017 is $842,000.
Components of Net Pension Cost and Other
Amounts Recognized in Accumulated Other Comprehensive Income
The following items are components of net
pension cost for the periods indicated:
|
|
Estimated
|
|
|
Actual
|
|
(in
thousands)
|
|
2017
|
|
|
2016
|
|
Service cost - benefits earned during the year
|
|
$
|
1,343
|
|
|
$
|
1,179
|
|
Interest costs on projected benefit obligations
|
|
|
1,008
|
|
|
|
956
|
|
Expected return on plan assets
|
|
|
(1,123
|
)
|
|
|
(1,057
|
)
|
Expected administrative expenses
|
|
|
88
|
|
|
|
70
|
|
Amortization of prior service cost
|
|
|
79
|
|
|
|
79
|
|
Amortization of unrecognized net loss
|
|
|
11
|
|
|
|
0
|
|
Net periodic pension expense
|
|
$
|
1,406
|
|
|
$
|
1,227
|
|
|
|
|
|
|
|
|
|
|
Pension expense - three months ended March 31, (actual)
|
|
$
|
352
|
|
|
$
|
307
|
|
The Company’s stock option plan provides
for the grant of options to purchase up to 557,706 shares of the Company’s common stock to officers and other key employees
of the Company and its subsidiaries. All options have been granted at exercise prices equal to fair value and vest over periods
ranging from four to five years.
The following table summarizes the Company’s
stock option activity:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
years)
|
|
|
($000)
|
|
Outstanding, beginning of period
|
|
|
44,458
|
|
|
$
|
20.11
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(4,345
|
)
|
|
|
20.34
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2017
|
|
|
40,113
|
|
|
$
|
20.08
|
|
|
|
0.75
|
|
|
$
|
110,931
|
|
Exercisable, March 31, 2017
|
|
|
38,844
|
|
|
$
|
20.24
|
|
|
|
0.73
|
|
|
$
|
103,647
|
|
Options have been adjusted to reflect a 4% stock dividend paid
on July 1, 2016.
Total stock-based compensation expense
was $1,000 and $5,000 for the three months ended March 31, 2017 and 2016, respectively. As of March 31, 2017, the total unrecognized
compensation expense related to non-vested stock awards was $2,000 and the related weighted average period over which it is expected
to be recognized is approximately 0.26 years.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Stock Dividend
On July 1,
2016, the Company paid a special stock dividend of 4% to common shareholders of record at the close of business on June 15, 2016.
For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to
reflect this change.
Basic earnings per share is computed by
dividing income available to shareholders by the weighted average number of shares outstanding during the year. Diluted earnings
per share gives effect to all dilutive potential shares that were outstanding during the year. The calculations of basic and diluted
earnings per share are as follows for the periods indicated:
|
|
Three
Months Ended March 31,
|
|
(dollars
in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
2,100
|
|
|
$
|
1,998
|
|
Basic earnings per share
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
2,100
|
|
|
$
|
1,998
|
|
Average shares outstanding
|
|
|
5,615,300
|
|
|
|
5,654,066
|
|
Effect of dilutive stock options
|
|
|
4,726
|
|
|
|
0
|
|
Average shares outstanding including dilutive stock options
|
|
|
5,620,026
|
|
|
|
5,654,066
|
|
Diluted earnings per share
|
|
$
|
0.37
|
|
|
|
0.35
|
|
Under the treasury stock method, outstanding
stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of
any unamortized compensation expense, exceeds the option price during the period, except when the Company has a loss from continuing
operations available to shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related
tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.
Options to purchase 20,787 and 44,458 shares
during the three months ended March 31, 2017 and 2016, respectively, were not included in the respective computations of diluted
earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense,
was greater than the average market price of the common shares and were considered anti-dilutive.
Repurchase Program
On August
6, 2015, the Board of Directors authorized a share repurchase plan to purchase through open market transactions $2.0 million market
value of the Company’s common stock. As of March 31, 2017, the Company repurchased a total of 45,293 shares of common stock
pursuant to the plan at an average price of $15.04 per share, including 1,400 shares of common stock repurchased pursuant to the
plan during the three months ended March 31, 2017 at an average price of $17.88 per share. At March 31, 2017, approximately $1.3
million may be used to purchase shares under the plan.
The
table below shows activity in the outstanding shares of the Company's common stock during the past three years. Shares in the table
below are presented on a historical basis and have not been restated for the annual 4% stock dividends.
|
|
Number
of shares
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2016
|
|
Outstanding, beginning of year
|
|
|
5,616,607
|
|
|
|
5,441,190
|
|
|
|
5,441,190
|
|
Issuance of stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
4% stock dividend
|
|
|
0
|
|
|
|
217,155
|
|
|
|
0
|
|
Purchase of treasury stock
|
|
|
(1,400
|
)
|
|
|
(41,738
|
)
|
|
|
(8,635
|
)
|
Outstanding, end of year
|
|
|
5,615,207
|
|
|
|
5,616,607
|
|
|
|
5,432,555
|
|
Except
as noted in the above table, all share and per share amounts in this note have been restated for the 4% common stock dividend distributed
July 1, 2016.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(12)
|
Fair Value Measurements
|
The Company uses fair value measurements
to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820,
Fair
Value Measurements and Disclosures,
defines fair value, establishes a framework for the measurement of fair value, and enhances
disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities
to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified
the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.
In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. As of March 31, 2017 and December 31, 2016, respectively, there were no transfers into or out of Levels 1-3.
The fair value hierarchy is
as follows:
Level 1 – Inputs are unadjusted
quoted prices for identical assets or liabilities in active markets.
Level 2 – Inputs other
than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might
include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable
at commonly quoted intervals.
Level 3 – Inputs are unobservable
inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s
best information and assumptions that a market participant would consider.
ASC Topic 820 also provides
guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased
and on identifying circumstances when a transaction may not be considered orderly.
The Company is required
to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a
nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate,
long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment
may have occurred.
Valuation Methods
for Instruments Measured at Fair Value on a Recurring Basis
Following is a description of
the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:
Available-for-Sale Securities
The fair value measurements of the Company’s
investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes,
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject
to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale
are reported at fair value utilizing Level 2 inputs.
Mortgage Servicing Rights
The fair value of mortgage
servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate,
constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation
model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market
participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost
to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value
of estimated future net servicing income. The Company classifies its servicing rights as Level 3.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
Quoted
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in
thousands)
|
|
Fair
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,271
|
|
|
$
|
0
|
|
|
|
13,271
|
|
|
$
|
0
|
|
Government sponsored enterprises
|
|
|
35,190
|
|
|
|
0
|
|
|
|
35,190
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
46,397
|
|
|
|
0
|
|
|
|
46,397
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
121,312
|
|
|
|
0
|
|
|
|
121,312
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,877
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,877
|
|
Total
|
|
$
|
219,047
|
|
|
$
|
0
|
|
|
$
|
216,170
|
|
|
$
|
2,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,364
|
|
|
$
|
0
|
|
|
|
13,364
|
|
|
$
|
0
|
|
Government sponsored enterprises
|
|
|
32,459
|
|
|
|
0
|
|
|
|
32,459
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
42,032
|
|
|
|
0
|
|
|
|
42,032
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
126,657
|
|
|
|
0
|
|
|
|
126,657
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,584
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,584
|
|
Total
|
|
$
|
217,096
|
|
|
$
|
0
|
|
|
$
|
214,512
|
|
|
$
|
2,584
|
|
The changes in Level 3 assets
and liabilities measured at fair value on a recurring basis are summarized as follows:
|
|
Fair
Value Measurements Using
|
|
|
|
Significant
Unobservable Inputs
|
|
|
|
(Level
3)
|
|
|
|
Mortgage
Servicing Rights
|
|
(in
thousands)
|
|
Three
Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
2,584
|
|
|
$
|
2,847
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
244
|
|
|
|
(155
|
)
|
Included in other comprehensive income
|
|
|
0
|
|
|
|
0
|
|
Purchases
|
|
|
0
|
|
|
|
0
|
|
Sales
|
|
|
0
|
|
|
|
0
|
|
Issues
|
|
|
49
|
|
|
|
53
|
|
Settlements
|
|
|
0
|
|
|
|
0
|
|
Balance at end of period
|
|
$
|
2,877
|
|
|
$
|
2,745
|
|
The change in valuation of mortgage
servicing rights arising from inputs and assumptions increased $375,000 and $3,000 for the three months ended March 31, 2017 and
2016, respectively.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Quantitative
Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Input
Value
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Mortgage servicing rights
|
|
Discounted cash flows
|
|
Weighted average constant prepayment rate
|
|
|
8.29
|
%
|
|
|
10.30
|
%
|
|
|
|
|
Weighted average note rate
|
|
|
3.85
|
%
|
|
|
3.91
|
%
|
|
|
|
|
Weighted average discount rate
|
|
|
9.72
|
%
|
|
|
9.19
|
%
|
|
|
|
|
Weighted average expected life (in years)
|
|
|
6.50
|
|
|
|
5.70
|
|
Valuation methods for instruments
measured at fair value on a nonrecurring basis
Following is a description of
the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:
Impaired Loans
The Company does not record loans
at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally
based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting
the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated,
a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level
3. As of March 31, 2017, the Company identified $7.7 million in impaired loans that had specific allowances for losses aggregating
$1.1 million. Related to these loans, there was $20,000 in charge-offs recorded during the three months ended March 31, 2017. As
of March 31, 2016, the Company identified $5.2 million in impaired loans that had specific allowances for losses aggregating $1.3
million. Related to these loans, there was $560,000 in charge-offs recorded during the three months ended March 31, 2016.
Other Real Estate and Foreclosed
Assets
Other real estate and foreclosed
assets consisted of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and
residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other
real estate assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less
estimated selling costs. The Company relies on external appraisals and assessment of property values by internal staff. In the
case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment
based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and
the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are
classified as Level 3.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
|
|
|
|
|
|
|
Quoted
Prices
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
Markets
for
|
|
|
Other
|
|
|
Significant
|
|
|
Ended
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
March
31,
|
|
|
|
Total
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total
Gains
|
|
(in
thousands)
|
|
Fair
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
(Losses)*
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
803
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
803
|
|
|
$
|
(1
|
)
|
Real estate construction - commercial
|
|
|
42
|
|
|
|
0
|
|
|
|
0
|
|
|
|
42
|
|
|
|
0
|
|
Real estate mortgage - residential
|
|
|
4,410
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4,410
|
|
|
|
(3
|
)
|
Real estate mortgage - commercial
|
|
|
1,308
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,308
|
|
|
|
(4
|
)
|
Consumer
|
|
|
47
|
|
|
|
0
|
|
|
|
0
|
|
|
|
47
|
|
|
|
(12
|
)
|
Total
|
|
$
|
6,610
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,610
|
|
|
$
|
(20
|
)
|
Other real estate and foreclosed assets
|
|
$
|
13,625
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13,625
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
248
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
248
|
|
|
$
|
(359
|
)
|
Real estate construction - commercial
|
|
|
44
|
|
|
|
0
|
|
|
|
0
|
|
|
|
44
|
|
|
|
0
|
|
Real estate mortgage - residential
|
|
|
3,170
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,170
|
|
|
|
(35
|
)
|
Real estate mortgage - commercial
|
|
|
243
|
|
|
|
0
|
|
|
|
0
|
|
|
|
243
|
|
|
|
(154
|
)
|
Consumer
|
|
|
100
|
|
|
|
0
|
|
|
|
0
|
|
|
|
100
|
|
|
|
(12
|
)
|
Total
|
|
$
|
3,805
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,805
|
|
|
$
|
(560
|
)
|
Other real estate and foreclosed assets
|
|
$
|
15,471
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
15,471
|
|
|
$
|
33
|
|
* Total gains (losses) reported
for other real estate and foreclosed assets includes charge-offs, valuation write downs, and net losses taken during the periods
reported.
|
(13)
|
Fair Value of Financial Instruments
|
The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
Loans
The
fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans
could be made to borrowers with similar credit ratings and for the same remaining maturities
. The net carrying amount
of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations,
or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price
concept of fair value prescribed by ASC Topic 820.
Investment Securities
A detailed description of the
fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided
in the
Fair Value Measurement
section above. A schedule of investment securities by category and maturity is provided in
the notes on
Investment Securities
.
Federal Home Loan Bank
(FHLB) Stock
Ownership of equity securities
of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair
value.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Federal Funds Sold,
Cash, and Due from Banks
The carrying amounts of short-term
federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due
from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell classified as short-term
generally mature in 90 days or less.
Mortgage Servicing
Rights
The fair value of mortgage servicing
rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant
prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model
that calculates the present value of estimated future net servicing income.
The
model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment
speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.
Cash
Surrender Value - Life Insurance
The fair
value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company
would receive the cash surrender value which equals the carrying amount.
Accrued
Interest Receivable and Payable
For accrued
interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these
financial instruments.
Deposits
The fair
value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is
equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities
Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury
For securities
sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable
estimate of fair value, as such instruments reprice in a short time period.
Subordinated Notes and
Other Borrowings
The fair value of subordinated
notes and other borrowings is based on the discounted value of contractual cashflows. The discount rate is estimated using the
rates currently offered for other borrowed money of similar remaining maturities.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
A summary of the carrying amounts
and fair values of the Company’s financial instruments at March 31, 2017 and December 31, 2016 is as follows:
|
|
|
|
|
|
|
|
March
31, 2017
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
March
31, 2017
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in
thousands)
|
|
Amount
|
|
|
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
16,746
|
|
|
$
|
16,746
|
|
|
$
|
16,746
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight interest-bearing deposits
|
|
|
6,427
|
|
|
|
6,427
|
|
|
|
6,427
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
216,170
|
|
|
|
216,170
|
|
|
|
0
|
|
|
|
216,170
|
|
|
|
0
|
|
Loans, net
|
|
|
999,920
|
|
|
|
993,219
|
|
|
|
0
|
|
|
|
0
|
|
|
|
993,219
|
|
Investment in FHLB stock
|
|
|
5,212
|
|
|
|
5,212
|
|
|
|
0
|
|
|
|
5,212
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,877
|
|
|
|
2,877
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,877
|
|
Cash surrender value - life insurance
|
|
|
2,430
|
|
|
|
2,430
|
|
|
|
0
|
|
|
|
2,430
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
4,702
|
|
|
|
4,702
|
|
|
|
4,702
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,254,484
|
|
|
$
|
1,247,783
|
|
|
$
|
27,875
|
|
|
$
|
223,812
|
|
|
$
|
996,096
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
239,059
|
|
|
$
|
239,059
|
|
|
$
|
239,059
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
519,379
|
|
|
|
519,379
|
|
|
|
519,379
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
284,566
|
|
|
|
282,822
|
|
|
|
0
|
|
|
|
0
|
|
|
|
282,822
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
31,512
|
|
|
|
31,512
|
|
|
|
31,512
|
|
|
|
0
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
34,228
|
|
|
|
0
|
|
|
|
34,228
|
|
|
|
0
|
|
Federal Home Loan Bank advances
|
|
|
91,900
|
|
|
|
92,225
|
|
|
|
0
|
|
|
|
92,225
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
452
|
|
|
|
452
|
|
|
|
452
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,216,354
|
|
|
$
|
1,199,677
|
|
|
$
|
790,402
|
|
|
$
|
126,453
|
|
|
$
|
282,822
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted
Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
December
31, 2016
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in
thousands)
|
|
amount
|
|
|
value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
25,589
|
|
|
$
|
25,589
|
|
|
$
|
25,589
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight interest-bearing deposits
|
|
|
1,406
|
|
|
|
1,406
|
|
|
|
1,406
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
214,512
|
|
|
|
214,512
|
|
|
|
0
|
|
|
|
214,512
|
|
|
|
0
|
|
Loans, net
|
|
|
964,143
|
|
|
|
959,929
|
|
|
|
0
|
|
|
|
0
|
|
|
|
959,929
|
|
Investment in FHLB stock
|
|
|
5,149
|
|
|
|
5,149
|
|
|
|
0
|
|
|
|
5,149
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,584
|
|
|
|
2,584
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,584
|
|
Cash surrender value - life insurance
|
|
|
2,409
|
|
|
|
2,409
|
|
|
|
0
|
|
|
|
2,409
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
5,183
|
|
|
|
5,183
|
|
|
|
5,183
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,220,975
|
|
|
$
|
1,216,761
|
|
|
$
|
32,178
|
|
|
$
|
222,070
|
|
|
$
|
962,513
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
235,975
|
|
|
$
|
235,975
|
|
|
$
|
235,975
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
468,731
|
|
|
|
468,731
|
|
|
|
468,731
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
305,960
|
|
|
|
304,334
|
|
|
|
0
|
|
|
|
0
|
|
|
|
304,334
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
31,015
|
|
|
|
31,015
|
|
|
|
31,015
|
|
|
|
0
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
33,712
|
|
|
|
0
|
|
|
|
33,712
|
|
|
|
0
|
|
Other borrowings
|
|
|
93,392
|
|
|
|
93,209
|
|
|
|
0
|
|
|
|
93,209
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
498
|
|
|
|
498
|
|
|
|
498
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,185,057
|
|
|
$
|
1,167,474
|
|
|
$
|
736,219
|
|
|
$
|
126,921
|
|
|
$
|
304,334
|
|
Off-Balance Sheet Financial
Instruments
The fair
value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on
such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have
been made on terms that are competitive in the markets in which it operates.
Limitations
The fair
value estimates provided are made at a point in time based on market information and information about the financial instruments.
Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.
|
(14)
|
Repurchase Reserve Liability
|
The Company’s repurchase reserve
liability for estimated losses incurred on sold loans was $160,000 at both March 31, 2017 and December 31, 2016. This liability
represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans originated
for sale that may arise from representation and warranty claims that could relate to a variety of issues, including but not limited
to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines. At March
31, 2017, the Company was servicing 2,843 loans sold to the secondary market with a
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
balance of approximately $291.00
million compared to 2,877 loans sold with a balance of approximately $294.4 million at December 31, 2016.
|
|
Three Months Ended March
31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
160
|
|
|
$
|
160
|
|
Provision for repurchase liability
|
|
|
0
|
|
|
|
0
|
|
Reimbursement of expenses
|
|
|
0
|
|
|
|
0
|
|
Balance at end of year
|
|
$
|
160
|
|
|
$
|
160
|
|
|
(15)
|
Commitments and Contingencies
|
The Company issues financial instruments
with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement
and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company
uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on
its consolidated balance sheets. At March 31, 2017, no amounts have been accrued for any estimated losses for these financial instruments.
The contractual amount of off-balance-sheet
financial instruments were as follows as of the dates indicated:
|
|
March 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Commitments to extend credit
|
|
$
|
238,425
|
|
|
$
|
253,375
|
|
Commitments to originate residential first and second mortgage loans
|
|
|
3,751
|
|
|
|
2,626
|
|
Standby letters of credit
|
|
|
23,570
|
|
|
|
2,745
|
|
Total
|
|
|
265,746
|
|
|
|
258,746
|
|
Commitments
Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters
of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the
customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.
Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit
are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby
letters of credit range from one month to five years at March 31, 2017.
Pending Litigation
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. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably
estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss
is deemed probable or an amount can be estimated.
Item 2
- Management’s Discussion
and Analysis of Financial Condition
And Results of Operations
Forward-Looking Statements
This report contains certain forward-looking
statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of
the Company, Hawthorn Bancshares, Inc., and its subsidiaries, including, without limitation:
|
·
|
statements that are not historical in
nature, and
|
|
·
|
statements preceded by, followed by or
that include the words
believes
,
expects, may, will, should, could, anticipates, estimates, intends
or similar expressions.
|
Forward-looking statements are not guarantees
of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from
those contemplated by the forward-looking statements due to, among others, the following factors:
|
·
|
competitive pressures among financial
services companies may increase significantly,
|
|
·
|
changes in the interest rate environment
may reduce interest margins,
|
|
·
|
general economic conditions, either nationally
or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,
|
|
·
|
increases in non-performing assets in
the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,
|
|
·
|
costs or difficulties related to the integration
of the business of the Company and its acquisition targets may be greater than expected,
|
|
·
|
legislative or regulatory changes may
adversely affect the business in which the Company and its subsidiaries are engaged, and
|
|
·
|
changes may occur in the securities markets.
|
We have described under the caption
Risk
Factors
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and in other reports filed
with the SEC from time to time, additional factors that could cause actual results to be materially different from those described
in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You
are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.
Overview
Crucial to the Company’s
community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through
the branch network of its subsidiary bank, the Company, with $1.3 billion in assets at March 31, 2017, provides a broad range of
commercial and personal banking services. The Bank’s specialties include commercial banking for small and mid-sized businesses,
including equipment, operating, commercial real estate, Small Business Administration (SBA) loans, and personal banking services
including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other
time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial services that the Company
provides include trust services that include estate planning, investment and asset management services and a comprehensive suite
of cash management services. The geographic areas in which the Company provides products and services include the Missouri communities
in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson, and the greater Kansas City metropolitan area.
The Company's primary
source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company's business
is commercial, commercial real estate development, and residential mortgage lending. The Company's income from mortgage brokerage
activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity.
The success of the Company's
growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans and deposits
at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated.
The Company's financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce
additional financial products and services by expanding new and
existing customer relationships,
utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends
on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable
and despite economic conditions being beyond its control.
The Company’s subsidiary
bank is a full-service bank conducting a general banking business, offering its customers checking and savings accounts, debit
cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial
loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the
Bank provides trust services.
The deposit accounts
of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the
Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted
by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally
for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination
by the Board of Governors of the Federal Reserve System.
CRITICAL ACCOUNTING
POLICIES
The following accounting
policies are considered most critical to the understanding of the Company’s financial condition and results of operations.
These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that
are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or
prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and
depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations
could reasonably be expected. The impact and any associated risks related to the critical accounting policies on the business operations
are discussed throughout
Management’s Discussion and Analysis of Financial Condition and Results of Operations
, where
such policies affect the reported and expected financial results.
Allowance for Loan
Losses
Management has identified
the accounting policy related to the allowance for loan losses as critical to the understanding of the Company's results of operations,
since the application of this policy requires significant management assumptions and estimates that could result in materially
different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology
used in establishing the allowance and the impact of any associated risks related to these policies on the Company’s business
operations is provided in note 1 to the Company’s unaudited consolidated financial statements and is also discussed in the
Lending and Credit Management
section below. Many of the loans are deemed collateral dependent for purposes of the measurement
of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market
conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility
can have an impact on the financial performance of the Company.
Other Real Estate
and Foreclosed Assets
Other real estate and foreclosed assets
consist of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential
real estate and other non-real estate property, including vehicles, manufactured homes, and construction equipment. Other real
estate assets are initially recorded as held for sale at the fair value of the collateral less estimated selling costs. Any adjustment
is recorded as a charge-off against the allowance for loan losses. The Company relies on external appraisals and assessment of
property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including
external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure,
valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The write-downs are recorded
as other real estate expense, net. The Company establishes a valuation allowance related to other real estate owned on an asset-by-asset
basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the cost
of the property.
SELECTED CONSOLIDATED
FINANCIAL DATA
The following table presents
selected consolidated financial information for the Company as of and for each of the three months ended March 31, 2017 and 2016,
respectively. The selected consolidated financial data should be read in conjunction with the unaudited consolidated financial
statements of the Company, including the related notes, presented elsewhere herein.
Selected Financial Data
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.37
|
|
|
$
|
0.35
|
|
Diluted earnings per share
|
|
|
0.37
|
|
|
|
0.35
|
|
Dividends paid on common stock
|
|
|
336
|
|
|
|
271
|
|
Book value per share
|
|
|
16.58
|
|
|
|
15.89
|
|
Market price per share
|
|
|
21.10
|
|
|
|
14.18
|
|
Selected Ratios
|
|
|
|
|
|
|
|
|
(Based on average balance sheets)
|
|
|
|
|
|
|
|
|
Return on total assets
|
|
|
0.65
|
%
|
|
|
0.66
|
%
|
Return on stockholders' equity
|
|
|
9.23
|
%
|
|
|
9.02
|
%
|
Stockholders' equity to total assets
|
|
|
7.01
|
%
|
|
|
7.28
|
%
|
Efficiency ratio (1)
|
|
|
72.51
|
%
|
|
|
73.87
|
%
|
|
|
|
|
|
|
|
|
|
(Based on end-of-period data)
|
|
|
|
|
|
|
|
|
Stockholders' equity to assets
|
|
|
7.05
|
%
|
|
|
7.28
|
%
|
Total risk-based capital ratio
|
|
|
13.37
|
%
|
|
|
14.65
|
%
|
Tier 1 risk-based capital ratio
|
|
|
11.06
|
%
|
|
|
12.03
|
%
|
Common equity Tier 1 capital
|
|
|
8.33
|
%
|
|
|
9.02
|
%
|
Tier 1 leverage ratio (2)
|
|
|
9.74
|
%
|
|
|
9.90
|
%
|
|
(1)
|
Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue
includes net interest income and non-interest income.
|
|
(2)
|
Tier I leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets.
|
RESULTS OF OPERATIONS ANALYSIS
The Company
has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, the
Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting
period. There can be no assurances that actual results will not differ from those estimates.
|
|
Three Months Ended March 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
10,487
|
|
|
$
|
9,848
|
|
|
$
|
639
|
|
|
|
6.5
|
%
|
Provision for loan losses
|
|
|
350
|
|
|
|
250
|
|
|
|
100
|
|
|
|
100.0
|
|
Noninterest income
|
|
|
2,407
|
|
|
|
2,448
|
|
|
|
(41
|
)
|
|
|
(1.7
|
)
|
Noninterest expense
|
|
|
9,351
|
|
|
|
9,083
|
|
|
|
268
|
|
|
|
3.0
|
|
Income before income taxes
|
|
|
3,193
|
|
|
|
2,963
|
|
|
|
230
|
|
|
|
7.8
|
|
Income tax expense
|
|
|
1,093
|
|
|
|
965
|
|
|
|
128
|
|
|
|
13.3
|
|
Net income
|
|
$
|
2,100
|
|
|
$
|
1,998
|
|
|
$
|
102
|
|
|
|
5.1
|
%
|
Consolidated net
income
of $2.1 million, or $0.37 per diluted share, for the three months ended March 31, 2017 increased $102,000 compared
to $2.0 million, or $0.35 per diluted share, for the three months ended March 31, 2016. For the three months ended March 31, 2017,
the return on average assets was 0.65%, the return on average stockholders’ equity was 9.23%, and the efficiency ratio was
72.51%.
Net interest income
was $10.5 million for the three months ended March 31, 2017 compared to $9.8 million for the three months ended March 31, 2016.
The net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.48% for the three months ended March 31,
2017, compared to 3.51% for the three months ended March 31, 2016. These changes are discussed in greater detail under the
Average
Balance Sheets and Rate and Volume Analysis
section below.
A $350,000
provision
for loan losses
was recorded for the three months ended March 31, 2017 compared to a $250,000 provision for the three months
ended March 31, 2016.
The Company’s net
recoveries were $26,000, or 0.00% of average loans, for the three months ended March 31, 2017 compared to net charge-offs of $223,000,
or 0.03% of average loans, for the three months ended March 31, 2016. Non-performing loans totaled $9.4 million, or 0.93% of total
loans, at March 31, 2017 compared to $9.2 million, or 0.95% of total loans, at December 31, 2016, and $9.0 million, or 1.03% of
total loans, at March 31, 2016. These changes are discussed in greater detail under the
Lending and Credit Management
section
below.
Non-interest income
decreased
$41,000, or 1.7%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. These changes
are discussed in greater detail below under Non-interest Income.
Non-interest expense
increased $268,000, or 3.0%, for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. These
changes are discussed in greater detail below under Non-interest Expense.
Average Balance
Sheets
Net interest income
is
the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit gathering activities.
It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and
interest bearing liabilities. The following table presents average balance sheets, net interest income, average yields of earning
assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent
basis for each of the periods ended March 31, 2017 and 2016, respectively.
|
|
Three Months Ended March 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
Interest
|
|
|
Rate
|
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
|
|
Balance
|
|
|
Expense(1)
|
|
|
Paid(1)
|
|
|
Balance
|
|
|
Expense(1)
|
|
|
Paid(1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (2) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
182,548
|
|
|
$
|
1,999
|
|
|
|
4.44
|
%
|
|
$
|
146,984
|
|
|
$
|
1,715
|
|
|
|
4.69
|
%
|
Real estate construction - residential
|
|
|
19,307
|
|
|
|
215
|
|
|
|
4.52
|
|
|
|
18,128
|
|
|
|
207
|
|
|
|
4.59
|
|
Real estate construction - commercial
|
|
|
66,214
|
|
|
|
720
|
|
|
|
4.41
|
|
|
|
35,333
|
|
|
|
409
|
|
|
|
4.66
|
|
Real estate mortgage - residential
|
|
|
260,551
|
|
|
|
2,922
|
|
|
|
4.55
|
|
|
|
253,511
|
|
|
|
2,910
|
|
|
|
4.62
|
|
Real estate mortgage - commercial
|
|
|
433,152
|
|
|
|
4,957
|
|
|
|
4.64
|
|
|
|
388,423
|
|
|
|
4,522
|
|
|
|
4.68
|
|
Consumer
|
|
|
30,234
|
|
|
|
300
|
|
|
|
4.02
|
|
|
|
23,881
|
|
|
|
275
|
|
|
|
4.63
|
|
Total loans
|
|
$
|
992,006
|
|
|
$
|
11,113
|
|
|
|
4.54
|
%
|
|
$
|
866,260
|
|
|
$
|
10,038
|
|
|
|
4.66
|
%
|
Investment securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
45,410
|
|
|
$
|
156
|
|
|
|
1.39
|
%
|
|
$
|
64,459
|
|
|
$
|
188
|
|
|
|
1.17
|
%
|
Obligations of states and political subdivisions
|
|
|
43,733
|
|
|
|
249
|
|
|
|
2.31
|
|
|
|
31,645
|
|
|
|
227
|
|
|
|
2.89
|
|
Mortgage-backed securities
|
|
|
124,321
|
|
|
|
582
|
|
|
|
1.90
|
|
|
|
150,626
|
|
|
|
737
|
|
|
|
1.97
|
|
Total investment securities
|
|
$
|
213,464
|
|
|
$
|
987
|
|
|
|
1.88
|
%
|
|
$
|
246,730
|
|
|
$
|
1,152
|
|
|
|
1.88
|
%
|
Other investments and securities, at cost
|
|
|
9,785
|
|
|
|
90
|
|
|
|
3.73
|
|
|
|
8,038
|
|
|
|
76
|
|
|
|
3.80
|
|
Federal funds sold and interest bearing deposits in other financial institutions
|
|
|
21,657
|
|
|
|
48
|
|
|
|
0.90
|
|
|
|
22,313
|
|
|
|
32
|
|
|
|
0.58
|
|
Total interest earning assets
|
|
$
|
1,236,912
|
|
|
$
|
12,238
|
|
|
|
4.01
|
%
|
|
$
|
1,143,341
|
|
|
$
|
11,298
|
|
|
|
3.97
|
%
|
All other assets
|
|
|
90,264
|
|
|
|
|
|
|
|
|
|
|
|
90,502
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(10,003
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,588
|
)
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,317,173
|
|
|
|
|
|
|
|
|
|
|
$
|
1,225,255
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
216,075
|
|
|
$
|
232
|
|
|
|
0.44
|
%
|
|
$
|
209,639
|
|
|
$
|
167
|
|
|
|
0.32
|
%
|
Savings
|
|
|
99,828
|
|
|
|
12
|
|
|
|
0.05
|
|
|
|
92,226
|
|
|
|
12
|
|
|
|
0.05
|
|
Commercial
|
|
|
1,655
|
|
|
|
2
|
|
|
|
0.49
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
|
Money market
|
|
|
199,698
|
|
|
|
143
|
|
|
|
0.29
|
|
|
|
178,539
|
|
|
|
116
|
|
|
|
0.26
|
|
Time deposits of $100,000 and over
|
|
|
143,376
|
|
|
|
254
|
|
|
|
0.72
|
|
|
|
129,091
|
|
|
|
209
|
|
|
|
0.65
|
|
Other time deposits
|
|
|
152,981
|
|
|
|
217
|
|
|
|
0.58
|
|
|
|
164,414
|
|
|
|
240
|
|
|
|
0.59
|
|
Total interest bearing deposits
|
|
$
|
813,613
|
|
|
$
|
860
|
|
|
|
0.43
|
%
|
|
$
|
773,909
|
|
|
$
|
744
|
|
|
|
0.39
|
%
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
29,078
|
|
|
|
22
|
|
|
|
0.31
|
|
|
|
49,295
|
|
|
|
23
|
|
|
|
0.19
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
408
|
|
|
|
3.34
|
|
|
|
49,486
|
|
|
|
354
|
|
|
|
2.88
|
|
Federal Home Loan Bank Advances
|
|
|
92,578
|
|
|
|
322
|
|
|
|
1.41
|
|
|
|
50,000
|
|
|
|
207
|
|
|
|
1.67
|
|
Total borrowings
|
|
$
|
171,142
|
|
|
$
|
752
|
|
|
|
1.78
|
%
|
|
$
|
148,781
|
|
|
$
|
584
|
|
|
|
1.58
|
%
|
Total interest bearing liabilities
|
|
$
|
984,755
|
|
|
$
|
1,612
|
|
|
|
0.66
|
%
|
|
$
|
922,690
|
|
|
$
|
1,328
|
|
|
|
0.58
|
%
|
Demand deposits
|
|
|
228,765
|
|
|
|
|
|
|
|
|
|
|
|
203,096
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
11,322
|
|
|
|
|
|
|
|
|
|
|
|
10,325
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,224,842
|
|
|
|
|
|
|
|
|
|
|
|
1,136,111
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
92,331
|
|
|
|
|
|
|
|
|
|
|
|
89,144
|
|
|
|
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders' equity
|
|
$
|
1,317,173
|
|
|
|
|
|
|
|
|
|
|
$
|
1,225,255
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
10,626
|
|
|
|
|
|
|
|
|
|
|
|
9,970
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
3.39
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.48
|
%
|
|
|
|
|
|
|
|
|
|
|
3.51
|
%
|
|
(1)
|
Interest income and yields are presented on a fully taxable equivalent basis using the federal
statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $139,000 and $122,000 for the
three months ended March 31, 2017 and 2016, respectively.
|
|
(2)
|
Non-accruing loans are included in the average amounts outstanding.
|
|
(3)
|
Average balances based on amortized cost.
|
|
(4)
|
Fees and costs on loans are included in interest income.
|
Rate and Volume
Analysis
The following table summarizes
the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest
bearing liabilities, identifying changes related to volumes and rates for the three months ended March 31, 2017 compared to the
three months ended March 31, 2016. The change in interest due to the combined rate/volume variance has been allocated to rate and
volume changes in proportion to the absolute dollar amounts of change in each.
|
|
Three Months Ended March
31,
|
|
|
|
2017
vs. 2016
|
|
|
|
|
|
|
Change
due to
|
|
|
|
Total
|
|
|
Average
|
|
|
Average
|
|
(In thousands)
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
Interest income on a fully taxable equivalent basis: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (2) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
284
|
|
|
$
|
395
|
|
|
$
|
(111
|
)
|
Real estate construction - residential
|
|
|
8
|
|
|
|
13
|
|
|
|
(5
|
)
|
Real estate construction - commercial
|
|
|
311
|
|
|
|
337
|
|
|
|
(26
|
)
|
Real estate mortgage - residential
|
|
|
12
|
|
|
|
80
|
|
|
|
(68
|
)
|
Real estate mortgage - commercial
|
|
|
435
|
|
|
|
513
|
|
|
|
(78
|
)
|
Consumer
|
|
|
25
|
|
|
|
66
|
|
|
|
(41
|
)
|
Investment securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
|
(32
|
)
|
|
|
(62
|
)
|
|
|
30
|
|
Obligations of states and political subdivisions
|
|
|
22
|
|
|
|
75
|
|
|
|
(53
|
)
|
Mortgage-backed securities
|
|
|
(155
|
)
|
|
|
(125
|
)
|
|
|
(30
|
)
|
Other investments and securities, at cost
|
|
|
14
|
|
|
|
17
|
|
|
|
(3
|
)
|
Federal funds sold and interest bearing deposits in other financial institutions
|
|
|
16
|
|
|
|
(1
|
)
|
|
|
17
|
|
Total interest income
|
|
|
940
|
|
|
|
1,308
|
|
|
|
(368
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
65
|
|
|
|
5
|
|
|
|
60
|
|
Savings
|
|
|
0
|
|
|
|
1
|
|
|
|
(1
|
)
|
Commercial
|
|
|
2
|
|
|
|
0
|
|
|
|
|
|
Money market
|
|
|
27
|
|
|
|
15
|
|
|
|
12
|
|
Time deposits of $100,000 and over
|
|
|
45
|
|
|
|
24
|
|
|
|
21
|
|
Other time deposits
|
|
|
(23
|
)
|
|
|
(17
|
)
|
|
|
(6
|
)
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
(1
|
)
|
|
|
(11
|
)
|
|
|
10
|
|
Subordinated notes
|
|
|
54
|
|
|
|
0
|
|
|
|
54
|
|
Federal Home Loan Bank advances
|
|
|
115
|
|
|
|
152
|
|
|
|
(37
|
)
|
Total interest expense
|
|
|
284
|
|
|
|
169
|
|
|
|
113
|
|
Net interest income on a fully taxable equivalent basis
|
|
$
|
656
|
|
|
$
|
1,139
|
|
|
$
|
(481
|
)
|
|
(1)
|
Interest income and yields are presented on a fully taxable equivalent basis using the Federal
statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $139,000 and $122,000 for the
three months March 31, 2017 and 2016, respectively.
|
|
(2)
|
Non-accruing loans are included in the average amounts outstanding.
|
|
(3)
|
Average balances based on amortized cost.
|
|
(4)
|
Fees and costs on loans are included in interest income.
|
Financial results for
the three months ended March 31, 2017 compared to the three months ended March 31, 2016, reflected an increase in net interest
income, on a tax equivalent basis, of $656,000, or 6.58%. Measured as a percentage of average earning assets, the net interest
margin (expressed on a fully taxable equivalent basis) decreased to 3.48% for the three months ended March 31, 2017 compared to
3.51% for the three months ended March 31, 2016. The increase in net interest income was primarily due to an increase in average
loans and the decrease in net interest margin was due to an increase in average interest bearing deposits and borrowings.
Average interest-earning
assets increased $93.6 million, or 8.18%, to $1.24 billion for the three months ended March 31, 2017 compared to $1.14 billion
for the three months ended March 31, 2016, and average interest bearing liabilities increased $62.1 million, or 6.73%, to $984.8
million for the three months ended March 31, 2017 compared to $922.7 million for the three months ended March 31, 2016.
Total interest
income
(expressed on a fully taxable equivalent basis) was $12.2 million for the three months ended March 31, 2017 compared
to $11.3 million for the three months ended March 31, 2016. The Company’s rates earned on interest earning assets were 4.01%
for the three months ended March 31, 2017 compared to 3.97% for the three months ended March 31, 2016.
Interest income
on loans
increased to $11.1 million for the three months ended March 31, 2017 compared to $10.0 million for the three months
ended March 31, 2016.
Average loans outstanding
increased $125.7 million, or 14.5%, to $992.0 million for the three months ended March 31, 2017 compared to $866.3 million for
the three months ended March 31, 2016. The average yield on loans receivable decreased to 4.54% for the three months ended March
31, 2017 compared to 4.66% for the three months ended March 31, 2016. See the
Lending and Credit Management
section for
further discussion of changes in the composition of the lending portfolio.
Total interest
expense
increased to $1.6 million for the three months ended March 31, 2017 compared to $1.3 million for the three months
ended March 31, 2016. The Company’s rates paid on interest bearing liabilities was 0.66% for the three months ended March
31, 2017 compared to 0.58% for the three months ended March 31, 2016. See the
Liquidity Management
section for further discussion.
Interest expense
on deposits
increased to $860,000 for the three months ended March 31, 2017 compared to $744,000 for the three months ended
March 31, 2016.
Average interest bearing
deposits increased $39.7 million, or 5.13%, to $813.6 million for the three months ended March 31, 2017 compared to $773.9 million
for the three months ended March 31, 2016. The average cost of deposits increased to 0.43% for the three months ended March 31,
2017 compared to 0.39% for the three months ended March 31, 2016.
Interest expense
on borrowings
increased to $752,000 for the three months ended March 31, 2017 compared to $584,000 for the three months
ended March 31, 2016. Average borrowings increased to $171.1million for the three months ended March 31, 2017 compared to $148.8
million for the three months ended March 31, 2016. See the
Liquidity Management
section for further discussion.
Non-interest Income and Expense
Non-interest income
for the periods indicated was as follows:
|
|
Three
Months Ended March 31,
|
|
(In
thousands)
|
|
2017
|
|
|
2016
|
|
|
$
Change
|
|
|
%
Change
|
|
Non-interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
$
|
836
|
|
|
$
|
834
|
|
|
$
|
2
|
|
|
|
0.2
|
%
|
Bank card income and fees
|
|
|
614
|
|
|
|
634
|
|
|
|
(20
|
)
|
|
|
(3.2
|
)
|
Trust department income
|
|
|
274
|
|
|
|
218
|
|
|
|
56
|
|
|
|
25.7
|
|
Real estate servicing fees, net
|
|
|
453
|
|
|
|
54
|
|
|
|
399
|
|
|
|
738.9
|
|
Gain on sales of mortgage loans, net
|
|
|
155
|
|
|
|
165
|
|
|
|
(10
|
)
|
|
|
(6.1
|
)
|
Gain on sale of investment securities
|
|
|
0
|
|
|
|
472
|
|
|
|
(472
|
)
|
|
|
(100.0
|
)
|
Other
|
|
|
75
|
|
|
|
71
|
|
|
|
4
|
|
|
|
5.6
|
|
Total non-interest income
|
|
$
|
2,407
|
|
|
$
|
2,448
|
|
|
$
|
(41
|
)
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income as a % of total revenue *
|
|
|
18.7%
|
|
|
|
19.9%
|
|
|
|
|
|
|
|
|
|
Total revenue per full time equivalent employee
|
|
$
|
39.0
|
|
|
$
|
36.2
|
|
|
|
|
|
|
|
|
|
* Total revenue is calculated as net interest income plus non-interest
income.
Total non-interest
income
was consistent at $2.4 million for both the three months ended March 31, 2017 and 2016.
Real estate servicing
fees, net
of the change in valuation of mortgage serving rights increased $399,000 to $453,000 for the three months ended
March 31, 2017 compared to $54,000 for the three months ended March 31, 2016 primarily due to slower prepayment speeds resulting
from a higher rate environment in the current quarter.
Mortgage loan servicing
fees earned on loans sold were $209,000 for the three months ended March 31, 2017 compared to $210,000 for the three months ended
March 31, 2016. Total realized losses included in earnings attributable to the change in unrealized gains or losses related to
assets still held were $244,000 for the three months ended March 31, 2017 compared to $155,000 for the three months ended March
31, 2016. The Company was servicing $291.0 million of mortgage loans at March 31, 2017 compared to $294.4 million and $308.1 million
at December 31, 2016 and March 31, 2016, respectively.
Gain on sales of
mortgage loans
decreased $10,000, or 6.1%, to $155,000 for the three months ended March 31, 2017 compared to $165,000 for
the three months ended March 31, 2016. The Company sold loans of $6.8 million for the three months ended March 31, 2017 compared
to $7.4 million for the three months ended March 31, 2016.
No
gain on sale
of investment securities
was recognized during the three months ended March 31, 2017. During the three months ended March
31, 2016 the Company received $44.1 million from proceeds on sales of available-for-sale debt securities and recognized gains of
$472,000. This transaction was the result of bond sales and purchases to replace several smaller holdings with fewer, larger investments
without materially changing the duration or yield of the investment portfolio.
Non-interest expense for the periods indicated was as follows:
|
|
Three
Months Ended March 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
$ Change
|
|
|
% Change
|
|
Non-interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
4,054
|
|
|
$
|
4,038
|
|
|
$
|
16
|
|
|
|
0.4
|
%
|
Employee benefits
|
|
|
1,400
|
|
|
|
1,312
|
|
|
|
88
|
|
|
|
6.7
|
|
Occupancy expense, net
|
|
|
619
|
|
|
|
634
|
|
|
|
(15
|
)
|
|
|
(2.4
|
)
|
Furniture and equipment expense
|
|
|
598
|
|
|
|
411
|
|
|
|
187
|
|
|
|
45.5
|
|
Processing expense, network and bank card expense
|
|
|
1,045
|
|
|
|
772
|
|
|
|
273
|
|
|
|
35.4
|
|
Legal, examination, and professional fees
|
|
|
280
|
|
|
|
333
|
|
|
|
(53
|
)
|
|
|
(15.9
|
)
|
FDIC insurance assessment
|
|
|
101
|
|
|
|
176
|
|
|
|
(75
|
)
|
|
|
(42.6
|
)
|
Advertising and promotion
|
|
|
239
|
|
|
|
209
|
|
|
|
30
|
|
|
|
14.4
|
|
Postage, printing, and supplies
|
|
|
232
|
|
|
|
237
|
|
|
|
(5
|
)
|
|
|
(2.1
|
)
|
Real estate foreclosure expense (gains), net
|
|
|
27
|
|
|
|
141
|
|
|
|
(114
|
)
|
|
|
80.9
|
|
Other
|
|
|
756
|
|
|
|
820
|
|
|
|
(64
|
)
|
|
|
(7.8
|
)
|
Total non-interest expense
|
|
$
|
9,351
|
|
|
$
|
9,083
|
|
|
$
|
268
|
|
|
|
3.0
|
%
|
Efficiency ratio *
|
|
|
72.5
|
%
|
|
|
73.9
|
%
|
|
|
|
|
|
|
|
|
Salaries and benefits as a % of total non-interest expense
|
|
|
58.3
|
%
|
|
|
58.9
|
%
|
|
|
|
|
|
|
|
|
Number of full-time equivalent employees
|
|
|
331
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
* Efficiency ratio is calculated as non-interest expense as
a percent of revenue.
Total revenue includes net interest income
and non-interest income.
Total non-interest
expense
increased $268,000, or 3.0%, to $9.4 million for the three months ended March 31, 2017 compared to $9.1 million
for the three months ended March 31, 2016.
Employee benefits
increased
$88,000, or 6.7%, to $1.4 million for the three months ended March 31, 2017 compared to $1.3 million for the three months ended
March 31, 2016. The increase was primarily due to increases in 401(k) profit-sharing and pension expenses partially offset by a
decrease in medical insurance premiums.
Furniture and equipment expense
increased $187,000, or 45.5%, to $598,000 for the three months ended March 31, 2017 compared to $411,000 for the three months ended
March 31, 2016. Beginning December 2016, the Company began upgrading its data processing infrastructure to a hosted cloud based
network solution. The process included changes in maintenance agreements and service providers.
Processing, network, and bank card
expense
increased $273,000, or 35.4%, to $1.0 million for the three months ended March 31, 2017 compared to $772,000 for
the three months ended March 31, 2016. The increase was primarily due to a corporate wide network upgrade and changes in processing
service providers.
Real estate foreclosure expense and
(gains), net
decreased $114,000, or 80.9%, to $27,000 for the three months ended March 31, 2017 compared to $141,000 for
the three months ended March 31, 2016. Net gains recognized on other real estate owned were $19,000 for the three months ended
March 31, 2017 compared to $21,000 for the three months ended March 31, 2016. Expenses to maintain foreclosed properties were $46,000
for the three months ended March 31, 2017 compared to $161,000 for the three months ended March 31, 2016. The decrease in in expenses
period over period was primarily due to sales of foreclosed assets.
FDIC insurance
assessment
decreased $75,000, or 42.6%, to $101,000 for the three months ended March 31, 2017 compared to $176,000 for
the three months ended March 31, 2016. In February 2011, the FDIC adopted a rule that requires large institutions to bear the burden
of raising the reserve ratio form 1.15% to 1.35% in accordance with the Dodd-Frank Act. The quarter after the reserve ratio reached
1.15%, lower assessment rates, surcharges, and new pricing for small institutions under $10 billion became effective July 1, 2016
and appeared on the December 31, 2016 invoicing. Once the reserve ratio reaches 1.38%, small institutions, such as Hawthorn, will
receive credits to offset their contribution to raising the reserve ratio to 1.35%.
Income taxes
Income taxes as a percentage of earnings before income taxes
as reported in the consolidated financial statements were 34.2% for the quarter ended March 31, 2017 compared to 32.6% for the
quarter ended March 31, 2016. The increase in tax rates quarter over quarter is primarily due to an immaterial return to provision
adjustment made in 2016.
Lending and Credit Management
Interest earned on the
loan portfolio is a primary source of interest income for the Company. Net loans represented 75.8% of total assets as of March
31, 2017 compared to 74.9% as of December 31, 2016.
Lending activities are
conducted pursuant to an established loan policy approved by the Bank’s Board of Directors. The Bank’s credit review
process is overseen by regional loan committees with established loan approval limits. In addition, a senior loan committee reviews
all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised
of senior managers of the Bank.
A summary of loans, by
major class within the Company’s loan portfolio as of the dates indicated is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Commercial, financial, and agricultural
|
|
$
|
182,493
|
|
|
$
|
182,881
|
|
Real estate construction - residential
|
|
|
20,299
|
|
|
|
18,907
|
|
Real estate construction - commercial
|
|
|
70,143
|
|
|
|
55,653
|
|
Real estate mortgage - residential
|
|
|
263,882
|
|
|
|
259,900
|
|
Real estate mortgage - commercial
|
|
|
442,266
|
|
|
|
426,470
|
|
Installment loans to individuals
|
|
|
31,099
|
|
|
|
30,218
|
|
Total loans
|
|
$
|
1,010,182
|
|
|
$
|
974,029
|
|
Percent of categories to total loans:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
18.1
|
%
|
|
|
18.8
|
%
|
Real estate construction - residential
|
|
|
2.0
|
|
|
|
1.9
|
|
Real estate construction - commercial
|
|
|
6.9
|
|
|
|
5.7
|
|
Real estate mortgage - residential
|
|
|
26.1
|
|
|
|
26.7
|
|
Real estate mortgage - commercial
|
|
|
43.8
|
|
|
|
43.8
|
|
Installment loans to individuals
|
|
|
3.1
|
|
|
|
3.1
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The Company extends credit
to its local community market through traditional real estate mortgage products. The Company does not participate in extending
credit to sub-prime residential real estate markets. The Company does not lend funds for the type of transactions defined as “highly
leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations
of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does
not have any interest-earning assets that would have been included in nonaccrual, past due, or restructured loans if such assets
were loans.
The Company generally
does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required
by the secondary market are offered to qualified borrowers, but are not funded until the Company has a non-recourse purchase commitment
from the secondary market at a predetermined price. During the three months ended March 31, 2017, the Company sold approximately
$6.8 million of loans to investors compared to $7.4 million for the three months ended March 31, 2016. At March 31, 2017, the Company
was servicing approximately $291.0 million of loans sold to the secondary market compared to $294.4 million at December 31, 2016,
and $308.1 million at March 31, 2016.
Risk Elements of the
Loan Portfolio
Management, the senior
loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established)
at least annually. Currently, loans in excess of $2.0 million in aggregate and all adversely classified credits identified by management
are reviewed. In addition, all other loans are reviewed on a sample basis. The senior loan committee reviews and reports to the
board of directors, on a monthly basis, past due, classified, and watch list loans in order to classify or reclassify loans as
loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans should be
considered impaired. Management follows the guidance provided in the FASB’s ASC Topic 310-10-35 in identifying and measuring
loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original
terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and
in conjunction with current economic conditions and
loss experience, specific
reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using
a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions,
loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management
informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted
to maintain the allowance at a level considered necessary by management to provide for probable losses inherent in the loan portfolio.
Nonperforming Assets
The following table summarizes nonperforming assets at the dates
indicated:
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
905
|
|
|
$
|
982
|
|
Real estate construction - commercial
|
|
|
49
|
|
|
|
50
|
|
Real estate mortgage - residential
|
|
|
2,016
|
|
|
|
1,888
|
|
Real estate mortgage - commercial
|
|
|
497
|
|
|
|
420
|
|
Installment and other consumer
|
|
|
59
|
|
|
|
89
|
|
Total
|
|
$
|
3,526
|
|
|
$
|
3,429
|
|
Loans contractually past - due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
Real estate mortgage - residential
|
|
$
|
22
|
|
|
$
|
54
|
|
Installment and other consumer
|
|
|
9
|
|
|
|
11
|
|
Total
|
|
$
|
31
|
|
|
$
|
65
|
|
Performing troubled debt restructurings
|
|
|
5,798
|
|
|
|
5,715
|
|
Total nonperforming loans
|
|
|
9,355
|
|
|
|
9,209
|
|
Other real estate owned and repossessed assets
|
|
|
13,625
|
|
|
|
14,162
|
|
Total nonperforming assets
|
|
$
|
22,980
|
|
|
$
|
23,371
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,010,182
|
|
|
$
|
974,029
|
|
Allowance for loan losses to loans
|
|
|
1.02
|
%
|
|
|
1.01
|
%
|
Nonperforming loans to loans
|
|
|
0.93
|
%
|
|
|
0.95
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
109.70
|
%
|
|
|
107.35
|
%
|
Allowance for loan losses to nonperforming loans, excluding performing TDR's
|
|
|
288.50
|
%
|
|
|
282.94
|
%
|
Nonperforming assets to loans, other real estate owned and repossessed assets
|
|
|
2.24
|
%
|
|
|
2.37
|
%
|
Total nonperforming assets
totaled $23.0 million at March 31, 2017 compared to $23.4 million at December 31, 2016. Nonperforming loans, defined as loans on
nonaccrual status, loans 90 days or more past due and still accruing, and TDRs totaled $9.4 million, or 0.93%, of total loans at
March 31, 2017 compared to $9.2 million, or 0.95%, of total loans at December 31, 2016. Non-accrual loans included $573,000 and
$619,000 of loans classified as TDRs at March 31, 2017 and December 31, 2016, respectively.
As of March 31, 2017
and December 31, 2016, approximately $4.4 million and $4.0 million, respectively, of loans classified as substandard, not included
in the nonperforming asset table, were identified as potential problem loans having more than normal risk which raised doubts as
to the ability of the borrower to comply with present loan repayment terms. Management believes the general allowance was sufficient
to cover the risks and probable losses related to such loans at March 31, 2017 and December 31, 2016, respectively.
Total non-accrual loans
at March 31, 2017 increased $97,000 to $3.5 million compared to $3.4 million at December 31, 2016. This increase primarily consisted
of a $205,000 increase in real estate mortgage - commercial loans and real estate mortgage - residential loans, partially offset
by a $77,000 decrease in commercial, financial, and agricultural loans, and a $30,000 decrease in installment loans.
Loans
past due 90 days and still accruing interest at March 31, 2017, were $31,000 compared to $65,000 at December 31, 2016. Other real
estate and repossessed assets at March 31, 2017 were $13.6 million compared to $14.2 million at December 31, 2016. During the three
months ended March 31, 2017, $103,000 of nonaccrual loans, net of charge-offs taken, moved to other real estate owned and repossessed
assets compared to $742,000 during the three months ended March 31, 2016.
The following
table summarizes the Company’s TDRs at the dates indicated:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
(In thousands)
|
|
Number
of
Contracts
|
|
|
Recorded
Investment
|
|
|
Specific
Reserves
|
|
|
Number
of
Contracts
|
|
|
Recorded
Investment
|
|
|
Specific
Reserves
|
|
Performing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
9
|
|
|
$
|
750
|
|
|
$
|
50
|
|
|
|
8
|
|
|
$
|
635
|
|
|
$
|
11
|
|
Real estate mortgage - residential
|
|
|
9
|
|
|
|
3,559
|
|
|
|
128
|
|
|
|
8
|
|
|
|
3,582
|
|
|
|
99
|
|
Real estate mortgage - commercial
|
|
|
3
|
|
|
|
1,489
|
|
|
|
122
|
|
|
|
3
|
|
|
|
1,498
|
|
|
|
123
|
|
Total performing TDRs
|
|
|
21
|
|
|
$
|
5,798
|
|
|
$
|
300
|
|
|
|
19
|
|
|
$
|
5,715
|
|
|
$
|
233
|
|
Nonperforming TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate mortgage - residential
|
|
|
5
|
|
|
|
332
|
|
|
|
58
|
|
|
|
6
|
|
|
$
|
430
|
|
|
$
|
58
|
|
Real estate mortgage - commercial
|
|
|
3
|
|
|
$
|
241
|
|
|
$
|
115
|
|
|
|
2
|
|
|
|
189
|
|
|
|
119
|
|
Total nonperforming TDRs
|
|
|
8
|
|
|
$
|
573
|
|
|
$
|
173
|
|
|
|
8
|
|
|
$
|
619
|
|
|
$
|
177
|
|
Total TDRs
|
|
|
29
|
|
|
$
|
6,371
|
|
|
$
|
473
|
|
|
|
27
|
|
|
$
|
6,334
|
|
|
$
|
410
|
|
At March 31, 2017, loans
classified as TDRs totaled $6.4 million, with $473,000 of specific reserves, of which $573,000 were classified as nonperforming
TDRs and $5.8 million were classified as performing TDRs. This compared to $6.3 million of loans classified as TDRs, with $410,000
of specific reserves, of which $619,000 were classified as nonperforming TDRs and $5.7 million were classified as performing TDRs
at December 31, 2016. Both performing and nonperforming TDRs are considered impaired loans. When an individual loan is determined
to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s
effective interest rate or the fair value of the underlying collateral less applicable selling costs. The net increase in total
TDRs from December 31, 2016 to March 31, 2017 was primarily due to two new TDR’s totally $187,000, partially offset by $168,000
of payments received.
Allowance for Loan
Losses and Provision
Allowance for Loan
Losses
The following table is a summary of the allocation of the allowance
for loan losses:
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Allocation of allowance for loan losses at end of period:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
2,360
|
|
|
$
|
2,753
|
|
Real estate construction - residential
|
|
|
99
|
|
|
|
108
|
|
Real estate construction - commercial
|
|
|
579
|
|
|
|
413
|
|
Real estate mortgage - residential
|
|
|
2,125
|
|
|
|
2,385
|
|
Real estate mortgage - commercial
|
|
|
4,731
|
|
|
|
3,793
|
|
Installment and other consumer
|
|
|
322
|
|
|
|
274
|
|
Unallocated
|
|
|
46
|
|
|
|
160
|
|
Total
|
|
$
|
10,262
|
|
|
$
|
9,886
|
|
The allowance for loan losses (ALL) was $10.3 million, or 1.02%,
of loans outstanding at March 31, 2017 compared to $9.9 million, or 1.01%, at December 31, 2016, and $8.6 million, or 0.99%, of
loans outstanding at March 31, 2016. The ratio of the allowance for loan losses to nonperforming loans, excluding performing TDR’s,
was 288.50% at March 31, 2017, compared to 282.94% at December 31, 2016.
The following table is a summary of the general and specific
allocations of the allowance for loan losses:
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Allocation of allowance for loan losses:
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment - specific reserves
|
|
$
|
1,103
|
|
|
$
|
1,080
|
|
Collectively evaluated for impairment - general reserves
|
|
|
9,159
|
|
|
|
8,806
|
|
Total
|
|
$
|
10,262
|
|
|
$
|
9,886
|
|
The
specific reserve component
applies
to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values
of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future
cash flows. Once the impairment amount is calculated, a specific reserve allocation is
recorded. At March 31, 2017, $1.1 million
of the Company’s ALL was allocated to impaired loans totaling approximately $9.3 million compared to $1.1 million of the
Company’s ALL allocated to impaired loans totaling approximately $9.1 million at December 31, 2016. Management determined
that $1.6 million, or 17%, of total impaired loans required no reserve allocation at March 31, 2017 compared to $2.1 million, or
23%, at December 31, 2016 primarily due to adequate collateral values
,
acceptable payment history
and adequate cash flow ability.
The
incurred loss component
of the
general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by asset
type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology
that considers historical loan loss experience by loan type. Beginning in the first quarter of 2016, the Company began to lengthen
its look-back period with the intent to increase such period from three to five years over the next two years. The Company believes
that the five-year look-back period, which is consistent with the Company’s practices prior to the start of the economic
recession in 2008, provides a representative historical loss period in the current economic environment. These historical loss
rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan
loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing
financial difficulty and the recognition of a loss.
The Company’s methodology includes
qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available
and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally
reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and
developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans,
the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment
of trends in collateral values, assessment of changes in the quality of the Company’s internal loan review department, and
changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.
The specific and general reserve allocations
represent management’s best estimate of probable losses inherent in the loan portfolio at the evaluation date. Although the
allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit
losses.
Provision
A $350,000 provision
was required for the three months ended March 31, 2017 compared to a $250,000 provision for the three months ended March 31, 2016.
The increase was primarily due to using a seventeen quarter look-back period compared to thirteen quarters, as discussed above,
in addition to an increase in loans.
The following table summarizes
loan loss experience for the periods indicated:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Analysis of allowance for loan losses:
|
|
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
9,886
|
|
|
$
|
8,604
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
28
|
|
|
|
103
|
|
Real estate construction - commercial
|
|
|
-
|
|
|
|
1
|
|
Real estate mortgage - residential
|
|
|
20
|
|
|
|
206
|
|
Real estate mortgage - commercial
|
|
|
14
|
|
|
|
82
|
|
Installment and other consumer
|
|
|
51
|
|
|
|
56
|
|
Total charge-offs
|
|
|
113
|
|
|
|
448
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
19
|
|
|
$
|
97
|
|
Real estate construction - residential
|
|
|
50
|
|
|
|
-
|
|
Real estate construction - commercial
|
|
|
-
|
|
|
|
11
|
|
Real estate mortgage - residential
|
|
|
36
|
|
|
|
8
|
|
Real estate mortgage - commercial
|
|
|
7
|
|
|
|
61
|
|
Installment and other consumer
|
|
|
27
|
|
|
|
48
|
|
Total recoveries
|
|
|
139
|
|
|
|
225
|
|
Net charge-offs (recoveries)
|
|
|
(26
|
)
|
|
|
223
|
|
Provision for loan losses
|
|
|
350
|
|
|
|
250
|
|
Balance end of period
|
|
$
|
10,262
|
|
|
$
|
8,631
|
|
Net Loan Charge-offs (Recoveries)
The Company’s net loan recoveries
were $26,000, or 0.00%, of average loans for the three months ended March 31, 2017, compared to net loan charge-offs of $223,000,
or 0.03%, of average loans for the three months ended March 31, 2016. The decrease in charge-offs quarter over quarter primarily
related to a decrease in commercial, financial, and agricultural loans, and a decrease in real estate mortgage residential loans.
The decrease in recoveries quarter over quarter was primarily due to a significant recovery in one commercial loan relationship
and one real estate construction loan relationship during the quarter ended March 31, 2016. This decrease was partially offset
by a recovery in one real estate construction loan relationship received during the quarter ended March 31, 2017.
Liquidity and Capital Resources
Liquidity Management
The role of liquidity management is to
ensure funds are available to meet depositors' withdrawal and borrowers' credit demands while at the same time maximizing profitability.
This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet the
demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds
from external sources, principally depositors. Due to the nature of services offered by the Company, management prefers to focus
on transaction accounts and full service relationships with customers.
The Company’s Asset/Liability Committee
(ALCO), primarily made up of senior management, has direct oversight responsibility for the Company's liquidity position and profile.
A combination of daily, weekly, and monthly reports provided to management detail the following: internal liquidity metrics, composition
and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access
to the financial markets for capital, and exposure to contingent draws on the Company's liquidity.
The Company has a number of sources of
funds to meet liquidity needs on a daily basis. The Company’s most liquid assets are comprised of available for sale investment
securities, federal funds sold, and excess reserves held at the Federal Reserve.
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Federal funds sold and other overnight interest-bearing deposits
|
|
$
|
6,427
|
|
|
$
|
1,406
|
|
Available-for-sale investment securities
|
|
|
216,170
|
|
|
|
214,512
|
|
Total
|
|
$
|
222,597
|
|
|
$
|
215,918
|
|
Federal funds sold and resale agreements
normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale
investment portfolio was $216.2 million at March 31, 2017 and included an unrealized net loss of $2.6 million. The portfolio includes
projected maturities and mortgage backed securities pay-downs of approximately $30.0 million over the next twelve months, which
offer resources to meet either new loan demand or reductions in the Company’s deposit base.
The Company pledges portions of its investment
securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase,
borrowing capacity at the Federal Reserve Bank, and for other purposes required by law. At March 31, 2017 and December 31, 2016,
the Company’s unpledged securities in the available for sale portfolio totaled approximately $39.3 million and $46.9 million,
respectively.
Total investment securities pledged for
these purposes were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Investment securities pledged for the purpose of securing:
|
|
|
|
|
|
|
|
|
Federal Reserve Bank borrowings
|
|
$
|
10,314
|
|
|
$
|
9,211
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
45,712
|
|
|
|
43,054
|
|
Other deposits
|
|
|
120,767
|
|
|
|
115,330
|
|
Total pledged, at fair value
|
|
$
|
176,793
|
|
|
$
|
167,595
|
|
Liquidity is available from the Company’s
base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At March 31,
2017, such deposits totaled $758.4 million and represented 72.7% of the Company’s total deposits. These core deposits are
normally less volatile and are often tied to other products of the Company through long lasting relationships. Time deposits and
certificates of deposit of $100,000 and over totaled $133.0 million at March 31, 2017. These accounts are normally considered more
volatile and higher costing representing 12.7% of total deposits at March 31, 2017.
Core deposits at March 31, 2017 and December
31, 2016 were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Core deposit base:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
239,059
|
|
|
$
|
235,975
|
|
Interest checking
|
|
|
221,252
|
|
|
|
177,414
|
|
Savings and money market
|
|
|
298,127
|
|
|
|
291,317
|
|
Total
|
|
$
|
758,438
|
|
|
$
|
704,706
|
|
Other components of liquidity are the level
of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings are comprised
of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and subordinated notes. Federal funds purchased
are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines.
As of March 31, 2017, under agreements with these unaffiliated banks, the Bank may borrow up to $40.0 million in federal funds
on an unsecured basis and $18.3 million on a secured basis. There were no federal funds purchased outstanding at March 31, 2017.
Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s
investment portfolio. At March 31, 2017, there was $31.5 million in repurchase agreements. The Company may periodically borrow
additional short-term funds from the Federal Reserve Bank through the discount window; although no such borrowings were outstanding
at March 31, 2017.
The Bank is a member of the Federal Home
Loan Bank of Des Moines (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. As of March 31, 2017,
the Bank had $91.9 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding subordinated
notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.
Borrowings outstanding at March 31, 2017
and December 31, 2016 were as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
$
|
31,512
|
|
|
$
|
31,015
|
|
Federal Home Loan Bank advances
|
|
|
91,900
|
|
|
|
92,900
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
49,486
|
|
Other borrowings
|
|
|
-
|
|
|
|
492
|
|
Total
|
|
$
|
172,898
|
|
|
$
|
173,893
|
|
The Company pledges certain assets, including
loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines
of credit and borrow from these entities. Based on the type and value of collateral pledged, the FHLB establishes a collateral
value from which the Company may draw advances against this collateral. This collateral is also used to enable the FHLB to issue
letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value
of assets pledged to support borrowings from the discount window. The following table reflects collateral value of assets pledged,
borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as
follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
(In thousands)
|
|
FHLB
|
|
|
Federal
Reserve
Bank
|
|
|
Federal
Funds
Purchased
Lines
|
|
|
Total
|
|
|
FHLB
|
|
|
Federal
Reserve
Bank
|
|
|
Federal
Funds
Purchased
Lines
|
|
|
Total
|
|
Advance equivalent
|
|
$
|
319,596
|
|
|
$
|
10,081
|
|
|
$
|
58,331
|
|
|
$
|
388,008
|
|
|
$
|
314,602
|
|
|
$
|
9,015
|
|
|
$
|
49,020
|
|
|
$
|
372,637
|
|
Letters of credit
|
|
|
(20,000
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(20,000
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Advances outstanding
|
|
|
(91,900
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(91,900
|
)
|
|
|
(92,900
|
)
|
|
|
0
|
|
|
|
(992
|
)
|
|
|
(93,892
|
)
|
Total available
|
|
$
|
207,696
|
|
|
$
|
10,081
|
|
|
$
|
58,331
|
|
|
$
|
276,108
|
|
|
$
|
221,702
|
|
|
$
|
9,015
|
|
|
$
|
48,028
|
|
|
$
|
278,745
|
|
At March 31, 2017, loans of $499.1 million
were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit. At March 31, 2017, investments totaling
$21.0 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.
Sources and Uses of Funds
Cash and cash equivalents were $23.2 million
at March 31, 2017 compared to $27.0 million at December 31, 2016. The $3.8 million decrease resulted from changes in the various
cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated
statement of cash flows for the three months ended March 31, 2017. Cash flow provided from operating activities consists mainly
of net income adjusted for certain non-cash items. Operating activities provided cash flow of $2.0 million for the three months
ended March 31, 2017.
Investing activities consisting mainly
of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio used total
cash of $36.8 million. The cash outflow primarily consisted of $35.5 million increase in loans and $15.3 million purchases of investment
securities, partially offset by $13.8 million from maturities and calls of investment securities.
Financing activities provided cash of $31.0
million, resulting primarily from a $50.6 million increase in interest bearing transaction accounts partially offset by a $21.4
million decrease in time deposits. Future short-term liquidity needs arising from daily operations are not expected to vary significantly
during 2017.
In the normal course of business, the Company
enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions
are managed through the Company's various risk management processes. Management considers both on-balance sheet and off-balance
sheet transactions in its evaluation of the Company's liquidity. The Company had $265.7 million in unused loan commitments and
standby letters of credit as of March 31, 2017. Although the Company's current liquidity resources are adequate to fund this commitment
level the nature of these commitments is such that the likelihood of such a funding demand is very low.
The Company is a legal entity, separate
and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing
liquidity needs primarily include funding its operating expenses and paying cash dividends to its shareholders. The Company paid
cash dividends to its shareholders totaling approximately $336,000 and $271,000 for the three months ended March 31, 2017 and 2016,
respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank did
not declare or pay dividends to the Company during the three months ended March 31, 2017. At March 31, 2017 and December 31, 2016,
the Company had cash and cash equivalents totaling $2.9 million and $3.9 million, respectively.
Capital Management
The Company and the Bank are subject to
various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company
and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are
subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
In July 2013, the federal banking
agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
The phase-in period for the Company began on January 1, 2015. The Federal Reserve System’s (FRB) capital adequacy guidelines
require that bank holding companies maintain a Common Equity Tier 1 risk-based capital ratio equal to at least 4.5% of its risk-weighted
assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital ratio
equal to at least 8% of its risk-weighted assets. In addition, bank holding companies generally are required to maintain a Tier
1 leverage ratio of at least 4%.
In addition, the final rules establish
a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. Institutions
that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage
of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior
executive management. The capital conservation buffer requirement will be phased in over four years beginning in 2016. On January
1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and the requirement will increase
each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk weighted assets on January
1, 2019. Once fully phase in , the capital conservation buffer requirement effectively raises the minimum required risk-based capital
ratios to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.
Under the Basel III requirements, at March
31, 2017 and December 31, 2016, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of
the levels established for well-capitalized institutions, as shown in the following table as of periods indicated:
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Well-Capitalized
Under
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|
|
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Required
for Capital
|
|
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Prompt
Corrective Action
|
|
|
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Actual
|
|
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Adequacy
Purposes
|
|
|
Provision
|
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(in
thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
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|
March 31, 2017
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
risk-weighted assets):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Company
|
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$
|
154,980
|
|
|
|
13.37
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%
|
|
$
|
92,766
|
|
|
|
8.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
151,380
|
|
|
|
13.10
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|
|
|
92,445
|
|
|
|
8.00
|
|
|
|
115,556
|
|
|
|
10.00
|
|
Tier I Capital (to
risk-weighted assets):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Company
|
|
$
|
128,201
|
|
|
|
11.06
|
%
|
|
$
|
69,574
|
|
|
|
6.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
140,958
|
|
|
|
12.20
|
|
|
|
69,334
|
|
|
|
6.00
|
|
|
|
92,445
|
|
|
|
8.00
|
|
Common Equity Tier
I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted
assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Company
|
|
$
|
96,558
|
|
|
|
8.33
|
%
|
|
$
|
52,181
|
|
|
|
4.50
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
140,958
|
|
|
|
12.20
|
|
|
|
52,000
|
|
|
|
4.50
|
|
|
|
75,111
|
|
|
|
6.50
|
|
Tier I Capital (to
adjusted average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
128,201
|
|
|
|
9.74
|
%
|
|
$
|
52,641
|
|
|
|
4.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A
.
|
%
|
Bank
|
|
|
140,958
|
|
|
|
10.73
|
|
|
|
52,524
|
|
|
|
4.00
|
|
|
|
65,655
|
|
|
|
5.00
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to
risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
152,864
|
|
|
|
13.72
|
%
|
|
$
|
89,118
|
|
|
|
8.00
|
%
|
|
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
148,304
|
|
|
|
13.36
|
|
|
|
88,804
|
|
|
|
8.00
|
|
|
$
|
111,005
|
|
|
|
10.00
|
|
Tier I Capital (to
risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
125,779
|
|
|
|
11.29
|
%
|
|
$
|
66,839
|
|
|
|
6.00
|
%
|
|
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
138,258
|
|
|
|
12.46
|
|
|
|
66,603
|
|
|
|
6.00
|
|
|
$
|
88,804
|
|
|
|
8.00
|
|
Common Equity Tier
I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted
assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
94,818
|
|
|
|
8.51
|
%
|
|
$
|
50,129
|
|
|
|
4.50
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
138,258
|
|
|
|
12.46
|
|
|
|
49,952
|
|
|
|
4.50
|
|
|
|
72,153
|
|
|
|
6.50
|
|
Tier I capital (to
adjusted average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
125,779
|
|
|
|
9.87
|
%
|
|
$
|
50,998
|
|
|
|
4.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
138,258
|
|
|
|
10.88
|
|
|
|
50,810
|
|
|
|
4.00
|
|
|
|
63,513
|
|
|
|
5.00
|
|