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 Missouri 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, 2017.
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, 2018, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June
15, 2018. 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 2018:
Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
and all subsequent
ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition
of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting
periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue
to be reported in accordance with historic accounting under Topic 605.
Topic 606 does not apply to revenue
associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams
such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also
not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue, service
charges and fees, debit card income, ATM surcharge income, and other real estate owned sales. However, the recognition of these
revenue streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams within the scope of Topic
606 are discussed in Footnote 16.
Financial Instruments
The
FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, in January 2016. The
amendments require all equity investments to be measured at fair value with changes in the fair value recognized through net income,
other than those accounted for under the equity method of accounting or those that result in the consolidation of the investee.
Additionally, these amendments require presentation in other comprehensive income the portion of the total change in the fair
value of a liability resulting from a change in the instrument-specific credit risk for those liabilities measured at fair value.
The amendments also require use of the exit price notion when measuring the fair value of financial instruments for disclosure
purposes. These amendments are effective for interim and annual periods beginning January 1, 2018. 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)
The FASB issued ASU 2018-04,
Investments
- Debt Securities (Topic 320) and Regulated Operations (Topic 980)
: The amendment in this ASU adds, amends and supersedes various
paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and ASC 980, Regulated Operations. The amendments
in this ASU are effective when a registrant adopts ASU 2016-01, which for the Company was January 1, 2018. This amendment did not
have a significant effect on the Company's consolidated financial statements.
Liabilities
The FASB issued
ASU 2016-04,
Recognition of Breakage for Certain Prepaid Store-Value Products
, in March 2016, in order to address current
and potential future diversity in practice related to the derecognition of a prepaid store-value product liability. Such products
include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid
telecommunication cards, and traveler's checks. The amendments require that the portion of the dollar value of prepaid stored-value
products that is ultimately unredeemed (that is, the breakage) be accounted for consistent with the breakage guidance for stored-value
product transactions provided in ASC Topic 606 - Revenue from Contracts with Customers. These amendments are effective for interim
and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the Company's consolidated
financial statements.
Pension
The FASB issued
ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
in March
2017. Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income
statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the
period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the
other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. The ASU is effective
for interim and annual reporting periods beginning after December 15, 2017. Employers will apply the guidance on the presentation
of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization
of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company utilizes the ASU’s
practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in
their pension and other postretirement benefit plan footnote. The adoption of the ASU did not have a significant effect on the
Company's consolidated financial statements.
|
(2)
|
Loans and Allowance for Loan Losses
|
Loans
A summary of loans, by major class within the
Company’s loan portfolio, at June 30, 2018 and December 31, 2017 is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Commercial, financial, and agricultural
|
|
$
|
200,628
|
|
|
$
|
192,238
|
|
Real estate construction - residential
|
|
|
28,285
|
|
|
|
26,492
|
|
Real estate construction - commercial
|
|
|
106,406
|
|
|
|
98,340
|
|
Real estate mortgage - residential
|
|
|
246,415
|
|
|
|
246,754
|
|
Real estate mortgage - commercial
|
|
|
479,571
|
|
|
|
472,455
|
|
Installment and other consumer
|
|
|
32,890
|
|
|
|
32,153
|
|
Total loans
|
|
$
|
1,094,195
|
|
|
$
|
1,068,432
|
|
The Bank grants real estate, commercial, installment,
and other consumer loans to customers located within the Missouri 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 June 30, 2018, loans of $489.6 million were
pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Allowance for Loan Losses
The following is a summary of the allowance
for loan losses during the periods indicated.
|
|
Three Months Ended June 30, 2018
|
|
|
|
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
|
|
$
|
3,261
|
|
|
$
|
240
|
|
|
$
|
895
|
|
|
$
|
2,057
|
|
|
$
|
4,008
|
|
|
$
|
352
|
|
|
$
|
134
|
|
|
$
|
10,947
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
865
|
|
|
|
(52
|
)
|
|
|
10
|
|
|
|
48
|
|
|
|
(388
|
)
|
|
|
90
|
|
|
|
(123
|
)
|
|
|
450
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
193
|
|
|
|
0
|
|
|
|
0
|
|
|
|
12
|
|
|
|
15
|
|
|
|
49
|
|
|
|
0
|
|
|
|
269
|
|
Less recoveries on loans
|
|
|
(10
|
)
|
|
|
(13
|
)
|
|
|
0
|
|
|
|
(16
|
)
|
|
|
(25
|
)
|
|
|
(20
|
)
|
|
|
0
|
|
|
|
(84
|
)
|
Net loan charge-offs (recoveries)
|
|
|
183
|
|
|
|
(13
|
)
|
|
|
0
|
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
29
|
|
|
|
0
|
|
|
|
185
|
|
Balance at end of period
|
|
$
|
3,943
|
|
|
$
|
201
|
|
|
$
|
905
|
|
|
$
|
2,109
|
|
|
$
|
3,630
|
|
|
$
|
413
|
|
|
$
|
11
|
|
|
$
|
11,212
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
|
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
|
|
$
|
3,325
|
|
|
$
|
170
|
|
|
$
|
807
|
|
|
$
|
1,689
|
|
|
$
|
4,437
|
|
|
|
345
|
|
|
$
|
79
|
|
|
$
|
10,852
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
898
|
|
|
|
54
|
|
|
|
128
|
|
|
|
416
|
|
|
|
(809
|
)
|
|
|
131
|
|
|
|
(68
|
)
|
|
|
750
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
303
|
|
|
|
48
|
|
|
|
30
|
|
|
|
32
|
|
|
|
29
|
|
|
|
106
|
|
|
|
0
|
|
|
|
548
|
|
Less recoveries on loans
|
|
|
(23
|
)
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
(36
|
)
|
|
|
(31
|
)
|
|
|
(43
|
)
|
|
|
0
|
|
|
|
(158
|
)
|
Net loan charge-offs (recoveries)
|
|
|
280
|
|
|
|
23
|
|
|
|
30
|
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
63
|
|
|
|
0
|
|
|
|
390
|
|
Balance at end of period
|
|
$
|
3,943
|
|
|
$
|
201
|
|
|
$
|
905
|
|
|
$
|
2,109
|
|
|
$
|
3,630
|
|
|
$
|
413
|
|
|
$
|
11
|
|
|
$
|
11,212
|
|
|
|
Three Months Ended June 30, 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
|
|
$
|
2,360
|
|
|
$
|
99
|
|
|
$
|
579
|
|
|
$
|
2,125
|
|
|
$
|
4,731
|
|
|
$
|
322
|
|
|
$
|
46
|
|
|
$
|
10,262
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
226
|
|
|
|
(54
|
)
|
|
|
36
|
|
|
|
(230
|
)
|
|
|
139
|
|
|
|
89
|
|
|
|
124
|
|
|
|
330
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
32
|
|
|
|
0
|
|
|
|
0
|
|
|
|
62
|
|
|
|
2
|
|
|
|
60
|
|
|
|
0
|
|
|
|
156
|
|
Less recoveries on loans
|
|
|
(24
|
)
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
(21
|
)
|
|
|
(14
|
)
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
(109
|
)
|
Net loan charge-offs (recoveries)
|
|
|
8
|
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
41
|
|
|
|
(12
|
)
|
|
|
35
|
|
|
|
0
|
|
|
|
47
|
|
Balance at end of period
|
|
$
|
2,578
|
|
|
$
|
70
|
|
|
$
|
615
|
|
|
$
|
1,854
|
|
|
$
|
4,882
|
|
|
$
|
376
|
|
|
$
|
170
|
|
|
$
|
10,545
|
|
|
|
Six Months Ended June 30, 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
|
|
|
(157
|
)
|
|
|
(113
|
)
|
|
|
202
|
|
|
|
(507
|
)
|
|
|
1,084
|
|
|
|
161
|
|
|
|
10
|
|
|
|
680
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
60
|
|
|
|
0
|
|
|
|
0
|
|
|
|
81
|
|
|
|
16
|
|
|
|
111
|
|
|
|
0
|
|
|
|
268
|
|
Less recoveries on loans
|
|
|
(42
|
)
|
|
|
(75
|
)
|
|
|
0
|
|
|
|
(57
|
)
|
|
|
(21
|
)
|
|
|
(52
|
)
|
|
|
0
|
|
|
|
(247
|
)
|
Net loan charge-offs (recoveries)
|
|
|
18
|
|
|
|
(75
|
)
|
|
|
0
|
|
|
|
24
|
|
|
|
(5
|
)
|
|
|
59
|
|
|
|
0
|
|
|
|
21
|
|
Balance at end of period
|
|
$
|
2,578
|
|
|
$
|
70
|
|
|
$
|
615
|
|
|
$
|
1,854
|
|
|
$
|
4,882
|
|
|
$
|
376
|
|
|
$
|
170
|
|
|
$
|
10,545
|
|
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 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.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
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. 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. As of December 31, 2017,
the Company utilized a five-year look-back period.
The following table provides the balance in
the allowance for loan losses at June 30, 2018 and December 31, 2017, 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
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
410
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
668
|
|
|
$
|
185
|
|
|
$
|
19
|
|
|
$
|
0
|
|
|
$
|
1,282
|
|
Collectively evaluated for impairment
|
|
|
3,533
|
|
|
|
201
|
|
|
|
905
|
|
|
|
1,441
|
|
|
|
3,445
|
|
|
|
394
|
|
|
|
11
|
|
|
|
9,930
|
|
Total
|
|
$
|
3,943
|
|
|
$
|
201
|
|
|
$
|
905
|
|
|
$
|
2,109
|
|
|
$
|
3,630
|
|
|
$
|
413
|
|
|
$
|
11
|
|
|
$
|
11,212
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
2,887
|
|
|
$
|
0
|
|
|
$
|
169
|
|
|
$
|
5,186
|
|
|
$
|
1,705
|
|
|
$
|
304
|
|
|
$
|
0
|
|
|
$
|
10,251
|
|
Collectively evaluated for impairment
|
|
|
197,741
|
|
|
|
28,285
|
|
|
|
106,237
|
|
|
|
241,229
|
|
|
|
477,866
|
|
|
|
32,586
|
|
|
|
0
|
|
|
|
1,083,944
|
|
Total
|
|
$
|
200,628
|
|
|
$
|
28,285
|
|
|
$
|
106,406
|
|
|
$
|
246,415
|
|
|
$
|
479,571
|
|
|
$
|
32,890
|
|
|
$
|
0
|
|
|
$
|
1,094,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
500
|
|
|
$
|
0
|
|
|
$
|
48
|
|
|
$
|
521
|
|
|
$
|
243
|
|
|
$
|
21
|
|
|
$
|
0
|
|
|
$
|
1,333
|
|
Collectively evaluated for impairment
|
|
|
2,825
|
|
|
|
170
|
|
|
|
759
|
|
|
|
1,168
|
|
|
|
4,194
|
|
|
|
324
|
|
|
|
79
|
|
|
|
9,519
|
|
Total
|
|
$
|
3,325
|
|
|
$
|
170
|
|
|
$
|
807
|
|
|
$
|
1,689
|
|
|
$
|
4,437
|
|
|
$
|
345
|
|
|
$
|
79
|
|
|
$
|
10,852
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
3,007
|
|
|
$
|
0
|
|
|
$
|
97
|
|
|
$
|
5,072
|
|
|
$
|
2,004
|
|
|
$
|
176
|
|
|
$
|
0
|
|
|
$
|
10,356
|
|
Collectively evaluated for impairment
|
|
|
189,231
|
|
|
|
26,492
|
|
|
|
98,243
|
|
|
|
241,682
|
|
|
|
470,451
|
|
|
|
31,977
|
|
|
|
0
|
|
|
|
1,058,076
|
|
Total
|
|
$
|
192,238
|
|
|
$
|
26,492
|
|
|
$
|
98,340
|
|
|
$
|
246,754
|
|
|
$
|
472,455
|
|
|
$
|
32,153
|
|
|
$
|
0
|
|
|
$
|
1,068,432
|
|
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 $10.3 million and $10.4 million at June 30, 2018 and December 31,
2017, 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 June 30, 2018 and December 31, 2017, $4.2 million and $4.0 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 June 30, 2018, $1.3 million of the Company’s allowance for loan
losses was allocated to impaired loans totaling $10.3 million compared to $1.3 million of the Company's allowance for loan losses
allocated to impaired loans totaling approximately $10.4 million at December 31, 2017. Management determined that $3.3 million,
or 33%, of total impaired loans required no reserve allocation at June 30, 2018 compared to $2.4 million, or 23%, at December 31,
2017 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 June 30, 2018
and December 31, 2017 are as follows:
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Non-accrual loans
|
|
$
|
6,311
|
|
|
$
|
5,672
|
|
Performing TDRs
|
|
|
3,940
|
|
|
|
4,684
|
|
Total impaired loans
|
|
$
|
10,251
|
|
|
$
|
10,356
|
|
The following tables provide additional
information about impaired loans at June 30, 2018 and December 31, 2017, 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
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,282
|
|
|
$
|
1,351
|
|
|
$
|
0
|
|
Real estate - construction residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate - construction commercial
|
|
|
169
|
|
|
|
188
|
|
|
|
0
|
|
Real estate - residential
|
|
|
993
|
|
|
|
1,048
|
|
|
|
0
|
|
Real estate - commercial
|
|
|
753
|
|
|
|
753
|
|
|
|
0
|
|
Consumer
|
|
|
137
|
|
|
|
137
|
|
|
|
0
|
|
Total
|
|
$
|
3,334
|
|
|
$
|
3,477
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,605
|
|
|
$
|
1,927
|
|
|
$
|
410
|
|
Real estate - construction residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate - residential
|
|
|
4,193
|
|
|
|
4,287
|
|
|
|
668
|
|
Real estate - commercial
|
|
|
952
|
|
|
|
1,078
|
|
|
|
185
|
|
Installment and other consumer
|
|
|
167
|
|
|
|
189
|
|
|
|
19
|
|
Total
|
|
$
|
6,917
|
|
|
$
|
7,481
|
|
|
$
|
1,282
|
|
Total impaired loans
|
|
$
|
10,251
|
|
|
$
|
10,958
|
|
|
$
|
1,282
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
(in thousands)
|
|
Investment
|
|
|
Balance
|
|
|
Reserves
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,393
|
|
|
$
|
1,445
|
|
|
$
|
0
|
|
Real estate - residential
|
|
|
674
|
|
|
|
688
|
|
|
|
0
|
|
Real estate - commercial
|
|
|
366
|
|
|
|
395
|
|
|
|
0
|
|
Total
|
|
$
|
2,433
|
|
|
$
|
2,528
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,614
|
|
|
$
|
1,834
|
|
|
$
|
500
|
|
Real estate - construction commercial
|
|
|
97
|
|
|
|
97
|
|
|
|
48
|
|
Real estate - residential
|
|
|
4,398
|
|
|
|
4,500
|
|
|
|
521
|
|
Real estate - commercial
|
|
|
1,638
|
|
|
|
1,743
|
|
|
|
243
|
|
Consumer
|
|
|
176
|
|
|
|
196
|
|
|
|
21
|
|
Total
|
|
$
|
7,923
|
|
|
$
|
8,370
|
|
|
$
|
1,333
|
|
Total impaired loans
|
|
$
|
10,356
|
|
|
$
|
10,898
|
|
|
$
|
1,333
|
|
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table presents by class, information
related to the average recorded investment and interest income recognized on impaired loans during the periods indicated.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Average
|
|
|
Recognized
|
|
|
Average
|
|
|
Recognized
|
|
|
Average
|
|
|
Recognized
|
|
|
Average
|
|
|
Recognized
|
|
|
|
Recorded
|
|
|
For the
|
|
|
Recorded
|
|
|
For the
|
|
|
Recorded
|
|
|
For the
|
|
|
Recorded
|
|
|
For the
|
|
(in thousands)
|
|
Investment
|
|
|
Period
Ended
|
|
|
Investment
|
|
|
Period
Ended
|
|
|
Investment
|
|
|
Period
Ended
|
|
|
Investment
|
|
|
Period
Ended
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,153
|
|
|
$
|
0
|
|
|
$
|
464
|
|
|
$
|
-1
|
|
|
$
|
1,302
|
|
|
$
|
1
|
|
|
$
|
519
|
|
|
$
|
0
|
|
Real estate - construction commercial
|
|
|
113
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
42
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate - residential
|
|
|
933
|
|
|
|
3
|
|
|
|
852
|
|
|
|
3
|
|
|
|
900
|
|
|
|
6
|
|
|
|
912
|
|
|
|
7
|
|
Real estate - commercial
|
|
|
116
|
|
|
|
10
|
|
|
|
395
|
|
|
|
-2
|
|
|
|
237
|
|
|
|
19
|
|
|
|
500
|
|
|
|
0
|
|
Installment and other consumer
|
|
|
137
|
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
34
|
|
|
|
0
|
|
|
|
31
|
|
|
|
0
|
|
Total
|
|
$
|
2,452
|
|
|
$
|
13
|
|
|
$
|
1,713
|
|
|
$
|
0
|
|
|
$
|
2,515
|
|
|
$
|
26
|
|
|
$
|
1,962
|
|
|
$
|
7
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,621
|
|
|
$
|
8
|
|
|
$
|
1,214
|
|
|
$
|
8
|
|
|
$
|
1,737
|
|
|
$
|
15
|
|
|
$
|
1,199
|
|
|
$
|
19
|
|
Real estate - construction residential
|
|
|
20
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
15
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate - construction commercial
|
|
|
0
|
|
|
|
0
|
|
|
|
48
|
|
|
|
0
|
|
|
|
24
|
|
|
|
0
|
|
|
|
49
|
|
|
|
0
|
|
Real estate - residential
|
|
|
4,118
|
|
|
|
14
|
|
|
|
4,790
|
|
|
|
42
|
|
|
|
4,247
|
|
|
|
47
|
|
|
|
4,595
|
|
|
|
87
|
|
Real estate - commercial
|
|
|
1,732
|
|
|
|
5
|
|
|
|
1,604
|
|
|
|
14
|
|
|
|
1,691
|
|
|
|
10
|
|
|
|
1,505
|
|
|
|
29
|
|
Installment and other consumer
|
|
|
172
|
|
|
|
1
|
|
|
|
51
|
|
|
|
0
|
|
|
|
167
|
|
|
|
1
|
|
|
|
48
|
|
|
|
0
|
|
Total
|
|
$
|
7,663
|
|
|
$
|
28
|
|
|
$
|
7,707
|
|
|
$
|
64
|
|
|
$
|
7,881
|
|
|
$
|
73
|
|
|
$
|
7,396
|
|
|
$
|
135
|
|
Total
impaired loans
|
|
$
|
10,115
|
|
|
$
|
41
|
|
|
$
|
9,420
|
|
|
$
|
64
|
|
|
$
|
10,396
|
|
|
$
|
99
|
|
|
$
|
9,358
|
|
|
$
|
142
|
|
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 $41,000
and $99,000, for the three months and six months ended June 30, 2018, respectively compared to $64,000 and $142,000 for the three
and six months ended June 30, 2017, 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.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table provides aging information
for the Company’s past due and non-accrual loans at June 30, 2018 and December 31, 2017.
|
|
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
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
197,928
|
|
|
$
|
271
|
|
|
$
|
0
|
|
|
$
|
2,429
|
|
|
$
|
200,628
|
|
Real Estate Construction - Residential
|
|
|
28,285
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
28,285
|
|
Real Estate Construction - Commercial
|
|
|
106,237
|
|
|
|
0
|
|
|
|
0
|
|
|
|
169
|
|
|
|
106,406
|
|
Real Estate Mortgage - Residential
|
|
|
242,937
|
|
|
|
695
|
|
|
|
8
|
|
|
|
2,775
|
|
|
|
246,415
|
|
Real Estate Mortgage - Commercial
|
|
|
478,383
|
|
|
|
535
|
|
|
|
0
|
|
|
|
653
|
|
|
|
479,571
|
|
Installment and Other Consumer
|
|
|
32,363
|
|
|
|
208
|
|
|
|
34
|
|
|
|
285
|
|
|
|
32,890
|
|
Total
|
|
$
|
1,086,133
|
|
|
$
|
1,709
|
|
|
$
|
42
|
|
|
$
|
6,311
|
|
|
$
|
1,094,195
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
189,537
|
|
|
$
|
192
|
|
|
$
|
2
|
|
|
$
|
2,507
|
|
|
$
|
192,238
|
|
Real Estate Construction - Residential
|
|
|
25,930
|
|
|
|
287
|
|
|
|
275
|
|
|
|
0
|
|
|
|
26,492
|
|
Real Estate Construction - Commercial
|
|
|
98,243
|
|
|
|
0
|
|
|
|
0
|
|
|
|
97
|
|
|
|
98,340
|
|
Real Estate Mortgage - Residential
|
|
|
242,597
|
|
|
|
2,173
|
|
|
|
28
|
|
|
|
1,956
|
|
|
|
246,754
|
|
Real Estate Mortgage - Commercial
|
|
|
471,476
|
|
|
|
43
|
|
|
|
0
|
|
|
|
936
|
|
|
|
472,455
|
|
Installment and Other Consumer
|
|
|
31,715
|
|
|
|
239
|
|
|
|
23
|
|
|
|
176
|
|
|
|
32,153
|
|
Total
|
|
$
|
1,059,498
|
|
|
$
|
2,934
|
|
|
$
|
328
|
|
|
$
|
5,672
|
|
|
$
|
1,068,432
|
|
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 June 30, 2018 and December 31, 2017.
(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 June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
7,378
|
|
|
$
|
598
|
|
|
$
|
3,581
|
|
|
$
|
8,584
|
|
|
$
|
33,482
|
|
|
$
|
9
|
|
|
$
|
53,632
|
|
Substandard
|
|
|
94
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,371
|
|
|
|
718
|
|
|
|
6
|
|
|
|
2,189
|
|
Performing TDRs
|
|
|
458
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,410
|
|
|
|
1,053
|
|
|
|
19
|
|
|
|
3,940
|
|
Non-accrual
|
|
|
2,429
|
|
|
|
0
|
|
|
|
169
|
|
|
|
2,775
|
|
|
|
653
|
|
|
|
285
|
|
|
|
6,311
|
|
Total
|
|
$
|
10,359
|
|
|
$
|
598
|
|
|
$
|
3,750
|
|
|
$
|
15,140
|
|
|
$
|
35,906
|
|
|
$
|
319
|
|
|
$
|
66,072
|
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
9,868
|
|
|
$
|
1,459
|
|
|
$
|
1,284
|
|
|
$
|
9,978
|
|
|
$
|
49,197
|
|
|
$
|
0
|
|
|
$
|
71,786
|
|
Substandard
|
|
|
658
|
|
|
|
462
|
|
|
|
0
|
|
|
|
2,262
|
|
|
|
723
|
|
|
|
16
|
|
|
|
4,121
|
|
Performing TDRs
|
|
|
500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,116
|
|
|
|
1,068
|
|
|
|
0
|
|
|
|
4,684
|
|
Non-accrual
|
|
|
2,507
|
|
|
|
0
|
|
|
|
97
|
|
|
|
1,956
|
|
|
|
936
|
|
|
|
176
|
|
|
|
5,672
|
|
Total
|
|
$
|
13,533
|
|
|
$
|
1,921
|
|
|
$
|
1,381
|
|
|
$
|
17,312
|
|
|
$
|
51,924
|
|
|
$
|
192
|
|
|
$
|
86,263
|
|
Troubled Debt Restructurings
At June 30, 2018, loans classified as TDRs totaled $5.9 million,
of which $2.0 million were classified as nonperforming TDRs and included in non-accrual loans and $3.9 million were classified
as performing TDRs. At December 31, 2017, loans classified as TDRs totaled $6.4 million, of which $1.7 million were classified
as nonperforming TDRs and included in non-accrual loans and $4.7 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 $510,000 and $577,000 related to
TDRs were allocated to the allowance for loan losses at June 30, 2018 and December 31, 2017, respectively.
The following table summarizes loans that were modified as
TDRs during the periods indicated.
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
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
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
1
|
|
|
$
|
131
|
|
|
$
|
130
|
|
Real estate mortgage - residential
|
|
|
1
|
|
|
|
75
|
|
|
|
75
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate mortgage - commercial
|
|
|
1
|
|
|
|
68
|
|
|
|
64
|
|
|
|
1
|
|
|
|
56
|
|
|
|
52
|
|
Consumer
|
|
|
4
|
|
|
|
48
|
|
|
|
47
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
6
|
|
|
$
|
191
|
|
|
$
|
186
|
|
|
|
2
|
|
|
$
|
187
|
|
|
$
|
182
|
|
(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. There were no loans and six loans meeting the TDR criteria
that were modified during the three and six months ended June 30, 2018, respectively, compared to no loans and two loans during
the three and six months ended June 30, 2017, respectively.
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 any of the three and six months ended June 30, 2018 and
2017, respectively, and within twelve months of their modification date. During 2018, one real estate mortgage loan went to foreclosure
totaling $48,000 and one commercial real estate loan totaling $366,000 was sold at foreclosure. 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
|
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Commercial
|
|
$
|
727
|
|
|
$
|
727
|
|
Real estate construction - residential
|
|
|
179
|
|
|
|
0
|
|
Real estate construction - commercial
|
|
|
12,101
|
|
|
|
12,380
|
|
Real estate mortgage - residential
|
|
|
317
|
|
|
|
382
|
|
Real estate mortgage - commercial
|
|
|
2,934
|
|
|
|
2,909
|
|
Repossessed assets
|
|
|
0
|
|
|
|
5
|
|
Total
|
|
$
|
16,258
|
|
|
$
|
16,403
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,022
|
)
|
|
|
(3,221
|
)
|
Total other real estate and repossessed assets
|
|
$
|
13,236
|
|
|
$
|
13,182
|
|
Changes in the net carrying amount of other real estate and
repossessed assets were as follows for the periods indicated:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
16,264
|
|
|
$
|
16,669
|
|
|
$
|
16,403
|
|
|
$
|
17,291
|
|
Additions
|
|
|
104
|
|
|
|
52
|
|
|
|
382
|
|
|
|
155
|
|
Proceeds from sales
|
|
|
(80
|
)
|
|
|
(126
|
)
|
|
|
(304
|
)
|
|
|
(784
|
)
|
Charge-offs against the valuation allowance for other real estate owned, net
|
|
|
(30
|
)
|
|
|
(53
|
)
|
|
|
(225
|
)
|
|
|
(170
|
)
|
Net gain on sales
|
|
|
0
|
|
|
|
(12
|
)
|
|
|
2
|
|
|
|
38
|
|
Total other real estate and repossessed assets
|
|
$
|
16,258
|
|
|
$
|
16,530
|
|
|
$
|
16,258
|
|
|
$
|
16,530
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,022
|
)
|
|
|
(3,174
|
)
|
|
|
(3,022
|
)
|
|
|
(3,174
|
)
|
Balance at end of period
|
|
$
|
13,236
|
|
|
$
|
13,356
|
|
|
$
|
13,236
|
|
|
$
|
13,356
|
|
At June 30, 2018, $246,000 of consumer
mortgage loans secured by residential real estate properties were in the process of foreclosure compared to no loans at December
31, 2017.
Activity in the valuation allowance for other real estate owned
was as follows for the periods indicated:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance, beginning of period
|
|
$
|
3,025
|
|
|
$
|
3,044
|
|
|
$
|
3,221
|
|
|
$
|
3,129
|
|
Provision for other real estate owned
|
|
|
27
|
|
|
|
183
|
|
|
|
26
|
|
|
|
215
|
|
Charge-offs
|
|
|
(30
|
)
|
|
|
(53
|
)
|
|
|
(225
|
)
|
|
|
(170
|
)
|
Balance, end of period
|
|
$
|
3,022
|
|
|
$
|
3,174
|
|
|
$
|
3,022
|
|
|
$
|
3,174
|
|
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 June 30, 2018 and December 31, 2017 were as follows:
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
(
in
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
1,983
|
|
|
$
|
0
|
|
|
$
|
(53
|
)
|
|
$
|
1,930
|
|
U.S. government and federal agency obligations
|
|
|
11,443
|
|
|
|
0
|
|
|
|
(351
|
)
|
|
|
11,092
|
|
Government sponsored enterprises
|
|
|
46,773
|
|
|
|
4
|
|
|
|
(718
|
)
|
|
|
46,059
|
|
Obligations of states and political subdivisions
|
|
|
42,054
|
|
|
|
38
|
|
|
|
(633
|
)
|
|
|
41,459
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
131,243
|
|
|
|
35
|
|
|
|
(4,217
|
)
|
|
|
127,061
|
|
Total available-for-sale securities
|
|
$
|
233,496
|
|
|
$
|
77
|
|
|
$
|
(5,972
|
)
|
|
$
|
227,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
1,980
|
|
|
$
|
0
|
|
|
$
|
(13
|
)
|
|
$
|
1,967
|
|
U.S. government and federal agency obligations
|
|
|
12,341
|
|
|
|
0
|
|
|
|
(268
|
)
|
|
|
12,073
|
|
Government sponsored enterprises
|
|
|
37,321
|
|
|
|
0
|
|
|
|
(424
|
)
|
|
|
36,897
|
|
Obligations of states and political subdivisions
|
|
|
47,019
|
|
|
|
114
|
|
|
|
(477
|
)
|
|
|
46,656
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
131,045
|
|
|
|
44
|
|
|
|
(2,140
|
)
|
|
|
128,949
|
|
Total available-for-sale securities
|
|
$
|
229,706
|
|
|
$
|
158
|
|
|
$
|
(3,322
|
)
|
|
$
|
226,542
|
|
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 the amount of $9.3 million and $11.0 million as of June 30, 2018 and December 31, 2017,
respectively.
Debt securities with carrying values aggregating
approximately $187.3 million and $181.7 million at June 30, 2018 and December 31, 2017, 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 June 30, 2018, 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.
|
|
Amortized
|
|
|
Fair
|
|
(
in
thousands)
|
|
Cost
|
|
|
Value
|
|
Due in one year or less
|
|
$
|
12,173
|
|
|
$
|
12,120
|
|
Due after one year through five years
|
|
|
68,835
|
|
|
|
68,187
|
|
Due after five years through ten years
|
|
|
18,243
|
|
|
|
17,287
|
|
Due after ten years
|
|
|
3,002
|
|
|
|
2,946
|
|
Total
|
|
|
102,253
|
|
|
|
100,540
|
|
Mortgage-backed securities
|
|
|
131,243
|
|
|
|
127,061
|
|
Total available-for-sale securities
|
|
$
|
233,496
|
|
|
$
|
227,601
|
|
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
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 June 30, 2018 and December 31, 2017 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 June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
1,930
|
|
|
$
|
(53
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,930
|
|
|
$
|
(53
|
)
|
U.S. government and federal agency obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
11,092
|
|
|
|
(351
|
)
|
|
|
11,092
|
|
|
|
(351
|
)
|
Government sponsored enterprises
|
|
|
17,776
|
|
|
|
(260
|
)
|
|
|
25,333
|
|
|
|
(458
|
)
|
|
|
43,109
|
|
|
|
(718
|
)
|
Obligations of states and political subdivisions
|
|
|
22,974
|
|
|
|
(228
|
)
|
|
|
12,371
|
|
|
|
(405
|
)
|
|
|
35,345
|
|
|
|
(633
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
55,223
|
|
|
|
(1,367
|
)
|
|
|
65,303
|
|
|
|
(2,850
|
)
|
|
|
120,526
|
|
|
|
(4,217
|
)
|
Total
|
|
$
|
97,903
|
|
|
$
|
(1,908
|
)
|
|
$
|
114,099
|
|
|
$
|
(4,064
|
)
|
|
$
|
212,002
|
|
|
$
|
(5,972
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
1,967
|
|
|
$
|
(13
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,967
|
|
|
$
|
(13
|
)
|
U.S. government and federal agency obligations
|
|
|
0
|
|
|
|
0
|
|
|
|
12,073
|
|
|
|
(268
|
)
|
|
|
12,073
|
|
|
|
(268
|
)
|
Government sponsored enterprises
|
|
|
16,471
|
|
|
|
(119
|
)
|
|
|
20,426
|
|
|
|
(305
|
)
|
|
|
36,897
|
|
|
|
(424
|
)
|
Obligations of states and political subdivisions
|
|
|
22,013
|
|
|
|
(165
|
)
|
|
|
12,570
|
|
|
|
(312
|
)
|
|
|
34,583
|
|
|
|
(477
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
52,829
|
|
|
|
(488
|
)
|
|
|
69,580
|
|
|
|
(1,652
|
)
|
|
|
122,409
|
|
|
|
(2,140
|
)
|
Total
|
|
$
|
93,280
|
|
|
$
|
(785
|
)
|
|
$
|
114,649
|
|
|
$
|
(2,537
|
)
|
|
$
|
207,929
|
|
|
$
|
(3,322
|
)
|
The total
available for sale portfolio consisted of approximately 369 securities at June 30, 2018. The portfolio included 322 securities
having an aggregate fair value of $212.0 million that were in a loss position at June 30, 2018. Securities identified as temporarily
impaired which had been in a loss position for 12 months or longer totaled $114.1 million at fair value. The $6.0 million aggregate
unrealized loss included in accumulated other comprehensive income at June 30, 2018 was caused by interest rate fluctuations
.
The total available for sale portfolio
consisted of approximately 355 securities at December 31, 2017. The portfolio included 280 securities having an aggregate fair
value of $207.9 million that were in a loss position at December 31, 2017. Securities identified as temporarily impaired which
had been in a loss position for 12 months or longer had a fair value of $114.6 million at December 31, 2017. The $3.3 million aggregate
unrealized loss included in accumulated other comprehensive loss at December 31, 2017 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 June
30, 2018 and December 31, 2017, 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.
The table presents the components of investment
securities gains and losses, which have been recognized in earnings:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Gains realized on sales
|
|
$
|
108
|
|
|
$
|
0
|
|
|
$
|
206
|
|
|
$
|
0
|
|
Losses realized on sales
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Other-than-temporary impairment recognized
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Investment securities gains
|
|
$
|
108
|
|
|
$
|
0
|
|
|
$
|
206
|
|
|
$
|
0
|
|
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Mortgage Servicing Rights
At June 30, 2018, the Company was servicing
approximately $284.9 million of loans sold to the secondary market compared to $285.8 million at December 31, 2017, and $289.8
million at June 30, 2017. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $210,000 and
$413,000 for the three and six months ended June 30, 2018, respectively, compared to $211,000 and $420,000 for the three and six
months ended June 30, 2017, respectively.
The table below presents changes in mortgage
servicing rights (MSRs) for the periods indicated.
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
2,781
|
|
|
$
|
2,877
|
|
|
$
|
2,713
|
|
|
$
|
2,584
|
|
Originated mortgage servicing rights
|
|
|
81
|
|
|
|
66
|
|
|
|
131
|
|
|
|
115
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to change in model inputs and assumptions (1)
|
|
|
30
|
|
|
|
(56
|
)
|
|
|
133
|
|
|
|
319
|
|
Other changes in fair value (2)
|
|
|
(79
|
)
|
|
|
(121
|
)
|
|
|
(164
|
)
|
|
|
(252
|
)
|
Balance at end of period
|
|
$
|
2,813
|
|
|
$
|
2,766
|
|
|
$
|
2,813
|
|
|
$
|
2,766
|
|
|
(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 June 30, 2018 and 2017, respectively:
|
|
Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Weighted average constant prepayment rate
|
|
|
9.55
|
%
|
|
|
9.28
|
%
|
Weighted average note rate
|
|
|
3.90
|
%
|
|
|
3.86
|
%
|
Weighted average discount rate
|
|
|
10.34
|
%
|
|
|
9.75
|
%
|
Weighted average expected life (in years)
|
|
|
6.10
|
|
|
|
6.10
|
|
|
(6)
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Federal funds purchased
|
|
$
|
0
|
|
|
$
|
0
|
|
Repurchase agreements
|
|
|
36,103
|
|
|
|
27,560
|
|
Total
|
|
$
|
36,103
|
|
|
$
|
27,560
|
|
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 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.
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Repurchase Agreements
|
|
Remaining Contractual Maturity of the Agreements
|
|
|
|
Overnight
|
|
|
Less
|
|
|
Greater
|
|
|
|
|
|
|
and
|
|
|
than
|
|
|
than
|
|
|
|
|
(in thousands)
|
|
continuous
|
|
|
90 days
|
|
|
90 days
|
|
|
Total
|
|
At June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
1,445
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,445
|
|
Government sponsored enterprises
|
|
|
14,205
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14,205
|
|
Asset-backed securities
|
|
|
20,453
|
|
|
|
0
|
|
|
|
0
|
|
|
|
20,453
|
|
Total
|
|
$
|
36,103
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
36,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
1,964
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,964
|
|
U.S. government and federal agency obligations
|
|
|
2,977
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,977
|
|
Government sponsored enterprises
|
|
|
8,382
|
|
|
|
0
|
|
|
|
0
|
|
|
|
8,382
|
|
Asset-backed securities
|
|
|
14,237
|
|
|
|
0
|
|
|
|
0
|
|
|
|
14,237
|
|
Total
|
|
$
|
27,560
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
27,560
|
|
Income taxes as a percentage of earnings
before income taxes as reported in the consolidated financial statements were 7.2% and 11.3% for the three and six months ended
June 30, 2018, respectively, compared to 33.9% and 34.1% for the three and six months ended June 30, 2017, respectively. As further
described below, the decrease in tax rate for the comparative periods is primarily due to a decrease in the federal corporate tax
rate, the release of the valuation allowance related to capital losses as a result of the Company’s tax planning initiatives,
a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company’s
additional tax planning initiatives.
The federal corporate income tax rate declined
from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act. The Company’s tax rate is lower than
the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation allowance related to capital
loss carryforwards, and a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year.
The provisional adjustments recorded in the fourth quarter of 2017 related to the enactment of the Tax Cuts and Jobs Act have not
been finalized as of June 30, 2018. The Company expects to finalize those adjustments within the one-year measurement period provided
under Staff Accounting Bulletin No. 118 in regards to the application of FASB’s ASC Topic 740,
Income Taxes
. The impact
of the Tax Cuts and Jobs Act is expected to require further adjustments in 2018 due to anticipated additional guidance from the
U.S. Department of the Treasury, changes in our assumptions, completion of 2017 U.S. tax returns and further information and interpretations
that become available.
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, and tax planning initiatives in making this assessment. In management’s opinion, the Company will more likely
than not realize the benefits of its deferred tax assets and, therefore, has not established a valuation allowance against its
deferred tax assets as of June 30, 2018. Management arrived at this conclusion based upon the level of historical taxable income
and projections for future taxable income of the appropriate character over the periods in which the deferred tax assets are deductible.
As indicated above, the Company released a $46,000 valuation allowance against certain capital loss carryforwards during the second
quarter of 2018 as a result of the execution of certain tax planning initiatives that generated sufficient capital gain income
prior to the expiration of the carryforwards.
The Company follows
ASC
Topic 740,
Income Taxes,
which addresses the accounting for uncertain tax positions
.
For each of the three and six
months ended June 30, 2018 and 2017, respectively, the Company did not have any uncertain tax provisions, and did not record any
related tax liabilities.
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Accumulated Other Comprehensive Loss
The following details the change in the
components of the Company’s accumulated other comprehensive loss for the six months ended June 30, 2018 and 2017:
|
|
Six months ended June 30, 2018
|
|
|
|
|
|
|
Unrecognized Net
|
|
|
Accumulated
|
|
|
|
Unrealized
|
|
|
Pension and
|
|
|
Other
|
|
|
|
Gain (Loss)
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
(in thousands)
|
|
on Securities (1)
|
|
|
Costs (2)
|
|
|
(Loss) Income
|
|
Balance at beginning of period
|
|
$
|
(2,500
|
)
|
|
$
|
(3,162
|
)
|
|
$
|
(5,662
|
)
|
Other comprehensive (loss) income, before reclassifications
|
|
|
(2,730
|
)
|
|
|
108
|
|
|
|
(2,622
|
)
|
Amounts reclassified from accumulated other comprehensive (loss) income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Current period other comprehensive (loss) income, before tax
|
|
|
(2,730
|
)
|
|
|
108
|
|
|
|
(2,622
|
)
|
Income tax expense (benefit)
|
|
|
573
|
|
|
|
(23
|
)
|
|
|
550
|
|
Current period other comprehensive (loss) income, net of tax
|
|
|
(2,157
|
)
|
|
|
85
|
|
|
|
(2,072
|
)
|
Balance at end of period
|
|
$
|
(4,657
|
)
|
|
$
|
(3,077
|
)
|
|
$
|
(7,734
|
)
|
|
|
|
|
|
|
Six months ended June 30, 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
|
|
|
1,452
|
|
|
|
45
|
|
|
|
1,497
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Current period other comprehensive income, before tax
|
|
|
1,452
|
|
|
|
45
|
|
|
|
1,497
|
|
Income tax expense
|
|
|
(552
|
)
|
|
|
(18
|
)
|
|
|
(570
|
)
|
Current period other comprehensive income, net of tax
|
|
|
900
|
|
|
|
27
|
|
|
|
927
|
|
Balance at end of period
|
|
$
|
(1,036
|
)
|
|
$
|
(1,838
|
)
|
|
$
|
(2,874
|
)
|
(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 June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Payroll taxes
|
|
$
|
301
|
|
|
$
|
288
|
|
|
$
|
652
|
|
|
$
|
644
|
|
Medical plans
|
|
|
612
|
|
|
|
468
|
|
|
|
1,160
|
|
|
|
894
|
|
401k match and profit sharing
|
|
|
237
|
|
|
|
226
|
|
|
|
423
|
|
|
|
476
|
|
Periodic pension cost
|
|
|
405
|
|
|
|
335
|
|
|
|
810
|
|
|
|
671
|
|
Other
|
|
|
10
|
|
|
|
9
|
|
|
|
25
|
|
|
|
25
|
|
Total employee benefits
|
|
$
|
1,565
|
|
|
$
|
1,326
|
|
|
$
|
3,070
|
|
|
$
|
2,710
|
|
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. Beginning January 1, 2018 and for all retrospective periods presented,
the Company adopted the guidance under ASU 2017-07,
Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Cost
. Under the new guidance only the service cost component of the net periodic benefit cost is reported
in the same income statement line item as salaries and benefits, and the remaining components are reported as other non-interest
expense. 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
made a pension contribution in the amount of $1.8 million in the second quarter of 2018. The 2018 minimum required contribution
is $1.0 million. Effective July 1, 2017, the Company amended the pension plan to effectuate a “soft freeze” such that
no individual hired (or rehired in the case of a former employee) by the Company after September 30, 2017, whether or not such
individual is or was a vested member in the plan, will be eligible to be an active member and be entitled to accrue any benefits
under the plan. Certain individuals hired by the Company before July 1, 2017 are also not eligible to participate in the plan.
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:
|
|
Pension Benefits
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Service cost - benefits earned during the year
|
|
$
|
1,620
|
|
|
$
|
1,343
|
|
Interest costs on projected benefit obligations (a)
|
|
|
1,033
|
|
|
|
1,009
|
|
Expected return on plan assets (a)
|
|
|
(1,267
|
)
|
|
|
(1,124
|
)
|
Expected administrative expenses (a)
|
|
|
93
|
|
|
|
88
|
|
Amortization of prior service cost (a)
|
|
|
79
|
|
|
|
79
|
|
Amortization of unrecognized net loss (a)
|
|
|
138
|
|
|
|
11
|
|
Net periodic pension cost
|
|
$
|
1,696
|
|
|
$
|
1,406
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost for the three months ended June 30, (actual)
|
|
$
|
405
|
|
|
$
|
335
|
|
Net periodic pension cost for the six months ended June 30, (actual)
|
|
$
|
810
|
|
|
$
|
671
|
|
(a) The components of net periodic pension cost other than the
service cost component are included in other non-interest expense.
The Company has one equity compensation
plan for its employees pursuant to which options were granted.
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
|
|
|
20,909
|
|
|
$
|
14.20
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2018
|
|
|
20,909
|
|
|
$
|
14.20
|
|
|
|
0.23
|
|
|
$
|
160,975
|
|
Exercisable, June 30, 2018
|
|
|
20,909
|
|
|
$
|
14.20
|
|
|
|
0.23
|
|
|
$
|
160,975
|
|
Options have been adjusted to reflect a 4% stock dividend paid
on July 1, 2018.
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Total stock-based compensation expense
was $0 for the three and six months ended June 30, 2018 compared to $1,000 and $2,000 for the three and six months ended June 30,
2017, respectively. As of December 31, 2017, there was no remaining unrecognized compensation expense related to non-vested stock
awards. The Plan expired on February 28, 2010, except as to outstanding options under the Plan, and no further options may be granted
pursuant to the Plan.
Stock Dividend
On July 1,
2018, the Company paid a special stock dividend of 4% to common shareholders of record at the close of business on June 15, 2018.
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.
Presented below is a summary of the components
used to calculate basic and diluted earnings per common share, which have been restated for all stock dividends:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(dollars in thousands, except per share data)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
2,907
|
|
|
$
|
1,919
|
|
|
$
|
4,997
|
|
|
$
|
4,020
|
|
Average shares outstanding
|
|
|
6,021,038
|
|
|
|
6,070,080
|
|
|
|
6,024,851
|
|
|
|
6,070,749
|
|
Basic earnings per share
|
|
$
|
0.48
|
|
|
$
|
0.32
|
|
|
$
|
0.83
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
2,907
|
|
|
$
|
1,919
|
|
|
$
|
4,997
|
|
|
$
|
4,020
|
|
Average shares outstanding
|
|
|
6,021,038
|
|
|
|
6,070,080
|
|
|
|
6,024,851
|
|
|
|
6,070,749
|
|
Effect of dilutive stock options
|
|
|
6,883
|
|
|
|
5,141
|
|
|
|
6,442
|
|
|
|
5,157
|
|
Average shares outstanding including dilutive stock
options
|
|
|
6,027,921
|
|
|
|
6,075,221
|
|
|
|
6,031,293
|
|
|
|
6,075,906
|
|
Diluted earnings per share
|
|
$
|
0.48
|
|
|
|
0.32
|
|
|
$
|
0.83
|
|
|
|
0.66
|
|
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. There
were no outstanding stock options for any of the three and six months ended June 30, 2018 and 2017, respectively, that were omitted
from the computation of diluted earnings per share as a result of being considered anti-dilutive.
Repurchase Program
On August
6, 2015, the Board of Directors authorized a share repurchase plan (the plan) to purchase through open market transactions up to
$2.0 million market value of the Company’s common stock. On August 8, 2017, the Board authorized the repurchase of an additional
$1.5 million market value of the Company’s common stock. As of June 30, 2018, the Company had repurchased a total of 95,709
shares of common stock pursuant to the plan at an average price of $17.90 per share, including 8,668 shares of common stock repurchased
pursuant to the plan during the six months ended June 30, 2018 at an average price of $20.63 per share. At June 30, 2018, approximately
$1.8 million remained available for the purchase of shares under the plan. The current plan expires September 8, 2018 unless renewed.
|
(12)
|
Fair Value Measurements
|
Fair value represents the amount expected
to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction
between market participants at the measurement date.
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Depending on the nature of the asset or
liability, the Company uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value
under US GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This
hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows. As of June 30, 2018 and December
31, 2017, 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. A quoted price in an active market provides the most reliable
evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides
reliable evidence of fair value.
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.
In accordance with fair value
accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either
a recurring or non-recurring basis in the Consolidated Financial Statements. 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 Assets and Labilities 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.
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)
|
June 30, 2018
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
1,930
|
|
|
$
|
1,930
|
|
|
|
0
|
|
|
$
|
0
|
|
U.S. government and federal agency obligations
|
|
|
11,092
|
|
|
|
0
|
|
|
|
11,092
|
|
|
|
0
|
|
Government sponsored enterprises
|
|
|
46,059
|
|
|
|
0
|
|
|
|
46,059
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
41,459
|
|
|
|
0
|
|
|
|
41,459
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
127,061
|
|
|
|
0
|
|
|
|
127,061
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,813
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,813
|
|
Total
|
|
$
|
230,414
|
|
|
$
|
1,930
|
|
|
$
|
225,671
|
|
|
$
|
2,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
|
$
|
1,967
|
|
|
$
|
1,967
|
|
|
|
0
|
|
|
$
|
0
|
|
U.S. government and federal agency obligations
|
|
|
12,073
|
|
|
|
0
|
|
|
|
12,073
|
|
|
|
0
|
|
Government sponsored enterprises
|
|
|
36,897
|
|
|
|
0
|
|
|
|
36,897
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
46,656
|
|
|
|
0
|
|
|
|
46,656
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
128,949
|
|
|
|
0
|
|
|
|
128,949
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,713
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,713
|
|
Total
|
|
$
|
229,255
|
|
|
$
|
1,967
|
|
|
$
|
224,575
|
|
|
$
|
2,713
|
|
The changes in Level 3 assets
and liabilities measured at fair value on a recurring basis are summarized as follows:
|
|
Fair Value Measurements Using
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable Inputs
|
|
Significant Unobservable Inputs
|
|
|
|
(Level 3)
|
|
(Level 3)
|
|
|
|
Mortgage Servicing Rights
|
|
Mortgage Servicing Rights
|
|
(in thousands)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June
30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
2,781
|
|
$
|
2,877
|
|
$
|
2,713
|
|
$
|
2,584
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(49
|
)
|
|
(177
|
)
|
|
(31
|
)
|
|
67
|
|
Included in other comprehensive income
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Purchases
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Sales
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Issues
|
|
|
81
|
|
|
66
|
|
|
131
|
|
|
115
|
|
Settlements
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Balance at end of period
|
|
$
|
2,813
|
|
$
|
2,766
|
|
$
|
2,813
|
|
$
|
2,766
|
|
The change in valuation of mortgage
servicing rights arising from inputs and assumptions increased $30,000 and $133,000 for the three and six months ended June 30,
2018, respectively, compared to a decrease of $56,000 and an increase of $319,000 for the three and six months ended June 30, 2017,
respectively.
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
Valuation methods for Assets
and Liabilities 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:
Collateral dependent impaired
loans
While the overall loan portfolio
is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of loans based on
fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include
certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally
based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the
Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral.
The Company maintains staff that is trained to perform in-house evaluations and also review third party appraisal reports for reasonableness.
In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and
judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by
senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of June
30, 2018, the Company identified $4.2 million in collateral dependent impaired loans that had specific allowances for losses aggregating
$911,000. Related to these loans, there was $192,000 and $250,000 in charge-offs recorded during the three and six months ended
June 30, 2018, respectively. As of June 30, 2017, the Company identified $3.0 million in collateral dependent impaired loans that
had specific allowances for losses aggregating $755,000. Related to these loans, there was $63,000 and $83,000 in charge-offs recorded
during the three and six months ended June 30, 2017, respectively.
Other Real Estate and Foreclosed
Assets
Other real estate owned (OREO)
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. Subsequent to foreclosure, these assets initially are carried at fair value of the collateral less estimated selling
costs. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Like
impaired loans, appraisals on OREO may be discounted based on the Company’s historical knowledge, changes in market conditions
from the time of appraisal or other information available. During the holding period, 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
|
|
Six
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Months
|
|
Months
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
Ended
|
|
Ended
|
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
June 30,
|
|
June 30,
|
|
|
|
Total
|
|
Assets
|
|
Inputs
|
|
Inputs
|
|
Total Gains
|
|
Total Gains
|
|
(in thousands)
|
|
Fair
Value
|
|
(Level
1)
|
|
(Level
2)
|
|
(Level
3)
|
|
(Losses)*
|
|
(Losses)*
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
1,648
|
|
$
|
0
|
|
$
|
0
|
|
$
|
1,648
|
|
$
|
(166
|
)
|
$
|
(166
|
)
|
Real estate construction - commercial
|
|
|
169
|
|
|
0
|
|
|
0
|
|
|
169
|
|
|
0
|
|
|
(27
|
)
|
Real estate mortgage - residential
|
|
|
998
|
|
|
0
|
|
|
0
|
|
|
998
|
|
|
(12
|
)
|
|
(12
|
)
|
Real estate mortgage - commercial
|
|
|
337
|
|
|
0
|
|
|
0
|
|
|
337
|
|
|
0
|
|
|
(20
|
)
|
Consumer
|
|
|
137
|
|
|
0
|
|
|
0
|
|
|
137
|
|
|
(14
|
)
|
|
(25
|
)
|
Total
|
|
$
|
3,289
|
|
$
|
0
|
|
$
|
0
|
|
$
|
3,289
|
|
$
|
(192
|
)
|
$
|
(250
|
)
|
Other real estate and foreclosed assets
|
|
$
|
13,236
|
|
$
|
0
|
|
$
|
0
|
|
$
|
13,236
|
|
$
|
(27
|
)
|
$
|
(26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral dependent impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
523
|
|
$
|
0
|
|
$
|
0
|
|
$
|
523
|
|
$
|
0
|
|
$
|
(1
|
)
|
Real estate mortgage - residential
|
|
|
1,488
|
|
|
0
|
|
|
0
|
|
|
1,488
|
|
|
(62
|
)
|
|
(65
|
)
|
Real estate mortgage - commercial
|
|
|
220
|
|
|
0
|
|
|
0
|
|
|
220
|
|
|
0
|
|
|
(4
|
)
|
Consumer
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
(1
|
)
|
|
(13
|
)
|
Total
|
|
$
|
2,231
|
|
$
|
0
|
|
$
|
0
|
|
$
|
2,231
|
|
$
|
(63
|
)
|
$
|
(83
|
)
|
Other real estate and foreclosed
assets
|
|
$
|
13,356
|
|
$
|
0
|
|
$
|
0
|
|
$
|
13,356
|
|
$
|
(195
|
)
|
$
|
(180
|
)
|
* 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
Fair
values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real
estate, and consumer. Each loan category is further segmented into fixed and variable interest rate categories. The fair value
of loans is estimated by using the future value of discounted cash flows using comparable market rates for similar types of loan
products and adjusted for market factors.
The discount rates used
are estimated using comparable market rates for similar types of loan products adjusted to be commensurate with the credit risk,
overhead costs, and optionality of such instruments.
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, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold
classified as short-term generally mature in 90 days or less.
Certificates of
Deposit in other banks
Certificates of deposit are
other investments made by the Company with other financial institutions that are carried at cost.
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
For securities
sold under agreements to repurchase, 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 cash-flows. 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 June 30, 2018 and December 31, 2017 is as follows:
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
June 30, 2018
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in thousands)
|
|
amount
|
|
|
value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
15,921
|
|
|
$
|
15,921
|
|
|
$
|
15,921
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight interest-bearing deposits
|
|
|
34,863
|
|
|
|
34,863
|
|
|
|
34,863
|
|
|
|
0
|
|
|
|
0
|
|
Certificates of deposit in other banks
|
|
|
10,746
|
|
|
|
10,746
|
|
|
|
10,746
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
227,601
|
|
|
|
227,601
|
|
|
|
1,930
|
|
|
|
225,671
|
|
|
|
0
|
|
Loans, net
|
|
|
1,082,983
|
|
|
|
1,061,707
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,061,707
|
|
Investment in FHLB stock
|
|
|
4,676
|
|
|
|
4,676
|
|
|
|
0
|
|
|
|
4,676
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,813
|
|
|
|
2,813
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,813
|
|
Cash surrender value - life insurance
|
|
|
2,516
|
|
|
|
2,516
|
|
|
|
0
|
|
|
|
2,516
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
5,294
|
|
|
|
5,294
|
|
|
|
5,294
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,387,413
|
|
|
$
|
1,366,137
|
|
|
$
|
68,754
|
|
|
$
|
232,863
|
|
|
$
|
1,064,520
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
250,232
|
|
|
$
|
250,232
|
|
|
$
|
250,232
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
614,976
|
|
|
|
614,976
|
|
|
|
614,976
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
318,178
|
|
|
|
315,242
|
|
|
|
0
|
|
|
|
0
|
|
|
|
315,242
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
36,103
|
|
|
|
36,103
|
|
|
|
36,103
|
|
|
|
0
|
|
|
|
0
|
|
Federal Home Loan Bank advances and other borrowings
|
|
|
74,270
|
|
|
|
73,846
|
|
|
|
0
|
|
|
|
73,846
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
44,146
|
|
|
|
0
|
|
|
|
44,146
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
790
|
|
|
|
790
|
|
|
|
790
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,344,035
|
|
|
$
|
1,335,335
|
|
|
$
|
902,101
|
|
|
$
|
117,992
|
|
|
$
|
315,242
|
|
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
December 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
|
|
$
|
23,325
|
|
|
$
|
23,325
|
|
|
$
|
23,325
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight interest-bearing deposits
|
|
|
39,553
|
|
|
|
39,553
|
|
|
|
39,553
|
|
|
|
0
|
|
|
|
0
|
|
Certificates of deposit in other banks
|
|
|
3,460
|
|
|
|
3,460
|
|
|
|
3,460
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
226,542
|
|
|
|
226,542
|
|
|
|
1,967
|
|
|
|
224,575
|
|
|
|
0
|
|
Loans, net
|
|
|
1,057,580
|
|
|
|
1,058,153
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,058,153
|
|
Investment in FHLB stock
|
|
|
6,390
|
|
|
|
6,390
|
|
|
|
0
|
|
|
|
6,390
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,713
|
|
|
|
2,713
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,713
|
|
Cash surrender value - life insurance
|
|
|
2,484
|
|
|
|
2,484
|
|
|
|
0
|
|
|
|
2,484
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
5,627
|
|
|
|
5,627
|
|
|
|
5,627
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,367,674
|
|
|
$
|
1,368,247
|
|
|
$
|
73,932
|
|
|
$
|
233,449
|
|
|
$
|
1,060,866
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
245,380
|
|
|
$
|
245,380
|
|
|
$
|
245,380
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
584,468
|
|
|
|
584,468
|
|
|
|
584,468
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
295,964
|
|
|
|
294,778
|
|
|
|
0
|
|
|
|
0
|
|
|
|
294,778
|
|
Federal funds purchased and securities sold under agreements to
repurchase
|
|
|
27,560
|
|
|
|
27,560
|
|
|
|
27,560
|
|
|
|
0
|
|
|
|
0
|
|
Federal Home Loan Bank advances and other borrowings
|
|
|
121,382
|
|
|
|
121,291
|
|
|
|
0
|
|
|
|
121,291
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
39,692
|
|
|
|
0
|
|
|
|
39,692
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
554
|
|
|
|
554
|
|
|
|
554
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,324,794
|
|
|
$
|
1,313,723
|
|
|
$
|
857,962
|
|
|
$
|
160,983
|
|
|
$
|
294,778
|
|
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 June 30, 2018 and December 31, 2017. 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 June 30,
2018, the Company was servicing 2,726 loans sold to the secondary market with a balance of approximately $284.9 million compared
to 2,773 loans sold with a balance of approximately $285.8 million at December 31, 2017, and 2,826 loans sold with a balance of
approximately $289.8 million at June 30, 2017.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
Provision for repurchase liability
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Reimbursement of expenses
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Balance at end of year
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
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 June 30, 2018, 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:
|
|
June 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2018
|
|
|
2017
|
|
Commitments to extend credit
|
|
$
|
235,159
|
|
|
$
|
238,527
|
|
Commitments to originate residential first and second mortgage loans
|
|
|
2,554
|
|
|
|
1,471
|
|
Standby letters of credit
|
|
|
77,276
|
|
|
|
74,004
|
|
Total
|
|
|
314,989
|
|
|
|
314,002
|
|
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 June 30, 2018.
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.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
On January 1, 2018, the Company adopted
ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
and all subsequent ASUs that modified Topic 606. As stated
in Note 1
Summary of Significant Accounting Policies
, the implementation of the new standard did not have a material impact
on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed
necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts
were not adjusted and continue to be reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated
with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as
fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in
the scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue, service
charges and fees, debit card income, ATM surcharge income, and sales of other real estate owned. However, the recognition of these
revenue streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams within the scope of Topic
606 are discussed below.
Trust Department Revenue
Trust and asset management income is primarily
comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance
obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value
of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a
direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real
estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s
performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point
in time (i.e., as incurred). Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist
of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check
orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly
service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check
orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation
is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily
received immediately or in the following month through a direct charge to customers’ accounts.
Fees, Exchange, and Other Service Charges
Fees, exchange, and other service charges
are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and
credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed
through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or
a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their
debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing
wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees,
exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon
completion. Payment is typically received immediately or in the following month.
Gains/Losses on Sales of Other
Real Estate Owned (OREO)
The Company records a gain or loss from
the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When
the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations
under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset
is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining
the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing
component is present. Two OREO sales for the six months ended June 30, 2018 and two sales for the six months ended June 30, 2017
were financed by the Bank, which financings were consistent with market terms.