2013
ANNUAL REPORT
TO
SHAREHOLDERS
HAWTHORN BANCSHARES, INC.
Jefferson City, Missouri
March 31, 2014
Dear Shareholders:
I am pleased to report that net income for 2013 increased 76% over 2012 and is at its highest level since 2007. For 2013, Hawthorn reported
a net profit of $5.0 million compared to $2.8 million for 2012. As a result of higher earnings and repayment of the Company’s U.S. Treasury
debt, income available to common shareholders increased for 2013 to $4.4 million, or $0.87 per diluted common share, compared to $1.0
million, or $0.21 per diluted common share for 2012.
Our improved earnings performance in 2013 was primarily the result of continued improvement in asset quality which allowed us to reduce
our loan loss provision. The provision for loan losses for 2013 was $2.0 million compared to $8.9 million for 2012. Non-performing loans
decreased $4.1 million to 4.21% of total loans at December 31, 2013, from 4.65% at December 31, 2012. During the year, net charge-offs
were $3.2 million compared to $7.9 million for 2012, when the allowance for loan losses at December 31, 2013 was $13.7 million, or 1.63%
of outstanding loans, and 38.84% of non-performing loans compared to December 31, 2012, where the allowance for loan losses was $14.8
million, or 1.75% of outstanding loans, and 37.70% of non-performing loans. As we evaluate our loan portfolio, we are seeing many positive
trends including stabilization in our problem assets. A significant portion of our reserves is specifically allocated to loans of customers who
are working through their financial problems.
Net interest income for 2013 was $39.3 million compared to $41.2 million for 2012. While the decrease continues to be the result of the
historically low rate environment and growing competition for quality loans, our net interest margin has remained healthy. On a tax
equivalent basis, Hawthorn’s net interest margin for 2013 was 3.72% compared to 3.84% for 2012. The lower net interest margin for 2013
was primarily the result of reduced average earning assets and continued net interest margin contraction.
Non-interest income for 2013 was $10.1 million compared to $9.7 million for 2012. The increase is primarily the result of a $1.3 million
positive variance in real estate servicing income related to changes in the fair value of mortgage servicing rights and $0.8 million of gains
realized on the sale of investment securities. These positive changes were partially offset by lower refinancing activity in our home mortgage
area which impacted both the volume of loans sold and the related gains recognized. Non-interest expense for 2013 was $40.8 million
compared to $38.7 million for 2012. The largest contributor to the increase resulted from higher expense valuation write-downs on
foreclosed assets.
On May 15, 2013, Hawthorn Bancshares’ exited participation in the U.S. Treasury’s Capital Purchase Program (commonly called TARP) by
repaying the outstanding $18.3 million debt. Repayment of the TARP funds reflected Hawthorn Bancshares’ financial strength as it was
made without borrowing funds or raising additional capital. Capital levels at December 31, 2013 continue to exceed regulatory well
capitalized thresholds at 8.80% leverage capital and 15.33% total risk-based capital.
While 2013 was certainly better than 2012, I am still not satisfied with our performance. We must continue to improve upon the 2013 0.43%
return on average assets and 5.95% return on average common equity. As an investor, director and executive officer, I am committed to
maintaining strong asset quality, improving earnings performance, sustaining sound and proper capital levels and paying regular dividends.
With the increase in regulatory requirements, consolidation in the financial services industry may present expansion opportunities.
Hawthorn Bancshares’ future is bright and you should feel confident about your investment. Your bankers are highly professional and I
respect their talents immensely. On behalf of your Board and Management team, thank you for your continued trust and confidence.
Sincerely,
David T. Turner,
Chairman & Chief Executive Officer
A WORD CONCERNING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans,
objectives, future performance and business of the Company, Hawthorn Bancshares, Inc., and its subsidiaries, including,
without limitation:
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statements that are not historical in nature, and
statements preceded by, followed by or that include the words believes, expects, may, will, should, could,
anticipates, estimates, intends or similar expressions.
Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and
assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among
others, the following factors:
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competitive pressures among financial services companies may increase significantly,
changes in the interest rate environment may reduce interest margins,
general economic conditions, either nationally or in Missouri, may be less favorable than expected and may
adversely affect the quality of our loans and other assets,
increases in non-performing assets in the Company’s loan portfolios and adverse economic conditions may
necessitate increases to our provisions for loan losses,
costs or difficulties related to the integration of the business of the Company and its acquisition targets may be
greater than expected,
legislative or regulatory changes may adversely affect the business in which the Company and its subsidiaries are
engaged, and
changes may occur in the securities markets.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, was enacted on
July 21, 2010. Provisions of the Act address many issues including, but not limited to, capital, interchange fees, compliance
and risk management, debit card overdraft fees, the establishment of a new consumer regulator, healthcare, incentive
compensation, expanded disclosures and corporate governance. While many of the new regulations under the Act are
expected to primarily impact financial institutions with assets greater than $10 billion, the Company expects these new
regulations could reduce revenues and increase expenses in the future. Management is currently assessing the impact of the
Act and of the regulations anticipated to be promulgated under the Act.
We have described under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2013, and in other reports filed with the SEC from time to time, additional factors that could cause actual
results to be materially different from those described in the forward-looking statements. Other factors that have not been
identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking
statement, which speak only as of the date they were made.
2
HAWTHORN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Through the branch network of its subsidiary bank, the Company, with $1.1 billion in assets at December 31, 2013,
provides a broad range of commercial and personal banking services, including certificates of deposit, individual retirement
and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts,
and money market accounts. The Company also provides a wide range of lending services, including real estate, commercial,
installment, and other consumer loans. Other financial services that the Company provides include automated teller
machines, trust services, credit-related insurance, and safe-deposit boxes. The geographic areas in which the Company
provides products and services include the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield,
Branson, and Lee's Summit, Missouri.
The Company's primary source of revenue is net interest income derived primarily from lending and deposit taking
activities. A secondary source of revenue is investment income. The Company also derives income from trust, brokerage,
credit card and mortgage banking activities and service charge income.
Much of the Company's business is commercial, commercial real estate development, and mortgage lending. The
Company has experienced soft loan demand in the communities within which we operate during the current economic
slowdown. The Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level
of home purchases and refinancings.
The success of the Company's growth strategy depends primarily on the ability of its banking subsidiary to generate
an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in
non-interest expenses relative to revenues generated. The Company's financial performance also depends, in part, on its
ability to manage various portfolios and to successfully introduce additional financial products and services by expanding
new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore,
the success of the Company's growth strategy depends on its ability to maintain sufficient regulatory capital levels during
periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.
The Company’s subsidiary bank, Hawthorn Bank (Bank), is a full-service bank conducting a general banking
business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a
wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment
personal loans, installment loans and credit card accounts. In addition, the Bank provides trust services.
The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent
provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance.
Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such
regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of
shareholders. The Company is subject to supervision and examination by the by the Board of Governors of the Federal
Reserve System.
3
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial information for the Company as of and for each of the
years in the five-years ended December 31, 2013. The selected consolidated financial data should be read in conjunction with
the Consolidated Financial Statements of the Company, including the related notes, presented elsewhere herein.
Income Statement Data
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after
provision for loan losses
Non-interest income
Gain on sale of investment securities
Total non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Accretion of discount on preferred stock
Net income (loss) available to
common shareholders
Dividends on Common Stock
Declared
Paid
Per Share Data
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Basic weighted average shares of
common stock outstanding
Diluted weighted average shares of
common stock outstanding
$
$
$
2013
2012
2011
2010
2009
45,665 $
6,342
39,323
2,030
49,114 $
7,905
41,209
8,900
53,469 $
10,853
42,616
11,523
58,739 $
15,753
42,986
15,255
37,293
10,088
778
10,866
40,763
7,396
2,422
4,974
337
278
32,309
9,700
26
9,726
38,667
3,368
546
2,822
1,125
659
31,093
9,200
0
9,200
36,845
3,448
591
2,857
1,513
476
27,731
10,481
0
10,481
44,851
(6,639)
(3,087)
(3,552)
1,513
476
63,562
22,974
40,588
8,354
32,234
10,702
606
11,308
36,730
6,812
1,856
4,956
1,517
477
4,359 $
1,038 $
868 $
(5,541) $
2,962
988 $
978
949 $
940
913 $
904
1,136 $
1,385
2,270
2,666
$ 0.87 $ 0.21 $ 0.17 $ (1.10) $ 0.59
0.59
0.17
(1.10)
0.87
0.21
5,032,679
5,032,679
5,032,679
5,032,679
5,032,679
5,032,679
5,032,679
5,032,679
5,032,679
5,032,679
4
(In thousands)
2013
2012
2011
2010
2009
Balance Sheet Data (at year end)
Total assets
Loans
Investment securities
Total deposits
Subordinated notes
Federal Home Loan Bank advances
Common stockholders' equity
Total stockholders' equity
Balance Sheet Data (average balances)
Total assets
Loans
Investment securities
Total deposits
Subordinated notes
Federal Home Loan Bank advances
Common stockholders' equity
Total stockholders' equity
Key Ratios
Earnings Ratios
Return (loss) on average total assets
Return (loss) on average
common stockholders' equity
Efficiency ratio (3)
Asset Quality Ratios
Allowance for loan losses to loans
Nonperforming loans to loans (1)
Allowance for loan losses to
nonperforming loans (1)
Nonperforming assets to loans
and foreclosed assets (2)
Net loan charge-offs to average loans
Capital Ratios
Average stockholders' equity to
average total assets
Period-end common stockholders' equity to
period-end assets
Period-end stockholders' equity to
period-end assets
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Leverage ratio
$
$
1,140,122
839,547
205,985
956,471
49,486
24,000
74,380
74,380
1,159,127
833,522
220,524
978,063
49,486
23,256
73,259
79,875
$
$
1,181,606
846,984
200,246
991,275
49,486
20,126
74,243
92,220
1,176,384
843,022
220,832
971,767
49,486
27,961
74,245
96,176
$
$
1,171,161
842,930
213,806
958,224
49,486
28,410
73,258
102,576
1,187,410
865,214
209,077
957,965
49,486
42,230
75,390
104,455
$
$
1,200,172
898,472
178,978
946,663
49,486
66,986
72,647
101,488
1,236,841
949,457
165,213
967,970
49,486
70,456
80,735
109,323
$
$
1,236,471
991,614
152,927
956,323
49,486
79,317
79,406
107,771
1,258,381
1,002,830
151,907
977,826
49,486
78,626
79,828
107,938
0.43 %
0.24 %
0.24 %
(0.29) %
0.39 %
5.95
81.22
1.40
75.91
1.15
71.11
(6.86)
83.89
3.71
70.78
1.63 %
4.21
1.75 %
4.65
1.64 %
6.37
1.62 %
6.27
1.49 %
4.27
38.84
37.70
25.73
25.87
34.94
5.87
0.38
7.23
0.93
8.11
1.42
7.71
1.63
5.08
0.62
6.89
%
8.18
%
8.80
%
8.84
%
8.58
%
6.52
6.28
6.26
6.05
6.42
6.52
15.33
11.40
8.80
7.80
16.83
13.58
10.37
8.76
18.03
15.16
11.52
8.46
17.05
14.25
11.00
8.72
16.49
14.01
11.35
(1) Nonperforming loans consist of nonaccrual loans, troubled debt restructurings, and loans contractually past due 90 days or more and
still accruing interest.
(2) Nonperforming assets consist of nonperforming loans and foreclosed assets.
(3) Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue includes net interest income and non-
interest income.
5
CRITICAL ACCOUNTING POLICIES
The following accounting policies are considered most critical to the understanding of the Company’s financial
condition and results of operations. These critical accounting policies require management’s most difficult, subjective and
complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current
circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different
assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially
different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks
related to the Company’s critical accounting policies on its business operations are discussed throughout Management’s
Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect the reported and
expected financial results.
Allowance for Loan Losses
Management has identified the accounting policy related to the allowance for loan losses as critical to the
understanding of the Company's results of operations, since the application of this policy requires significant management
assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying
circumstances were to change. Further discussion of the methodology used in establishing the allowance and the impact of
any associated risks related to these policies on the Company’s business operations is provided in Note 1 to the Company’s
consolidated financial statements and is also discussed in the Lending and Credit Management section below. Many of the
loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the fair value of the
underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of
the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial
performance of the Company.
Income Taxes
Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or
refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been
recognized in the Company’s financial statements or tax returns. Judgment is required in addressing the Company’s future
tax consequences of events that have been recognized in the consolidated financial statements or tax returns such as
realization of the effects of temporary differences, net operating loss carry forwards and changes in tax laws or interpretations
thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such
deferred tax assets will not become realizable. In this case, the Company would adjust the recorded value of the deferred tax
asset, which would result in a direct charge to income tax expense and earnings in the period that the determination was
made. Likewise, the Company would reverse the valuation allowance when it is expected to realize the deferred tax asset.
Critical to the assessment is the Company’s estimates and judgments related to future taxable income which is based on
historical financial performance and assumptions related to the forecasts of future performance. In addition, the Company is
subject to the continuous examination of its tax returns by the Internal Revenue Service and other taxing authorities. The
Company accrues for penalties and interest related to income taxes in income tax expense. As of December 31, 2013, the
Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax
positions.
Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through
foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property,
including autos, manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as
held for sale at the fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against
the allowance for loan losses. The Company relies on external appraisals and assessment of property values by internal staff.
In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and
judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated
periodically, and the assets may be written down to reflect a new cost basis. The write-downs are recorded as other real estate
expense, net. The Company establishes a valuation allowance related to other real estate owned on an asset-by-asset basis.
The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the cost of the
property.
6
RESULTS OF OPERATIONS ANALYSIS
The Company has prepared all of the consolidated financial information in this report in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial
statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ
from those estimates.
(In thousands)
2013
2012
2011
'13-'12
'12-'11
'13-'12
'12-'11
$ Change
% Change
Net interest income
Provision for loan losses
Noninterest income
Investment securities
gains, net
Total noninterest income
Noninterest expense
Income (loss) before
income taxes
Income tax expense
Net income
Preferred stock dividends
Accretion of discount on
preferred stock
Net income available
$ 39,323 $ 41,209 $ 42,616 $
8,900
9,700
11,523
9,200
2,030
10,088
778
10,866
40,763
26
9,726
38,667
-
9,200
36,845
7,396
2,422
3,368
546
$ 4,974 $ 2,822 $ 2,857 $
1,125
3,448
591
337
1,513
$
(1,886)
(6,870)
388
752
1,140
2,096
(1,407)
(2,623)
500
26
526
1,822
4,028
1,876
2,152
(788)
(80)
(45)
(35)
(388)
$
278
659
476
(381)
183
170
%
(4.6)
(77.2)
4.0
%
(3.3)
(22.8)
5.4
NM
11.7
5.4
(119.6)
(343.6)
76.3
(70.0)
(57.8)
%
NM
5.7
4.9
(2.3)
(7.6)
(1.2)
(25.6)
38.4
%
319.9
%
(19.6)
%
to common shareholders
$
4,359
$
1,038
$
868
$
3,321
$
Business Events On December 19, 2008, the Company announced its participation in the U.S. Treasury
Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks.
Participation in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of
$1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock. On May 9, 2012, the
Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program, and on
May 15, 2013, the remaining 18,255 shares were redeemed.
On June 11, 2013 the common stock warrant issued under the U.S Treasury Department’s CPP program was
repurchased by the Company pursuant to a letter agreement between the Treasury and the Company for a total repurchase
price of $540,000, or $1.88 per warrant share. The repurchase price was based on the fair market value of the warrant as
agreed upon by the Company and the Treasury. The repurchase of the warrant ends the Company’s participation in the U.S
Treasury Department’s CPP.
For the fifth consecutive year, on July 1, 2013, the Company distributed a four percent stock dividend to common
shareholders of record at the close of business on June 15, 2013. For all periods presented, share information, including basic
and diluted earnings per share, has been adjusted retroactively to reflect the stock dividend.
Consolidated net income of $5.0 million for the year ended December 31, 2013 increased $2.2 million compared to
a consolidated net income of $2.8 million for the year ended December 31, 2012. Net income available to common
shareholders for the year ended December 31, 2013 was $4.4 million, or $0.87 per diluted common share, compared to net
income available to common shareholders of $1.0 million, or $0.21 per diluted common share for the year ended December
31, 2012. For the year ended December 31, 2013, the return on average assets was 0.43%, the return on average common
stockholders’ equity was 5.95%, and the efficiency ratio was 81.22%. The lower level of dividends and accretion on
preferred stock for the year ended December 31, 2013 resulted from the Company’s redemption of the remaining 18,255
shares of preferred stock issued under the U.S. Treasury’s CPP program on May 15, 2013.
For the year ended December 31, 2012, consolidated net income was $2.8 million compared to $2.9 million for the
year ended December 31, 2011. For the year ended December 31, 2012, net income available to common shareholders was
$1.0 million, or $0.21 per diluted common share, compared to net income available to common shareholders of $868,000 or
$0.17 per diluted common share, for the year ended December 31, 2011. On May 9, 2012, the Company redeemed 12,000 of
the 30,255 shares of preferred stock issued und the U.S. Treasury’s CPP program. Related to these shares was an additional
$300,000 of accretion that was recognized at the time of the redemption. For the year ended December 31, 2012, the return
7
on average assets was 0.24%, the return on average common stockholders’ equity was 1.40%, and the efficiency ratio was
75.91%.
Net interest income decreased 4.6% to $39.3 million for the year ended December 31, 2013 compared to $41.2
million for the year ended December 31, 2012. For the year ended December 31, 2012, net interest income decreased 3.3% to
$41.2 million compared to $42.6 million for the year ended December 31, 2011. These decreases were primarily due to lower
average earning asset levels and continued contraction of the net interest margin resulting from the prolonged low interest
rate environment. The net interest margin decreased to 3.72% for the year ended December 31, 2013, compared to 3.84% and
3.92% for the years ended December 31, 2012 and 2011, respectively.
The lower provision for loan losses for the year ended December 31, 2013 compared to the years ended December
31, 2012 and 2011, respectively, was primarily a result of the improving credit quality in the Company’s historical loss
analysis and reduced levels of nonperforming loans. Net charge-offs for the year ended December 31, 2013, were $3.2
million, or 0.38% of average loans compared to $7.9 million, or 0.93% of average loans for the year ended December 31,
2012, and $12.3 million, or 1.42% of average loans for the year ended December 31, 2011. Non-performing assets were
4.40% of total assets at December 31, 2013 compared to 5.33% at December 31, 2012, and 5.95% at December 31, 2011.
Non-interest income increased $1.1 million, or 11.7%, for the year ended December 31, 2013 compared to the year
ended December 31, 2012, and increased $526,000, or 5.7%, for the year ended December 31, 2012, compared to the year
ended December 31, 2011. These changes are discussed in greater detail below under Non-interest Income.
Non-interest expense increased $2.1 million, or 5.4%, for the year ended December 31, 2013 compared to the year
ended December 31, 2012, and increased $1.8 million, or 4.9%, for the year ended December 31, 2012, compared to the year
ended December 31, 2011. These increases are discussed in greater detail below under Non-interest Expense.
Average Balance Sheets
Net interest income is the largest source of revenue resulting from the Company’s lending, investing, borrowing,
and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and
mix of interest earning assets and interest bearing liabilities. The following table presents average balance sheets, net interest
income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest
margin on a fully taxable equivalent basis for each of the years in the three year periods ended December 31, 2013, 2012, and
2011, respectively.
8
(In thousands)
ASSETS
Loans: (2) (4)
Commercial
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Consumer
Total loans
Investment securities: (3)
U.S. treasury
2013
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
2012
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
2011
Interest
Income/
Expense(1)
Rate
Earned/
Paid(1)
Average
Balance
Average
Balance
Average
Balance
$ 131,738 $ 6,475
23,856
1,062
47,490
2,217
219,317
11,036
388,134
18,970
22,987
1,447
4.92 % $ 127,035 $ 6,621
1,196
21,471
4.45
5.21 % $ 127,572 $ 6,952
1,704
30,171
5.57
4.67
5.03
4.89
6.29
43,224
1,872
219,045
11,719
404,462
20,856
27,785
1,798
4.33
5.35
5.16
6.47
50,374
2,255
203,587
11,619
423,682
22,884
29,828
2,057
$ 833,522 $ 41,207
4.94 % $ 843,022 $ 44,062
5.23 % $ 865,214 $ 47,471
5.45 %
5.65
4.48
5.71
5.40
6.90
5.49 %
$ 1,378 $ 20
1.45 % $ 2,048 $ 33
1.61 % $ 1,754 $ 29
1.65 %
Government sponsored enterprises
66,771
814
117,496
34,879
2,714
1,303
1.22
2.31
3.74
70,787
998
113,749
34,248
3,025
1,398
1.41
2.66
4.08
63,089
1,240
111,859
32,375
3,551
1,573
1.97
3.17
4.86
$ 220,524 $ 4,851
4,027
82
2.20 % $ 220,832 $ 5,454
102
4,287
2.04
2.47 % $ 209,077 $ 6,393
156
5,091
2.38
3.06 %
3.06
Asset backed securities
State and municipal
Total investment securities
Restricted investments
Federal funds sold and interest bearing
deposits in other financial institutions
13,975
37
Total interest earning assets
$ 1,072,048 $ 46,177
18,255
0.26
46
4.31 % $ 1,086,396 $ 49,664
22,362
0.25
58
4.57 % $ 1,101,744 $ 54,078
0.26
4.91 %
All other assets
Allowance for loan losses
Total assets
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW accounts
Savings
Money market
Time deposits of $100,000 and over
Other time deposits
Total time deposits
Federal funds purchased and securities
sold under agreements to repurchase
Subordinated notes
102,076
(14,997)
$ 1,159,127
$
189,610 $
75,374
159,834
116,879
256,453
$
798,150 $
20,548
49,486
105,129
(15,141)
$ 1,176,384
99,216
(13,550)
$ 1,187,410
504
80
390
906
2,734
4,614
24
1,284
0.27 % $
181,422 $
0.11
0.24
0.78
1.07
66,569
153,388
129,165
277,337
0.58 % $
807,881 $
0.12
2.59
23,280
49,486
636
74
436
1,111
3,715
5,972
21
1,381
0.35 % $
175,347 $
0.11
0.28
0.86
1.34
60,582
153,672
131,175
291,842
0.74 % $
812,618 $
0.09
2.78
27,636
49,486
911
125
608
1,663
5,124
8,431
47
1,301
Federal Home Loan Bank Advances
Total borrowings
23,256
420
$ 93,290 $ 1,728
Total interest bearing liabilities
$
891,440 $
6,342
1.81
531
27,961
1.85 % $ 100,727 $ 1,933
7,905
908,608 $
0.71 % $
1.89
1,074
42,230
1.91 % $ 119,352 $ 2,422
10,853
931,970 $
0.87 % $
Demand deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
stockholders' equity
Net interest income (FTE)
Net interest spread
Net interest margin
179,913
7,899
1,079,252
79,875
163,886
7,714
1,080,208
96,176
145,347
5,638
1,082,955
104,455
$
1,159,127
$
1,176,384
$
1,187,410
39,835
41,759
43,225
3.60 %
3.72 %
3.70 %
3.84 %
(1)
Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible
interest expense. Such adjustments totaled $512,000, $550,000 and $610,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
(2) Non-accruing loans are included in the average amounts outstanding.
(3) Average balances based on amortized cost.
(4) Fees and costs on loans are included in interest income.
0.52 %
0.21
0.40
1.27
1.76
1.04 %
0.17
2.63
2.54
2.03 %
1.16 %
3.75 %
3.92 %
9
Rate and volume analysis
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major
category of interest earning assets and interest bearing liabilities, indentifying changes related to volumes and rates for the
years ended December 31, 2013, compared to December 31, 2012, and for the years ended December 31, 2012 compared to
December 31, 2011. The change in interest due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the absolute dollar amounts of change in each.
(In thousands)
Interest income on a fully
taxable equivalent basis: (1)
Loans: (2) (4)
Commercial
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Consumer
Investment securities: (3)
U.S. treasury
Government sponsored entities
Asset backed securities
State and municipal
Restricted investments
Federal funds sold and interest bearing
deposits in other financial institutions
Total interest income
Interest expense:
NOW accounts
Savings
Money market
Time deposits of $100,000 and over
Other time deposits
Federal funds purchased and securities
sold under agreements to repurchase
Subordinated notes
Federal Home Loan Bank advances
Total interest expense
Net interest income on a fully
taxable equivalent basis
2013
2012
Total
Change
Change due to
Average
Average
Rate
Volume
Total
Change
Change due to
Average
Average
Rate
Volume
$ (146) $ 239 $ (385)
(257)
123
152
193
(698)
15
(1,064)
(822)
(49)
(302)
(134)
345
(683)
(1,886)
(351)
$ (331) $ (29) $ (302)
(25)
(483)
(72)
(311)
(750)
850
(1,015)
(1,013)
(123)
(136)
(508)
(383)
100
(2,028)
(259)
(13)
(184)
(311)
(95)
(20)
(10)
(55)
97
26
(6)
(3)
(129)
(408)
(121)
(14)
4
(242)
(526)
(175)
(54)
5
138
59
87
(23)
(1)
(380)
(585)
(262)
(31)
(9)
(3,487)
(11)
(513)
2
(2,974)
(12)
(4,414)
(11)
(867)
(1)
(3,547)
(132)
6
(46)
(205)
(981)
28
10
17
(101)
(264)
(160)
(4)
(63)
(104)
(717)
(276)
(51)
(172)
(552)
(1,408)
31
11
(1)
(25)
(244)
(307)
(62)
(171)
(527)
(1,164)
3
(97)
(111)
(1,563)
(2)
-
(85)
(397)
5
(97)
(26)
(1,166)
(26)
80
(543)
(2,948)
(6)
-
(310)
(544)
(20)
80
(233)
(2,404)
$ (1,924) $ (116) $ (1,808)
$ (1,466) $ (323) $ (1,143)
(5)
Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible
interest expense. Such adjustments totaled $512,000, $550,000 and $610,000 for the years ended December 31, 2013, 2012 and 2011, respectively.
(6) Non-accruing loans are included in the average amounts outstanding.
(7) Average balances based on amortized cost.
(8) Fees and costs on loans are included in interest income.
Financial results for the year ended December 31, 2013 compared to the year ended December 31, 2012, and
December 31, 2012 compared to the year ended December 31, 2011 reflected a decrease in net interest income, on a tax
equivalent basis, of $1.9 million, or 4.6%, and $1.5 million, or 3.4%, respectively. The decreases in net interest income are
primarily due to lower average earning asset levels and continued contraction of the net interest margin resulting from the
prolonged low interest rate environment. Measured as a percentage of average earning assets, the net interest margin
(expressed on a fully taxable equivalent basis) decreased to 3.72% for the year ended December 31, 2013, compared to
3.84% and 3.92% for the years ended December 31, 2012 and 2011, respectively.
10
Average interest-earning assets decreased $14.3 million, or 1.3%, to $1.1 billion for the year ended December 31,
2013 compared to the year ended December 31, 2012, and average interest bearing liabilities decreased $17.2 million, or
1.9%, to $891.4 million for the year ended December 31, 2013 compared to $908.6 million for the year ended December 31,
2012.
Average interest-earning assets decreased $15.3 million, or 1.4%, to $1.1 billion for the year ended December 31,
2012 compared to the year ended December 31, 2011 and average interest bearing liabilities decreased $23.4 million, or
2.5%, to $908.6 million for the year ended December 31, 2012 compared to $932.0 million for the year ended December 31,
2011.
Total interest income (expressed on a fully taxable equivalent basis) decreased to $46.2 million for the year ended
December 31, 2013 compared to $49.7 million and $54.1 million for the years ended December 31, 2012 and 2011,
respectively. The Company’s rates earned on interest earning assets were 4.31% the year ended December 31, 2013
compared to 4.57% and 4.91% for the years ended December 31, 2012 and 2011, respectively.
Interest income on loans decreased to $41.2 million for the year ended December 31, 2013 compared to $44.1
million and $47.5 million for the years ended December 31, 2012 and 2011, respectively.
Average loans outstanding decreased $9.5 million, or 1.1%, to $833.5 million for the year ended December 31, 2013
compared to $843.0 million for the year ended December 31, 2012. The average yield on loans receivable decreased to 4.94%
during the year ended December 31, 2013 compared to 5.23% for the year ended December 31, 2012 primarily as a result of
decreasing market interest rates.
Average loans outstanding decreased $22.2 million, or 2.6%, to $843.0 million for the year ended December 31,
2012 compared to $865.2 million for the year December 31, 2011. The average yield on loans decreased to 5.23% for the
year ended December 31, 2012 compared to 5.49% for the year ended December 31, 2011. See the Lending and Credit
Management section for further discussion of changes in the composition of the lending portfolio.
Total interest expense decreased to $6.3 million for the year ended December 31, 2013, respectively, compared to
$7.9 million and $10.9 million for the years ended December 31, 2012 and 2011, respectively. The Company’s rates paid on
interest bearing liabilities was 0.71% for the year ended December 31, 2013 compared to 0.87% and 1.16% for the years
ended December 31, 2012 and 2011, respectively. On January 1, 2012, the Company recorded a $368,000 credit to interest
expense on time deposits for imputed capitalized interest not accounted for during the time period of 2004 through 2011 on
the construction of the Company’s new bank buildings. This is considered a correction of an immaterial prior period error.
Without this credit to interest expense, rates paid on interest bearing liabilities would have been approximately 0.92% for the
year ended December 31, 2012. See the Liquidity Management section for further discussion.
Interest expense on deposits decreased to $4.6 million for the year ended December 31, 2013 compared to $6.0
million and $8.4 million for the years ended December 31, 2012 and 2011, respectively.
Average time deposits decreased $9.7 million, or 1.2%, to $798.2 million for the year ended December 31, 2013
compared to $807.9 million for the year ended December 31, 2012. The average cost of deposits decreased to 0.58% during
the year ended December 31, 2013 compared to 0.74% for the year ended December 31, 2012 primarily as a result of lower
market interest rates, and approximately $23.0 million from a 58 month 6.05% certificate of deposit special that matured
during the third quarter of 2013.
Average time deposits decreased $4.7 million, or 0.6%, to $807.9 million for the year ended December 31, 2012
compared to $812.6 million for the year ended December 31, 2011. The cost of deposits decreased to 0.74% for the year
ended December 31, 2012 compared to 1.04% for the year ended December 31, 2011.
Interest expense on borrowings decreased to $1.7 million for year ended December 31, 2013 compared to $1.9
million and $2.4 million for the years ended December 31, 2012 and 2011, respectively. Average borrowings decreased $7.4
million to $93.3 million for the year ended December 31, 2013 compared to $100.7 million and $119.4 million for the years
ended December 31, 2012 and 2011, respectively. See the Liquidity Management section for further discussion.
11
Non-interest Income and Expense
Non-interest income for the years ended December 31, 2013, 2012 and 2011 was as follows:
(In thousands)
Non -i nte re st In com e
Service charges on deposit account s
T rust depart ment income
Real estat e servicing fees, net
Gain on sales of mortgage loans, net
Gain on sale of invest ment securities
Ot her
Total non -i n te re st in com e
Non-int erest income as a
% of total revenue *
T otal revenue per full t im e
2013
2012
2011
'13-'12
'12-'11
'13-'12
'12-'11
$ C h an ge
% C h an ge
$
$
5,556 $
796
876
1,665
778
1,195
10,866 $
5,439 $
893
(453)
2,669
26
1,152
9,726 $
5,566 $
898
55
1,649
0
1,032
9,200 $
117 $
(97)
1,329
(1,004)
752
43
1,140 $
(127)
(5)
(508)
1,020
26
120
526
2.2 %
(10.9)
(293.4)
(37.6)
NM
3.7
11.7 %
(2.3) %
(0.6)
(923.6)
61.9
NM
11.6
5.7 %
21.7 %
19.1 %
17.8 %
equivalent employee
153.8
* T ot al revenue is calculat ed as net int erest income plus non-int erest incom e.
145.1
147.6
$
$
$
NM - not meaningful
Total non-interest income increased $1.1 million, or 11.7%, to $10.9 million for the year ended December 31,
2013 compared to $9.7 million for the year ended December 31, 2012, and increased $526,000, or 5.7%, to $9.7 million for
the year ended December 31, 2012 compared to $9.2 million for the year ended December 31, 2011. On January 1, 2012, the
Company opted to measure mortgage servicing rights (MSRs) at fair value as permitted by Accounting Standards
Codification (ASC) Topic 860-50 Accounting for Servicing Financial Assets. The election of this option resulted in the
recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to
beginning retained earnings, as further described in Note 6 to the consolidated financial statements. As such, effective
January 1, 2012, the change in the fair value of mortgage servicing rights is recognized in net real estate servicing fees in
non-interest income for the period in which the change occurs.
Real estate servicing fees, net increased $1.3 million to $876,000 for the year ended December 31, 2013 compared
to the year ended December 31, 2012, and decreased $508,000 to $(453,000) for the year ended December 31, 2012
compared to the year ended December 31, 2011. Net real estate servicing fees include mortgage loan servicing fees and the
gains or losses due to the change in fair value of MSRs arising from inputs and assumptions. Mortgage loan servicing fees
earned on loans sold were $901,000 for the year ended December 31, 2013 compared to $878,000 and $863,000 for the years
ended 2012 and 2011, respectively. Total net losses recognized related to MSRs due to the change in fair value were $25,000
for the year ended December 31, 2013 compared to total net losses of $1.3 million for the year ended 2012. The net losses
recognized related to MSRs in 2012 included a one time adjustment of $538,000 correction of an immaterial prior period
error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for
amortizing MSRs in prior years. During the year ended December 31, 2011, $808,000 of amortization was included in net
real estate servicing fees. The Company was servicing $322.5 million of mortgage loans at December 31, 2013 compared to
$310.6 million and $307.0 million at December 31, 2012 and 2011, respectively.
Gain on sales of mortgage loans decreased $1.0 million to $1.7 million for the year ended December 31, 2013
compared to the year ended December 31, 2012, and increased $1.0 million to $2.7 million for the year ended December 31,
2012 compared to the year ended December 31, 2011. The Company sold loans of $76.0 million for the year ended
December 31, 2013 compared to $97.1 million and $75.0 million for the years ended 2012 and 2011, respectively.
Refinancing activity impacting both the volume of loans sold and gains recognized began to slow down during 2013 due to
rising interest rates. During 2013, the Company increased its repurchase reserve liability by $160,000 for estimated losses
incurred on sold loans that is included in total gain on sales of mortgage loans.
Gain on sale of investment securities During the year ended December 31, 2013, the Company received $32.6
million from proceeds on sales of available-for-sale debt securities and recognized gains of $778,000. These transactions
were the result of bond sales and purchases to replace several smaller holdings with fewer, larger investments without
materially changing the duration or yield of the investment portfolio.
12
Non-interest expense for the years ended December 31, 2013, 2012, and 2011 was as follows:
(In thousands)
Non-i nte re st Expe n se
Salaries
Employee benefits
Occupancy expense, net
Furniture and equipment
expense
FDIC insurance assessment
Legal, examination, and
professional fees
Advert ising and prom ot ion
P ostage, print ing, and supplies
P rocessing expense
Ot her real est at e expense
Ot her
Total non -i nte re st e xpe n se
Efficiency ratio
Salaries and benefit s as a %
2013
2012
2011
'13-'12
'12-'11
'13-'12
'12-'11
$ C h an ge
% C h an ge
$
14,702 $
4,840
2,630
14,369 $
4,796
2,598
13,760 $
4,222
2,701
333 $
44
32
2,007
992
982
1,301
1,210
3,543
4,924
3,632
1,840
993
1,189
1,083
1,144
3,593
2,659
4,403
2,019
1,107
1,332
1,103
1,158
3,193
2,559
3,691
167
(1)
(207)
218
66
(50)
2,265
(771)
609
574
(103)
(179)
(114)
(143)
(20)
(14)
400
100
712
2.3 %
0.9
1.2
4.4 %
13.6
(3.8)
9.1
(0.1)
(17.4)
20.1
5.8
(1.4)
85.2
(17.5)
(8.9)
(10.3)
(10.7)
(1.8)
(1.2)
12.5
3.9
19.3
$
40,763 $
38,667 $
36,845 $
2,096 $
1,822
5.4 %
4.9 %
81.2 %
75.9 %
71.1 %
of total non-int erest expense
47.9 %
49.6 %
48.8 %
Number of full-t ime
equivalent em ployees
346
345
337
Total non-interest expense increased $2.1 million, or 5.4%, to $40.8 million for the year ended December 31, 2013
compared to the year ended December 31, 2012 and increased $1.8 million, or 4.9%, to $38.7 million for the year ended
December 31, 2012 compared to the year ended December 31, 2011.
Employee benefits increased $44,000, or 0.9%, for the year ended December 31, 2013 compared to the year ended
December 31, 2012, and increased $574,000, or 13.6%, for the year ended December 31, 2012 compared to the year ended
December 31, 2011. The increase in 2013 over 2012 primarily resulted from a $143,000 increase in medical insurance
premiums, partially offset by a $98,000 decrease in other employee benefits. The increase in 2012 over 2011 primarily
resulted from a $382,000 increase in estimated profit sharing and pension expense accruals, a $68,000 increase in other
employee benefits due to expenses incurred hiring new executive management, and a $95,000 increase in medical insurance
premiums.
Federal Deposit Insurance Corporation (FDIC) insurance assessment decreased $1,000, or 0.1%, for the year
ended December 31, 2013 compared to the year ended December 31, 2012, and decreased $114,000, or 10.3%, for the year
ended December 31, 2012 compared to the year ended December 31, 2011. The decrease in 2012 over 2011 was due to
amendments made by the FDIC effective for the third quarter of 2011 to implement revisions to the Federal Deposit
Insurance Act made by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The years ending after September
30, 2011 reflect a new assessment base using assets and tier one capital in the assessment calculation.
Legal, examination, and professional fees decreased $207,000, or 17.4%, for the year ended December 31, 2013
compared to the year ended December 31, 2012, and decreased $143,000, or 10.7%, for the year ended December 31, 2012
compared to the year ended December 31, 2011. The decrease in 2013 over 2012 primarily consisted of a $121,000 decrease
in legal fees, a $37,000 decrease in consulting fees, and a $48,000 decrease in audit fees. The decrease in 2012 over 2011
primarily consisted of a $140,000 decrease in consulting fees for a human resource best practices and profitability-consulting
project completed during 2011. The decrease in legal fees in 2013 over the comparable periods 2012 and 2011, was primarily
a result of a decrease in litigation fees related to two legal suits incurred during 2012. The decrease in 2013 auditing fees was
primarily due to nonrecurring fees incurred in 2012 for tax and fair value analysis.
Advertising and promotion increased $218,000, or 20.1%, for the year ended December 31, 2013 compared to the
year ended December 31, 2012, and decreased $20,000, or 1.8%, for the year ended December 31, 2012 compared to the year
ended December 31, 2011. The increase in 2013 over the years ended December 31, 2012 and 2011 was primarily due to
additional advertising projects and payment for several sponsorships and promotional items that were not incurred during
2012 and 2011.
13
Processing expense decreased $50,000, or 1.4%, for the year ended December 31, 2013 compared to the year ended
December 31, 2012, and increased $400,000, or 12.5% for the year ended December 31, 2012 compared to the year ended
December 31, 2011. The decrease in 2013 over 2012 was primarily due to contract savings resulting in lower core processing
expenses. In 2013 a one time consulting fee was incurred to negotiate reduced future core processing expenses. A portion of
this fee is being amortized over the new contract period with the Company’s core processing vendor. The increase in 2012
over 2011 primarily resulted from a one time reclassification of ATM and debit card income that was previously offset by the
related expenses.
Other real estate (ORE) expense increased $2.3 million, or 85.2%, to $4.9 million for the year ended December
31, 2013 compared to the year ended December 31, 2012, and increased $100,000, or 3.9%, to $2.7 million for the year
ended December 31, 2012 compared to the year ended December 31, 2011. The expense provision for valuation write-downs
taken on ORE was $3.4 million for the year ended December 31, 2013 compared to $713,000 and $1.3 million for the years
ended December 31, 2012 and 2011, respectively. The significant increase in the expense provision during 2013 primarily
related to two hotels located in the Branson area that were sold at auction during the second quarter of 2013. Expenses
incurred to maintain foreclosed properties were $1.5 million for the year ended December 31, 2013 compared to $2.3 million
and $1.3 million for the years ended 2012 and 2011, respectively. The Company began to see a decrease in overall operating
costs during the third quarter of 2013 due to the sale of the hotels.
Other non-interest expense decreased $771,000, or 17.5%, for the year ended December 31, 2013 compared to the
year ended December 31, 2012, and increased $712,000, or 19.3%, for the year ended December 31, 2012 compared to the
year ended December 31, 2011. The decrease for the year ended December 31, 2013 was primarily due to a $273,000
decrease in CDI amortization, a $235,000 decrease in repossessed asset and loan expense, and a $326,000 decrease in
donations due to property that was donated during 2012. Impairment write-downs taken on mining equipment and classic
cars, included in repossessed asset and loan expenses, were $189,000 in 2013 compared to $330,000 in 2012. The increase
for the year ended December 31, 2012 over 2011 was primarily due to two property donations totaling $309,000 to charitable
organizations during 2012 that were both in other real estate owned, and $330,000 impairment write-downs on repossessed
assets taken in of 2012.
Comparing fourth quarter 2013 to third quarter 2013
Consolidated net income available to common shareholders’ increased to $1.7 million for the fourth quarter 2013
compared to $1.6 million for the third quarter 2013. Net interest income, on a tax equivalent basis, remained consistent at
$10.0 million for both the fourth and third quarters of 2013 with $1.0 billion in average interest earning assets.
The lower provision for loan losses for both the fourth and third quarter of 2013 was primarily a result of the
improving credit quality in the Company’s historical loss analysis and reduced level of nonperforming loans. Net charge-offs
for the fourth quarter 2013 were $564,000, or 0.07% of average loans, compared to $1.1 million, or 0.17% of average loans
for the third quarter 2013.
Non-interest income decreased to $2.3 million for the fourth quarter 2013 compared to $2.5 million for the third
quarter of 2013. This decrease included a $120,000 decrease in service charge income, a $222,000 decrease in net real estate
servicing income, partially offset by $224,000 increase in gains on sale of investment securities. Mortgage loan servicing fees
earned on loans sold were $227,000 for the fourth quarter 2013 compared to $215,000 for the third quarter 2013. Total gains
or losses recognized due to the change in fair value of MSRs arising from inputs and assumptions were ($111,000) for the
fourth quarter 2013 compared to $123,000 for the third quarter 2013.
Non-interest expense decreased to $9.6 million for fourth quarter 2013 compared to $10.0 million for the third
quarter 2013. This decrease primarily resulted from a $778,000 decrease in other real estate expenses from $1.3 million for
the third quarter 2013 compared to $487,000 for the fourth quarter 2013. The provision for the valuation allowance for other
real estate owned was $847,000 for the third quarter 2013 compared to $336,000 for the fourth quarter 2013.
Comparing fourth quarter 2013 to fourth quarter 2012
Consolidated net income available to common shareholders’ decreased to $1.7 million for the fourth quarter 2013
compared to $1.9 million for the fourth 2012. Net interest income, on a tax equivalent basis, decreased to $10.0 million from
$10.2 million over the same period. This decrease was primarily the result of a decrease in average interest earning assets
from $1.1 billion for the fourth quarter ended 2012 to $1.0 billion for the fourth quarter ended 2013.
The provision for loan losses was $30,000 for fourth quarter 2013 compared to $1.0 million for the fourth quarter
2012, and was primarily a result of the improving credit quality in the Company’s historical loss analysis and reduced level
of nonperforming loans. Net charge-offs for the fourth quarter 2013 were $564,000, or 0.07% of average loans, compared to
$3.1 million, or 0.36% of average loans for the fourth quarter 2012.
14
Non-interest income decreased to $2.3 million for fourth quarter 2013 compared to $2.6 million for fourth quarter
of 2012. This decrease included a $746,000 decrease in the net gain on sales of mortgage loans, partially offset by a $220,000
increase in net real estate servicing income, and $224,000 increase in gains on sale of investment securities. The Company’s
loans sold were $11.0 million for the fourth quarter 2013 compared to $30.1 million fourth quarter 2012. Mortgage loan
servicing fees earned on loans sold were $227,000 for the fourth quarter 2013 compared to $241,000 for the fourth quarter
2012. Total net losses recognized due to the change in fair value of MSRs arising from inputs and assumptions were
$111,000 for the fourth quarter 2013 compared to $345,000 for the fourth quarter 2012.
Non-interest expense increased to $9.6 million for fourth quarter 2013 compared to $8.7 million for fourth quarter
2012. This increase primarily resulted from a $1.0 million increase in other real estate expenses partially offset by a $422,000
decrease in other non-interest expenses. The provision for the valuation allowance for other real estate owned was $336,000
for the fourth quarter 2013, and in the fourth quarter 2012, a net $1.1 million of the valuation allowance was released. A
current appraisal supported a partial recovery of $3.9 million of a $5.7 million provision on a commercial real estate
construction property taken in 2010. The decrease in other non-interest expense resulted from impairment write-downs taken
on mining equipment and classic cars of $330,000 in the fourth quarter 2012 compared to a recovery of $50,000 received in
the fourth quarter 2013.
Income taxes
Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were
32.8% for the year ended December 31, 2013 compared to 16.2% and 17.2% for the years ended December 31, 2012 and
2011, respectively. Excluding an immaterial correction of a prior period error of $371,000, income taxes as a percentage of
earnings before income taxes would have been 26.3% for the year ended December 31, 2012. At December 31, 2011, the
Company released $28,000 of interest accrued related to the release of $221,000 of provisions for uncertain tax positions.
The Company had not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax
positions as of December 31, 2013 and 2012.
Lending and Credit Management
Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 72.4% of
total assets as of December 31, 2013 compared to 70.4% as of December 31, 2012.
Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors.
The Bank’s credit review process is overseen by regional loan committees with established loan approval limits. In addition,
a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan
committee meets weekly and are comprised of senior managers of the Bank.
A summary of loans, by major class within the Company’s loan portfolio as of the dates indicated is as follows:
(In thousands)
2013
2012
2011
2010
2009
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total loans
Percent of categories to total loans:
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total
$
$
151,399
38,841
77,937
232,332
453,975
37,130
$ 839,547 $ 846,984 $ 842,930 $ 898,472 $ 991,614
128,555
30,201
47,697
203,454
402,960
30,063
131,382 $
31,834
56,053
207,835
439,069
32,299
130,040 $
22,177
43,486
221,223
405,092
24,966
133,717
21,008
55,076
225,541
382,550
21,655
$
15.9 % 15.4 % 15.3 % 14.6 % 15.3 %
3.6
2.5
5.7
6.6
24.1
26.9
47.8
45.6
2.5
3.5
100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
3.9
7.9
23.4
45.8
3.7
3.5
6.2
23.2
48.9
3.6
2.6
5.1
26.1
47.8
3.0
15
The Company extends credit to its local community market through traditional real estate mortgage products. The
Company does not participate in extending credit to sub-prime residential real estate markets. The Company does not lend
funds for the type of transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans.
Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise
disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets that would have
been included in nonaccrual, past due, or restructured loans if such assets were loans.
The contractual maturities of loan categories at December 31, 2013, and the composition of those loans between
fixed rate and floating rate loans are as follows:
(In thousands)
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total loans net of unearned income
Loans with fixed rates
Loans with floating rates
Total loans net of unearned income
Principal Payments Due
Over One
Year Through
Five Years
One Year
Or Less
Over
Five
Years
Total
$ 78,425 $ 50,605 $ 4,687 $ 133,717
21,008
55,076
225,541
382,550
21,655
$ 303,420 $ 418,238 $ 117,889 $ 839,547
561
16,487
86,822
252,782
10,981
-
1,703
93,557
17,219
723
20,447
36,886
45,162
112,549
9,951
247,483
55,937
649,579
189,968
$ 303,420 $ 418,238 $ 117,889 $ 839,547
372,713
45,525
29,383
88,506
The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate
loans conforming to standards required by the secondary market are offered to qualified borrowers, but are not funded until the
Company has a non-recourse purchase commitment from the secondary market at a predetermined price. For the year ended
December 31, 2013, the Company sold approximately $76.0 million of loans to investors compared to $99.8 million for the
year December 31, 2012. At December 31, 2013, the Company was servicing approximately $322.5 million of loans sold to
the secondary market compared to $310.6 million at December 31, 2012, and $307.0 million at December 31, 2011.
Risk Elements of the Loan Portfolio
Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain
dollar amounts (periodically established) at least annually. Currently, loans in excess of $2.0 million in aggregate and all
adversely classified credits identified by management are reviewed. In addition, all other loans are reviewed on a sample
basis. The senior loan committee reviews and reports to the board of directors, on a monthly basis, past due, classified, and
watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this
review, management also determines which loans should be considered impaired. Management follows the guidance
provided in the FASB’s ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measuring
loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the
original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for
impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as
further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent
methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan
risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep
management informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan
losses are adjusted to maintain the allowance at a level considered necessary by management to provide for probable losses
inherent in the loan portfolio.
16
Nonperforming Assets
The following table summarizes nonperforming assets at the dates indicated:
(In thousands)
Nonaccrual loans:
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total
Loans contractually past - due 90 days
or more and still accruing:
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Total
Troubled debt restructurings - accruing
Total nonperforming loans
Other real estate owned
Foreclosed assets
Total nonperforming assets
Loans
Allowance for loan losses to loans
Nonperforming loans to loans
Allowance for loan losses to
nonperforming loans
Nonperforming assets to loans,
other real estate owned and foreclosed
$
$
$
$
$
$
2013
2012
2011
2010
2009
$
$
$
$
$
$
1,684
2,204
6,251
4,165
9,074
302
23,680
0
0
0
129
100
14
243
11,395
35,318
14,826
41
50,185
839,547
1.63 %
4.21 %
38.84 %
5.87 %
$
$
$
$
$
$
1,335
2,497
7,762
5,330
13,938
219
31,081
0
0
0
0
0
6
6
8,282
39,369
23,124
468
62,961
846,984
1.75 %
4.65 %
$
$
$
$
$
$
268
1,147
7,867
4,153
31,000
168
44,603
0
0
8
9
36
1
54
7,217
53,674
15,741
279
69,694
842,930
1.64 %
6.37 %
$
$
$
$
$
$
3,532
3,586
10,067
5,672
27,604
126
50,587
0
0
0
0
0
33
33
5,683
56,303
13,393
616
70,312
898,472
1.62 %
6.27 %
2,067
2,678
9,277
6,692
13,161
279
34,154
2
0
0
0
0
6
8
8,191
42,347
8,452
39
50,838
991,614
1.49 %
4.27 %
37.70 %
25.73 %
25.87 %
34.94 %
7.23 %
8.11 %
7.71 %
5.08 %
Total nonperforming assets decreased $12.8 million, or 20.2%, from December 30, 2012 to December 31, 2013. As
detailed below, this decrease includes a decrease of $8.7 million, or 37.0%, due to sales and impairment write-downs of other
real estate owned and repossessed assets and a $7.4 million, or 23.8%, decrease in nonaccrual loans, partially offset by a $3.0
million increase, or 37.6%, in accruing troubled debt restructurings (TDRs).
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and still accruing, and
TDRs totaled $35.3 million, or 4.21%, of total loans at December 31, 2013 compared to $39.4 million, or 4.65%, of total
loans at December 31, 2012.
It is the Company's policy to discontinue the accrual of interest income on loans when management believes that the
borrower’s financial condition, after consideration of business conditions and collection efforts, is such that the collection of
interest is doubtful, or upon which principal or interest due 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. Interest on nonaccrual loans, which would have been recorded under the original terms of the loans, was
approximately $1.2 million for the years ended December 31, 2013 and 2012, and $1.9 million for the year ended December
31, 2011.
As of December 31, 2013 and December 31, 2012, approximately $21.0 million and $17.6 million, respectively, of
loans classified as substandard, not included in the nonperforming asset table, were identified as potential problem loans
having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment
terms. Even though borrowers are experiencing moderate cash flow problems as well as some deterioration in collateral
value, management believes the general allowance was sufficient to cover the risks and probable losses related to such loans
at December 31, 2013 and December 31, 2012, respectively.
Total non-accrual loans at December 31, 2013 decreased $7.4 million to $23.7 million from December 31, 2012.
This decrease primarily consisted of a $6.0 million decrease in real estate mortgage non-accrual loans and a $1.8 million
decrease in real estate construction loans. This decrease was partially offset by a $349,000 increase in commercial, financial,
17
and agricultural loans. At December 31, 2013 and December 31, 2012, real estate mortgage – commercial non-accrual loans
made up 38% of total non-accrual loans.
Loans past due 90 days and still accruing interest at December 31, 2013 increased $237,000 to $243,000 from
December 31, 2012. Other real estate owned and repossessed assets at December 31, 2013 decreased $8.7 million to $14.9
million from December 31, 2012 primarily due to the sale of two hotels located in the Branson area and land held in
foreclosed property in the Company’s real-estate subsidiary. During the year ended December 31, 2013, $4.6 million of
nonaccrual loans, net of charge-offs taken, moved to other real estate owned and repossessed assets, and a net $3.4 million
additional provision to the valuation allowance was recorded to reflect current fair values compared to a net $713,000
provision during the year ended December 31, 2012.
The following table summarizes the Company’s TDRs at the dates indicated:
(In thousands)
TDRs - Accrual
Commercial, financial and agricultural
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Total TDRs - Accrual
TDRs - Non-accrual
Commercial, financial and agricultural
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Consumer
Total TDRs - Non-accrual
Total TDRs
Number of
contracts
December 31, 2013
Recorded
Investment
Specific
Reserves
Number of
contracts
December 31, 2012
Recorded
Investment
Specific
Reserves
$
$
9
1
6
6
22
2
1
5
7
2
17
39
$
$
$
2,331 $
364
2,352
6,348
11,395 $
88 $
3,742
639
5,572
43
10,084 $
21,479 $
101
0
529
885
1,515
8
0
229
424
15
676
2,191
12
0
3
6
21
$
$
$
2
5
9
12
2
30
51
$
$
2,820 $
0
440
5,022
8,282 $
201 $
5,693
1,177
6,966
44
14,081 $
22,363 $
104
0
94
111
309
14
468
142
611
0
1,235
1,544
At December 31, 2013, loans classified as TDRs totaled $21.5 million, of which $10.1 million were on non-accrual
status and $11.4 million were on accrual status. At December 31, 2012, loans classified as TDRs totaled $22.4 million, of
which $14.1 million were on non-accrual status and $8.3 million were on accrual status. The net decrease in total TDRs from
December 31, 2012 was primarily due to $1.0 million charged off, and approximately $2.9 million of payments received,
partially offset by $3.6 million additions to TDRs during 2013. The increase in TDRs classified as real estate mortgage
accruing loans primarily relates to two new loan relationships modified to interest only payments. The decrease in real estate
construction and real estate mortgage non-accrual TDRs is primarily related to property sales and one loan relationship that
went to accruing TDR status.
Provision and Allowance for Loan Losses
As mentioned above, the Company is continuing to recover from the deterioration of collateral values during the
prior and current economic conditions. Current appraisals are being obtained and management has adjusted the provision to
reflect the amounts determined necessary to maintain the allowance for loan losses at a level necessary to cover probable
losses in the loan portfolio. The allowance for loan losses was $13.7 million, or 1.63%, of loans outstanding at December 31,
2013 compared to $14.8 million, or 1.75%, of loans outstanding at December 31, 2012, and $13.8 million, or 1.64%, of loans
outstanding at December 31, 2011.
18
The following table summarizes loan loss experience for the years ended as indicated:
(In thousands)
Analysis of allowance for loan losses:
Balance beginning of year
Net charge-offs (recoveries):
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Net charge-offs
Provision for loan losses
Balance end of year
Net Loan Charge-offs
2013
2012
2011
2010
2009
$
14,842 $ 13,809 $
14,565 $
14,797 $ 12,667
555
119
628
701
933
217
3,153
2,030
13,719 $ 14,842 $
1,599
(67)
(23)
819
5,218
321
7,867
8,900
1,964
1,793
262
1,775
6,317
168
12,279
11,523
13,809 $
1,191
1,750
1,007
903
450
4,534
2,612
4,306
724
3,812
240
182
6,224
15,487
15,255
8,354
14,565 $ 14,797
$
The Company’s net loan charge-offs were $3.2 million, or 0.38% of average loans, for the year ended December 31,
2013 compared to net loan charge-offs of $7.9 million, or 0.93% of average loans, for the year ended December 31, 2012,
and $12.3 million, or 1.42% of average loans for the year ended December 31, 2011.
Commercial, financial, and agricultural net charge-offs represented 18% of total net charge-offs during the year
ended December 31, 2013 compared to 20% and 16% of net charge-offs during the years ended December 31, 2012 and
2011, respectively. Real estate mortgage – residential net charge-offs represented 22% of total net charge-offs during the year
ended December 31, 2013 compared to 10% and 14% of total net charge-offs during the years ended December 31, 2012, and
2011, respectively. Real estate mortgage - commercial net charge-offs represented to 30% of total net charge-offs during the
year ended December 31, 2013 compared to 66% and 51% of total net charge-offs during the years ended December 31, 2012
and 2011, respectively.
Provision
The provision for loan losses decreased to $2.0 million for the year ended December 31, 2013, compared to $8.9
million and $11.5 million for the years ended December 31, 2012 and 2011, respectively. Due to decreases in historical loss
rates based on the Company’s last thirty-six months of charge-off experience, decreases in average loans and reduced levels
of nonperforming loans, the Company’s required provision during the year decreased.
Allowance for loan losses
The following table is a summary of the allocation of the allowance for loan losses:
(In thousands)
Allocation of allowance for
loan losses at end of year:
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment loans to individuals
Unallocated
Total
2013
2012
2011
2010
2009
$
2,374 $
931
631
2,959
6,523
294
7
1,937 $
732
1,711
3,387
6,834
239
2
1,804 $
1,188
1,562
3,251
5,734
267
3
$
13,719 $
14,842 $
13,809 $
2,931 $
2,067
1,339
3,922
3,458
231
617
14,565 $
2,773
348
1,740
3,488
4,693
380
1,375
14,797
The Company’s allowance for loan losses decreased to $13.7 million at December 31, 2013 compared to $14.8
million at December 31, 2012. The decrease from December 31, 2012 primarily consisted of a $1.0 million decrease in the
allocation for real estate construction – commercial loans, $428,000 decrease in real estate mortgage - residential loans, and a
$311,000 decrease in real estate mortgage – commercial loans, partially offset by a $437,000 increase in commercial,
financial, and agricultural loans, and a $199,000 increase in real estate construction – residential loans. The ratio of the
allowance for loan losses to nonperforming loans was 38.8% at December 31, 2013, compared to 37.7% at December 31,
2012.
19
The following table is a summary of the general and specific allocations of the allowance for loan losses:
(In thousands)
Allocation of allowance for loan losses:
Individually evaluated for impairment - specific reserves
Collectively evaluated for impairment - general reserves
Total
2013
2012
2011
2010
2009
$
$
4,796 $
8,923
13,719 $
4,020 $ 3,748 $ 6,376 $
10,822
14,842 $ 13,809 $ 14,565 $
10,061
8,189
6,415
8,382
14,797
The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of
impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal
evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific
reserve allocation is recorded. At December 31, 2013, $4.8 million of the Company’s allowance for loan losses was allocated
to impaired loans totaling approximately $35.1 million compared to $4.0 million of the Company's allowance for loan losses
allocated to impaired loans totaling approximately $39.4 million at December 31, 2012. Management determined that $18.8
million, or 54%, of total impaired loans required no reserve allocation at December 31, 2013 compared to $14.7 million, or
37%, at December 31, 2012 primarily due to adequate collateral values, acceptable payment history and adequate cash flow
ability.
The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by
applying percentages to pools of loans by asset type. Loans not individually evaluated are aggregated based on similar risk
characteristics. Historical loss rates for each risk group, which is updated quarterly, are quantified using all recorded loan
charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the
Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as
the starting point to determine allowance provisions. The Company’s methodology includes factors that allow management to
adjust its estimates of losses based on the most recent information available. The rates are then adjusted to reflect actual
changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure,
any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic
conditions and developments, including general economic and business conditions affecting the Company’s key lending
areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and
findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as
appropriate.
The specific and general reserve allocations represent management’s best estimate of probable losses contained in
the loan portfolio at the evaluation date. Although the allowance for loan losses comprises of specific and general allocations,
the entire allowance is available to absorb any credit losses.
Investment Portfolio
The Company classifies its debt and equity securities into one of the following two categories:
Held-to-Maturity - includes investments in debt securities that the Company has the positive intent and ability to
hold until maturity. Available-for-Sale - includes investments in debt and equity securities not classified as held to maturity
or trading (i.e., investments that the Company has no present plans to sell in the near-term but may be sold in the future under
different circumstances). The Company’s investment portfolio consists of available-for-sale securities.
Debt securities classified as held-to-maturity are carried at amortized cost, while debt and equity securities classified
as available-for-sale are carried at estimated market value. Unrealized holding gains and losses from available-for-sale
securities are excluded from earnings and reported, net of applicable taxes, as a separate component of stockholders' equity
until realized.
The Company does not engage in trading activities and accordingly does not have any debt or equity securities
classified as trading securities. Historically the Company's practice had been to purchase and hold debt instruments until
maturity unless special circumstances exist. However, since the investment portfolio's major function is to provide liquidity
and to balance the Company's interest rate sensitivity position, all debt securities are classified as available-for-sale.
At December 31, 2013, the investment portfolio classified as available-for-sale represented 18.3% of total
consolidated assets. Future levels of held-to-maturity and available-for-sale investment securities can be expected to vary
depending upon liquidity and interest sensitivity needs as well as other factors.
20
The following table presents the composition of the investment portfolio by major category:
(In thousands)
U.S. Treasury
Government sponsored enterprises
Asset-backed securities
Obligations of states and political subdivisions
Total available for sale debt securities
2013
2012
$ 1,003
60,616
110,373
33,993
$ 205,985
$ 2,030
55,180
107,872
35,164
$ 200,246
As of December 31, 2013, the maturity of debt securities in the investment portfolio was as follows:
(In thousands)
U.S. Treasury
Government sponsored enterprises
Asset-backed securities (2)
States and political subdivisions (3)
Total available-for-sale debt
Over One
Through
Five Years
Over Five
Through
Ten Years
Over
Ten Years
Total
One Year
Or Less
$ 1,003 $
2,540
604
3,396
- $
- $
- $ 1,003
60,616
-
15,936
110,373
2,199
53,112
33,993
1,078
15,308
$ 7,543 $ 110,809 $ 84,356 $ 3,277 $ 205,985
42,140
54,458
14,211
Weighted
Average
Yield (1)
1.26 %
2.18
1.28
3.67
2.15 %
Weighted average yield (1)
3.46 %
2.08 %
2.14 %
2.05 %
2.15 %
1) Weighted average yield is based on amortized cost.
2) Asset-backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio
experience during the twelve months ended December 31, 2013 calculated separately for each mortgage-backed security. These
repayment speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage
interest rates.
3) Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the statutory Federal
income tax rate of 34%.
At December 31, 2013 $13,000 of debt securities classified as available-for-sale in the table above had variable rate
provisions with adjustment periods ranging from one week to twelve months.
The following non-marketable securities are restricted securities which, lacking a market, are carried at cost. These
securities are reported in other assets. At December 31, 2013, $2.4 million of the total included Federal Home Loan Bank
(Des Moines) stock held by the Bank in accordance with debt and regulatory requirements. Other non-marketable securities
include a $1.5 million equity investment in the Company’s unconsolidated Exchange Statutory Trusts. (See Note 8 to the
Company’s consolidated financials for further explanation on the Exchange Statutory Trusts.)
(In thousands)
Federal Home Loan Bank of Des Moines stock
Midwest Independent Bank stock
Federal Agricultural Mortgage Corporation stock
Investment in unconsolidated trusts
Total non-marketable investment securities
Liquidity and Capital Resources
Liquidity Management
2013
2012
$ 2,354
151
10
1,486
$ 4,001
$ 2,278
151
10
1,486
$ 3,925
The role of liquidity management is to ensure funds are available to meet depositors' withdrawal and borrowers'
credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for
funds with changes in the supply of those funds. Liquidity to meet the demands is provided by maturing assets, short-term
liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due
to the nature of services offered by the Company, management prefers to focus on transaction accounts and full service
relationships with customers. Management believes it has the ability to increase deposits at any time by offering rates slightly
higher than the market rate.
21
The Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight
responsibility for the Company's liquidity position and profile. A combination of daily, weekly, and monthly reports provided
to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing
differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital, and
exposure to contingent draws on the Company's liquidity.
The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company’s most liquid
assets are comprised of available for sale investment securities, federal funds sold, and excess reserves held at the Federal
Reserve.
(In thousands)
Federal funds sold and other overnight interest-bearing deposits
Available for sale investment securities
Total
2013
2012
$ 1,360 $ 27,857
200,246
$ 207,345 $ 228,103
205,985
Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity
purposes. The fair value of the available for sale investment portfolio was $206.0 million at December 31, 2013 and included
an unrealized net loss of $2.4 million. The portfolio includes projected maturities and mortgage backed securities pay-downs
of approximately $7.5 million over the next twelve months, which offer resources to meet either new loan demand or
reductions in the Company’s deposit base.
The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds
purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other
purposes required by law. At December 31, 2013 and December 31, 2012, respectively, the Company’s unpledged securities
in the available for sale portfolio totaled approximately $60.2 million and $53.8 million, respectively.
Total investment securities pledged for these purposes were as follows:
(In thousands)
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings
Federal funds purchased and
securities sold under agreements to repurchase
Other deposits
Total pledged, at fair value
2013
2012
$
3,360 $
3,436
25,149
117,283
145,792 $
31,278
111,728
146,442
$
Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking,
savings, and money market deposit accounts. At December 31, 2013, such deposits totaled $606.4 million and represented
63.4% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of
the Company through long lasting relationships. Time deposits and certificates of deposit of $100,000 and over totaled
$350.0 million at December 31, 2013. These accounts are normally considered more volatile and higher costing representing
36.6% of total deposits at December 31, 2013.
Core deposits at December 31, 2013 and 2012 were as follows:
(In thousands)
Core deposit base:
Non-interest bearing demand
Interest checking
Savings and money market
Total
2013
2012
$ 187,382 $ 192,271
178,121
227,581
$ 606,467 $ 597,973
182,103
236,982
Other components of liquidity are the level of borrowings from third party sources and the availability of future
credit. The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, Federal Home
Loan Bank advances, and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from
upstream correspondent banks with which the Company maintains approved credit lines. As of December 31, 2013,
under agreements with these unaffiliated banks, the Bank may borrow up to $26.50 million in federal funds on an unsecured
basis and $4.7 million on a secured basis. There was $13.5 million federal funds purchased outstanding at December 31,
2013. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the
Company’s investment portfolio. At December 31, 2013, there was $31.1 million in repurchase agreements. The Company
may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window; although
no such borrowings were outstanding at December 31, 2013.
22
The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As a member of the FHLB, the
Bank has access to credit products of the FHLB. As of December 31, 2013, the Bank had $24.0 million in outstanding
borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly-
owned grantor trusts, funded by preferred securities issued by the trusts.
Borrowings outstanding at December 31, 2013 and 2012 were as follows:
(In thousands)
Borrowings:
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated notes
Total
2013
2012
$ 31,084 $ 21,058
20,126
49,486
$ 104,570 $ 90,670
24,000
49,486
The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB,
and other correspondent banks as security to establish lines of credit and borrow from these entities. Based on the type and
value of collateral pledged, the Company may draw advances against this collateral.
The following table reflects the advance equivalent of the assets pledged, borrowings, and letters of credit outstanding, in
addition to the estimated future funding capacity available to the Company as follows:
(In thousands)
Advance equivalent
Advances outstanding
Total available
$
$
FHLB
259,221 $
(24,000)
235,221 $
2013
Federal
Reserve
Bank
Federal
Funds
Purchased
Lines
3,286 $
0
3,286 $
41,430 $
(13,504)
27,926 $
Total
303,937 $
(37,504)
266,433 $
FHLB
290,084 $
(20,126)
269,958 $
2012
Federal
Funds
Purchased
Lines
Federal
Reserve
Bank
3,344 $
16,790 $
0
0
3,344 $
16,790 $
Total
310,218
(20,126)
290,092
At December 31, 2013, loans with a market value of $381.6 million were pledged at the Federal Home Loan Bank
as collateral for borrowings and letters of credit. At December 31, 2013, investments with a market value of $5.3 million
were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.
Sources and Uses of Funds
Cash and cash equivalents were $28.4 million at December 31, 2013 compared to $58.9 million at December 31,
2012. The $30.4 million decrease resulted from changes in the various cash flows produced by operating, investing, and
financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the year ended
December 31, 2013. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash
items. Operating activities provided cash flow of $20.2 million for the year ended December 31, 2013.
Investing activities consisting mainly of purchases, sales and maturities of available for sale securities, and changes
in the level of the loan portfolio, used total cash of $9.5 million. Cash was provided by $41.6 million in proceeds from
investment maturities, calls, and pay-downs, $32.6 million in proceeds from sales of investment securities, and $9.6 million
in proceeds received from sales of other real estate owned and repossessed assets, partially offset by $88.1 million in
purchases of investment securities.
Financing activities used cash of $41.1 million, resulting primarily from a $43.3 million decrease in time deposits,
$18.2 million to redeem the remaining shares of preferred stock, and $540,000 to redeem the common stock warrant. These
decreases were partially offset by a $13.4 million increase in interest-bearing transaction accounts, a $10.0 million increase in
federal funds purchased and securities sold under agreements to repurchase, and a $3.9 million net advance from Federal
Home Loan Bank. Future short-term liquidity needs arising from daily operations are not expected to vary significantly
during 2013.
In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including
unfunded loan commitments and letters of credit. These transactions are managed through the Company's various risk
management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of
the Company's liquidity. The Company had $128.3 million in unused loan commitments and standby letters of credit as of
December 31, 2013. Although the Company's current liquidity resources are adequate to fund this commitment level the
nature of these commitments is such that the likelihood of such a funding demand is very low.
The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its
operating needs. The Company’s ongoing liquidity needs primarily include funding its operating expenses and paying cash
23
dividends to its common and preferred shareholders. The Company paid cash dividends to its common and preferred
shareholders totaling approximately $1.4 and $2.1 million for years ended December 31, 2013 and 2012, respectively. A
large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid
$15.0 million and $4.5 million in dividends to the Company during the years ended December 31, 2013 and 2012,
respectively. At December 31, 2013 and 2012, the Company had cash and cash equivalents totaling $450,000 and $1.9
million, respectively.
Capital Management
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated
financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative
judgments by the regulators about components, risk-weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and
of Tier I capital to adjusted-average assets. Management believes, as of December 31, 2013 and 2012, the Company and the
Bank each met all capital adequacy requirements.
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and
changes required by the Dodd-Frank Act. The phase-in period for community banking organizations begins January 1, 2015,
while larger institutions (generally those with assets of $250 billion or more) must begin compliance on January 1, 2014. The
final rules call for the following capital requirements:
� A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%.
� A minimum ratio of tier 1 capital to risk-weighted assets of 6%.
� A minimum leverage ratio of 4%.
In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets
applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and
the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus
payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations
will begin on January 1, 2016.
Under the proposed rules previously issued by the federal banking agencies, accumulated other comprehensive income
(AOCI) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community
banks to make a one-time election not to include these new AOCI components in regulatory capital and instead use the
existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital.
The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution
becomes subject to the final rule.
The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and
cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations
with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual
holding companies as of May 19, 2010.
The Company has assessed the impact of these changes and it does not expect there to be a material impact on the
regulatory ratios of the Company and the Bank and on the capital, operations and earnings of the Company and the Bank.
The Company exceeded all capital adequacy requirements as of December 31, for the years indicated:
2013
2012
2011
2010
2009
Well -
Capitalized
Regulatory
Guidelines
Risk-based capital ratios:
Total capital
Tier I capital
Leverage ratio
14.29 % 16.83 % 18.03 % 17.05 % 16.49 % 10.00 %
13.03
10.04
6.00
5.00
14.25
11.00
13.58
10.37
14.01
11.35
15.16
11.52
24
Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements
The required payments of time deposits and other borrowed money, not including interest, at December 31, 2013 are as
follows:
(In thousands)
Time deposits
Other borrowed money
Payments due by Period
Total
$ 350,004
24,000
Less than 1
Year
$ 231,644
-
1-3
Years
$ 58,844
6,000
3-5
Years
$ 59,516
18,000
Over 5
Years
$ -
-
In the normal course of business, the Company is party to activities that contain credit, market and operational risk
that are not reflected in whole or in part in the Company's consolidated financial statements. Such activities include
traditional off-balance sheet credit related financial instruments.
The Company provides customers with off-balance sheet credit support through loan commitments and standby letters of
credit. Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at
December 31, 2013 are as follows:
(In thousands)
Unused loan commitments
Commitments to originate
Total
$ 117,880
Amount of Commitment Expiration per Period
3-5
1-3
Less than
1 Year
$ 86,778
Years
$ 11,165
Years
$ 8,057
Over 5
Years
$ 11,880
residential first and second mortgage loans
Standby letters of credit
8,570
1,826
8,570
1,442
-
376
-
8
-
-
Since many of the unused commitments are expected to expire or be only partially used, the total amount of commitments in
the preceding table does not necessarily represent future cash requirements.
Quantitative and Qualitative Disclosures about Market Risk
Interest Sensitivity
Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The
Company faces market risk in the form of interest rate risk through transactions other than trading activities. The Company
uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings
due to changing interest rate environments. Guidelines established by the Company's Asset/Liability Committee and
approved by the board of directors are used to monitor exposure of earnings at risk. General interest rate movements are used
to develop sensitivity as the Company feels it has no primary exposure to specific points on the yield curve. At December 31,
2013, the rate shock scenario models indicated that annual net interest income could change by as much as (20.5%) to 29.0%
should interest rates rise or fall, respectively, 400 basis points from their current level over a one year period. However there
are no assurances that the change will not be more or less than this estimate. Management believes this is an acceptable level
of risk.
25
The following table represents estimated interest rate sensitivity and periodic and cumulative gap positions
calculated as of December 31, 2013. Significant assumptions used for this table included: loans will repay at historic
repayment rates; certain interest-bearing demand accounts are interest sensitive due to immediate repricing, and fixed
maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these
assumptions could materially affect the results reflected in the table.
Year 1
Year 2
Year 3
Year 4
Year 5
Over
5 Years or
No stated
Maturity
Total
$
10,789
$
22,110
$
33,565
$
15,268
$
14,245
$
110,008
$
205,985
1,360
4,001
357,720
373,870
243,454
231,644
31,084
49,486
10,000
565,668
(191,798)
(191,798)
$
$
$
$
$
$
$
$
$
$
-
-
113,329
135,439
-
58,844
-
-
-
58,844
76,595
(115,203)
$
$
$
$
$
-
-
126,650
160,215
175,631
30,767
-
-
3,000
209,398
(49,183)
(164,386)
$
$
$
$
$
-
-
115,222
130,490
-
12,662
-
-
3,000
15,662
114,828
(49,558)
$
$
$
$
$
-
-
88,931
103,176
-
16,087
-
-
8,000
24,087
79,089
29,531
$
$
$
$
$
-
-
37,695
147,703
-
-
-
-
-
-
147,703
177,234
$
$
$
$
$
1,360
4,001
839,547
1,050,893
419,085
350,004
31,084
49,486
24,000
873,659
177,234
177,234
0.66
0.66
2.30
0.82
0.77
0.80
8.33
0.94
4.28
1.03
NM
1.20
1.20
1.20
(In thousands)
ASSETS
Investment securities
Federal funds sold and other
over-night interest-bearing deposits
Other restricted investments
Loans
Total
LIABILITIES
Savings, interest checking, and
money market deposits
Time deposits
Federal funds purchased and
securities sold under
agreements to repurchase
Subordinated notes
Federal Home Loan Bank advances
Total
Interest-sensitivity GAP
Periodic GAP
Cumulative GAP
Ratio of interest-earning
assets to interest-bearing liabilities
Periodic GAP
Cumulative GAP
Effects of Inflation
The effects of inflation on financial institutions are different from the effects on other commercial enterprises since
financial institutions make few significant capital or inventory expenditures, which are directly affected by changing prices.
Because bank assets and liabilities are virtually all monetary in nature, inflation does not affect a financial institution as much
as do changes in interest rates. The general level of inflation does underlie the general level of most interest rates, but interest
rates do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in
the expected rate of inflation and to changes in monetary and fiscal policy.
Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to
increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management,
inflation did not have a significant effect on the Company's operations for the year ended December 31, 2013.
Impact of New Accounting Standards
No new accounting pronouncements issued during the year ended December 31, 2013, have had or are expected to
have a significant impact on the Company's consolidated financial statements.
26
CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and report of the Company's independent auditors appear on
the pages indicated.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Income for each of the years ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Income for each of the
years ended December 31, 2013, 2012, and 2011
Consolidated Statements of Stockholders’ Equity for each of the years ended
December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2013, 2012, and 2011
Notes to the Consolidated Financial Statements
Page
28
29
30
31
32
33-34
35
27
KPMG LLP
Suite 900
10 South Broadway
St. Louis, MO 63102-1761
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hawthorn Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Hawthorn Bancshares, Inc. and
subsidiaries (the Company) as of December 31, 2013 and 2012, and the related consolidated statements of
income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2013. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Hawthorn Bancshares, Inc. and subsidiaries as of December 31, 2013 and
2012, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Hawthorn Bancshares, Inc.’s internal control over financial reporting as of
December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
March 31, 2014 expressed an unqualified opinion on the effectiveness of Hawthorn Bancshares, Inc.’s
internal control over financial reporting.
St. Louis, Missouri
March 31, 2014
/s/ KPMG LLP
KPMG LLP is a Delaware limited liability partnership,
the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
ASSETS
Cash and due from banks
Federal funds sold and other overnight interest-bearing deposits
Cash and cash equivalents
Investment in available-for-sale securities, at fair value
Loans
Allowances for loan losses
Net loans
Premises and equipment - net
Investments in Federal Home Loan Bank stock and other equity securities, at cost
Mortgage servicing rights
Other real estate owned and repossessed assets - net
Accrued interest receivable
Cash surrender value - life insurance
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand
Savings, interest checking and money market
Time deposits $100,000 and over
Other time deposits
Total deposits
Federal funds purchased and securities sold
under agreements to repurchase
Subordinated notes
Federal Home Loan Bank advances
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ equity:
Preferred stock, $0.01 par value per share, 1,000,000 shares authorized;
Issued 0 shares and 18,255 shares, respectively,
$1,000 per share liquidation value, net of discount
Common stock, $1 par value, authorized 15,000,000 shares;
Issued 5,194,537 and 5,000,972 shares, respectively
Surplus
Retained earnings
Accumulated other comprehensive (loss) income, net of tax
Treasury stock; 161,858 shares, at cost
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to the consolidated financial statements.
29
December 31,
2013
2012
27,079 $
1,360
28,439
205,985
839,547
(13,719)
825,828
38,079
4,001
3,036
14,867
4,999
2,213
12,675
1,140,122 $
187,382 $
419,085
111,667
238,337
956,471
31,084
49,486
24,000
426
4,275
1,065,742
31,020
27,857
58,877
200,246
846,984
(14,842)
832,142
37,021
3,925
2,549
23,592
5,190
2,136
15,928
1,181,606
192,271
405,702
120,777
272,525
991,275
21,058
49,486
20,126
909
6,532
1,089,386
0
17,977
5,195
33,385
40,086
(769)
(3,517)
74,380
1,140,122 $
5,001
31,816
39,118
1,825
(3,517)
92,220
1,181,606
$
$
$
$
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans
Interest on debt securities:
Taxable
Nontaxable
Federal funds sold and
other overnight interest-bearing deposits
Dividends on other securities
Total interest income
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market
Time deposit accounts $100,000 and over
Other time deposits
Interest on federal funds purchased and securities sold
under agreements to repurchase
Interest on subordinated notes
Interest on Federal Home Loan Bank advances
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NON-INTEREST INCOME
Service charges on deposit accounts
Trust department income
Real estate servicing fees, net
Gain on sale of mortgage loans, net
Gain on sale of investment securities
Other
Total non-interest income
NON-INTEREST EXPENSE
Salaries and employee benefits
Occupancy expense, net
Furniture and equipment expense
FDIC insurance assessment
Legal, examination, and professional fees
Advertising and promotion
Postage, printing, and supplies
Processing expense
Other real estate expense, net
Other
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Accretion of discount on preferred stock
Total preferred stock dividends and
accretion of discount on preferred stock
Net income available to common shareholders
Basic earnings per share
Diluted earnings per share
See accompanying notes to the consolidated financial statements.
30
Years Ended December 31,
2012
2011
2013
$
41,110 $
43,957 $
47,361
3,592
844
37
82
45,665
974
906
2,734
24
1,284
420
6,342
39,323
2,030
37,293
5,556
796
876
1,665
778
1,195
10,866
19,542
2,630
2,007
992
982
1,301
1,210
3,543
4,924
3,632
40,763
7,396
2,422
4,974
337
278
4,100
909
46
102
49,114
1,146
1,111
3,715
21
1,381
531
7,905
41,209
8,900
32,309
5,439
893
(453)
2,669
26
1,152
9,726
19,165
2,598
1,840
993
1,189
1,083
1,144
3,593
2,659
4,403
38,667
3,368
546
2,822
1,125
659
$
$
$
615
4,359 $
0.87 $
0.87 $
1,784
1,038 $
0.21 $
0.21 $
4,864
1,029
59
156
53,469
1,645
1,663
5,123
47
1,301
1,074
10,853
42,616
11,523
31,093
5,566
898
55
1,649
0
1,032
9,200
17,982
2,701
2,019
1,107
1,332
1,103
1,158
3,193
2,559
3,691
36,845
3,448
591
2,857
1,513
476
1,989
868
0.17
0.17
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Net income
Other comprehensive (loss) income, net of tax
Securities available for sale:
Unrealized (loss) gain on investment securities
available-for-sale, net of tax
Adjustment for gain on sales of
investment securities, net of tax
Defined benefit pension plans:
Net gain (loss) arising during the year, net of tax
Amortization of prior service cost included
in net periodic pension cost, net of tax
Total other comprehensive (loss) income
Total comprehensive income
See accompanying notes to the consolidated financial statements.
Years Ended December 31,
2012
2011
2013
$
4,974 $
2,822 $
2,857
(4,274)
(482)
2,094
68
(2,594)
2,380 $
(123)
(16)
547
77
485
3,307 $
2,380
0
(1,830)
48
598
3,455
$
31
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In thousands)
Balance, December 31, 2010
Net income
Other comprehensive income
Stock based compensation expense
Accretion of preferred stock discount
Stock dividend
Cash dividends declared, preferred stock
Cash dividends declared, common stock
Balance, December 31, 2011
Cumulative effect of change in
accounting principle
Balance, January 1, 2012
Net income
Other comprehensive income
Stock based compensation expense
Accretion of preferred stock discount
Redemption of 12,000 shares of
preferred stock
Stock dividend
Cash dividends declared, preferred stock
Cash dividends declared, common stock
Balance, December 31, 2012
Net income
Other comprehensive loss
Stock based compensation expense
Accretion of preferred stock discount
Redemption of 18,255 shares of
preferred stock
Redemption of common stock warrant
Stock dividend
Cash dividends declared, preferred stock
Cash dividends declared, common stock
Balance, December 31, 2013
Preferred
Stock
Common
Stock
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss)
Income
Total
Stock -
holders'
Equity
Treasury
Stock
$
28,841 $
4,636 $
28,929 $
41,857 $
742 $
(3,517) $
101,488
0
0
0
477
0
0
0
$
$
29,318 $
0
29,318 $
0
0
0
659
(12,000)
0
0
0
$
17,977 $
0
0
0
278
(18,255)
0
0
0
0
0 $
$
0
0
0
0
179
0
0
4,815 $
0
4,815 $
0
0
0
0
0
186
0
0
5,001 $
0
0
0
0
0
0
194
0
0
5,195 $
0
0
58
0
1,279
0
0
30,266 $
0
30,266 $
0
0
29
0
0
1,521
0
0
31,816 $
0
0
19
0
0
(540)
2,090
0
0
33,385 $
2,857
0
0
(477)
(1,458)
(1,513)
(912)
40,354 $
460
40,814 $
2,822
0
0
(659)
0
(1,707)
(1,203)
(949)
39,118 $
4,974
0
0
(278)
0
0
(2,284)
(456)
(988)
40,086 $
0
598
0
0
0
0
0
1,340 $
0
1,340 $
0
485
0
0
0
0
0
0
1,825 $
0
(2,594)
0
0
0
0
0
0
0
(769) $
0
0
0
0
0
0
0
(3,517) $
0
(3,517) $
0
0
0
0
0
0
0
0
(3,517) $
0
0
0
0
0
0
0
0
0
(3,517) $
2,857
598
58
0
0
(1,513)
(912)
102,576
460
103,036
2,822
485
29
0
(12,000)
0
(1,203)
(949)
92,220
4,974
(2,594)
19
0
(18,255)
(540)
0
(456)
(988)
74,380
See accompanying notes to the consolidated financial statements.
32
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Depreciation expense
Net amortization of investment securities, premiums, and discounts
Amortization of intangible assets
Stock based compensation expense
Change in fair value of mortgage servicing rights
Gain on sale of investment securities
Gain on sales and dispositions of premises and equipment
Loss (gain) on sales and dispositions of other real estate owned
and repossessed assets
Provision for other real estate owned
Decrease in accrued interest receivable
Increase in cash surrender value -life insurance
Decrease in other assets
Decrease (increase) in income tax receivable
Decrease in accrued interest payable
Increase (decrease) in other liabilities
Origination of mortgage loans for sale
Proceeds from the sale of mortgage loans
Gain on sale of mortgage loans, net
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Net (increase) decrease in loans
Purchase of available-for-sale debt securities
Proceeds from maturities of available-for-sale debt securities
Proceeds from calls of available-for-sale debt securities
Proceeds from sales of available-for-sale debt securities
Proceeds from sales of FHLB stock
Purchases of FHLB stock
Purchases of premises and equipment
Proceeds from sales of premises and equipment
Proceeds from sales of other real estate owned and repossessed assets
Net cash (used) provided by investing activities
Cash flows from financing activities:
Net (decrease) increase in demand deposits
Net increase in interest-bearing transaction accounts
Net decrease in time deposits
Net increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase
Repayment of FHLB advances
FHLB advances
Redemption of 18,255 and 12,000 shares, respectively, of preferred stock
Warrant redemption
Cash dividends paid - preferred stock
Cash dividends paid - common stock
Net cash (used) provided by financing activities
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
See accompanying notes to the consolidated financial statements.
33
Years Ended December 31,
2012
2013
2011
$
4,974 $
2,822 $
2,857
2,030
1,605
1,211
135
19
25
(778)
(6)
330
3,367
191
(77)
4,311
524
(483)
1,113
(72,100)
75,961
(1,665)
(444)
20,243
(2,525)
(88,137)
33,341
8,275
32,590
536
(612)
(2,680)
23
9,641
(9,548)
(4,889)
13,383
(43,298)
8,900
1,858
1,161
408
29
1,331
(26)
(79)
(317)
713
151
(72)
949
(644)
(145)
253
(99,420)
99,797
(2,669)
(125)
14,875
(26,499)
(76,498)
42,735
45,170
790
460
0
(1,375)
272
8,571
(6,374)
33,084
21,103
(21,136)
10,026
(15,126)
19,000
(18,255)
(540)
(456)
(978)
(41,133)
(30,438)
58,877
28,439 $
(3,458)
(8,284)
0
(12,000)
0
(1,203)
(940)
7,166
15,667
43,210
58,877 $
$
11,523
1,940
837
1,243
58
0
0
(13)
206
1,252
393
(62)
252
1,008
(437)
(104)
(73,272)
74,983
(1,649)
(183)
20,832
32,298
(122,871)
36,923
54,185
0
1,757
0
(3,393)
47
7,435
6,381
21,438
5,461
(15,337)
(5,552)
(38,576)
0
0
0
(1,513)
(904)
(34,983)
(7,770)
50,980
43,210
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(In thousands)
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest
Income taxes
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans
See accompanying notes to the consolidated financial statements.
Years Ended December 31,
2012
2013
2011
$
$
$
6,825 $
131 $
8,420 $
1,591 $
11,290
665
4,613 $
16,869 $
10,903
34
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(1) Summary of Significant Accounting Policies
Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range
of banking services to individual and corporate customers located within the communities in and surrounding Jefferson City,
Clinton, Warsaw, Springfield, Branson, and Lee’s Summit, Missouri. 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 consolidated financial statements of the Company have been prepared in conformity with U.S.
generally accepted accounting principles (U.S. GAAP). 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, 2013, the Company paid a special stock dividend of four percent to common shareholders of record
at the close of business on June 15, 2013. For all periods presented, share information, including basic and diluted earnings per
share, has been adjusted retroactively to reflect this change.
The significant accounting policies used by the Company in the preparation of the consolidated financial statements
are summarized below:
Principles of Consolidation
In December of 2008 and March of 2010, the Company formed Hawthorn Real Estate, LLC, and Real Estate Holdings of
Missouri, LLC, respectively (the Real Estate Companies); both are wholly owned subsidiaries of the Company. The
consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), and the Real Estate
Companies. All significant intercompany accounts and transactions have been eliminated in consolidation.
Loans
Loans that the Company has the intent and ability to hold for the foreseeable future or maturity are held for investment at their
stated unpaid principal balance amount less unearned income and the allowance for loan losses. Income on loans is accrued on
a simple-interest basis. Loan origination fees and certain direct costs are deferred and recognized over the life of the loan as an
adjustment to yield.
Loans Held for Sale
The Bank originates certain loans which are sold in the secondary market. These long-term, fixed rate loans are typically
classified as held for sale upon origination based on management’s intent to sell. In order to manage the risk associated with
such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in
the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for
normal and customary representation and warranty provisions. At December 31, 2013 there were $95,882 mortgage loans that
were held for sale in comparison to $2.3 million loans held for sale at December 31, 2012.
Mortgage loan servicing fees earned on loans sold are reported as other noninterest income when the related loan payments are
collected net of amortization from mortgage servicing rights. Operational costs to service such loans are charged to expense as
incurred.
35
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Impaired Loans
A loan is considered impaired when it is probable the Company will be unable to collect all amounts due, both principal and
interest, according to the contractual terms of the loan agreement. Included in impaired loans are all non-accrual loans and
loans whose terms have been modified in a troubled debt restructuring. Impaired loans are individually evaluated for
impairment based on fair values of the underlying collateral, obtained through independent appraisals or internal valuations for
a collateral dependent loan, or by discounting the total expected future cash flows.
Non-Accrual Loans
Loans are placed on nonaccrual status when management believes that the borrower’s financial condition, after consideration of
business conditions and collection efforts, is such that collection of interest is doubtful. Loans that are contractually 90 days
past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in
the process of collection. Subsequent interest payments received on such loans are applied to principal if doubt exists as to the
collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. A loan remains on
nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the
ability to pay and remain current.
Restructured Loans
A modified or restructured loan is accounted for as a troubled debt restructuring (TDR) for any loans in which concessions are
made to the borrower for economic or legal reasons that the Company would not otherwise consider and the borrower is
experiencing financial difficulty. A loan classified as a TDR will generally retain such classification until the loan is paid in
full. Non-accrual TDRs are returned to accruing status once the borrower demonstrates the ability to pay under the terms of the
restructured note through a sustained period of repayment performance, which is generally six months. The Company includes
all accruing and non-accruing TDRs in the impaired and non-performing asset totals. TDRs are measured for impairment loss
by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or by
discounting the total expected future cash flows.
Allowance for Loan Losses
Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the
Company's results of operations, since the application of this policy requires significant management assumptions and
estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to
change. Many of the loans are deemed collateral dependent for purposes of the measurement of the impairment loss, thus the
fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand,
condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the
financial performance of the Company.
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. 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. Although
the allowance for loan losses are comprised of specific and general allocations, the entire allowance is available to absorb credit
losses.
The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired
loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or
by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is
recorded. The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by
36
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
applying loss rates to pools of loans by asset type. Loans not individually evaluated are aggregated based on similar risk
characteristics. Historical loss rates for each risk group, which are updated quarterly, are quantified using all recorded loan
charge-offs. Management determined that the previous twelve quarters were reflective of the loss characteristics of the
Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as
the starting point to determine loss rates for measurement purposes. The Company’s methodology includes factors that allow
management to adjust its estimates of losses based on the most recent information available. The rates are then adjusted to
reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through
foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local
economic conditions and developments, including general economic and business conditions affecting the Company’s key
lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results,
and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as
appropriate.
Investment in Debt and Equity Securities
At the time of purchase, debt securities are classified into one of two categories: available-for-sale or held-to-maturity.
Held-to-maturity securities are those securities which the Company has the positive intent and ability to hold until maturity. All
debt securities not classified as held-to-maturity are classified as available-for-sale. The Company’s securities are classified as
available-for-sale and are carried at fair value. Changes in fair value, excluding certain losses associated with other-than-
temporary impairment, are reported in other comprehensive income, net of taxes, a component of stockholders’ equity.
Securities are periodically evaluated for other-than-temporary impairment in accordance with guidance provided in the FASB
ASC Topic 320, Investments –Debt and Equity Securities. For those securities with other-than-temporary impairment, the entire
loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it
more likely than not that it will be required to sell the security before the anticipated recovery. If neither condition is met, but
the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred,
which is then recognized in current earnings. The amount of the total other-than-temporary impairment related to all other
factors is recognized in other comprehensive income.
Premiums and discounts are amortized using the interest method over the lives of the respective securities, with consideration
of historical and estimated prepayment rates for mortgage-backed securities, as an adjustment to yield. Dividend and interest
income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in
earnings based on the specific identification method for determining the cost of securities sold.
Capital Stock of the Federal Home Loan Bank
The Bank, as a member of the Federal Home Loan Bank System administered by the Federal Housing Finance Board, is
required to maintain an investment in the capital stock of the Federal Home Loan Bank of Des Moines (FHLB) in an amount
equal to 12 basis points of the Bank’s year-end total assets plus 4.45% of advances from the FHLB to the Bank. These invest-
ments are recorded at cost, which represents redemption value.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improve-
ments and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful
lives of the assets. Such lives are estimated to be 5 to 40 years for buildings and improvements and 3 to 15 years for furniture
and equipment. Maintenance and repairs are charged to expense as incurred.
Core Deposit Intangibles
Intangible assets that have finite useful lives, such as core deposit intangibles, are amortized over their estimated useful lives.
Core deposit intangibles are amortized over periods of 7 to 8 years representing their estimated lives using straight line and
accelerated methods.
37
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the
recoverability of the carrying value based upon future cash flows expected to result from the use of the underlying asset and its
eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the
carrying value of the underlying asset, the Company recognizes an impairment loss. The impairment loss recognized represents
the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset.
Mortgage Servicing Rights
The Company originates and sells residential mortgage loans in the secondary market and may retain the right to service the
loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to
the investors or master servicer. Upon a sale of mortgage loans for which servicing rights are retained, the retained mortgage
servicing rights asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing
activities.
Mortgage servicing rights do not trade in an active market with readily observable prices. The Company determines the fair
value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans
being serviced. Key economic assumptions used in measuring the fair value of mortgage servicing rights include, but are not
limited to, prepayment speeds, discount rates, delinquencies, ancillary income, and cost to service. These assumptions are
validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party valuation specialist
firm.
On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting
Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in
the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to
beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights have
been recognized in real estate servicing fees, net in non-interest income in the Company’s Consolidated Statements of Income
in the period in which the change occurred.
Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This
collateral is comprised of commercial and residential real estate and other non-real estate property, including autos,
manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the
fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for
loan losses. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-
real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on
experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets
may be written down to reflect a new cost basis. The write-downs are recorded as other real estate expense. The Company
establishes a valuation allowance related to other real estate owned on an asset-by-asset basis. The valuation allowance is
created during the holding period when the fair value less cost to sell is lower than the cost of the property.
Pension Plan
The Company provides a noncontributory defined benefit pension plan for all full-time employees. The benefits are based on
age, years of service and the level of compensation during the employees highest ten years of compensation before retirement.
Net periodic costs are recognized as employees render the services necessary to earn the retirement benefits. The Company
records annual amounts relating to its pension plan based on calculations that incorporate various actuarial and other
assumptions including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The
Company reviews its assumptions on an annual basis and may make modifications to the assumptions based on current rates
and trends when it is appropriate to do so. The Company believes that the assumptions utilized in recording its obligations
under its plan are reasonable based on its experience and market conditions.
38
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation – Retirement Plans under
the subtopic Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an
employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the
year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the
funded status of a plan as of the date of its fiscal year-end, with limited exceptions. Additional disclosures are required to
provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair
value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures.
Income Taxes
Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for
the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the
Company’s financial statements or tax returns. Judgment is required in addressing the Company’s future tax consequences of
events that have been recognized in the consolidated financial statements or tax returns such as realization of the effects of
temporary differences, net operating loss carry forwards and changes in tax laws or interpretations thereof. A valuation
allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not
become realizable. In this case, the Company would adjust the recorded value of our deferred tax asset, which would result in a
direct charge to income tax expense in the period that the determination was made. Likewise, the Company would reverse the
valuation allowance when it is expected to realize the deferred tax asset. In addition, the Company is subject to the continuous
examination of its tax returns by the Internal Revenue Service and other taxing authorities. The Company accrues for penalties
and interest related to income taxes in income tax expense. At December 31, 2011, the Company released $28,000 of interest
accrued related to the release of $221,000 of uncertain tax provisions. The Company had not recognized any tax liabilities or
any interest or penalties in income tax expense related to uncertain tax positions as of December 31, 2013 and 2012.
Trust Department
Property held by the Bank in a fiduciary or agency capacity for customers is not included in the accompanying consolidated
balance sheets, since such items are not assets of the Company. Trust department income is recognized on the accrual basis.
Consolidated Statements of Cash Flows
For the purpose of the consolidated statements of cash flows, cash and cash equivalents consist of short-term federal funds sold
and securities sold or purchased under agreements to resell, interest earning deposits with banks, cash, and due from banks.
Stock-Based Compensation
The Company’s stock-based employee compensation plan is described in Note 12, Stock Compensation. In accordance with
FASB ASC Topic 718, Compensation – Stock Compensation, the Company measures the cost of the stock-based compensation
based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an
award is estimated using the Black-Scholes option-pricing model. The expense recognized is based on an estimation of the
number of awards for which the requisite service is expected to be rendered, and is included in salaries and employee benefits
in the accompanying Consolidated Statements of Income. The standard also requires that excess tax benefits related to stock
option exercises be reflected as financing cash inflows instead of operating cash inflows.
Treasury Stock
The purchase of the Company’s common stock is recorded at cost. Purchases of the stock are made both in the open market and
through negotiated private purchases based on market prices. At the date of subsequent reissue, the treasury stock account is
reduced by the cost associated with such stock on a first-in-first-out basis.
Reclassifications
Certain prior year information has been reclassified to conform to the current year presentation.
39
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The following represents significant new accounting principles adopted in 2013:
Balance Sheet In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The
ASU is a joint requirement by the FASB and International Accounting Standards Board to enhance current disclosures and
increase comparability of U.S. GAAP and International Financial Reporting Standards (IFRS) financial statements. Under the
ASU, an entity will be required to disclose both gross and net information about instruments and transactions eligible for offset
in the balance sheet, as well as instruments and transactions subject to an agreement similar to a master netting agreement. ASU
2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities, was issued in January 2013, and amended
ASU 2011-11 to specifically include only derivatives accounted for under Topic 815, repurchase and reverse purchase
agreements, and securities and borrowing and lending transactions that are either offset or subject to an enforceable master
netting arrangement. Both ASUs are effective for annual and interim periods beginning January 1, 2013. The adoption of these
ASUs had no effect on the Company’s financial statements.
Other Comprehensive Income In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out
of Accumulated Other Comprehensive Income (AOCI). The amendments of ASU No. 2013-02 require an entity to present,
either in the income statement or in the notes, significant amounts reclassified out of accumulated other comprehensive income
by the respective line items of net income, but only if the amount reclassified is required under U.S. GAAP to be reclassified to
net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be
reclassified in their entirety, an entity is required to cross-reference to other disclosures that provide additional detail about
those amounts. This ASU is effective for annual and interim periods beginning January 1, 2013. As a result of the adoption of
the ASU, the disclosure of AOCI included in Note 10 contains information regarding reclassifications out of AOCI and into net
income.
40
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(2) Loans and Allowance for Loan Losses
Loans
A summary of loans, by major class within the Company’s loan portfolio, at December 31, 2013 and 2012 is as follows:
(in thousands)
Commercial, financial, and agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment and other consumer
Total loans
2013
2012
$
$
133,717 $
21,008
55,076
225,541
382,550
21,655
839,547 $
130,040
22,177
43,486
221,223
405,092
24,966
846,984
The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the
communities surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. 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 vehicles. At
December 31, 2013, loans with a carrying value of $388.1 million were pledged to the Federal Home Loan Bank as collateral
for borrowings and letters of credit.
The following is a summary of loans to directors and executive officers or to entities in which such individuals had a beneficial
interest of the Company, are summarized as follows:
(in thousands)
Balance at December 31, 2012
New loans
Amounts collected
Balance at December 31, 2013
$
$
8,067
57
(3,287)
4,837
Such loans were made in the normal course of business on substantially the same terms, including interest rates and
collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve
more than the normal risk of collectability or present unfavorable features.
41
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Allowance for loan losses
The following is a summary of the allowance for loan losses for the years ended December 31, 2013, 2012, and 2011:
$
$
$
(in thousands)
Balance at December 31, 2010
Additions:
Provision for loan losses
Deductions:
Loans charged off
Less recoveries on loans
Net loans charged off
Balance at December 31, 2011
Additions:
Provision for loan losses
Deductions:
Loans charged off
Less recoveries on loans
Net loans charged off
Balance at December 31, 2012
Additions:
Provision for loan losses
Deductions:
Loans charged off
Less recoveries on loans
Net loans charged off
Commercial,
Financial, &
Agricultural
Real Estate
Construction -
Residential
Real Estate
Construction -
Commercial
Real Estate
Mortgage -
Residential
Real Estate
Mortgage -
Commercial
Installment
Loans to
Individuals
Un-
allocated
Total
2,931
$
2,067
$
1,339
$
3,922
$
3,458
$
231
$
617
$
14,565
837
2,157
(193)
1,964
914
1,858
(65)
1,793
485
512
(250)
262
1,104
1,883
(108)
1,775
8,593
6,420
(103)
6,317
204
376
(208)
168
1,804
$
1,188
$
1,562
$
3,251
$
5,734
$
267
$
1,732
1,760
(161)
1,599
(523)
0
(67)
(67)
126
0
(23)
(23)
955
977
(158)
819
6,318
5,466
(248)
5,218
293
586
(265)
321
1,937
$
732
$
1,711
$
3,387
$
6,834
$
239
$
992
895
(340)
555
318
119
0
119
(452)
633
(5)
628
273
812
(111)
701
622
1,301
(368)
933
272
420
(203)
217
(614)
11,523
0
0
0
3
(1)
$
0
0
0
2
5
0
0
0
7
13,206
(927)
12,279
13,809
8,900
8,789
(922)
7,867
$
14,842
2,030
4,180
(1,027)
3,153
$
13,719
Balance at December 31, 2013
$
2,374
$
931
$
631
$
2,959
$
6,523
$
294
$
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.
42
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The following table provides the balance in the allowance for loan losses at December 31, 2013 and 2012, and the related loan
balance by impairment methodology.
Commercial,
Financial, and
Agricultural
Real Estate
Construction -
Residential
Real Estate
Construction -
Commercial
Real Estate
Mortgage -
Residential
Real Estate
Mortgage -
Commercial
Installment
Loans to
Individuals
Un-
allocated
Total
721 $
1,653
2,374 $
392 $
539
931 $
304 $
327
631 $
1,374 $
1,989 $
1,585
2,959 $
4,534
6,523 $
16 $
278
294 $
4,015 $
2,204 $
6,615 $
6,517 $
15,422 $
43 $
129,702
133,717 $
18,804
21,008 $
48,461
55,076 $
219,024
225,541 $
367,128
382,550 $
21,612
21,655 $
213 $
1,724
1,937 $
125 $
607
732 $
542 $
1,069 $
2,071 $
1,169
1,711 $
2,318
3,387 $
4,763
6,834 $
0 $
239
239 $
4,157 $
2,496 $
7,762 $
5,771 $
18,959 $
44 $
125,883
130,040 $
19,681
22,177 $
35,724
43,486 $
215,452
221,223 $
386,133
405,092 $
24,922
24,966 $
0 $
7
7 $
0 $
0
0 $
0 $
2
2 $
0 $
0
0 $
4,796
8,923
13,719
34,816
804,731
839,547
4,020
10,822
14,842
39,189
807,795
846,984
(in thousands)
December 31, 2013
Allowance for loan losses:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total
Loans outstanding:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total
December 31, 2012
Allowance for loan losses:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total
Loans outstanding:
Individually evaluated for
impairment
Collectively evaluated for
impairment
Total
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 totaled $35.1 million and $39.4 million at December 31,
2013 and 2012, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled
debt restructurings. Total impaired loans of $35.1 million at December 31, 2013, includes $34.8 million of impaired loans
individually evaluated for impairment and $259,000 of non-accrual consumer loans that were collectively evaluated for
impairment. Total impaired loans of $39.4 million at December 31, 2012, includes $39.2 million of impaired loans individually
evaluated for impairment and $174,000 of non-accrual consumer loans that were collectively evaluated for impairment.
The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent
appraisals or internal evaluations, or by discounting the total expected future cash flows. At December 31, 2013 and 2012, $21.8
million and $36.1 million, respectively, of impaired loans were evaluated based on the fair value of the loan’s collateral. Once the
impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2013, $4.8 million of the Company’s
allowance for loan losses was allocated to impaired loans totaling $35.1 million compared to $4.0 million of the Company's
allowance for loan losses allocated to impaired loans totaling approximately $39.4 million at December 31, 2012. Management
determined that $18.8 million, or 54%, of total impaired loans required no reserve allocation at December 31, 2013 compared to
$14.7 million, or 37%, at December 31, 2012 primarily due to adequate collateral values, acceptable payment history and adequate
cash flow ability.
43
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The categories of impaired loans at December 31, 2013 and 2012 are as follows:
(in thousands)
Non-accrual loans
Troubled debt restructurings continuing to accrue interest
Total impaired loans
2013
2012
$
$
23,680 $
11,395
35,075 $
31,081
8,282
39,363
The following tables provide additional information about impaired loans at December 31, 2013 and 2012, respectively, segregated
between loans for which an allowance has been provided and loans for which no allowance has been provided.
(in thousands)
December 31, 2013
With no related allowance recorded:
Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer
Total
With an allowance recorded:
Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer
Total
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Specific
Reserves
$
$
$
$
$
2,467 $
44
6,101
2,121
7,817
259
18,809 $
1,548 $
2,160
514
4,396
7,605
43
16,266 $
35,075 $
2,593 $
80
7,148
2,654
8,056
282
20,813 $
1,607 $
2,331
514
4,570
7,925
45
16,992 $
37,805 $
0
0
0
0
0
0
0
721
392
304
1,374
1,989
16
4,796
4,796
44
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(in thousands)
December 31, 2012
With no related allowance recorded:
Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer
Total
With an allowance recorded:
Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer
Total
Total impaired loans
Recorded
Investment
Unpaid
Principal
Balance
Specific
Reserves
$
$
$
$
$
$
3,272
2,307
1,879
1,939
5,162
174
14,733 $
885 $
189
5,883
3,832
13,797
44
24,630 $
39,363 $
4,009 $
2,339
2,102
2,393
5,565
186
16,594 $
898 $
189
6,011
3,999
14,167
44
25,308 $
41,902 $
0
0
0
0
0
0
0
213
125
542
1,069
2,071
0
4,020
4,020
The following table presents by class, information related to the average recorded investment and interest income recognized on
impaired loans for the years ended December 31, 2013 and 2012:
(in thousands)
With no related allowance recorded:
Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer
Total
With an allowance recorded:
Commercial, financial and agricultural
Real estate - construction residential
Real estate - construction commercial
Real estate - residential
Real estate - commercial
Consumer
Total
Total impaired loans
2013
2012
Average
Recorded
Investment
Interest
Recognized
For the
Period Ended
Average
Recorded
Investment
Interest
Recognized
For the
Period Ended
$
$
$
$
$
2,693 $
80
7,437
2,612
8,461
290
21,573 $
1,677 $
2,409
514
4,596
8,157
45
17,398 $
38,971 $
108 $
0
6
51
170
3
338 $
29 $
0
0
24
113
0
166 $
504 $
4,157 $
1,137
1,692
3,169
12,198
170
22,523 $
776 $
189
6,087
2,604
11,271
2
20,929 $
43,452 $
93
7
0
50
124
1
275
29
0
0
11
99
0
139
414
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 $504,000 and $414,000, for the years ended December 31, 2013 and 2012, respectively.
The average recorded investment in impaired loans is calculated on a monthly basis during the years reported. Contractual interest
lost on loans in non-accrual status was $1.2 million for the years ended December 31, 2013 and 2012, respectively.
45
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
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 following table provides aging information for the Company’s past due and non-accrual loans at December 31, 2013 and
2012.
Current or
Less Than
30 Days
Past Due
90 Days
Past Due
And Still
Accruing
30 - 89 Days
Past Due
Non-Accrual
Total
$
$
$
$
131,091 $
18,738
48,230
217,179
372,651
21,048
808,937 $
126,884 $
19,390
35,117
213,694
390,032
24,221
809,338 $
942 $
66
595
4,068
725
291
6,687 $
1,821 $
290
607
2,199
1,122
520
6,559 $
0 $
0
0
129
100
14
243 $
0 $
0
0
0
0
6
6 $
1,684 $
2,204
6,251
4,165
9,074
302
23,680 $
1,335 $
2,497
7,762
5,330
13,938
219
31,081 $
133,717
21,008
55,076
225,541
382,550
21,655
839,547
130,040
22,177
43,486
221,223
405,092
24,966
846,984
(in thousands)
December 31, 2013
Commercial, Financial, and Agricultural
Real Estate Construction - Residential
Real Estate Construction - Commercial
Real Estate Mortgage - Residential
Real Estate Mortgage - Commercial
Installment and Other Consumer
Total
December 31, 2012
Commercial, Financial, and Agricultural
Real Estate Construction - Residential
Real Estate Construction - Commercial
Real Estate Mortgage - Residential
Real Estate Mortgage - Commercial
Installment and Other Consumer
Total
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 (1) one or more weaknesses that could jeopardize timely liquidation exits;
or (2) the margin or liquidity of an asset is sufficiently tenuous that adverse trends could result in a collection problem. 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. 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.
46
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The following table presents the risk categories by class at December 31, 2013 and 2012.
(in thousands)
At December 31, 2013
Watch
Substandard
Non-accrual
Total
At December 31, 2012
Watch
Substandard
Non-accrual
Total
Commercial,
Financial, &
Agricultural
Real Estate
Construction -
Residential
Real Estate
Construction -
Commercial
Real Estate
Mortgage -
Residential
Real Estate
Mortgage -
Commercial
Installment
and other
Consumer
Total
$
$
$
$
15,016 $
7,553
1,684
24,253 $
14,814 $
6,485
1,335
22,634 $
2,007 $
92
2,204
4,303 $
4,580 $
396
2,497
7,473 $
6,111 $
1,403
6,251
13,765 $
6,459 $
2,035
7,762
16,256 $
26,331 $
8,579
4,165
39,075 $
26,063 $
5,472
5,330
36,865 $
23,662 $
14,510
9,074
47,246 $
29,753 $
11,027
13,938
54,718 $
388 $
281
302
971 $
672 $
423
219
1,314 $
73,515
32,418
23,680
129,613
82,341
25,838
31,081
139,260
Troubled Debt Restructurings
At December 31, 2013, loans classified as troubled debt restructurings (TDRs) totaled $21.5 million, of which $10.1
million were on non-accrual status and $11.4 million were on accrual status. At December 31, 2012, loans classified as TDRs
totaled $22.4 million, of which $14.1 million were on non-accrual status and $8.3 million were on accrual status. 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 $2.2 million and $1.5 million related to TDRs were allocated to the allowance for loan losses
at December 31, 2013 and 2012, respectively.
The following table summarizes loans that were modified as TDRs during the years ended December 31, 2013 and 2012.
(in thousands)
Troubled Debt Restructurings
Commercial, financial and agricultural
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Consumer
Total
2013
Recorded Investment (1)
Pre-
Modification
Number of
Contracts
Post-
Modification
Number of
Contracts
2012
Recorded Investment (1)
Pre-
Modification
Post-
Modification
0 $
0
3
1
0
4 $
0 $
0
2,156
1,282
0
3,438 $
0
0
1,992
1,282
0
3,274
4 $
1
5
2
2
14
$
637 $
43
657
645
44
2,026 $
613
41
657
644
44
1,999
(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 such as interest rates below the current market
rate, deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as
a TDR until it is ultimately repaid in full, charged-off, or the collateral for the loan is foreclosed and sold. The Company
considers a loan in TDR status in default when the borrower’s payment according to the modified terms is at least 90 days past
due or has defaulted due to expiration of the loan’s maturity date. During the year ended December 31, 2013, four loans
meeting the TDR criteria were modified compared to fourteen loans during the year ended December 31, 2012. There were no
47
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
loans modified as a TDR that defaulted during the year December 31, 2013, and within twelve months of their modification
date compared to one loan during the year ended December 31, 2012.
(3) Real Estate and Other Assets Acquired in Settlement of Loans
(in thousands)
Commercial
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Repossessed assets
Total
Less valuation allowance for other real estate owned
Total other real estate owned and foreclosed assets
2013
2012
$
$
$
$
0
114
10,020
830
8,537
41
19,542 $
(4,675)
14,867 $
329
112
13,392
1,227
14,201
468
29,729
(6,137)
23,592
Changes in the net carrying amount of other real estate owned and repossessed assets for the years ended December 31, 2011
2012, and 2013, respectively, were as follows:
Balance at December 31, 2011
Additions
Proceeds from sales
Charge-offs against the valuation allowance for other real estate owned
Repossessed assets impairment write-downs
Net gain on sales
Balance at December 31, 2012
Additions
Proceeds from sales
Charge-offs against the valuation allowance for other real estate owned, net
Repossessed assets impairment write-downs
Net loss on sales
Total other real estate owned and repossessed assets
Less valuation allowance for other real estate owned
Balance at December 31, 2013
$
$
$
$
22,997
16,869
(8,571)
(1,553)
(330)
317
29,729
4,613
(9,641)
(4,829)
(189)
(141)
19,542
(4,675)
14,867
During the years ended December 31, 2013 and 2012, net charge-offs against the allowance for loan losses at the time of
foreclosure were approximately $800,000 and $6.7 million, respectively.
48
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2013,
2012 and 2011, respectively, is summarized as follows:
(in thousands)
2013
2012
2011
Balance, beginning of year
Provision for other real estate owned
Charge-offs
Balance, end of year
(4)
Investment Securities
$
$
6,137 $
3,367
(4,829)
4,675 $
6,977 $
713
(1,553)
6,137 $
6,158
1,252
(433)
6,977
The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2013 and 2012 are as
follows:
(in thousands)
December 31, 2013
U.S. Treasury
Government sponsored enterprises
Asset-backed securities
Obligations of states and political subdivisions
Total available for sale securities
December 31, 2012
U.S. Treasury
Government sponsored enterprises
Asset-backed securities
Obligations of states and political subdivisions
Total available for sale securities
Amortized
cost
1,000
61,006
112,747
33,637
Gross
unrealized
gains
Gross
unrealized
losses
$
3 $
0 $
377
817
568
767
3,191
212
Fair value
1,003
60,616
110,373
33,993
208,390
$
1,765 $
4,170 $
205,985
$
2,000
54,327
104,607
33,959
194,893
$
30 $
853
3,276
1,222
5,381 $
0 $
0
11
17
28 $
2,030
55,180
107,872
35,164
200,246
$
$
$
$
All of the Company’s investment securities are classified as available for sale. Agency bonds and notes, 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.
Investment securities that are classified as restricted equity securities primarily consist of Federal Home Loan Bank stock
and the Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of $4.0 million
and $3.9 million as of December 31, 2013 and 2012, respectively.
Debt securities with carrying values aggregating approximately $145.8 million and $146.4 million at December 31, 2013
and December 31, 2012, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and
for other purposes as required or permitted by law.
49
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2013, 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.
(in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Asset-backed securities
Total available for sale securities
Amortized
cost
Fair
value
$
$
6,896 $
55,859
31,757
1,131
95,643
112,747
208,390 $
6,939
56,351
31,244
1,078
95,612
110,373
205,985
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 December 31, 2013 and
December 31, 2012 were as follows:
(in thousands)
At December 31, 2013
Government sponsored
enterprises
Asset-backed securities
Obligations of states and
political subdivisions
Total
(in thousands)
At December 31, 2012
Government sponsored
enterprises
Asset-backed securities
Obligations of states and
political subdivisions
Total
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or more
Fair
Value
Unrealized
Losses
Total
Fair
Value
Total
Unrealized
Losses
$
25,771
76,048
$
(767) $
(2,940)
$
0
5,941
$
0
(251)
$
25,771
81,989
6,907
(159)
450
(53)
7,357
$
108,726
$
(3,866) $
6,391
$
(304) $
115,117
$
$
$
1,044
4,729
2,114
7,887
$
$
$
0
(11)
(17)
(28) $
0
0
150
150
$
$
0
0
0
0
$
$
1,044
4,729
2,264
8,037
$
$
(767)
(3,191)
(212)
(4,170)
0
(11)
(17)
(28)
The total available for sale portfolio consisted of approximately 348 securities at December 31, 2013. The portfolio
included 96 securities having an aggregate fair value of $115.1 million that were in a loss position at December 31, 2013.
Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $6.4 million at
fair value. The $4.2 million aggregate unrealized loss included in accumulated other comprehensive income at December 31,
2013 was caused by interest rate fluctuations. The total available for sale portfolio consisted of approximately 380 securities at
December 31, 2012. The portfolio included 14 securities having an aggregate fair value of $8.0 million that were in a loss
position at December 31, 2012. Securities identified as temporarily impaired which had been in a loss position for 12 months or
longer totaled $150,000 at fair value. The $28,000 aggregate unrealized loss included in other comprehensive income at
December 31, 2012 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 December 31,
2013 and 2012, respectively.
50
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The table presents the components of investment securities gains and losses which have been recognized in earnings:
(in thousands)
Gains realized on sales
Losses realized on sales
Other-than-temporary impairment recognized
Investment securities gains
2013
2012
2011
$
$
786 $
(8)
0
778 $
26 $
0
0
26 $
0
0
0
0
(5)
Premises and Equipment
A summary of premises and equipment at December 31, 2013 and 2012 is as follows:
(in thousands)
Land and land improvements
Buildings and improvements
Furniture and equipment
Construction in progress
Total
Less accumulated depreciation
Premises and equipment, net
2013
2012
10,073 $
33,730
11,627
2,402
57,832
19,753
38,079 $
10,073
34,174
12,250
155
56,652
19,631
37,021
$
$
Depreciation expense for the years ended December 31, 2013, 2012, and 2011 was as follows:
(in thousands)
Depreciation expense
2013
2012
2011
$
1,605
$
1,858
$
1,940
(6)
Intangible Assets
Core Deposit Intangible Asset
A summary of core deposit intangible assets at December 31, 2013 and 2012 is as follows:
(in thousands)
Gross
Carrying
Amount
2013
Accumulated
Amortization
Core deposit intangible
$
4,795
$
(4,795) $
2012
Net
Amount
-
Gross
Carrying
Amount
Accumulated
Amortization
Net
Amount
$
4,795
$
(4,660) $
135
51
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Changes in the net carrying amount of core deposit intangible assets for the years ended December 31, 2013, 2012, and 2011 is
as follows:
(in thousands)
Balance at beginning of year
Additions
Amortization
Balance at end of year
Mortgage Servicing Rights
2013
2012
2011
$
$
135 $
0
(135)
0 $
$
543
0
(408)
135
$
978
0
(435)
543
On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting
Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in
the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to
beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights have
been recognized in earnings in non-interest income in the period in which the change occurred.
At December 31, 2013 and 2012, respectively, the Company serviced mortgage loans for others totaling $322.5 million
and $310.6 million, respectively. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were
$901,000, $878,000, and $863,000, for the years ended December 31, 2013, 2012, and 2011, respectively.
The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2013, 2012, and
2011.
(in thousands)
2013
2011
2012
Balance at beginning of year
Re-measurement to fair value upon election to measure
servicing rights at fair value
Originated mortgage servicing rights
Changes in fair value:
Due to change in model inputs and assumptions (1)
Other changes in fair value (2)
Amortization
Balance at end of year
$
2,549
$
2,308
$
2,356
0
512
723
(748)
0
742
830
241
(1,572)
0
0
760
0
0
(808)
$
3,036
$
2,549
$
2,308
(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. This also includes a one time adjustment of a
$538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated
amortization method of accounting for amortizing MSRs in prior years. If the aforementioned was corrected as of December 31, 2011,
the balance at the beginning of the period would have been $1.8 million.
52
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The following key data and assumptions were used in estimating the fair value of the Company’s mortgage servicing rights as
of the years ended December 31, 2013 and 2012:
Weighted-Average Constant Prepayment Rate
Weighted-Average Note Rate
Weighted-Average Discount Rate
Weighted-Average Expected Life (in years)
(7) Deposits
2013
2012
9.48 %
4.01 %
9.06 %
6.10
18.60 %
4.22 %
7.99 %
3.90
The scheduled maturities of total time deposits as of the years ended December 31, 2013 and 2012 were as follows:
(in thousands)
Due within:
One year
Two years
Three years
Four years
Five years
Total
2013
2012
231,644 $
58,844
30,767
12,662
16,087
350,004 $
280,477
65,220
23,482
11,984
12,139
393,302
$
$
At December 31, 2013 and 2012, the Company had certificates and other time deposits in denominations of $100,000 or more
with maturities as follows:
(in thousands)
Due within:
Three months or less
Over three months through six months
Over six months through twelve months
Over twelve months
Total
2013
2012
$
$
32,647 $
14,435
27,055
37,530
37,166
18,690
33,265
31,656
111,667 $
120,777
The Federal Reserve Bank required the Bank to maintain cash or balances of $1.3 million and $1.4 million at
December 31, 2013 and 2012, respectively, to satisfy reserve requirements.
Average compensating balances held at correspondent banks were $315,000 and $1.6 million at December 31, 2013 and
2012, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services
rendered by those banks.
53
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(8) Borrowings
Federal Funds Purchased and Securities Sold under Agreements to Repurchase (Repurchase Agreements)
Information relating to federal funds purchased and repurchase agreements is as follows:
(in thousands)
2013
Federal funds purchased
Short-term repurchase agreements
Total
2012
Federal funds purchased
Short-term repurchase agreements
Total
Year End
Weighted
Rate
Average
Weighted
Rate
Average
Balance
Outstanding
Maximum
Outstanding at
any Month End
Balance at
December 31,
0.4 %
0.1
0.0 %
0.1
0.4 % $
0.1
635 $
19,913
0.6 % $
0.1
412 $
22,867
13,503 $
25,007
$
345 $
24,734
$
13,503
17,581
31,084
0
21,058
21,058
The securities underlying the agreements to repurchase are under the control of the Bank. All securities sold under
agreements to repurchase are secured by a portion of the Bank’s investment portfolio.
Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $26.5 million on an unsecured basis
and $4.7 million on a secured basis at December 31, 2013.
Subordinated Notes and Other Borrowings
Other borrowings of the Company consisted of the following:
(in thousands)
2013
Year End
Weighted
Rate
2012
Year End
Weighted
Rate
FHLB advances
The Bank
Borrower
Total Bank
Maturity
Date
2014 $
2015
2016
2017
2018-19
$
Year End
Balance
0
0
3,000
3,000
18,000
24,000
Year End
Balance
10,126
0
0
0
10,000
20,126
$
$
na
na
0.6 %
0.9 %
2.0 %
Subordinated notes The Company
Total Company
2034 $
2035
$
25,774
23,712
49,486
2.9 % $
2.1 %
$
25,774
23,712
49,486
1.5 %
na
na
na
2.5 %
3.0 %
2.1 %
The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has access to term financing from
the FHLB. These borrowings are secured under a blanket agreement which assigns all investment in FHLB stock, as well as
mortgage loans equal to 125% to 175% (based on collateral type) of the outstanding advance balance, to secure amounts
borrowed by the Bank. The outstanding balance of $24.0 million includes $10.0 million which the FHLB may call for early
payment within the next year. Based upon the collateral pledged to the FHLB at December 31, 2013, the Bank could borrow up
to an additional $235.2 million under the agreement.
54
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
On March 17, 2005, Exchange Statutory Trust II, a business trust and subsidiary of the Company, issued $23.0 million of
30-year floating rate Trust Preferred Securities (TPS) to a TPS Pool. The floating rate is equal to a three-month LIBOR rate
plus 1.83% and reprices quarterly (2.07% at December 31, 2013). The TPS can be prepaid without penalty at any time after
five years from the issuance date.
The TPS represent preferred interests in the trust. The Company invested approximately $712,000 in common interests
in the trust and the purchaser in the private placement purchased $23.0 million in preferred interests. The proceeds were used
by the trust to purchase from the Company its 30-year deeply subordinated debentures whose terms mirror those stated above
for the TPS. The debentures are guaranteed by the Company pursuant to a subordinated guarantee. Distributions on the TPS are
payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The
trustee for the TPS holders is U.S. Bank, N.A.. The trustee does not have the power to take enforcement action in the event of a
default under the TPS for five years from the date of default. In the event of default, however, the Company would be
precluded from paying dividends until the default is cured.
On March 17, 2004, Exchange Statutory Trust I, a business trust and subsidiary of the Company issued $25.0 million of
floating rate TPS to a TPS Pool. The floating rate is equal to the three-month LIBOR rate plus 2.70% and reprices quarterly
(2.94% at December 31, 2013). The TPS are fully, irrevocably, and unconditionally guaranteed on a subordinated basis by the
Company. The proceeds of the TPS were invested in junior subordinated debentures of the Company. Distributions on the TPS
are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The
TPS mature on March 17, 2034. That maturity date may be shortened if certain conditions are met.
The Exchange Statutory Trusts are not consolidated in the Company’s financial statements. Accordingly, the Company
does not report the securities issued by the Exchange Statutory Trusts as liabilities, and instead reports the subordinated notes
issued by the Company and held by the Exchange Statutory Trusts as liabilities. The amount of the subordinated notes as of
December 31, 2013 and 2012 was $49.5 million, respectively. The Company has recorded the investments in the common
securities issued by the Exchange Statutory Trusts aggregating $1.5 million, and the corresponding obligations under the
subordinated notes, as well as the interest income and interest expense on such investments and obligations in its consolidated
financial statements.
(9)
Income Taxes
The composition of income tax expense for the years ended December 31, 2013, 2012, and 2011 was as follows:
(in thousands)
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
2013
2012
2011
$
$
584
71
655
1,485
282
1,767
$
651
156
807
(197)
(64)
(261)
374
(214)
160
386
45
431
591
Total income tax expense
$
2,422
$
546
$
55
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Applicable income tax expense for financial reporting purposes differs from the amount computed by applying the statutory
Federal income tax rate for the reasons noted in the table for the years ended December 31, 2013, 2012, and 2011 are as
follows:
(in thousands)
Income before provision for
income tax expense
Tax at statutory Federal income tax rate
Tax-exempt income
State income tax, net of Federal
tax benefit
Release of prior year over accrual
Other, net
Provision for income tax expense
2013
2012
2011
Amount
%
Amount
%
Amount
%
$
$
$
7,396
2,515
(353)
$
34.00 % $
(11)
233
0
27
3
0
7
3,368
1,145
(380)
61
(371)
91
$
34.00 % $
(11)
2
(11)
3
3,448
1,172
(404)
(111)
0
(66)
34.00 %
(12)
(3)
0
(2)
2,422
32.75 % $
546
16.23 % $
591
17.14 %
The components of deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are as follows:
(in thousands)
Deferred tax assets:
Allowance for loan losses
Impairment of other real estate owned
Goodwill
Available-for-sale securities
Deferred taxes on pension
Nonaccrual loan interest
Core deposit intangible
Pension
Deferred compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Available-for-sale securities
Premises and equipment
Mortgage servicing rights
Deferred taxes on pension
Assets held for sale
FHLB stock dividend
Other
Total deferred tax liabilities
Net deferred tax asset
$
$
$
2013
2012
5,213 $
1,771
2,134
914
0
1,015
822
896
44
322
5,640
2,774
2,483
0
997
940
904
450
36
449
13,131 $
14,673
0 $
988
1,114
328
112
100
72
2,714
2,088
958
908
0
110
100
1
4,165
$
10,417 $
10,508
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income 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 strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are
56
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences
at December 31, 2013 and, therefore, did not establish a valuation reserve.
At December 31, 2013, the accumulation of prior years’ earnings representing tax bad debt deductions of the Bank was
$2.9 million. If these tax bad debt reserves were charged for losses other than bad debt losses, the Bank would be required to
recognize taxable income in the amount of the charge. It is not contemplated that such tax-restricted retained earnings will be
used in a manner that would create federal income tax liabilities.
The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. As a
result of the lapse of the statue of limitations for the 2007 tax year, the Company recognized $340,351 of gross unrecognized
tax benefits and $30,969 of accrued interest which resulted in a decrease in the effective tax rate for the year ended December
31, 2011. As of December 31, 2013, 2012, and 2011, respectively, the Company did not have any uncertain tax provisions.
A reconciliation of the beginning and ending amount of the unrecognized tax benefits is as follows:
Unrecognized tax benefits as of January 1,
Gross amounts of the increases and decreases in unrecognized
tax benefits as a result of tax positions taken during prior years
Gross amounts of the increases and decreases in unrecognized
tax benefits as a result of tax positions taken during year
The amount of decreases in unrecognized tax benefits
relating to settlements with taxing authorities
Reductions to unrecognized benefits as a result of a lapse of the
applicable statute of limitations
Unrecognized tax benefits as of December 31,
(10) Stockholders’ Equity
Accumulated Other Comprehensive (Loss) Income
2013
2012
0 $
0 $
2011
340,351
0
0
0
0
0 $
0
0
0
0
0
0
0
0 $
(340,351)
0
$
$
The following details the change in the components of the Company’s accumulated other comprehensive (loss) income
for the year ended December 31, 2013:
(in thousands)
Balance, December 31, 2012
Other comprehensive (loss) income,
before reclassifications, net of tax
Amounts reclassified from accumulated other
comprehensive income, net of tax
Other comprehensive (loss) income, net of tax
Balance, December 31, 2013
Unrecognized Net
Pension and
Postretirement
Costs (2)
Accumulated
Other
Comprehensive
(Loss)
Income
(1,440)
$
1,825
Unrealized Loss
on Securities (1)
3,265
$
(4,274)
3,488
(482)
(4,756)
(1,491) $
(1,326)
2,162
722
$
(786)
(1,808)
(2,594)
(769)
$
$
(1) The pre-tax amounts reclassified from accumulated other comprehensive (loss) income are included in gain on sale of investment
securities in the consolidated statements of income.
57
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension
cost. (see Note 11)
(11) Employee Benefit Plans
Employee benefits charged to operating expenses are summarized in the table below for the years ended December 31, as
indicated.
(in thousands)
Payroll taxes
Medical plans
401k match
Pension plan
Profit-sharing
Other
Total employee benefits
2013
2012
2011
$
1,106
1,915
309
1,173
118
219
$
1,127
1,772
298
1,224
58
317
4,840
$
4,796
$
1,098
1,676
291
907
0
250
4,222
$
$
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.
Pension
The Company provides a noncontributory defined benefit pension plan for all full-time employees. An employer is
required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the
Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for
current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements
are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company has not made any
contributions to the defined benefit plan for the current plan year. The minimum required contribution for the 2014 plan year is
estimated to be $1.3 million. The Company has not determined whether it will make any contributions other than the minimum
required funding contribution for 2014.
58
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Obligations and Funded Status at December 31,
(in thousands)
Change in projected benefit obligation:
Balance, January 1
Service cost
Interest cost
Actuarial gain
Benefits paid
Balance, December 31
Change in plan assets:
Fair value, January 1
Actual return on plan assets
Employer contribution
Expenses paid
Benefits paid
Fair value, December 31
Funded status at end of year
Accumulated benefit obligation
2013
2012
15,342
1,174
646
(1,991)
(319)
14,852
$
$
$
11,707
2,220
0
(76)
(319)
13,532
$
(1,320) $
12,298
$
14,217
1,168
667
(458)
(252)
15,342
10,034
1,193
766
(34)
(252)
11,707
(3,635)
12,564
$
$
$
$
$
$
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 years ended December 31, as indicated:
(in thousands)
Service cost—benefits earned during the year
Interest costs on projected benefit obligations
Expected return on plan assets
Expected administrative expenses
Amortization of prior service cost
Amortization of unrecognized net loss
2013
2012
2011
$
1,174 $
646
(797)
40
79
31
1,168 $
667
(776)
40
79
46
931
604
(706)
0
78
0
907
Net periodic pension expense
$
1,173 $
1,224 $
59
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) at
December 31, 2013 and 2012 are shown below, including amounts recognized in other comprehensive income during the
periods. All amounts are shown on a pre-tax basis.
(in thousands)
Prior service costs
Net accumulated actuarial net loss
Accumulated other comprehensive gain (loss)
Net periodic benefit cost in excess of cumulative employer contributions
Net amount recognized at December 31, balance sheet
Net gain arising during period
Prior service cost amortization
Amortization of net actuarial loss
Total recognized in other comprehensive income (loss)
Total recognized in net periodic pension cost
and other comprehensive income (loss)
2013
2012
(522) $
1,560
1,038
(2,358)
(1,320) $
3,378 $
79
31
3,488 $
(600)
(1,849)
(2,449)
(1,186)
(3,635)
881
79
46
1,006
(2,315) $
218
$
$
$
$
$
The estimated prior service cost for the defined benefit pension plan that will be amortized from accumulated other
comprehensive income into net periodic cost in 2014 is $79,000. During 2014, $30,000 is the estimated amount of actuarial
loss subject to amortization into net periodic pension cost.
Assumptions utilized to determine benefit obligations as of December 31, 2013, 2012 and 2011 and to determine
pension expense for the years then ended are as follows:
Determination of benefit obligation at year end:
Discount rate
Annual rate of compensation increase
Determination of pension expense for year ended:
Discount rate for the service cost
Annual rate of compensation increase
Expected long-term rate of return on plan assets
2013
5.00%
3.73%
5.00%
3.73%
7.00%
2012
4.25%
3.61%
4.75%
3.61%
7.00%
2011
4.75%
4.50%
5.75%
4.50%
7.00%
The assumed overall expected long-term rate of return on pension plan assets used in calculating 2013 pension expense
was 7.0%. Determination of the plan’s rate of return is based upon historical returns for equities and fixed income indexes.
During the past five years, the Company’s plan assets have experienced the following annual returns: 19.1% in 2013, 11.4% in
2012, 0.1% in 2011, 12.4% in 2010, and 22.0% in 2009. The rate used in plan calculations may be adjusted by management for
current trends in the economic environment. With a traditional investment mix of over half of the plan’s investments in
equities, the actual return for any one plan year may fluctuate significantly with changes in the stock market. Due to a decrease
in discount rates used in the actuarial calculation of plan income, the Company expects to incur $945,000 of expense in 2014
compared to $1.2 million in 2013.
Plan Assets
The investment policy of the pension plan is designed for growth in value while minimizing risk to the overall portfolio.
The Company diversifies the assets through investments in domestic and international fixed income securities and domestic and
international equity securities. The assets are readily marketable and can be sold to fund benefit payment obligations as they
become payable. The Company’s long-term investment target mix for the plan is 70% equity securities and 30% fixed income.
The Company regularly reviews its policies on the investment mix and may make changes depending on economic conditions
and perceived investment mix.
60
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The fair value of the Company’s pension plan assets at December 31, 2013 and 2012 by asset category were as follows:
Fair Value Measurements
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
675 $
675 $
0 $
6,506
820
1,151
2,016
387
319
6,506
820
1,151
2,016
387
319
0
0
0
0
0
0
1,450
209
0
13,533 $
0
0
0
11,874 $
1,450
209
0
1,659 $
485 $
485 $
0 $
4,335
575
635
1,670
395
370
2,726
416
100
11,707 $
4,335
575
635
1,670
395
370
0
0
0
0
0
0
0
0
0
8,465 $
2,726
416
100
3,242 $
$
$
$
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
(in thousands)
December 31, 2013
Cash equivalents
Equity securities:
U.S. large-cap (a)
U.S. mid-cap (b)
U.S. small-cap (c)
International (d)
Real estate (e)
Commodities (f)
Fixed income securities:
U.S. gov't agency obligations (g)
Corporate investment grade (g)
Corporate non-investment grade (g)
Total
December 31, 2012
Cash equivalents
Equity securities:
U.S. large-cap (a)
U.S. mid-cap (b)
U.S. small-cap (c)
International (d)
Real estate (e)
Commodities (f)
Fixed income securities:
U.S. gov't agency obligations (g)
Corporate investment grade (g)
Corporate non-investment grade (g)
Total
(a) This category is comprised of low-cost equity index funds not actively managed that track the S&P 500.
(b) This category is comprised of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.
(c) This category is comprised of actively managed mutual funds.
(d) 32% and 37% at December 31, 2013 and 2012, respectively, of this category is comprised of low-cost equity index funds not actively managed that track
the MSCI EAFE.
(e) This category is comprised of low-cost real estate index exchange traded funds.
(f) This category is comprised of exchange traded funds investing in agricultural and energy commodities.
(g) This category is comprised of individual bonds.
61
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The following future benefit payments are expected to be paid:
Year
(in thousands)
2014
2015
2016
2017
2018
2019 to 2023
$
Pension
benefits
438
462
483
583
609
4,184
(12) Stock Compensation
The Company’s stock option plan provides for the grant of options to purchase up to 547,492 shares of the Company’s
common stock to officers and other key employees of the Company and its subsidiaries. All options have been granted at
exercise prices equal to fair value and vest over periods ranging from four to five years, except options issued in 2008 to
acquire 11,578 shares that vested immediately.
The following table summarizes the Company’s stock option activity:
Outstanding, beginning of year
Granted
Exercised
Forfeited
Expired
Number of shares
December 31
2012
286,977
0
0
0
(63,026)
2013
223,951
0
0
0
(102,546)
2011
287,186 $
0
0
0
(209)
Weighted average
exercise price
December 31
2012
22.46 $
0.00
0.00
0.00
17.94
2013
23.74 $
0.00
0.00
0.00
23.26
2011
22.46
0.00
0.00
0.00
17.27
Outstanding, end of year
121,405
223,951
286,977 $
24.14 $
23.74 $
22.46
Exercisable, end of year
106,888
205,616
258,206 $
24.43 $
23.81 $
22.53
Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2013.
Options outstanding at December 31, 2013 had a weighted average remaining contractual life of approximately 2.5 years
and no intrinsic value. Options outstanding at December 31, 2012 had a weighted average remaining contractual life of
approximately 3.0 years and no intrinsic value. No stock options were granted during the years presented above.
Options exercisable at December 31, 2013 had a weighted average remaining contractual life of approximately 2.3 years
and no intrinsic value. Options exercisable at December 31, 2012 had a weighted average remaining contractual life of
approximately 2.8 years and no intrinsic value. No stock options were exercised during the years presented above.
Total stock-based compensation expense for the years ended December 31, 2013, 2011, and 2010 was $19,000, $29,000,
and $58,000, respectively. As of December 31, 2013, the total unrecognized compensation expense related to non-vested stock
awards was $50,000 and the related weighted average period over which it is expected to be recognized is approximately 1.7
years.
62
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(13) Preferred Stock
On December 19, 2008, the Company announced its participation in the U.S. Treasury Department’s Capital Purchase
Program (CPP), a voluntary program that provides capital to financially healthy banks. This program was designed to attract
broad participation by banking institutions to help stabilize the financial system by encouraging lending.
Participating in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par
value of $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock (see below for
additional information) to the U.S. Department of Treasury in exchange for $30.3 million. On May 9, 2012, the Company
redeemed 12,000 shares of preferred stock from the U.S. Department of Treasury by repaying $12.0 million of the $30.3
million CPP funds along with $140,000 of accrued and unpaid dividends on the shares redeemed. Related to these shares was
an additional $300,000 of accretion that was recognized at the time of the redemption. On May 15, 2013, the Company
redeemed the remaining 18,255 shares of preferred stock from the U.S. Department of Treasury by repaying the $18.3 million
of the CPP funds along with $228,187 of accrued and unpaid dividends on the shares redeemed. Related to these shares was an
additional $182,209 of accretion that was recognized at the time of the redemption.
The common stock warrant was repurchased by the Company on June 11, 2013 pursuant to a letter agreement between
the Treasury and the Company for a total repurchase price of $540,000, or $1.88 per warrant share. The repurchase price was
based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant
ends the Company’s participation in the U.S Treasury Department’s CPP. For the year ended December 31, 2013, the Company
had declared and paid $456,000 of dividends and recognized $278,000 of accretion of the discount on preferred stock.
63
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(14) Earnings per Share
Basic earnings per share is computed by dividing income available to common shareholders by the weighted average
number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common
shares that were outstanding during the year. The calculations of basic and diluted earnings per share are as follows for the
years indicated:
Basic earnings per common share:
Net income
Less:
Preferred stock dividends
Accretion of discount on preferred stock
Net income available to
common shareholders
Basic earnings per share
Diluted earnings per common share:
Net income
Less:
Preferred stock dividends
Accretion of discount on preferred stock
Net income available to
common shareholders
Average shares outstanding
Effect of dilutive stock options
Average shares outstanding including
dilutive stock options
Diluted earnings per share
2013
2012
2011
4,974 $
2,822 $
2,857
337
278
4,359 $
0.87 $
1,125
659
1,038 $
0.21 $
4,974 $
2,822 $
337
278
1,125
659
1,513
476
868
0.17
2,857
1,513
476
4,359 $
1,038 $
5,032,679
0
5,032,679
0
5,032,679
5,032,679
0.87 $
0.21 $
868
5,032,679
0
5,032,679
0.17
$
$
$
$
$
$
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 common 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.
The following options to purchase shares during the years ended December 31, 2013, 2012 and 2011 were not included
in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the
effect of the unamortized compensation expense, was greater than the average market price of the common shares and were
considered anti-dilutive.
Anti-dilutive shares - option shares
Anti-dilutive shares - warrant shares
Total anti-dilutive shares
2013
121,405
-
121,405
2012
223,951
298,618
522,569
2011
286,977
298,618
585,595
64
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(15) Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated
financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments
by the regulators about components, risk-weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to
maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of
Tier I capital to adjusted-average assets. Management believes, as of December 31, 2013 and 2012, the Company and the Bank
met all capital adequacy requirements.
As of December 31, 2013, the most recent notification from the regulatory authorities categorized the bank as well-
capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions
or events since the notification that management believes have changed the Bank’s categories.
(in thousands)
December 31, 2013
Total capital (to risk-weighted assets):
Company
Bank
Tier I capital (to risk-weighted assets):
Company
Bank
Tier I capital (to adjusted average assets):
Company
Bank
(in thousands)
December 31, 2012
Total capital (to risk-weighted assets):
Company
Bank
Tier I capital (to risk-weighted assets):
Company
Bank
Tier I capital (to adjusted average assets):
Company
Bank
Actual
Amount
Ratio
Minimum
Capital Requirements
Amount
Ratio
Well-Capitalized
Capital Requirements
Amount
Ratio
$
$
$
$
$
$
133,638
122,959
99,398
112,166
99,398
112,166
15.33 % $
14.29
11.40 % $
13.03
8.80 % $
10.04
148,889
131,126
120,138
120,243
16.83 % $
15.12
13.58 % $
13.87
120,138
120,243
10.37 % $
10.60
69,728
68,842
34,864
34,421
33,876
33,517
70,759
69,375
35,380
34,686
34,762
34,037
8.00 %
8.00
4.00 %
4.00
$
$
3.00 % $
3.00
N.A.
0
N.A.
0
N.A.
0
8.00 %
8.00
4.00 %
4.00
$
$
3.00 % $
3.00
N.A.
86,715
N.A.
52,029
N.A.
56,729
N.A. %
10.00
N.A. %
6.00
N.A. %
5.00
N.A. %
10.00
N.A. %
6.00
N.A. %
5.00
65
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(16) Fair Value Measurements
The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets
and liabilities. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a
framework for the measurement of fair value, and enhances disclosures about fair value measurements. The standard applies
whenever other standards require (permit) assets or liabilities to be measured at fair value but does not expand the use of fair
value in any new circumstances. In this standard, FASB clarified the principle that fair value should be based on the
assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard
establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of December 31, 2013
and 2012, respectively, there were no transfers into or out of Levels 1-3.
The fair value hierarchy is as follows:
Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly
or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates
and yield curves that are observable at commonly quoted intervals.
Level 3 – Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be
internally developed using the Company’s best information and assumptions that a market participant would consider.
ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or
liability have significantly decreased and on identifying circumstances when a transaction may not be considered
orderly.
The Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those
measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would
include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when
circumstances or other events indicate that impairment may have occurred.
Valuation methods for instruments measured at fair value on a recurring basis
Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair
value on a recurring basis:
Available-for-sale securities
The fair value measurements of the Company’s investment securities are determined by a third party pricing service
which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s
terms and conditions, among other things. The fair value measurements are subject to independent verification to
another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are
reported at fair value utilizing Level 2 inputs.
Mortgage servicing rights
The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing
contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly,
the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing
income. The model incorporates assumptions that market participants use in estimating future net servicing income,
including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary
income, including late fees. The valuation models estimate the present value of estimated future net servicing income.
The Company classifies its servicing rights as Level 3.
66
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Fair Value Measurements
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Fair Value
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
$
$
$
1,003 $
60,616
110,373
33,993
3,036
209,021 $
2,030 $
55,180
107,872
35,164
2,549
202,795 $
1,003 $
0
0
0
0
1,003 $
2,030 $
0
0
0
0
2,030 $
0 $
60,616
110,373
33,993
0
204,982 $
0 $
55,180
107,872
35,164
0
198,216 $
0
0
0
0
3,036
3,036
0
0
0
0
2,549
2,549
(in thousands)
December 31, 2013
Assets:
U.S. treasury
Government sponsored enterprises
Asset-backed securities
Obligations of states and political
subdivisions
Mortgage servicing rights
Total
December 31, 2012
Assets:
U.S. treasury
Government sponsored enterprises
Asset-backed securities
Obligations of states and political
subdivisions
Mortgage servicing rights
Total
67
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:
(in thousands)
Balance at December 31, 2011
Transfer into level 3
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Purchases
Sales
Issues
Settlements
Balance at December 31, 2012
Total gains or losses (realized/unrealized):
Included in earnings
Included in other comprehensive income
Purchases
Sales
Issues
Settlements
Balance at December 31, 2013
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Mortgage Servicing Rights
0
3,050
(1,331)
0
0
0
830
0
2,549
(25)
0
0
0
512
0
3,036
$
$
$
Total gains for the years ended included in earnings attributable to the change in unrealized gains or losses related to
assets still held were $723,000 and $241,000 at December 31, 2013 and 2012, respectively.
Quantitative Information about Level 3 Fair Value Measurements
Valuation Technique
Unobservable Inputs
Input Value
Mortgage servicing rights
Discounted cash flows
Weighted average constant prepayment rate
Weighted average discount rate
2013
9.48
9.06
2012
% 18.60
7.99
%
%
%
Valuation methods for instruments measured at fair value on a nonrecurring basis
Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair
value on a nonrecurring basis:
Impaired Loans
The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired.
The net carrying value of impaired loans is generally based on fair values of the underlying collateral obtained through
independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair
value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is
made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of December
31, 2013, the Company identified $16.3 million in impaired loans that had specific allowances for losses aggregating
$4.8 million. Related to these loans, there was $3.2 million in charge-offs recorded during the year ended December
31, 2013. As of December 31, 2012, the Company identified $24.6 million in impaired loans that had specific
68
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
allowances for losses aggregating $4.0 million. Related to these loans, there was $5.2 million in charge-offs recorded
during the year ended December 31, 2012.
Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets consisted of loan collateral that has been repossessed through
foreclosure. This collateral comprises of commercial and residential real estate and other non-real estate property,
including autos, manufactured homes, and construction equipment. Other real estate owned assets are recorded as held
for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. The
Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate
collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on
experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the
assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the
measurements are classified as Level 3.
(in thousands)
December 31, 2013
Assets:
Impaired loans:
Commercial, financial, & agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Consumer
Total
Other real estate owned
and repossessed assets
December 31, 2012
Assets:
Impaired loans:
Commercial, financial, & agricultural
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Consumer
Total
Other real estate owned
and repossessed assets
$
$
$
$
$
$
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Total
Fair Value
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total Gains
(Losses)*
0 $
0
0
0
0
0
0 $
0 $
0 $
0
0
0
0
0
0 $
0 $
0 $
0
0
0
0
0
0 $
0 $
0 $
0
0
0
0
0
0 $
0 $
827 $
1,768
210
3,022
5,616
27
11,470 $
14,867 $
672 $
64
5,341
2,763
11,726
44
20,610 $
23,592 $
(735)
(119)
(498)
(376)
(1,457)
0
(3,185)
(5,395)
(1,659)
0
0
(839)
(2,716)
0
(5,214)
(4,378)
827 $
1,768
210
3,022
5,616
27
11,470 $
14,867 $
672 $
64
5,341
2,763
11,726
44
20,610 $
23,592 $
69
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(17) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for
which it is practicable to estimate such value:
Loans
The fair values of loans are estimated by discounting the expected future cash flows using the current rates at which
similar loans could be made to borrowers with similar credit ratings and for the same remaining maturities. The net
carrying amount of impaired loans is generally based on the fair values of collateral obtained through independent
appraisals or internal evaluations, or by discounting the total expected future cash flows. This method of estimating fair
value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.
Investment Securities
A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the
investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment
securities by category and maturity is provided in the notes on Investment Securities.
Federal Home Loan Bank (FHLB) Stock
Ownership of equity securities of FHLB is restricted and there is no established market for their resale. The carrying
amount is a reasonable estimate of fair value.
Federal Funds Sold, Cash, and Due from Banks
The carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest
earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold and securities
purchased under agreements to resell classified as short-term generally mature in 90 days or less.
Mortgage Servicing Rights
The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing
contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly,
the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing
income. The model incorporates assumptions that market participants use in estimating future net servicing income,
including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary
income, including late fees.
Cash Surrender Value –Life Insurance
The fair value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these
investments, the Company would receive the cash surrender value which equals the carrying amount.
Accrued Interest Receivable and Payable
For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the
short maturity for these financial instruments.
Deposits
The fair value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and
money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted
value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar
remaining maturities.
70
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Securities Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury
For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying
amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.
Subordinated Notes and Other Borrowings
The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining
maturities.
71
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
A summary of the carrying amounts and fair values of the Company’s financial instruments at December 31, 2013 and 2012 is
as follows:
(in thousands)
Assets:
Cash and due from banks
Federal funds sold and overnight
interest-bearing deposits
Investment in available-for-sale securities
Loans, net
Investment in FHLB stock
Mortgage servicing rights
Cash surrender value - life insurance
Accrued interest receivable
Liabilities:
Deposits:
Non-interest bearing demand
Savings, interest checking and money market
Time deposits
Federal funds purchased and securities sold
under agreements to repurchase
Subordinated notes
Federal Home Loan Bank advances
Accrued interest payable
December 31, 2013
Fair Value Measurements
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Net
Significant
Unobservable
Inputs
(Level 3)
December 31, 2013
Carrying
amount
Fair
value
$
27,079 $
27,079 $
27,079 $
0 $
0
$
$
1,360
205,985
825,828
2,354
3,036
2,213
4,999
1,360
205,985
829,223
2,354
3,036
2,213
4,999
1,360
1,003
0
0
0
4,999
0
204,982
0
2,354
0
2,213
0
1,072,854 $
1,076,249 $
34,441 $
209,549 $
187,382 $
419,085
350,004
187,382 $
419,085
352,432
187,382 $
419,085
0
31,084
49,486
24,000
426
31,084
32,048
25,366
426
31,084
0
0
426
0 $
0
0
0
32,048
25,366
0
0
0
829,223
0
3,036
0
0
832,259
0
0
352,432
0
0
0
0
$
1,061,467 $
1,047,823 $
637,977 $
57,414 $
352,432
72
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(in thousands)
Assets:
Cash and due from banks
Federal funds sold and overnight
interest-bearing deposits
Investment in available-for-sale securities
Loans, net
Investment in FHLB stock
Mortgage servicing rights
Cash surrender value - life insurance
Accrued interest receivable
Liabilities:
Deposits:
Non-interest bearing demand
Savings, interest checking and money market
Time deposits
Federal funds purchased and securities sold
under agreements to repurchase
Subordinated notes
Federal Home Loan Bank advances
Accrued interest payable
December 31, 2012
Fair Value Measurements
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Observable
Inputs
(Level 2)
Net
Significant
Unobservable
Inputs
(Level 3)
December 31, 2012
Carrying
amount
Fair
value
$
31,020 $
31,020 $
31,020 $
0 $
0
$
$
27,857
200,246
832,142
2,278
2,549
2,136
5,190
27,857
200,246
834,824
2,278
2,549
2,136
5,190
27,857
2,030
0
0
0
0
5,190
0
198,216
0
2,278
0
2,136
0
1,103,418 $
1,106,100 $
66,097 $
202,630 $
192,271 $
405,702
393,302
192,271 $
405,702
397,986
192,271 $
405,702
0
21,058
49,486
20,126
909
21,058
13,154
20,651
909
21,058
0
0
909
0 $
0
0
0
13,154
20,651
0
0
0
834,824
0
2,549
0
0
837,373
0
0
397,986
0
0
0
0
$
1,082,854 $
1,051,731 $
619,940 $
33,805 $
397,986
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.
73
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(18) Repurchase Reserve Liability
The Company’s repurchase reserve liability for estimated losses incurred on sold loans that are included in gain on
sales of mortgage loans was $160,000 at December 31, 2013. 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. Although the Company has not experienced any historical
repurchase losses, it was notified during the third quarter of 2013 by one of its two investors, Freddie Mac, that fifteen loans
which were foreclosed upon from 2007 to the present, are being reviewed for quality control purposes and may result in loss
indemnification payments to the investor as reimbursement for losses. The balance of these loans at foreclosure date totaled
$1.5 million. During the fourth quarter of 2013 and through March 31, 2014, the Company settled these loan foreclosures
resulting in payments totaling $119,000 for reimbursement of costs incurred by Freddie Mac on three of these foreclosures. The
remaining twelve foreclosures were settled without incurring any additional costs. At December 31, 2013, the Company was
servicing 3,114 loans sold to the secondary market with a balance of approximately $322.5 million compared to 3,057 loans
sold with a balance of approximately $310.6 million at December 31, 2012.
(19) 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 December 31, 2013, no amounts
have been accrued for any estimated losses for these financial instruments.
The contractual amount of off-balance-sheet financial instruments as of December 31, 2013 and 2012, is as follows:
(in thousands)
Commitments to extend credit
Commitments to originate residential first and second mortgage loans
Standby letters of credit
$
2013
117,880 $
8,570
1,826
2012
118,412
5,171
2,995
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 December 31, 2013.
74
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
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 amount can be estimated.
75
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(20) Condensed Financial Information of the Parent Company Only
Following are the condensed financial statements of Hawthorn Bancshares, Inc. (Parent only) as of and for the years indicated:
Condensed Balance Sheets
(in thousands)
Assets
Cash and due from bank subsidiaries
Investment in equity securities
Investment in subsidiaries
Premises and equipment
Deferred tax asset
Other assets
Total assets
Liabilities and Stockholders’ Equity
Subordinated notes
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Condensed Statements of Income
December 31,
2013
2012
450 $
1,486
122,413
0
130
1,011
125,490 $
1,863
1,486
139,849
1
1,424
1,022
145,645
49,486 $
1,624
74,380
49,486
3,939
92,220
125,490 $
145,645
$
$
$
$
For the Years Ended December 31,
2013
2012
2011
Income
Interest and dividends received from subsidiaries
Total income
Expenses
Interest on subordinated notes
Other
Total expenses
Income before income tax benefit and
equity in undistributed income of subsidiaries
Income tax benefit
Equity in undistributed (losses) income of subsidiaries
Net income
$
$
$
15,039
15,039
4,596 $
4,596
1,284
1,778
3,062
11,977
1,126
(8,129)
4,974
$
1,381
2,889
4,270
326
2,257
239
2,822 $
5,191
5,191
1,301
2,605
3,906
1,285
1,368
204
2,857
76
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation
Equity in undistributed losses (income) of subsidiaries
Stock based compensation expense
Decrease (increase) in deferred tax asset
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Investment in subsidiary
Net cash provided by investing activities
Cash flows from financing activities:
Redemption of 18,255 and 12,000 shares, respectively,
of preferred stock
Cash dividends paid - preferred stock
Cash dividends paid - common stock
Warrant redemption
Net cash used in financing activities
Net (decrease) increase in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year
For the Years Ended December 31,
2013
2012
2011
$
4,974 $
2,822 $
2,857
1
8,129
19
1,325
(182)
14,266
4,550
4,550
(18,255)
(456)
(978)
(540)
(20,229)
(1,413)
1,863
$
450 $
1
(239)
29
(148)
(813)
1,652
1,072
1,072
(12,000)
(1,203)
(940)
0
(14,143)
(11,419)
13,282
1,863 $
2
(204)
58
(274)
(89)
2,350
900
900
0
(1,513)
(904)
0
(2,417)
833
12,449
13,282
77
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2013, 2012, and 2011
(21) Quarterly Financial Information (Unaudited)
(In thousands except per share data)
Year Ended December 31, 2013
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income tax (benefit) expense
Net (loss) income
Preferred stock dividends
Accretion of discount on preferred stock
Net income (loss) available to common stockholders
Net income (loss) per share:
Basic (loss) earnings per share
Diluted (loss) earnings per share
Year Ended December 31, 2012
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Noninterest expense
Income tax (benefit) expense
Net income (loss)
Preferred stock dividends
Accretion of discount on preferred stock
Net income (loss) available to common stockholders
Net income (loss) per share:
Basic earnings (loss) per share
Diluted earnings (loss) per share
First
quarter
Second
quarter
Third
quarter
Fourth
quarter
11,545 $
1,816
9,729
1,000
3,007
11,934
(62)
(136) $
223
72
(431) $
11,592 $
1,777
9,815
1,000
3,088
9,281
810
1,812 $
114
206
1,492 $
11,298 $
1,433
9,865
0
2,447
9,972
771
1,569 $
0
0
1,569 $
11,230 $
1,316
9,914
30
2,324
9,576
903
1,729 $
0
0
1,729 $
Year
to
Date
45,665
6,342
39,323
2,030
10,866
40,763
2,422
4,974
337
278
4,359
(0) $
(0)
0.30 $
0.30
0.31 $
0.31
0.34 $
0.34
0.87
0.87
12,646 $
1,831
10,815
1,700
1,970
9,480
154
1,451 $
370
119
962 $
12,297 $
2,125
10,172
1,500
2,443
10,098
277
740 $
296
396
48 $
12,151 $
2,029
10,122
4,700
2,680
10,378
(704)
(1,572) $
228
72
(1,872) $
12,020 $
1,920
10,100
1,000
2,633
8,711
819
2,203 $
231
72
1,900 $
49,114
7,905
41,209
8,900
9,726
38,667
546
2,822
1,125
659
1,038
0.21 $
0.21
0.01 $
0.01
(0) $
(0)
0.39 $
0.39
0.21
0.21
$
$
$
$
$
$
$
$
78
MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS
Market Price
The Company's common stock trades on Nasdaq's global select market under the stock symbol of “HWBK.” The
following table sets forth the range of high and low bid prices of the Company's common stock by quarter for each
quarter in 2013 and 2012 in which the stock was traded.
2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
11.52 $
12.94 $
14.99 $
14.29 $
7.53 $
9.59 $
9.98 $
8.89 $
7.08
10.66
12.00
11.85
5.51
6.66
8.12
6.77
$
$
$
$
$
$
$
$
Shares Outstanding.
As of February 28, 2014, the Company had issued 5,194,537 shares of common stock, of which 5,032,679 shares
were outstanding. The outstanding shares were held of record by approximately 1,350 shareholders.
Dividends
The following table sets forth information on dividends paid by the Company in 2013 and 2012.
Month Paid
January, 2013
April, 2013
July, 2013
October, 2013
Total for 2013
January, 2012
April, 2012
July, 2012
October, 2012
Total for 2012
Dividends
Per Share
$ 0.05
0.05
0.05
0.05
$ 0.20
$ 0.05
0.05
0.05
0.05
$ 0.20
The board of directors intends that the Company will continue to pay quarterly dividends. The actual amount of
quarterly dividends and the payment, as well as the amount, of any special dividend ultimately will depend on the
payment of sufficient dividends by the subsidiary Bank to the Company. The payment by the Bank of dividends to
the Company will depend upon such factors as the Bank’s financial condition, results of operations and current and
anticipated cash needs, including capital requirements.
79
Stock Performance Graph
The following performance graph shows a comparison of cumulative total returns for the Company, the Nasdaq
Stock Market (U.S. Companies), and a peer index of financial institutions having total assets of between $1 billion
and $5 billion for the period from December 31, 2008, through December 31, 2013. The cumulative total return on
investment for each of the periods for the Company, the Nasdaq Stock Market (U.S. Companies) and the peer index
is based on the stock price or index at December 31, 2008. The performance graph assumes that the value of an
investment in the Company’s common stock and each index was $100 at December 31, 2008 and that all dividends
were reinvested. The information presented in the performance graph is historical in nature and is not intended to
represent or guarantee future returns.
Total Return Performance
Hawthorn Bancshares, Inc.
NASDAQ Composite
SNL Bank $1B-$5B
300
250
200
150
100
50
e
u
l
a
V
x
e
d
n
I
0
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
The comparison of cumulative total returns presented in the above graph was plotted using the following index
values and common stock price values:
Hawthorn Bancshares, Inc.
Nasdaq Composite
(U.S. Companies)
Index of financial
12/31/08
12/31/09
12/31/10
12/31/11
12/31/12
12/31/13
$100.00
$60.54
$58.11
$43.70
$57.70
$98.79
$100.00
$145.36
$171.74
$170.38
$200.63
$281.22
institutions ($1 billion to $5 billion)
$100.00
$71.68
$81.25
$74.10
$91.37
$132.87
80
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Name
David T. Turner
Position with The Company
Position with Subsidiary Bank Principal Occupation
Chairman, Chief Executive
Officer, President and Director
-Class III
Chairman, Chief Executive
Officer, President and Director
Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank
Charles G. Dudenhoeffer, Jr. Director-Class II
Philip D. Freeman
Director-Class I
Director
Director
Kevin L. Riley
Director-Class III
Director
James E. Smith
Director-Class I
Gus S. Wetzel, II
Director-Class II
Director
Director
W. Bruce Phelps
Chief Financial Officer
Senior Vice President and Chief
Financial Officer
Retired
Owner/Manager, Freeman
Mortuary, Jefferson City,
Missouri
Co-owner, Riley Chevrolet,
Buick, GMC Cadilac, and
Riley Toyota Scion, Jefferson
City, Missouri
Retired
Physician, Wetzel Clinic,
Clinton, Missouri
Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank
Kathleen L. Bruegenhemke
Senior Vice President, Chief
Risk Officer and Corporate
Secretary
Senior Vice President and Chief
Risk Officer and Corporate
Secretary
Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities
and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2014
annual meeting of shareholders upon written request to Kathleen L. Bruegenhemke, Corporate Secretary, Hawthorn
Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101. The Company will provide a copy of any exhibit to
the Form 10-K to any such person upon written request and the payment of the Company's reasonable expenses in furnishing
such exhibits.
81