2018
ANNUAL REPORT
TO
SHAREHOLDERS
HAWTHORN BANCSHARES, INC.
Jefferson City, Missouri
March 14, 2019
Dear Shareholders:
Net income for 2018 was $10.7 million, or $1.78 per diluted share, compared to $3.4 million, or $0.56 per diluted share, for 2017. Included
in the 2017 net income is a $4.1 million charge, or $0.68 per diluted share, that includes $3.1 million resulting from application of the Tax
Cuts and Jobs Act (the “Tax Act”) enacted in the fourth quarter of 2017, and $1.0 million resulting from tax planning initiatives
implemented at year-end 2017. The 2018 net income reflects a 43.5% increase in non-GAAP earnings per diluted common share
excluding the impact of the Tax Act and tax planning initiatives.
Although a portion of the increased earnings for 2018 resulted from the lower tax rate enacted by the Tax Act and tax planning initiatives,
our pre-tax income also increased by $1.1 million, or 9.4%. Loan growth continued to contribute to these increased earnings as net loans
increased $77.4 million, or 7.3%, from the last year-end leading to a $1.7 million increase in net interest income over the prior year. This
growth was achieved without a deterioration in loan quality as nonperforming loans to total loans decreased from 0.56% at December 31,
2017, to 0.49% at December 31, 2018.
Our 2018 net interest margin of 3.30% continues to be squeezed by increased interest expense during the recent rising interest rate
environment although the last two quarters of 2018 have shown increases from the prior linked quarters compared to the 11 basis points
decline year over year. Non-interest income of $9.3 million for 2018 increased $0.4 million, or 4.4%, from the prior year mostly due to
increased service charge and bankcard income. Non-interest expense of $40.3 million for 2018 was $1.5 million, or 3.9%, higher than
the prior year. This increase over the prior year was mostly due to a $0.9 million increase in salaries and a $0.5 million increase in benefits.
One-time bonuses paid to staff in the first quarter 2018 as a result of the benefits accruing from the enactment of the Tax Act contributed
$0.4 million of the salary increase as did annual cost of living increases averaging 3%. The increase in benefits was due to higher medical
and pension benefit costs.
As of December 31, 2018, we have been able to reduce our full-time equivalent head count by 45, or approximately 14%, since
December 31, 2017, most of which occurred in the latter half of 2018. As a result, the cost savings from this reduction will be more fully
realized in 2019. We continue to pursue initiatives to improve our efficiency ratio including right sizing our branch network. To this end,
we closed our Windsor branch during the fourth quarter 2018 and completed the sale of our Branson branch in February 2019. While
these transactions are not expected to have a significant effect on loan or deposit volumes, they will further reduce head count and operating
expenses.
Our capital levels at December 31, 2018 continue to exceed regulatory well capitalized thresholds with 9.55% of leverage capital and
13.28% of total risk-based capital.
Maintaining strong asset quality while achieving sustainable growth and improving our net interest margin are our primary initiatives. As
is evident from this year’s financial results, we have taken proactive steps to reduce costs and improve efficiencies, which should continue
into the coming year. I am committed to further improving earnings performance; sustaining sound and proper capital levels; and paying
regular dividends.
Hawthorn's staff, management, Board of Directors and Advisory Board members are committed to the continued growth of our strong
community bank and delivering long term value to our shareholders. We appreciate your support and encourage you to continue to use
Hawthorn Bank for your banking needs and request that you refer prospective customers to your bank.
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:
•
•
statements that are not historical in nature, and
statements preceded by, followed by or that include the words believes, expects, may, will, should, could, anticipates, estimates,
intends or similar expressions.
Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual
results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:
•
•
•
•
•
•
•
competitive pressures among financial services companies may increase significantly,
changes in the interest rate environment may reduce interest margins,
general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the
quality of our loans and other assets,
increases in non-performing assets in the Company's loan portfolios and adverse economic conditions may necessitate increases
to our provisions for loan losses,
costs or difficulties related to the integration of the business of the Company and its acquisition targets may be greater than
expected,
legislative, regulatory, or tax law changes may adversely affect the business in which the Company and its subsidiaries are
engaged, and
changes may occur in the securities markets.
We have described under the caption Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2018,
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
Crucial to the Company's community banking strategy is growth in its commercial banking services, retail mortgage lending and retail
banking services. Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.5 billion in assets
at December 31, 2018, provides a broad range of commercial and personal banking services. The Bank's specialties include commercial
banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration
(SBA) loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit,
individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial
services that the Company provides include trust services that include estate planning, investment and asset management services and a
comprehensive suite of cash management services. The geographic areas in which the Company provides products and services include
the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City
metropolitan area.
The Company's primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of
the Company's business is commercial, commercial real estate development, and residential mortgage lending. The Company's income
from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity.
The success of the Company's growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level
of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to
revenues generated. The Company's financial performance also depends, in part, on its ability to manage various portfolios and to
successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved
technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends on its ability to
maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic
conditions being beyond its control.
The Company's subsidiary bank is a full-service bank conducting a general banking business, offering its customers checking and savings
accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial
loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the Bank provides
trust services.
The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The
operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank
are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are
principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination
by the Board of Governors of the Federal Reserve System.
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, 2018. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
57,779 $
13,186
44,593
1,475
43,118
9,341
255
40,332
12,382
1,668
10,714 $
2017
50,935 $
8,007
42,928
1,765
41,163
8,950
5
38,802
11,316
7,902
3,414 $
2016
46,010 $
5,663
40,347
1,425
38,922
8,315
602
36,807
11,032
3,750
7,282 $
2015
45,756 $
4,999
40,757
250
40,507
9,158
8
36,494
13,179
4,580
8,599 $
2014
44,498
5,044
39,454
—
39,454
8,729
20
36,507
11,696
4,042
7,654
Per Share Data
1.25
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.25
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid on common stock . . . . . . . . . . . . . . . . . . . . .
1,017
Common stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,697
13.17
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12.18
Basic weighted average shares of common stock outstanding . . . 6,026,971 6,057,920 6,095,727 6,116,558 6,116,623
Diluted weighted average shares of common stock outstanding . . 6,032,013 6,063,417 6,095,727 6,116,558 6,116,623
1.78 $
1.78
1,993
5,014
16.49
21.03
1.41 $
1.41
1,058
2,847
14.27
14.00
1.19 $
1.19
1,097
3,149
14.93
16.36
0.56 $
0.56
1,474
4,166
15.08
19.95
4
(In thousands)
Balance Sheet Data (at year end)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,481,682
1,134,975
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
223,880
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,198,468
Federal Home Loan Bank advances and other
2018
borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet Data (average balances)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,446,160
1,086,163
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
242,806
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,169,243
Federal Home Loan Bank advances and other
95,153
49,486
99,414
borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . .
81,945
49,486
93,615
2017
2016
2015
2014
$ 1,429,216
1,057,580
237,579
1,125,812
$ 1,287,048
964,143
224,308
1,010,666
$ 1,200,921
856,476
243,091
947,197
$ 1,169,731
852,114
203,720
969,514
121,382
49,486
91,371
93,392
49,486
91,017
50,000
49,486
87,286
43,000
49,486
80,568
$ 1,352,343
1,013,702
226,911
1,068,487
$ 1,251,741
904,069
243,169
997,514
$ 1,199,061
852,514
242,740
975,036
$ 1,156,911
839,957
212,697
971,777
98,383
49,486
95,116
67,212
49,486
91,401
48,474
49,486
84,818
29,964
49,486
78,953
Key Ratios
Earnings Ratios
Return on average total assets . . . . . . . . . . . . . . . . . . . . .
Return on average common stockholders' equity . . . . . .
Efficiency ratio (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest spread . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset Quality Ratios
Allowance for loan losses to loans . . . . . . . . . . . . . . . . .
Non-performing loans to loans (1) . . . . . . . . . . . . . . . . .
Non-performing assets to loans (2) . . . . . . . . . . . . . . . . .
Non-performing assets to assets (2) . . . . . . . . . . . . . . . .
Allowance for loan losses to non-performing loans . . .
Net loan charge-offs to average loans . . . . . . . . . . . . . . .
Capital Ratios
Average stockholders' equity to average total assets . . .
Period-end stockholders' equity to period-end assets . .
Total risk-based capital ratio . . . . . . . . . . . . . . . . . . . . . .
Tier 1 risk-based capital ratio . . . . . . . . . . . . . . . . . . . . .
Common equity Tier 1 capital . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.74 %
11.45
74.78
3.05
3.30
0.25 %
3.59
74.79
3.24
3.41
0.58 %
7.97
75.64
3.36
3.48
0.72 %
10.14
73.10
3.59
3.69
1.02 %
0.49
1.68
1.30
208.97
0.06
1.02 %
0.56
1.80
1.34
180.87
0.08
1.02 %
0.36
1.81
1.37
282.94
0.02
1.00 %
0.51
2.36
1.70
194.48
0.09
6.47 %
6.71
13.28
11.21
8.48
9.55
7.03 %
6.39
12.93
10.72
8.04
9.33
7.30 %
7.07
13.88
11.42
8.61
9.87
7.07 %
7.27
14.78
12.03
9.04
9.84
0.66 %
9.69
75.74
3.61
3.72
1.06 %
2.13
3.51
2.58
49.72
0.54
6.82 %
6.89
15.78
12.38
NA
9.42
(1) Nonperforming loans consist of nonaccrual loans, troubled debt restructurings included in nonaccrual loans, and loans contractually
past due 90 days or more and still accruing interest.
(2) Nonperforming assets consist of nonperforming loans and other real estate owned and repossessed 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.
Non-GAAP Financial Measures
The financial measures in the table below include items that are non-GAAP, meaning they are not presented in accordance with generally
accepted accounting principles (GAAP) in the U.S. The non-GAAP items presented are non-GAAP net income, non-GAAP basic earnings
per share, non-GAAP diluted earnings per share, non-GAAP return on average assets and non-GAAP return on average common equity.
These measures include adjustments to exclude the transitional impact of the Tax Cuts and Jobs Act (Tax Act) and the Company's
implementation of new tax planning initiatives, which are non-recurring and not considered indicative of underlying earnings performance.
The adjustments do not include the ongoing impacts of the lower U.S. statutory rate under the Tax Act on 2018 earnings. The Company
believes that the exclusion of these items provides a useful basis for evaluating the Company's underlying performance, but should not be
5
considered in isolation and is not in accordance with, or a substitute for, evaluating performance utilizing GAAP financial information.
The Company uses non-GAAP measures to analyze its financial performance and to make financial comparisons to prior periods presented
on a similar basis. The Company believes that providing such adjusted results allows investors to better understand the Company's
comparative operating performance for the periods presented. Non-GAAP measures are not formally defined by GAAP or codified in the
federal banking regulations, and other entities may use calculation methods that differ from those used by the Company. The Company
has reconciled each of these measures to a comparable GAAP measure below:
Income Statement Data
(In thousands, except per share data) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income - GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,714
Effect of net deferred tax asset adjustments (a) . . . . . . . . . . . . . . . . . . . . . .
—
Net income - non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,714
2018
2017
$ 3,414
4,105
$ 7,519
2016
$ 7,282
—
$ 7,282
2015
$ 8,599
—
$ 8,599
2014
$ 7,654
—
$ 7,654
Per Share Data
Basic earnings per share - GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.78
—
Effect of net deferred tax asset adjustments (a) . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share - non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.78
Diluted earnings per share - GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.78
Effect of net deferred tax asset adjustments (a) . . . . . . . . . . . . . . . . . . . . . .
—
Diluted earnings per share - non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.78
$ 0.56
0.68
$ 1.24
$ 0.56
0.68
$ 1.24
$
$
$
$
1.19
—
1.19
1.19
—
1.19
$ 1.41
—
$ 1.41
$ 1.41
—
$ 1.41
$ 1.25
—
$ 1.25
$ 1.25
—
$ 1.25
Key Ratios
Return on average total assets - GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of net deferred tax asset adjustments (a) . . . . . . . . . . . . . . . . . . . . . .
Return on average total assets - non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average stockholders' equity - GAAP . . . . . . . . . . . . . . . . . . . . .
Effect of net deferred tax asset adjustments (a) . . . . . . . . . . . . . . . . . . . . . .
Return on average stockholders' equity - non-GAAP . . . . . . . . . . . . . . . . .
0.74 %
— %
0.74 %
11.45 %
— %
11.45 %
0.25 %
0.31 %
0.56 %
3.59 %
4.31 %
7.90 %
0.58 %
0.72 %
— %
— %
0.72 %
0.58 %
7.97 % 10.14 %
— %
7.97 % 10.14 %
— %
0.66 %
— %
0.66 %
9.69 %
— %
9.69 %
(a) Calculated using the difference in combined statutory rates of 38% for 2017 and 21% for subsequent years.
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 (ALL) 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.
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
6
liabilities at the date of the consolidated 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.
$ Change
% Change
2018
(In thousands)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,593 $ 42,928 $ 40,347 $ 1,665 $ 2,581
340
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . 1,475
635
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,341
Investment securities gains, net . . . . . . . . . . . . . . . . . . . . .
(597)
255
1,995
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,332
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . 12,382
284
4,152
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,668
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,714 $ 3,414 $ 7,282 $ 7,300 $ (3,868)
1,425
8,315
602
36,807
11,032
3,750
1,765
8,950
5
38,802
11,316
7,902
(290)
391
250
1,530
1,066
(6,234)
'17-'16
'18-'17
2017
2016
'18-'17
3.9 %
'17-'16
6.4 %
23.9
7.6
(99.2)
5.4
2.6
110.7
(16.4)
4.4
NM
3.9
9.4
(78.9)
213.8 % (53.1)%
NM - not meaningful
Consolidated net income increased $7.3 million to $10.7 million, or $1.78 per diluted share, for the year ended December 31, 2018
compared to $3.4 million, or $0.56 per diluted share, for the year ended December 31, 2017. For the year ended December 31, 2018, the
return on average assets (ROA) was 0.74%, the return on average stockholders' equity (ROE) was 11.45%, and the efficiency ratio was
74.78%.
Consolidated net income decreased $3.9 million to $3.4 million, or $0.56 per diluted share, for the year ended December 31, 2017
compared to $7.3 million, or $1.19 per diluted share, for the year ended December 31, 2016. For the year ended December 31, 2017, the
return on average assets (ROA) was 0.25%, the return on average stockholders' equity (ROE) was 3.59%, and the efficiency ratio was
74.79%.
The ROA and ROE for 2017 reflects a $4.1 million write-down of the Company's net deferred tax asset (DTA) in response to the enactment
of the Tax Cuts and Jobs Act (Tax Act) and additional tax planning initiatives, which was recorded as additional income tax expense
during the fourth quarter of 2017. As a result, the Company's effective tax rate for 2017 was 69.8% compared to 13.5% for 2018 and 34%
for 2016. The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Act.
Net interest income was $44.6 million for the year ended December 31, 2018 compared to $42.9 million and $40.3 million for the years
ended December 31, 2017 and 2016, respectively. The net interest margin was 3.30% for the year ended December 31, 2018 compared to
3.41% and 3.48% for the years ended December 31, 2017 and 2016, respectively.
A $1.5 million provision for loan losses was recorded for the year ended December 31, 2018 compared to a $1.8 million and $1.4 million
provision for the years ended December 31, 2017 and 2016, respectively.
The Company's net charge-offs for the year ended December 31, 2018, were $675,000, or 0.06% of average loans compared to $799,000,
or 0.08% of average loans for the year ended December 31, 2017, and $143,000, or 0.02% of average loans for the year ended
December 31, 2016.
Non-performing loans totaled $5.6 million, or 0.49% of total loans, at December 31, 2018 compared to $6.0 million, or 0.56% of total
loans at December 31, 2017, and $3.5 million, or 0.36% of total loans, at December 31, 2016.
Non-interest income increased $391,000, or 4.4%, for the year ended December 31, 2018 compared to the year ended December 31,
2017, and increased $635,000, or 7.6%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. These
changes are discussed in greater detail below under Non-interest Income.
Investment securities gains, net of $255,000 were recorded for the year ended December 31, 2018 compared to $5,000 and $602,000 for
the years ended December 31, 2017 and 2016, respectively. Security gains for the year ended December 31, 2018 included gains realized
from a series of short term sales of U.S. Treasury securities with repurchase agreements in order to generate capital gains to offset capital
losses expiring in 2018 and 2019.
Non-interest expense increased $1.5 million, or 3.9%, for the year ended December 31, 2018 compared to the year ended December 31,
2017, and increased $2.0 million, or 5.4%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. These
changes are discussed in greater detail below under Non-interest Expense.
7
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, 2018, 2017, and 2016, respectively.
2018
Interest Rate
Income/ Earned/
Average
Balance
Average
Expense(1) Paid(1) Balance
2017
Interest Rate
Income/ Earned/
Average
Expense(1) Paid(1) Balance
2016
Interest Rate
Income/ Earned/
Expense(1) Paid(1)
(In thousands)
ASSETS
Loans: (2) (4)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,448 $
Real estate construction - residential . . . . . . . .
Real estate construction - commercial . . . . . . .
Real estate mortgage - residential . . . . . . . . . .
Real estate mortgage - commercial . . . . . . . . .
Installment and other consumer . . . . . . . . . . .
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,097,384 $
Investment securities: (3)
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. government and federal agency
29,481
103,880
245,737
485,911
32,927
13,092 $
10,039
1,562
5,072
11,850
22,704
1,285
52,512
5.03 % $ 186,140 $
5.30
4.88
4.82
4.67
3.90
4.79 % $ 1,024,210 $
21,466
78,861
255,091
450,427
32,225
8,644
998
3,550
11,706
20,697
1,253
46,848
4.64 % $ 161,177 $
4.65
4.50
4.59
4.60
3.89
4.57 % $ 913,173 $
17,671
43,759
253,614
410,672
26,280
7,588
803
2,016
11,544
18,947
1,161
42,059
4.71 %
4.54
4.61
4.55
4.61
4.42
4.61 %
215
1.64 % $
312 $
6
1.92 % $
— $
—
— %
obligations . . . . . . . . . . . . . . . . . . . . . . . . .
53,856
951
1.77
47,665
693
1.45
48,551
582
1.20
Obligations of states and political
subdivisions . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . $ 237,702 $
Other investment securities . . . . . . . . . . . . . .
Federal funds sold and interest bearing
41,807
124,492
4,455
5,104
964
2,631
247
5,008
218
46,716
122,124
4,486
2.31
2.11
5.54
2.11 % $ 221,303 $
4.27
5,608
1,041
2,258
232
4,230
158
32,836
153,024
4,486
2.23
1.85
5.17
1.91 % $ 238,897 $
2.82
4,272
836
2,597
225
4,240
92
2.55
1.70
5.02
1.77 %
2.15
deposits in other financial institutions . . . . .
32,142
Total interest earning assets . . . . . . . . . . . . $ 1,372,332 $
85,049
All other assets . . . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses . . . . . . . . . . . . . . .
(11,221)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,446,160
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . $ 218,328 $
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest checking . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . .
Total interest bearing deposits . . . . . . . . . . . $ 922,904 $
Federal funds purchased and securities sold
94,964
3,249
295,982
310,381
699
58,437
2.17
4.26 % $ 1,273,965 $
22,844
267
51,503
1.17
4.04 % $ 1,171,868 $
15,526
80
46,471
0.52
3.97 %
88,886
(10,508)
$ 1,352,343
88,977
(9,104)
$ 1,251,741
2,131
48
34
3,220
3,419
8,852
0.98 % $ 210,780 $
0.05
1.05
1.09
1.10
0.96 % $ 829,148 $
98,051
1,514
224,076
294,727
1,114
50
12
1,153
2,230
4,559
0.53 % $ 195,099 $
0.05
0.79
0.51
0.76
0.55 % $ 780,500 $
96,130
630
186,356
302,285
607
49
3
500
1,908
3,067
0.31 %
0.05
0.48
0.27
0.63
0.39 %
under agreements to repurchase . . . . . . . . .
39,564
603
1.52
29,512
113
0.38
36,539
64
0.18
Federal Home Loan Bank advances and
81,945
49,486
other borrowings . . . . . . . . . . . . . . . . . . . .
Subordinated notes . . . . . . . . . . . . . . . . . . . .
Total borrowings . . . . . . . . . . . . . . . . . . . . . $ 170,995 $
Total interest bearing liabilities . . . . . . . . . . $ 1,093,899 $
Demand deposits . . . . . . . . . . . . . . . . . . . . . .
246,339
Other liabilities . . . . . . . . . . . . . . . . . . . . . . .
12,307
Total liabilities . . . . . . . . . . . . . . . . . . . . . . .
1,352,545
93,615
Stockholders' equity . . . . . . . . . . . . . . . . . . . .
Total liabilities and stockholders' equity . . . $ 1,446,160
Net interest income (FTE) . . . . . . . . . . . . . .
Net interest spread . . . . . . . . . . . . . . . . . . . .
Net interest margin . . . . . . . . . . . . . . . . . . .
$
1,517
2,229
4,349
13,201
98,383
49,486
1.85
4.50
2.54 % $ 177,381 $
1.21 % $ 1,006,529 $
1,590
1,751
3,454
8,013
67,212
49,486
1.62
3.54
1.95 % $ 153,237 $
0.80 % $ 933,737 $
1,038
1,495
2,597
5,664
1.54
3.02
1.69 %
0.61 %
239,339
11,359
1,257,227
95,116
$ 1,352,343
217,014
9,589
1,160,340
91,401
$ 1,251,741
45,236
$
43,490
$
40,807
3.05 %
3.30 %
3.24 %
3.41 %
3.36 %
3.48 %
(1)
Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21% and 34%, net of nondeductible interest
expense. Such adjustments totaled $658,000, $568,000 and $461,000 for the years ended December 31, 2018, 2017 and 2016, respectively.
(2) Non-accruing loans are included in the average amounts outstanding.
(3) Fees and costs on loans are included in interest income.
8
Rate and volume analysis
The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest
earning assets and interest bearing liabilities, identifying changes related to volumes and rates for the years ended December 31, 2018,
compared to December 31, 2017, and for the years ended December 31, 2017 compared to December 31, 2016. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of
change in each.
2018
Change due to
2017
Change due to
Total
Average
Change Volume
Average
Rate
Total
Average
Change Volume
Average
Rate
(In thousands)
Interest income on a fully taxable equivalent basis: (1)
Loans: (2) (4)
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,395 $
Real estate construction - residential . . . . . . . . . . . . . . . . . . . . . . . . .
564
Real estate construction - commercial . . . . . . . . . . . . . . . . . . . . . . . . 1,522
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . .
144
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,007
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32
Investment securities: (3)
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government and federal agency obligations . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold and interest bearing deposits in other
209
258
(77)
373
15
60
financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
432
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,934
Interest expense:
NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,017
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)
Interest checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,067
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,189
Federal funds purchased and securities sold under agreements
642 $
411
1,201
(438)
1,653
27
753 $ 1,056 $
153
321
582
354
5
195
1,534
162
1,750
92
1,160 $
176
1,581
67
1,827
242
210
97
(112)
45
(2)
(15)
(1)
161
35
328
17
75
6
111
205
(339)
7
66
—
(11)
319
(557)
—
33
139
3,858
293
3,076
187
5,032
51
4,888
41
(2)
17
462
124
976
—
5
1,605
1,065
507
1
9
653
322
53
1
6
118
(49)
(104)
19
(47)
95
(77)
(150)
6
122
(114)
218
7
33
136
144
454
—
3
535
371
490
to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances and other borrowings . . . . . . . .
(73)
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
478
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,188
Net interest income on a fully taxable equivalent basis . . . . . . . . $ 1,746 $
50
(287)
—
405
440
214
478
4,783
49
552
256
2,349
3,453 $ (1,707) $ 2,683 $
(14)
501
—
616
63
51
256
1,733
4,272 $ (1,589)
(1) Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21% for 2018 and 34% for
2017 and 2016, net of nondeductible interest expense. Such adjustments totaled $658,000, $568,000 and $461,000 for the years ended December 31,
2018, 2017 and 2016, respectively.
(2) Non-accruing loans are included in the average amounts outstanding.
(3) Fees and costs on loans are included in interest income.
Financial results for the year ended December 31, 2018 compared to the year ended December 31, 2017 reflected an increase in net interest
income, on a tax equivalent basis, of $1.7 million, or 4.01%, and financial results for the year ended December 31, 2017 compared to the
year ended December 31, 2016 reflected an increase of $2.7 million, or 6.57%.
Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to
3.30% for the year ended December 31, 2018, compared to 3.41% and 3.48% for the years ended December 31, 2017 and 2016,
respectively.
The increase in net interest income for 2018 over 2017 was primarily due to an increase in average earning assets and the decrease in the
net interest margin was primarily due to a 41 basis point increase in the rates paid on average interest bearing liabilities. The prime rate
increased to 5.50% at December 31, 2018 compared to 4.50% at December 31, 2017.
9
The increase in net interest income for 2017 over 2016 was primarily due to an increase in average earning assets and the decrease in the
net interest margin was primarily due to a 19 basis point increase in the rates paid on average interest bearing liabilities. The prime rate
increased to 4.50% at December 31, 2017 compared to 3.75% at December 31, 2016.
Average interest-earning assets increased $98.4 million, or 7.72%, to $1.37 billion for the year ended December 31, 2018 compared to
$1.27 billion for the year ended December 31, 2017, and average interest bearing liabilities increased $87.4 million, or 8.7%, to $1.1
billion for the year ended December 31, 2018 compared to $1.0 billion for the year ended December 31, 2017.
Average interest-earning assets increased $102.1 million, or 8.71%, to $1.27 billion for the year ended December 31, 2017 compared to
$1.17 billion for the year ended December 31, 2016, and average interest bearing liabilities increased $72.8 million, or 7.8%, to $1.0
billion for the year ended December 31, 2017 compared to $933.7 million for the year ended December 31, 2016.
Total interest income (expressed on a fully taxable equivalent basis) increased to $58.4 million for the year ended December 31, 2018
compared to $51.5 million and $46.5 million for the years ended December 31, 2017 and 2016, respectively. The Company's rates earned
on interest earning assets were 4.26% for the year ended December 31, 2018 compared to 4.04% and 3.97% for the years ended
December 31, 2017 and 2016, respectively.
Interest income on loans increased to $52.5 million for the year ended December 31, 2018 compared to $46.8 million and $42.1 million
for the years ended December 31, 2017 and 2016, respectively.
Average loans outstanding increased $73.2 million, or 7.14%, to $1.1 billion for the year ended December 31, 2018 compared to $1.0
billion for the year ended December 31, 2017. The average yield on loans receivable increased to 4.79% during the year ended
December 31, 2018 compared to 4.57% for the year ended December 31, 2017.
Average loans outstanding increased $111.0 million, or 12.16%, to $1.0 billion for the year ended December 31, 2017 compared to $913.2
million for the year ended December 31, 2016. The average yield on loans receivable decreased to 4.57% during the year ended
December 31, 2017 compared to 4.61% for the year ended December 31, 2016. See the Lending and Credit Management section for
further discussion of changes in the composition of the lending portfolio.
Total interest expense was $13.2 million for the year ended December 31, 2018 compared to $8.0 million and $5.7 million for the years
ended December 31, 2017 and 2016, respectively. The Company's rates paid on interest bearing liabilities was 1.21% for the year ended
December 31, 2018 compared to 0.80% and 0.61% for the years ended December 31, 2017 and 2016, respectively. See the Liquidity
Management section for further discussion.
Interest expense on deposits was $8.9 million for the year ended December 31, 2018 compared to $4.6 million and $3.1 million for the
years ended December 31, 2017 and 2016, respectively.
Average interest bearing deposits increased $93.8 million, or 11.3%, to $922.9 million for the year ended December 31, 2018 compared
to $829.1 million for the year ended December 31, 2017. The average cost of deposits increased to 0.96% during the year ended
December 31, 2018 compared to 0.55% for the year ended December 31, 2017.
Average interest bearing deposits increased $48.6 million, or 6.2%, to $829.1 million for the year ended December 31, 2017 compared to
$780.5 million for the year ended December 31, 2016. The average cost of deposits increased to 0.55% during the year ended
December 31, 2017 compared to 0.39% for the year ended December 31, 2016.
Interest expense on borrowings was $4.3 million for year ended December 31, 2018 compared to $3.5 million and $2.6 million for the
years ended December 31, 2017 and 2016, respectively. Average borrowings were $171.0 million for the year ended December 31, 2018
compared to $177.4 million and $153.2 million for the years ended December 31, 2017 and 2016, respectively. See the Liquidity
Management section for further discussion.
10
Non-interest Income and Expense
Non-interest income for the years ended December 31, 2018, 2017, and 2016 was as follows:
2018
(In thousands)
Non-interest Income
Service charges and other fees . . . . . . . . . . . . . . . . . . . . . $ 3,736
Bank card income and fees . . . . . . . . . . . . . . . . . . . . . . . . 2,754
Trust department income . . . . . . . . . . . . . . . . . . . . . . . . . . 1,166
Real estate servicing fees, net . . . . . . . . . . . . . . . . . . . . . .
794
Gain on sales of mortgage loans, net . . . . . . . . . . . . . . . .
721
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
170
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . $ 9,341
Non-interest income as a % of total revenue * . . . . . . . . .
`
$Change
% Change
2017
2016
'18-'17 '17-'16 '18-'17
'17-'16
$ 3,437
2,614
1,137
740
770
252
$ 8,950
$ 3,400
2,547
952
325
851
240
$ 8,315
$ 299 $
140
29
54
(49)
(82)
37
67
185
415
(81)
12
$ 391 $ 635
8.7 %
5.4
2.6
7.3
(6.4)
(32.5)
4.4 %
1.1 %
2.6
19.4
127.7
(9.5)
5.0
7.6 %
17.3 %
17.3 %
17.1 %
* Total revenue is calculated as net interest income plus non-interest income.
Total non-interest income increased $391,000, or 4.4%, to $9.3 million for the year ended December 31, 2018 compared to the year
ended December 31, 2017, and increased $635,000, or 7.6%, to $9.0 million for the year ended December 31, 2017 compared to the year
ended December 31, 2016.
Service charges and other fees increased $299,000, or 8.7%, to $3.7 million for the year ended December 31, 2018 compared to the year
ended December 31, 2017, and increased $37,000, or 1.1% to $3.4 million for the year ended December 31, 2017 compared to the year
ended December 31, 2016. The increase for the year 2018 over the years ended 2017 and 2016 was primarily due to reduced waived
service charges and increases in fees and ATM income resulting from deposit growth.
Bank card income and fees increased $140,000, or 5.4%, to $2.8 million for the year ended December 31, 2018 compared to the year
ended December 31, 2017, and increased $67,000, or 2.6% to $2.6 million for the year ended December 31, 2017 compared to the year
ended December 31, 2016. The increase in all years presented was mainly the result of growth in debit card fees as a result of a higher
volume of transactions year over year.
Trust department income increased $29,000, or 2.6%, to $1.2 million for the year ended December 31, 2018 compared to the year ended
December 31, 2017, and increased $185,000, or 19.4% to $1.1 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016. The increase year over year was primarily due to new trust customer relationships.
Real estate servicing fees, net of the change in valuation of mortgage serving rights increased $54,000, or 7.3%, to $794,000 for the year
ended December 31, 2018 compared to the year ended December 31, 2017, and increased $415,000, or 127.7%, to $740,000 for the year
ended December 31, 2017 compared to the year ended December 31, 2016. The increase in the years 2018 and 2017 over the prior years
presented was primarily due to higher MSR valuations resulting from slower prepayment speeds in a higher rate environment.
Mortgage loan servicing fees earned on loans sold were $821,000 for the year ended December 31, 2018 compared to $833,000 and
$854,000 for the years ended 2017 and 2016, respectively. The Company was servicing $279.9 million of mortgage loans at December
31, 2018 compared to $285.8 million and $294.4 million at December 31, 2017 and 2016, respectively.
Gain on sales of mortgage loans decreased $49,000, or 6.4%, to $721,000 for the year ended December 31, 2018 compared to the year
ended December 31, 2017, and decreased $81,000, or 9.5%, to $770,000 for the year ended December 31, 2017 compared to the year
ended December 31, 2016. The Company sold loans of $37.0 million for the year ended December 31, 2018 compared to $33.8 million
and $37.9 million for the years ended December 31, 2017 and 2016, respectively. Although the volume of loans sold in 2018 increased
from 2017, the marginal price of the 2018 volume was lower than 2017 leading to reduced income.
Other income decreased $82,000, or 32.5%, to $170,000 for the year ended December 31, 2018 compared to the year ended December 31,
2017, and increased $12,000, or 5.0% to $252,000 for the year ended December 31, 2017 compared to the year ended December 31, 2016.
The variances between the year ended 2018 over 2017 and for the year ended 2017 over 2016 were primarily due to changes in brokerage
income. During 2018, the Company transitioned into a new relationship with a financial services provider causing a temporary disruption
in brokerage services.
11
Investment securities gains, net for the years ended December 31, 2018, 2017, and 2016 was as follows:
(in thousands)
Investment securities gains, net
Available for sale securities:
Gains realized on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Losses realized on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investment securities:
Fair value adjustments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
253 $
—
—
2
255 $
38 $
(33)
—
—
5 $
623
(21)
—
—
602
During the year ended December 31, 2018, the Company received $77.2 million from proceeds from a series of short term sales of U.S.
Treasury securities purchased with repurchase agreements and recognized gains of $253,000 in order to generate capital gains to offset
capital losses that were to expire during 2018 and 2019.
During the year ended December 31, 2017, the Company received $11.7 million from proceeds on sales of available-for-sale debt
securities and recognized gains of $5,000, compared to $60.7 million from proceeds on sales of available-for-sale debt securities and
recognized net gains of $602,000 during the year ended December 31, 2016. 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.
Non-interest expense for the years ended December 31, 2018, 2017, and 2016 was as follows:
2018
(In thousands)
Non-interest Expense
Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,109
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,995
Occupancy expense, net . . . . . . . . . . . . . . . . . . . . . . . . .
2,957
3,001
Furniture and equipment expense . . . . . . . . . . . . . . . . .
Processing expense, network and bank card expense . .
3,484
Legal, examination, and professional fees . . . . . . . . . .
1,223
FDIC insurance assessment . . . . . . . . . . . . . . . . . . . . . .
612
Advertising and promotion . . . . . . . . . . . . . . . . . . . . . .
1,233
Postage, printing, and supplies . . . . . . . . . . . . . . . . . . .
996
Real estate foreclosure expense (gains), net . . . . . . . . .
156
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,566
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . $ 40,332
Efficiency ratio* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of full-time equivalent employees . . . . . . . . .
2017
2016
'18-'17 '17-'16 '18-'17
'17-'16
$Change
% Change
$ 16,227
5,492
2,782
2,683
3,643
1,308
478
1,255
925
402
3,607
$ 38,802
$ 15,623
5,179
2,751
1,783
3,309
1,301
567
1,083
1,018
370
3,823
$ 36,807
$
882 $
503
175
318
(159)
(85)
134
(22)
71
(246)
(41)
604
313
31
900
334
7
(89)
172
(93)
32
(216)
$ 1,530 $ 1,995
5.4 %
9.2
6.3
11.9
(4.4)
(6.5)
28.0
(1.8)
7.7
(61.2)
(1.1)
3.9 %
3.9 %
6.0
1.1
50.5
10.1
0.5
(15.7)
15.9
(9.1)
8.6
(5.7)
5.4 %
74.8 %
288
74.8 %
333
75.6 %
326
* Efficiency ratio is calculated as non-interest expense as a percentage of total revenue. Total revenue includes net interest income and
non-interest income.
Total non-interest expense increased $1.5 million, or 3.9%, to $40.3 million for the year ended December 31, 2018 compared to the year
ended December 31, 2017, and increased $2.0 million, or 5.4%, to $38.8 million for the year ended December 31, 2017 compared to the
year ended December 31, 2016.
Salaries increased $882,000, or 5.4%, to $17.1 million for the year ended December 31, 2018 compared to the year ended December 31,
2017, and increased $604,000, or 3.9%, to $16.2 million for the year ended December 31, 2017 compared to the year ended December 31,
2016. The increase for the year ended 2018 over 2017 was primarily due to a bonus that was paid in February 2018 to all eligible full-
time and part-time employees as a result of the expected tax savings from the Tax Act, and 3.0% average cost of living increases paid in
January
12
2018. The increase for the year ended 2017 over 2016 was primarily due to cost of living, merit salary increases, and a decrease in deferred
loan costs.
Employee benefits increased $503,000, or 9.2%, to $6.0 million for the year ended December 31, 2018 compared to the year ended
December 31, 2017, and increased $313,000, or 6.0%, to $5.5 million for the year ended December 31, 2017 compared to the year ended
December 31, 2016. The increase in the years presented was primarily due to an increase in pension expense due to lower assumed
discount rate and increased medical plan premiums effective July 1 of each year.
Furniture and equipment expense increased $318,000, or 11.9%, to $3.0 million for the year ended December 31, 2018 compared to the
year ended December 31, 2017, and increased $900,000, 50.5%, to $2.7 million for the year ended December 31, 2017 compared to the
year ended December 31, 2016. Beginning December 2016, the Company began upgrading its data processing infrastructure to a hosted
network environment. The process included changes in maintenance agreements, service providers, and equipment.
Processing, network, and bank card expense decreased $159,000, or 4.4%, to $3.5 million for the year ended December 31, 2018
compared to the year ended December 31, 2017, and increased $334,000, or 10.1%, to $3.6 million for the year ended December 31, 2017
compared to the year ended December 31, 2016. The decrease in 2018 over 2017 was due to additional one-time costs associated with a
corporate wide network upgrade and changes in processing service providers during 2017. This was partially offset by increased debit
card processing expense during 2018. The increase in 2017 over 2016 was primarily due to a corporate wide network upgrade and changes
in processing service providers.
FDIC insurance assessment increased $134,000, or 28.0%, to $612,000 for the year ended December 31, 2018 compared to December 31,
2017, and decreased $89,000, or 15.7%, to $478,000 for the year ended December 31, 2017 compared to the year ended December 31,
2016. The increase in 2018 over 2017 was primarily due to an increase in the Company's total assessment base.
Advertising and promotion expense decreased $22,000, or 1.8%, to $1.2 million for the year ended December 31, 2018 compared to the
year ended December 31, 2017, and increased $172,000, or 15.9%, to $1.3 million for the year ended December 31, 2017 compared to
the year ended December 31, 2016. The decrease in 2018 over 2017 was primarily due to during 2017, the Company advertised and
introduced new products and services, such as interactive teller machines, and a new branch in the process of opening in the Columbia
market.
Real estate foreclosure expense (gains), net decreased $246,000, or 61.2%, to $156,000 for the year ended December 31, 2018 compared
to the year ended December 31, 2017, and increased $32,000, or 8.6%, to $402,000 for the year ended December 31, 2017 compared to
the year ended December 31, 2016.
Net losses recognized on other real estate owned were $12,000 and $232,000 for the years ended December 31, 2018 and 2017,
respectively, compared to a net gain of $21,000 for the year ended December 31, 2016. Expenses to maintain foreclosed properties were
$144,000 for the year ended December 31, 2018, compared to $170,000 and $391,000 for the years ended December 31, 2017 and 2016,
respectively.
Income taxes
Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 13.5% for the year
ended December 31, 2018 compared to 69.8% and 34.0% for the years ended December 31, 2017 and 2016, respectively. As further
described below, the decrease in tax rate for the comparative years is primarily due to a decrease in the federal corporate tax rate, the
release of the valuation allowance related to capital losses as a result of the Company's tax planning initiatives, a pension contribution
made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives.
The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act (Tax
Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation
allowance related to capital loss carryforwards, a pension contribution made during the second quarter of 2018 that was attributable to the
2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter of 2017
related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax return,
within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's ASC
Topic 740, Income Taxes.
13
Lending and Credit Management
Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 76.6% of total assets
as of December 31, 2018 compared to 74.0% as of December 31, 2017.
Lending activities are conducted pursuant to an established loan policy approved by the Bank's Board of Directors. The Bank's credit
review process is overseen by regional loan committees with established loan approval limits. In addition, a senior loan committee reviews
all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised of senior
managers of the Bank.
A summary of loans, by major class within the Company's loan portfolio as of the dates indicated is as follows:
2018
(In thousands)
207,720
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . $
28,610
Real estate construction - residential . . . . . . . . . . . . . . . . . . . . .
106,784
Real estate construction - commercial . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . . .
241,517
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . . .
529,536
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . .
32,460
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,146,627
Percent of categories to total loans:
2017
$ 192,238
26,492
98,340
246,754
472,455
32,153
$ 1,068,432
2016
$ 182,881
18,907
55,653
259,900
426,470
30,218
$ 974,029
2015
$ 149,091
16,895
33,943
256,086
385,869
23,196
$ 865,080
2014
$ 154,834
18,103
48,822
247,117
372,321
20,016
$ 861,213
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18.1 %
2.5
9.3
21.1
46.2
2.8
100.0 %
18.0 %
2.5
9.2
23.1
44.2
3.0
100.0 %
18.8 %
1.9
5.7
26.7
43.8
3.1
100.0 %
17.2 %
2.0
3.9
29.6
44.6
2.7
100.0 %
18.0 %
2.1
5.7
28.7
43.2
2.3
100.0 %
The Company extends credit to its local community market through traditional real estate mortgage products. The Company does not
participate in extending credit to sub-prime residential real estate markets. The Company does not lend funds for the type of transactions
defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any
concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company
does not have any interest-earning assets that would have been included in nonaccrual, past due, or restructured loans if such assets were
loans.
The contractual maturities of loan categories at December 31, 2018, and the composition of those loans between fixed rate and floating
rate loans are as follows:
Principal Payments Due
Total
(In thousands)
207,720
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,207 $
28,610
Real estate construction - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106,784
Real estate construction - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
241,517
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
529,536
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,460
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 231,763 $ 433,892 $ 480,972 $ 1,146,627
1,877
20,096
182,113
211,599
4,366
25,523
35,232
21,463
66,862
3,476
Over
Five
Years
67,592 $ 60,921 $
1,210
51,456
37,941
251,075
24,618
One Year Year Through
Or Less
Five Years
Over One
636,761
Loans with fixed rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans with floating rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
509,866
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 231,763 $ 433,892 $ 480,972 $ 1,146,627
131,729
349,243
120,762
111,001
384,270
49,622
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
14
purchase commitment from the secondary market at a predetermined price. For the year ended December 31, 2018, the Company sold
approximately $37.0 million of loans to investors compared to $33.8 million and $37.9 million for the years ended December 31, 2017
and 2016, respectively. At December 31, 2018, the Company was servicing approximately $279.9 million of loans sold to the secondary
market compared to $285.5 million at December 31, 2017, and $294.4 million at December 31, 2016.
Risk Elements of the Loan Portfolio
Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts
(periodically established) at least annually. Loans in excess of $2.0 million in aggregate and all adversely classified credits identified by
management are reviewed by the senior loan committee. In addition, all other loans are reviewed on a risk weighted selection process.
The senior loan committee reviews and reports to the board of directors, on a monthly basis, past due, classified, and watch list loans in
order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also
determines which loans should be considered impaired. Management follows the guidance provided in the FASB's ASC Topic 310-10-
35 in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be
collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for
impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed
below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical
loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Management
believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these
procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered necessary by
management to provide for probable losses inherent in the loan portfolio.
Nonperforming Assets
The following table summarizes nonperforming assets at the dates indicated:
(In thousands)
Nonaccrual loans:
2018
2017
2016
2015
2014
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 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 and other consumer . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total non-performing loans (a) . . . . . . . . . . . . . . . . . . . . . . .
Other real estate owned and repossessed assets . . . . . . . . .
Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,857
—
153
2,720
474
210
5,414
—
—
—
156
—
6
162
5,576
13,691
19,267
$
$
$
$
$
2,507
—
97
1,956
936
176
5,672
$
982
—
50
1,888
420
89
$ 3,429
$
308
—
102
2,322
1,542
144
$ 4,418
$
5,279
1,751
2,096
4,419
4,465
233
$ 18,243
2
275
—
28
—
23
328
6,000
13,182
19,182
$
—
—
—
54
—
11
65
3,494
14,162
$ 17,656
$
$
1
—
—
—
—
5
6
4,424
15,992
$ 20,416
$
$
—
—
56
—
—
2
58
18,301
11,885
$ 30,186
$
Loans (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,146,044
Allowance for loan losses to loans . . . . . . . . . . . . . . . . . . . . . .
Non-performing loans to loans (a) . . . . . . . . . . . . . . . . . . . . . .
Non-performing assets to loans (b) . . . . . . . . . . . . . . . . . . . . . .
Non-performing assets to assets (b) . . . . . . . . . . . . . . . . . . . . .
Allowance for loan losses to non-performing loans . . . . . . . .
1.02 %
0.49 %
1.68 %
1.30 %
208.97 %
$ 1,068,049
$ 973,867
$ 863,390
$ 861,213
1.02 %
0.56 %
1.80 %
1.34 %
1.00 %
1.02 %
0.51 %
0.36 %
2.36 %
1.81 %
1.70 %
1.37 %
180.87 % 282.94 % 194.48 %
1.06 %
2.13 %
3.51 %
2.58 %
49.72 %
(a) Non-performing loans include loans 90 days past due and accruing, nonaccrual loans, and non-performing TDRs included in nonaccrual loans.
15
(b) Non-performing assets include non-performing loans and other real estate owned and repossessed assets.
(c) Loan totals do not include loans held for sale.
Total non-performing assets were $19.3 million, or 1.68% of total loans, at December 31, 2018 compared to $19.2 million, or 1.80% of
total loans, at December 31, 2017. Non-accrual loans included $2.0 million and $1.7 million of loans classified as TDRs at December 31,
2018 and 2017, respectively.
As of December 31, 2018, approximately $5.2 million compared to $8.8 million at December 31, 2017, of loans classified as substandard,
which include performing TDRs, and are not included in the nonperforming asset table, were identified as potential problem loans having
more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. Management
believes the general allowance was sufficient to cover the risks and probable losses related to such loans at December 31, 2018 and
December 31, 2017, respectively.
Total non-accrual loans at December 31, 2018 decreased $258,000, or 5.0%, to $5.4 million compared to $5.7 million at December 31,
2017. The decrease in non-accrual loans primarily consisted of decreases in commercial, financial, and agricultural loans and real estate
mortgage commercial loans, partially offset by an increase in real estate mortgage residential loans.
Loans past due 90 days and still accruing interest at December 31, 2018, were $162,000 compared to $328,000 at December 31, 2017.
Other real estate owned and repossessed assets at December 31, 2018 were $13.7 million compared to $13.2 million at December 31,
2017. During the year ended December 31, 2018, $628,000 of non-accrual loans, net of charge-offs taken, moved to other real estate
owned and repossessed assets compared to $374,000 for the year ended December 31, 2017.
The following table summarizes the Company's TDRs at the dates indicated:
(In thousands)
Performing TDRs
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total performing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-performing TDRs
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-performing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2018
December 31, 2017
Number of Recorded Specific Number of Recorded Specific
contracts Investment Reserves
contracts Investment Reserves
570 $
6 $
9
2
3
20 $ 3,064 $
2,073
377
44
5 $ 1,042 $
5
—
2
12 $ 1,981 $
32 $ 5,045 $
867
—
72
174
72
8
4
258
94
182
—
9
285
543
500 $
6 $
11
2
—
19 $ 4,684 $
3,116
1,068
—
838 $
290
589
—
4 $
4
4
—
12 $ 1,717 $
31 $ 6,401 $
20
236
109
—
365
41
61
110
—
212
577
At December 31, 2018, loans classified as TDRs totaled $5.0 million, with $543,000 of specific reserves, of which $2.0 million were
classified as non-performing TDRs and $3.0 million were classified as performing TDRs. This is compared to $6.4 million of loans
classified as TDRs, with $577,000 of specific reserves, of which $1.7 million were classified as non-performing TDRs and $4.7 million
were classified as performing TDRs at December 31, 2017. Both performing and non-performing TDRs are considered impaired loans.
When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash
flows discounted at the loan's effective interest rate, or the fair value of the underlying collateral less applicable selling costs if the loan is
collateral dependent. The net decrease in total TDRs from December 31, 2017 to December 31, 2018 was primarily due to approximately
$2.3 million of payments received, partially offset by $916,000 of new loans designated as TDRs during the year ended December 31,
2018.
16
Allowance for Loan Losses and Provision
Allowance for Loan Losses
The following table is a summary of the allocation of the allowance for loan losses:
(In thousands)
Allocation of allowance for loan losses at end of period:
2018
2017
2016
2015
2014
3,325 $ 2,753 $ 2,153 $ 1,779
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . $
171
Real estate construction - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
466
Real estate construction - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,527
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,846
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
270
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,652 $ 10,852 $ 9,886 $ 8,604 $ 9,099
3,237 $
140
757
2,071
4,914
334
199
170
807
1,689
4,437
345
79
108
413
2,385
3,793
274
160
59
644
2,439
2,935
273
101
The allowance for loan losses was $11.7 million, or 1.02%, of loans outstanding at December 31, 2018 compared to $10.9 million, or
1.02%, of loans outstanding at December 31, 2017. The ratio of the allowance for loan losses to non-performing loans was 208.97% at
December 31, 2018, compared to 180.87% at December 31, 2017.
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:
2018
2017
2016
2015
2014
Individually evaluated for impairment - specific reserves . . . . . . . . . . . . . $ 1,194 $ 1,333 $ 1,080 $ 1,540 $ 1,749
Collectively evaluated for impairment - general reserves . . . . . . . . . . . . . . 10,458
7,350
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,652 $ 10,852 $ 9,886 $ 8,604 $ 9,099
7,064
8,806
9,519
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,
2018, $1.2 million of the Company's allowance for loan losses was allocated to impaired loans totaling approximately $8.5 million
compared to $1.3 million of the Company's allowance for loan losses allocated to impaired loans totaling approximately $10.4 million at
December 31, 2017. Management determined that $2.1 million, or 25%, of total impaired loans required no reserve allocation at
December 31, 2018 compared to $2.4 million, or 23%, at December 31, 2017 primarily due to adequate collateral values, acceptable
payment history and adequate cash flow ability.
The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates
to pools of loans by loan type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a
consistent methodology that considers historical loan loss experience by loan type. The Company believes that the five-year look-back
period provides a representative historical loss period in the current economic environment. These historical loss rates for each risk group
are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss
emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the
recognition of a loss.
The Company's methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most
recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk
factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic
conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due
loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment
of trends in collateral values, assessment of changes in the quality of the Company's internal loan review department, and changes in
lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.
The specific and general reserve allocations represent management's best estimate of probable losses inherent in the loan portfolio at the
evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available
to absorb any credit losses.
17
Provision
A $1.5 million provision for loan losses was required for the year ended December 31, 2018 compared to $1.8 million for the year ended
December 31, 2017, and $1.4 million for the year ended December 31, 2016. The decrease in 2018 over 2017 was primarily due to
improved credit quality and economic conditions used in assessing the risk in the portfolio. The increase in 2017 over 2016 was primarily
due to losses observed in the look-back period in addition to an increase in loans outstanding.
The following table summarizes loan loss experience for the years ended as indicated:
(In thousands)
Analysis of allowance for loan losses:
Balance beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,852 $ 9,886 $ 8,604 $ 9,099 $ 13,719
Charge-offs:
2015
2017
2018
2016
2014
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 charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries:
484
48
30
186
38
255
1,041
649
—
—
219
45
268
1,181
389
—
1
495
147
258
1,290
1,131
—
15
379
363
302
2,190
1,285
349
491
408
2,890
405
5,828
319
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate construction - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
181
Real estate construction - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
202
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
320
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
186
1,208
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,620
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Balance end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,652 $ 10,852 $ 9,886 $ 8,604 $ 9,099
672
322
—
138
165
148
1,445
745
250
100
62
—
52
58
94
366
675
1,475
74
88
—
83
32
105
382
799
1,765
299
—
502
60
140
146
1,147
143
1,425
Net Loan Charge-offs
The Company's net loan charge-offs were $675,000, or 0.06% of average loans, for the year ended December 31, 2018 compared to net
charge-offs of $799,000, or 0.08% of average loans, for the year ended December 31, 2017, and $143,000, or 0.02% of average loans for
the year ended December 31, 2016.
Investment Portfolio
The Company's investment portfolio consists of securities which are classified as available-for-sale, equity or other. The largest
component, available for sale debt securities are carried at estimated fair 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, 2018, the investment portfolio classified as available-for-sale represented 14.7% of total consolidated assets. Future
levels of investment securities can be expected to vary depending upon liquidity and interest sensitivity needs as well as other factors.
18
Available for sale securities
The following table presents the composition of the investment portfolio and related fair value by major category:
(In thousands)
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. government and federal agency obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgaged-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank issued trust preferred securities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available for sale debt securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
1,952
9,966
43,335
40,386
118,192
3,000
1,374
218,205
$
$
2017
1,967
12,073
36,897
46,656
128,949
3,000
1,486
231,028
$
$
(a) Certain hybrid instruments possessing characteristics typically associated with debt obligations were reclassified from other
investment securities carried at cost to available for sale securities carried at fair value in the years presented.
As of December 31, 2018, the maturity of debt securities in the investment portfolio was as follows:
One Year
Or Less
(In thousands)
—
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
U.S. government and federal agency obligations . .
12,681
Government sponsored enterprises . . . . . . . . . . . . .
5,284
States and political subdivisions (2) . . . . . . . . . . . .
Mortgage-backed securities (1) . . . . . . . . . . . . . . . .
299
—
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . .
—
Bank issued trust preferred securities . . . . . . . . . .
Total available-for-sale debt securities . . . . . . . . $ 18,264
Over One Over Five
Through
Five Years
1,952
$
5,101
30,162
25,383
81,785
—
—
$ 144,383
Through
Ten Years
—
$
4,865
492
8,148
34,537
—
—
$ 48,042
$
2.53 %
Over
Ten Years
—
$
—
—
1,571
1,571
3,000
1,374
7,516
4.28 %
Weighted
Average
Yield
2.15 %
2.27
1.86
2.39
2.27
6.00
5.09
2.28 %
$
Total
1,952
9,966
43,335
40,386
118,192
3,000
1,374
$ 218,205
2.28 %
Weighted average yield . . . . . . . . . . . . . . . . . . .
1.54 %
2.18 %
(1) Mortgage-backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual
portfolio experience during the twelve months ended December 31, 2018 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.
(2) Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the statutory federal
income tax rate of 21%.
At December 31, 2018, $20.9 million 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.
Other investment securities
Other investment securities include equity securities with readily determinable fair values and other investments securities that do not
have readily determinable fair values. Investments in Federal Home Loan Bank (FHLB) stock, and Midwest Independent Bank (MIB)
bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations.
(In thousands)
Federal Home Loan Bank of Des Moines stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Midwest Independent Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities with readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
2017
5,512
151
12
5,675
$
$
6,390
151
10
6,551
19
Liquidity and Capital Resources
Liquidity Management
The role of liquidity management is to ensure funds are available to meet depositors' withdrawal and borrowers' credit demands while at
the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of
those funds. Liquidity to meet the demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the
ability to attract funds from external sources, principally depositors. Due to the nature of services offered by the Company, management
prefers to focus on transaction accounts and full service relationships with customers.
The Company's Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for the
Company's liquidity position and profile. A combination of daily, weekly, and monthly reports provided to management detail the
following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow
obligations, available pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company's
liquidity.
The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company's most liquid assets are comprised
of available for sale investment securities, federal funds sold, and excess reserves held at the Federal Reserve Bank.
(In thousands)
Federal funds sold and other overnight interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates of deposit in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
18,396
12,247
218,205
248,848
$
$
2017
39,553
3,460
231,028
274,041
$
$
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 $218.2 million at December 31, 2018 and included an unrealized net loss of $4.4
million. The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $18.3 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. The
Company's unpledged securities in the available for sale portfolio totaled approximately $65.2 million and $49.3 million at December 31,
2018 and 2017, respectively.
Total investment securities pledged for these purposes were as follows:
(In thousands)
Investment securities pledged for the purpose of securing:
2018
2017
Federal Reserve Bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . .
Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total pledged, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
9,397
32,529
111,090
153,016
$
$
9,570
40,931
131,197
181,698
Liquidity is available from the Company's base of core customer deposits, defined as demand, interest checking, savings, money market
deposit accounts, and time deposits less than $250,000, less all brokered deposits under $250,000. At December 31, 2018, such deposits
totaled $1.1 billion and represented 89.9% 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 $250,000 and over
totaled $113.4 million at December 31, 2018. These accounts are normally considered more volatile and higher costing representing
10.1% of total deposits at December 31, 2018.
20
Core deposits at December 31, 2018 and 2017 were as follows:
(In thousands)
Core deposit base:
2018
2017
Non-interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
245,380
Interest checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
229,862
Savings and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
345,593
230,309
Other time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,068,488 $ 1,051,144
262,857 $
215,432
378,484
211,715
The total amount of certificates of deposit of $250,000 and greater at December 31, 2018 and 2017 were $104.9 million and $63.2 million,
respectively. The Company had brokered deposits totaling $39.8 million and $9.8 million at December 31, 2018 and 2017, respectively.
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, 2018, under agreements with these unaffiliated banks, the Bank may borrow up to
$42.0 million in federal funds on an unsecured basis and $16.4 million on a secured basis. There were $8.0 million in federal funds
purchased outstanding at December 31, 2018. 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, 2018, there were $16.6 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, 2018.
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, 2018, the Bank had $95.1 million in outstanding borrowings with the FHLB. In addition, the
Company has $49.5 million at December 31, 2018 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by
preferred securities issued by the trusts.
Borrowings outstanding at December 31, 2018 and 2017 were as follows:
(In thousands)
Borrowings:
2018
2017
Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . $
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
24,647 $
95,126
49,486
27
169,286 $
27,560
121,352
49,486
30
198,428
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.
2018
2017
Federal
Reserve Bank
Federal
Funds
Purchased
Lines
Total
FHLB
Lines
Total
Federal
Reserve Bank
Federal
Funds
Purchased
(In thousands)
Advance equivalent . . . . . . . . . $ 301,606 $
Letters of credit . . . . . . . . . . . .
Advances outstanding . . . . . . .
(80,000)
(95,126)
FHLB
9,160 $ 57,235 $ 368,001 $ 294,081 $
—
—
—
(8,000)
(80,000)
(103,126)
(70,000)
(121,352)
Total available . . . . . . . . . . . $ 126,480 $
9,160 $ 49,235 $ 184,875 $ 102,729 $
21
9,364 $ 47,825 $ 351,270
(70,000)
—
(121,352)
—
9,364 $ 47,825 $ 159,918
—
—
At December 31, 2018, loans of $530.1 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of
credit. At December 31, 2018, investments with a market value of $18.8 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 $42.1 million at December 31, 2018 compared to $62.9 million at December 31, 2017. The $20.8 million
decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as
shown in the accompanying consolidated statement of cash flows for the year ended December 31, 2018. Cash flow provided from
operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $16.3
million for the year ended December 31, 2018.
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 $78.6 million. The cash outflow primarily consisted of $103.1 million purchases of investment securities,
$79.3 million increase in the loan portfolio, and $8.8 million purchases of certificates of deposit in other banks, partially offset by $36.2
million in proceeds from investment maturities, calls, and pay-downs, and $77.2 million in proceeds from sales of investment securities.
Financing activities provided cash of $41.5 million, resulting primarily from a $55.2 million increase in interest-bearing transaction
accounts and time deposits, and a $17.5 million increase in demand deposits, partially offset by a $26.2 net repayment of FHLB advances.
Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2019.
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 $352.0 million in unused loan commitments and standby letters of credit as of December 31, 2018. Although the Company's
current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such
a funding demand is very low.
The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The
Company's ongoing liquidity needs primarily include funding its operating expenses and paying cash dividends to its shareholders. The
Company paid cash dividends to its common shareholders totaling approximately $2.0 million and $1.5 million for the years ended
December 31, 2018 and 2017, respectively. A large portion of the Company's liquidity is obtained from the Bank in the form of dividends.
The Bank declared and paid $5.0 million and $2.6 million in dividends to the Company during the years ended December 31, 2018 and
2017, respectively. At December 31, 2018 and 2017, the Company had cash and cash equivalents totaling $1.3 million and $1.4 million,
respectively.
Capital Management
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy
guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company
and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required
by the Dodd-Frank Act. The phase-in period for the Company began on January 1, 2015. The Federal Reserve System's (FRB) capital
adequacy guidelines require that bank holding companies maintain a Common Equity Tier 1 risk-based capital ratio equal to at least 4.5%
of its risk-weighted assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital
ratio equal to at least 8% of its risk-weighted assets. In addition, bank holding companies generally are required to maintain a Tier 1
leverage ratio of at least 4%.
In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all
banking organizations. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent
limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary
bonuses to senior executive management. The capital conservation buffer requirement will be phased in over four years beginning in 2016.
22
The capital conservation buffer requirement effectively raises the minimum required risk-based capital ratios to 7% Common Equity Tier
1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.
Under the Basel III requirements, at December 31, 2018, the Company met all capital adequacy requirements and had regulatory capital
ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of December 31, for the years
indicated:
2018
2017
2016
2015
2014
Guidelines*
Minimum Ratios
required for
Capital Adequacy
Well-Capitalized
Under Prompt
Corrective Action
Banks
Minimum Ratios for
Risk-based capital ratios:
Total capital ratio . . . . . . . . . . . . . . . . . . . . . 13.28 % 12.93 % 13.88 % 14.78 % 15.78 %
Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . 11.21
Common Equity Tier 1 capital ratio . . . . . .
8.48
Tier 1 leverage ratio . . . . . . . . . . . . . . . . . . .
9.55
10.72
8.04
9.33
11.42
8.61
9.87
12.38
NA
9.42
12.03
9.04
9.84
8.0 %
6.0
4.5
4.0
10.0 %
8.0
6.5
5.0
*
effective January 1, 2015
Stock Dividend For the tenth consecutive year, on July 1, 2018, the Company distributed a four percent stock dividend to common
shareholders of record at the close of business on June 15, 2018. For all periods presented, share information, including basic and diluted
earnings per share, has been adjusted retroactively to reflect the stock dividend.
Repurchase Program The Company's share repurchase plan expired on September 8, 2018. As of December 31, 2018, the Company had
repurchased a total of 95,709 shares of common stock pursuant to the plan at an average price of $17.90 per share, including 8,668 shares
of common stock repurchased pursuant to the plan during the year ended December 31, 2018 at an average price of $20.63 per share.
Commitments, Contractual Obligations, and Off-Balance-Sheet Arrangements
The required payments of time deposits and other borrowed money, not including interest, at December 31, 2018 are as follows:
(In thousands)
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321,571 $ 198,609 $ 77,304 $ 45,658 $
Federal Home Loan Bank advances and other borrowed money . . . . . . . . .
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
62,477
—
95,153
49,486
28,231
—
4,445
—
Years
Years
Total
Year
—
—
49,486
Payments due by Period
Less than 1
1-3
3-5
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, 2018
are as follows:
Amount of Commitment Expiration per Period
(In thousands)
Unused loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,314 $ 196,465 $ 26,332 $ 11,369 $ 33,148
Commitments to originate residential first and second mortgage loans . . . .
—
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 351,968 $ 279,751 $ 27,700 $ 11,369 $ 33,148
1,759
81,527
1,759
82,895
—
1,368
—
—
Years
Years
Total
Less than 1
Year
1-3
3-5
Over 5
Years
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.
23
Quantitative and Qualitative Disclosures about Market Risk
Asset/Liability and Interest Rate Risk
Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that
monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity
analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments
on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability
cash flows.
The principal objective of the Company's asset and liability management function is to evaluate the interest rate risk within the balance
sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and
capital. The asset and liability management function is under the guidance of the Asset Liability Committee from direction of the Board
of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and
liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity,
capital, deposit mix, loan mix and investment positions of the Company.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes
in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various
assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and
deposits, reinvestment and replacement of asset and liability cash flows.
Management analyzes the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net
interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic
value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of
changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on
net interest income.
The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 200 and 100 basis point
decrease in interest rates on net interest income based on the interest rate risk model at December 31, 2018 and 2017.
Hypothetical shift in interest rates
(bps)
200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(100) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(200) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
% Change in projected net interest income
December 31,
2018
0.26 %
1.17 %
3.39 %
4.19 %
2017
(3.14) %
(2.05) %
1.58 %
0.46 %
The improvement in our interest rate risk exposure from December 31, 2017 to December 31, 2018 was primarily due to higher offering
rates for repricing loans at December 31, 2018 and a decrease in short-term maturity borrowings from December 31, 2017.
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our
projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve.
The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response
to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.
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, 2018.
24
Impact of New Accounting Standards
Intangibles In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40)
Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU
aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that
include an internal-use software license). ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019 and
is not expected to have a significant impact on the Company's consolidated financial statements.
Fair Value Measurement In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Changes to the
Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes the requirement to disclose the amount of and reasons for
transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the
valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for
the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period
and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable
inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be
a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company
is currently evaluating the impact of the adoption on the Company's consolidated financial statements and disclosures.
Derivatives and Hedging The FASB issued guidance within ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities
(Topic 815) in August 2017. The amendments in ASU 2017-12 to Topic 815, Derivatives and Hedging, are intended to more closely align
hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency
as to the scope and results of hedging programs. The guidance also amends the presentation and disclosure requirements and changes how
companies assess effectiveness. Under the new guidance, public companies will have until the end of the first quarter in which a hedge is
designated to perform an initial assessment of a hedge's effectiveness. After initial qualification, the new guidance permits a qualitative
effectiveness assessment for certain hedges instead of a quantitative test if the company can reasonably support an expectation of high
effectiveness throughout the term of the hedge. Additional disclosures include cumulative basis adjustments for fair value hedges and the
effect of hedging on individual income statement line items. The amendments in this Update are effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the
Update. The ASU is not expected to have a significant effect on the Company's Consolidated Financial Statements.
Financial Instruments In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement
of Credit Losses on Financial Instruments (CECL). The revised accounting guidance will remove all recognition thresholds and will
require a company to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument
and the amount of amortized cost that the company expects to collect over the instrument's contractual life. It also amends the credit loss
measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. This new accounting
guidance will be effective for interim and annual reporting periods beginning after December 15, 2019. While the Company generally
expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting
period in which the new standard is effective, the Company has not determined the magnitude of any such one-time adjustment or the
overall impact of the new guidance on the Company's consolidated financial statements. The Company has formed a committee and is
continuing to evaluate the impact of the ASU's adoption on the Company's consolidated financial statements. Beginning in the first quarter
of 2019, the Company plans to run parallel credit risk models to continue evaluating the results.
Leases In February 2016, the FASB issued ASU 2016-02, Leases, in order to increase transparency and comparability by recognizing
lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU primarily
affects lessee accounting, which requires the lessee to recognize a right-of-use asset and a liability to make lease payments for those leases
classified as operating leases under previous GAAP. For leases with a term of 12 months or less, an election by class of underlying asset
not to recognize lease assets and lease liabilities is permitted. The ASU also provides additional guidance as to the definition of a lease,
identification of lease components, and sale and leaseback transactions. The amendments in the ASU are effective for interim and annual
periods beginning January 1, 2019. The Company's operating leases primarily relate to office space and bank branches.
The Company adopted ASU 2016-02 and related transition guidance on January 1, 2019 and elected the package of practical expedients
permitted under the transition guidance within the new standard, which among other things, allows the carryforward of the historical lease
classification, the practical expedient related to land easements and the hindsight practical expedient to determine the reasonably certain
lease term for existing leases. The Company made an accounting policy election to keep leases with an initial term of 12 months or less
off of the balance sheet and recognize those lease payments in the Consolidated Statements of Income on a straight-line basis over the lease
25
term. The adoption of ASU 2016-02 and related transition guidance resulted in the recognition of additional net lease assets and liabilities
of approximately $296,000 and $296,000, respectively, as of January 1, 2019. The standard will not materially affect our consolidated net
earnings or regulatory capital ratios.
Callable Debt Securities In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs
(Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the
premium on certain purchased callable debt securities to the earliest call date. The ASU does not impact securities held at a discount; the
discount continues to be amortized to maturity. The guidance calls for a modified retrospective transition approach under which a
cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is
adopted. The ASU is effective for the Company on January 1, 2019. The adoption did not have an impact on the consolidated financial
statements and related disclosures and no cumulative effect adjustment was required upon adoption.
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, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Income for each of the years ended December 31, 2018, 2017, and 2016 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2018, 2017, and 2016 . . . . . . . . .
Consolidated Statements of Stockholders' Equity for each of the years ended December 31, 2018, 2017, and 2016 . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the years ended December 31, 2018, 2017, and 2016 . . . . . . . . . . . . . . . . . . .
Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
28
29
30
31
32
33
34
27
KPMG LLP
Suite 900
10 South Broadway
St. Louis, MO 63102-1761
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Hawthorn Bancshares, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Hawthorn Bancshares, Inc. and subsidiaries (the Company) as of
December 31, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated financial
statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year
period ended December 31, 2018, 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) (PCAOB),
the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated
March 14, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1993.
St. Louis, Missouri
March 14, 2019
KPMG LLP is a Delaware limited liability partnership and the U.S. member
firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (“KPMG International”), a Swiss entity.
28
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except per share data)
December 31,
2018
2017
ASSETS
23,687
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Federal funds sold and other interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,396
42,083
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12,247
Certificates of deposit in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale debt securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
218,205
5,675
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
223,880
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,146,627
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(11,652)
Allowances for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,134,975
Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,894
Premises and equipment - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,931
Other real estate owned and repossessed assets - net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,691
6,162
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,542
Cash surrender value - life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,277
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,481,682
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Savings, interest checking and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits $250,000 and over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity:
Common stock, $1 par value, authorized 15,000,000 shares; issued 6,278,481 and 6,046,907 shares,
262,857
614,040
104,900
216,671
1,198,468
24,647
95,153
49,486
1,035
13,479
1,382,268
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,279
50,173
Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,105
(6,099)
Accumulated other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock; 243,638 and 248,898 shares, at cost, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,044)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99,414
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,481,682
$
23,325
39,553
62,878
3,460
231,028
6,551
237,579
1,068,432
(10,852)
1,057,580
34,811
2,713
13,182
5,627
2,484
8,902
$ 1,429,216
$
245,380
584,468
63,176
232,788
1,125,812
27,560
121,382
49,486
554
13,051
1,337,845
6,047
45,442
50,595
(5,662)
(5,051)
91,371
$ 1,429,216
See accompanying notes to the consolidated financial statements.
29
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest on investment securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nontaxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds sold, other interest-bearing deposits, and certificates of deposit in other banks .
Dividends on other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on federal funds purchased and securities sold under agreements to repurchase . . . . . .
Interest on Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST INCOME
Service charges and other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank card income and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trust department income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate servicing fees, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of mortgage loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities gain, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NON-INTEREST EXPENSE
Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Processing , network, and bank card expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal, examination, and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FDIC insurance assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and promotion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postage, printing, and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
See accompanying notes to the consolidated financial statements.
Years Ended December 31,
2017
2016
2018
52,151 $
46,596 $
41,854
4,114
597
699
218
57,779
5,433
3,404
8,837
603
1,517
2,229
4,349
13,186
44,593
1,475
43,118
3,736
2,754
1,166
794
721
170
9,341
255
3,257
657
267
158
50,935
2,329
2,224
4,553
113
1,590
1,751
3,454
8,007
42,928
1,765
41,163
3,437
2,614
1,137
740
770
252
8,950
5
23,104
2,957
3,001
3,484
1,223
612
1,233
996
3,722
40,332
12,382
1,668
10,714 $
1.78 $
1.78 $
21,719
2,782
2,683
3,643
1,308
478
1,255
925
4,009
38,802
11,316
7,902
3,414 $
0.56 $
0.56 $
3,463
521
80
92
46,010
1,159
1,907
3,066
64
1,038
1,495
2,597
5,663
40,347
1,425
38,922
3,400
2,547
952
325
851
240
8,315
602
20,802
2,751
1,783
3,309
1,301
567
1,083
1,018
4,193
36,807
11,032
3,750
7,282
1.19
1.19
30
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income, net of tax
Investment securities available-for-sale:
Years Ended December 31,
2017
3,414 $
2018
10,714 $
2016
7,282
Unrealized loss on investment securities available-for-sale, net of tax . . . . . . . . . . . . . . . . . . .
Adjustment for gain on sale of investment securities, net of tax . . . . . . . . . . . . . . . . . . . . . . . .
(955)
—
(23)
(3)
(972)
(373)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
345
173
(437)
10,277 $
(673)
56
(643)
2,771 $
(487)
49
(1,783)
5,499
See accompanying notes to the consolidated financial statements.
31
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Common
Stock
Surplus Earnings
(In thousands)
Balance, December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,605 $ 38,549 $ 48,700 $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, common stock . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,822 $ 41,498 $ 51,671 $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive
7,282
—
—
(3,149)
—
(1,162)
—
—
17
2,932
—
—
—
—
—
217
—
—
—
—
—
—
Total
Stock -
holders'
Equity
Accumulated
Other
Retained Comprehensive Treasury
Loss
Stock
(2,018) $ (3,550) $ 87,286
7,282
(1,783)
17
—
(623)
(1,162)
(3,801) $ (4,173) $ 91,017
3,414
(643)
—
(1,783)
—
—
—
—
—
—
—
—
(623)
—
3,414
—
—
(643)
—
—
loss per ASU 2018-02 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . .
Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, common stock . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,047 $ 45,442 $ 50,595 $
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock under equity compensation plan . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared, common stock . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,279 $ 50,173 $ 54,105 $
10,714
—
—
—
(5,014)
(2,190)
—
—
(51)
—
4,782
—
1,218
—
(4,166)
—
(1,542)
—
3
3,941
—
—
—
—
—
—
232
—
—
—
225
—
—
—
—
—
(878)
—
(1,218)
—
—
—
—
—
3
—
(878)
(1,542)
(5,662) $ (5,051) $ 91,371
10,714
(437)
135
(179)
—
(2,190)
(6,099) $ (5,044) $ 99,414
—
—
186
(179)
—
—
—
(437)
—
—
—
—
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities gain, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on sales and dispositions of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sales and dispositions of other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in cash surrender value - life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in deferred tax asset due to tax reform reclass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase 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:
Purchase of certificates of deposit in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of certificates of deposit in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities:
Net increase in demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase in interest-bearing transaction accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net decrease in federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . .
Repayment of FHLB advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of stock under equity compensation plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid - common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncash investing and financing activities:
Other real estate and repossessed assets acquired in settlement of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other real estate transferred from other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See accompanying notes to the consolidated financial statements.
Year Ended December 31,
2017
2018
2016
$
10,714
$
3,414
$
7,282
1,475
1,797
1,506
—
27
(255)
3
(14)
26
(535)
(58)
854
—
481
667
(36,469)
36,990
(721)
(186)
16,302
(8,787)
—
(79,298)
(103,078)
34,586
1,685
77,168
(4,713)
5,591
(2,326)
13
585
(78,574)
17,477
29,572
25,607
(2,913)
(220,542)
194,313
135
(179)
(1,993)
41,477
(20,795)
62,878
42,083
12,719
241
635
471
5,014
$
$
$
$
$
$
1,765
1,735
1,664
3
93
(5)
123
(45)
284
(444)
(75)
(808)
4,105
56
923
(33,245)
33,794
(770)
(88)
12,479
(3,460)
1,000
(95,355)
(64,611)
31,053
8,175
11,653
(2,483)
1,242
(1,266)
12
1,115
(112,925)
9,405
115,737
(9,996)
(3,947)
(183,188)
211,670
—
(878)
(1,474)
137,329
36,883
25,995
62,878
7,951
3,975
374
—
4,166
1,425
1,782
1,903
17
529
(602)
(1)
(207)
213
(330)
(61)
317
—
116
387
(36,017)
37,896
(851)
(267)
13,531
—
—
(112,353)
(113,357)
51,855
17,855
60,720
(1,759)
—
(1,262)
9
4,057
(94,235)
27,940
27,651
7,878
(25,327)
(24,000)
66,900
—
(623)
(1,097)
79,322
(1,382)
27,377
25,995
5,547
3,760
2,233
—
3,149
$
$
$
$
$
$
$
$
$
$
$
$
33
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
(1) Summary of Significant Accounting Policies
Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services
to individual and corporate customers located within the communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw,
Springfield, and the greater Kansas City metropolitan area. The Company is subject to competition from other financial and nonfinancial
institutions providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory
agencies and undergo periodic examinations by those regulatory agencies.
The accompanying 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.
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, the Company formed Hawthorn Real Estate, LLC, (the Real Estate Company); a wholly owned subsidiary of the
Company. In December of 2017, the Company formed Hawthorn Risk Management, Inc., (the Insurance Captive); a wholly owned
subsidiary of the Company. The consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), the
Real Estate Company, and the Insurance Captive. 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 to 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
Loans originated, primarily one-to-four family residential mortgage loans, with the intent to be sold in the secondary market are classified
as held for sale and are accounted for at the lower of adjusted cost or fair value. Adjusted cost reflects the funded loan amount and any
loan origination costs and fees. 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. Mortgage loans held for
sale were $583,000 at December 31, 2018 compared to $383,000 loans held for sale at December 31, 2017.
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.
34
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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 loan is accounted for as a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the borrowers'
financial difficulties, grants a concession to the borrower that it would not otherwise consider. A TDR typically involves (1) modification
of terms such as a reduction of the stated interest rate, loan principal, accrued interest, or an extended maturity date (2) a loan renewal at
a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy.
Nonperforming TDRs are returned to performing 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
performing and non-performing TDRs in the impaired and non-performing asset totals. The Company measures the impairment loss of a
TDR in the same manner as described below. TDRs which are performing under their contractual terms continue to accrue interest which
is recognized in current earnings.
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. The fair value of impaired loans
deemed collateral dependent, for purposes of the measurement of the impairment loss, can be subject to changing market conditions,
supply and demand, condition of the collateral and other factors over 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. When loans become 90 days past
due, they are generally placed on nonaccrual status or charged off unless extenuating circumstances justify leaving the loan on accrual
basis. When loans reach 120 days past due and there is little likelihood of repayment, the uncollectible portion of the loans are charged
off. 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.
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 applying loss rates
to pools of loans by loan type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a
consistent methodology that considers historical loan loss experience by loan type. The Company believes that the five-year look-back
period provides a representative historical loss period in the current economic environment. These historical loss rates for each risk group
are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss
emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the
recognition of a loss.
The Company's methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most
recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk
35
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic
conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due
loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations,
assessment of trends in collateral values, assessment of changes in the quality of the Company's internal loan review department, and
changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.
Certificates of Deposit in other banks
Certificates of deposit are investments made by the Company with other financial institutions, in amounts less than $250,000 each in order
to qualify for FDIC insurance coverage, that are carried at cost which approximates fair values.
Investment Securities
Available for sale securities
The largest component of the Company's investment portfolio consists of debt securities which 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 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.
Other investment securities
Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have
readily determinable fair values. Investments in Federal Home Loan Bank (FHLB) stock, and Midwest Independent Bank (MIB) bankers
bank stock, that do not have readily determinable fair values, are required for membership in those organizations.
Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings. Equity
securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment.
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 Agency, 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 4.00% of advances from the FHLB to the Bank. These investments 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 improvements and
furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such
36
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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.
Mortgage Servicing Rights
The Company originates and sells residential mortgage loans in the secondary market and typically retains 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 are carried at fair value in the consolidated balance sheet with changes in the fair value recognized in earnings.
As most 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 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.
In addition to the changes in fair value of the mortgage servicing rights, the Company also recorded loan servicing fee income as part of
real estate servicing fees, net in the consolidated statements of income. Loan servicing fee income represents revenue earned for servicing
mortgage loans. The servicing fees are based on contractual percentage of the outstanding principal balance and recognized as revenue as
the related mortgage payments are collected. Corresponding loan servicing costs are charged to expense as incurred.
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 valuation write-downs are recorded
as other non-interest expense. The Company establishes a valuation allowance related to other real estate owned and repossessed assets
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 asset.
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.
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
37
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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. Deferred income tax assets and liabilities are provided as temporary differences between the tax basis of an asset
or liability and its reported amount in the consolidated financial statements at the enacted tax rate expected to be applied in the period the
deferred tax item is expected to be realized. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most
likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and
recoverable taxes paid in prior years.
The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act, (Tax
Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation
allowance related to capital loss carryforwards, a pension contribution made during the second quarter of 2018 that was attributable to the
2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter of 2017
related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax return,
within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's
ASC Topic 740, Income Taxes.
The Tax Act resulted in stranded income tax effects in accumulated other comprehensive loss, for which new accounting guidance was
issued under ASU 2018-02. This guidance allowed the Company to early adopt and retrospectively apply the reclassification of stranded
income tax effects from accumulated other comprehensive loss to retained earnings. As of December 31, 2017, the Company reclassified
$1.2 million from accumulated other comprehensive loss to retained earnings resulting from the Tax Act.
A tax position is initially recognized in the financial statements when it is more likely than not the position will be sustained upon
examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is
greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all
relevant facts. Penalties and interest incurred under the applicable tax law are classified as income tax expense. The Company has not
recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions as of December 31, 2018,
2017, and 2016.
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, overnight interest earning deposits with banks, cash, and due from banks.
Stock-Based Compensation
The Company's stock-based employee compensation plan (the plan) is described in Note 13, 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 Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, on
January 1, 2017 and elected to recognize forfeitures as they occur. Prior to the adoption of the ASU, the expense was recognized based on
38
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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 plan expired on February 28, 2010, except as to outstanding options
under the plan, and no further options may be granted pursuant to the plan. All options were fully expensed as of September 30, 2017.
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. Gains on the sale of treasury stock are credited to additional paid-in-capital. Losses
on the sale of treasury stock are charged to additional paid-in-capital to the extent of pervious gains, otherwise charged to retained earnings.
Stock Dividend On July 1, 2018, the Company paid a special stock dividend of four percent to shareholders of record at the close of
business on June 15, 2018. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted
retroactively to reflect this change.
Summary of Recent Transactions and Events On February 8, 2019, Hawthorn Bank, a wholly-owned subsidiary of Hawthorn
Bancshares, Inc., completed the sale of its branch located in Branson, Missouri to Branson Bank, Branson, Missouri. Total deposits
transferred were approximately $10.6 million while loans assigned to the branch were retained. The Branson branch land and building
were considered assets held for sale at December 31, 2018. The sale is expected to result in a pre-tax gain of approximately $2.1 million,
$1.7 million related to the land and building, subject to certain future adjustments required in the definitive agreement.
Reclassifications Certain prior year information has been reclassified to conform to the 2018 presentation.
The following represents significant new accounting principles adopted in 2018:
Revenue from Contracts with Customers On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with
Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material
impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not
deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period
amounts were not adjusted and continue to be reported in accordance with historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain
noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit
card fees are not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue,
service charges and fees, debit card income, ATM surcharge income, and other real estate owned sales. However, the recognition of these
revenue streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams within the scope of Topic 606 are
discussed in Footnote 16.
Financial Instruments The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, in
January 2016. The amendments require all equity investments to be measured at fair value with changes in the fair value recognized
through net income, other than those accounted for under the equity method of accounting or those that result in the consolidation of the
investee. Additionally, these amendments require presentation in other comprehensive income the portion of the total change in the fair
value of a liability resulting from a change in the instrument-specific credit risk for those liabilities measured at fair value. The amendments
also require use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments
are effective for interim and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the
Company's consolidated financial statements.
The FASB issued ASU 2018-04, Investments - Debt Securities (Topic 320) and Regulated Operations (Topic 980): The amendment in
this ASU adds, amends and supersedes various paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and
ASC 980, Regulated Operations. The amendments in this ASU are effective when a registrant adopts ASU 2016-01, which for the
Company was January 1, 2018. This amendment did not have a significant effect on the Company's consolidated financial statements.
39
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
Liabilities The FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products, in March 2016, in order
to address current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. Such
products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid
telecommunication cards, and traveler's checks. The amendments require that the portion of the dollar value of prepaid stored-value
products that is ultimately unredeemed (that is, the breakage) be accounted for consistent with the breakage guidance for stored-value
product transactions provided in ASC Topic 606 - Revenue from Contracts with Customers. These amendments are effective for interim
and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the Company's consolidated
financial statements.
Pension The FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost in March 2017. Under the new guidance, the Company presents the service cost component of the net periodic benefit cost
in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered
during the period. In addition, only the service cost component will be eligible for capitalization in assets. The Company presents the
other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. The Company utilizes the
ASU's practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in
their pension and other postretirement benefit plan footnote. The amendments were effective January 1, 2018 and did not have a significant
effect on the Company's consolidated financial statements. See Note 12 for further discussion.
(2) Loans and Allowance for Loan Losses
Loans
A summary of loans, by major class within the Company's loan portfolio, at December 31, 2018 and 2017 is as follows:
2018
(in thousands)
207,720
Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
28,610
Real estate construction - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
106,784
Real estate construction - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
241,517
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
529,536
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
32,460
Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,146,627
$
2017
192,238
26,492
98,340
246,754
472,455
32,153
$ 1,068,432
The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding
Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson and the greater Kansas City metropolitan area. As such, the Bank is
susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one
economic sector. Installment and other consumer loans consist primarily of the financing of vehicles. At December 31, 2018, $530.1
million of loans 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:
(in thousands)
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New loans and new directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
6,442
1,127
(1,565)
6,004
40
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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.
Allowance for loan losses
The following table illustrates the changes in the allowance for loan losses by portfolio segment:
(in thousands)
Balance at December 31, 2015 . . . . $
Additions:
Commercial,
Financial, & Construction - Construction - Mortgage - Mortgage -
Agricultural Residential Commercial Residential Commercial Individuals allocated Total
Real Estate Real Estate Installment
Real Estate
Real Estate
Loans to
Un-
2,153 $
59 $
644 $ 2,439 $
2,935 $
273 $ 101 $ 8,604
Provision for loan losses . . . . . . . . .
690
49
(732)
381
865
113
59
1,425
Deductions:
Loans charged off . . . . . . . . . . . . . .
Less recoveries on loans . . . . . . . . .
Net loans charged off . . . . . . . . . . . .
Balance at December 31, 2016 . . . . $
Additions:
389
(299)
90
2,753 $
—
—
—
108 $
1
(502)
(501)
413 $ 2,385 $
495
(60)
435
147
(140)
7
3,793 $
1,290
—
258
(1,147)
—
(146)
112
143
—
274 $ 160 $ 9,886
Provision for loan losses . . . . . . . . .
1,147
(26)
394
(560)
657
234
(81)
1,765
Deductions:
Loans charged off . . . . . . . . . . . . . .
Less recoveries on loans . . . . . . . . .
Net loans charged off . . . . . . . . . . . .
Balance at December 31, 2017 . . . . $
Additions:
649
(74)
575
3,325 $
—
(88)
(88)
170 $
—
—
—
807 $ 1,689 $
219
(83)
136
45
(32)
13
4,437
268
(105)
163
345 $
1,181
—
(382)
—
—
799
79 $ 10,852
Provision for loan losses . . . . . . . . .
296
(44)
(20)
516
457
150
120
1,475
Deductions:
Loans charged off . . . . . . . . . . . . . .
Less recoveries on loans . . . . . . . . .
Net loans charged off . . . . . . . . . . . .
Balance at December 31, 2018 . . . . $
484
(100)
384
3,237 $
48
(62)
(14)
140 $
30
—
30
757 $ 2,071 $
186
(52)
134
38
(58)
(20)
4,914 $
255
—
1,041
(94)
—
(366)
—
161
675
334 $ 199 $ 11,652
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.
Beginning with December 31, 2017, the Company utilized a five-year look-back period, which was considered a representative historical
loss period. The look-back period is consistently evaluated for relevance given the current facts and circumstances.
41
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The following table illustrates the allowance for loan losses and recorded investment by portfolio segment:
(in thousands)
December 31, 2018
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, 2017
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
Commercial,
Financial, and Construction - Construction - Mortgage - Mortgage -
Agricultural Residential Commercial Residential Commercial Consumer allocated Total
Real Estate Real Estate Installment
and Other Un-
Real Estate
Real Estate
551 $
2,686
3,237 $
— $
140
140 $
— $
757
757 $
579 $
1,492
2,071 $
37 $
4,877
4,914 $
27 $
307
334 $
— $
199
199 $
1,194
10,458
11,652
2,428 $
205,292
207,720 $
— $
28,610
28,610 $
153 $
4,793 $
850 $
254 $
106,631
106,784 $ 241,517 $
236,724
528,686
529,536 $
32,206
32,460 $
8,478
— $
—
1,138,149
— $ 1,146,627
500 $
2,825
3,325 $
— $
170
170 $
48 $
759
807 $
521 $
1,168
1,689 $
243 $
4,194
4,437 $
21 $
324
345 $
— $
79
79 $
1,333
9,519
10,852
3,007 $
189,231
192,238 $
— $
26,492
26,492 $
97 $
5,072 $
2,004 $
176 $
98,243
98,340 $ 246,754 $
241,682
470,451
472,455 $
31,977
32,153 $
10,356
— $
—
1,058,076
— $ 1,068,432
Loans evaluated under ASC 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively
evaluated for impairment under ASC 450-20. Impaired loans individually evaluated for impairment totaled $8.5 million and $10.4 million
at December 31, 2018 and 2017, respectively, and are comprised of loans on non-accrual status and loans which have been classified as
troubled debt restructurings (TDRs).
The net carrying value of impaired loans is based on the fair values of collateral obtained through independent appraisals or internal
evaluations, or by discounting the total expected future cash flows. At December 31, 2018 and 2017, $3.8 million and $4.0 million,
respectively, of impaired loans were evaluated based on the fair value less estimated selling costs of the loan's collateral. Once the
impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2018, $1.2 million of the Company's
allowance for loan losses was allocated to impaired loans totaling $8.5 million compared to $1.3 million of the Company's allowance for
loan losses allocated to impaired loans totaling approximately $10.4 million at December 31, 2017. Management determined that $2.1
million, or 25%, of total impaired loans required no reserve allocation at December 31, 2018 compared to $2.4 million, or 23%, at
December 31, 2017 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.
The categories of impaired loans at December 31, 2018 and 2017 are as follows:
(in thousands)
Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Performing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
5,414
3,064
8,478
$
$
2017
5,672
4,684
10,356
42
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The following tables provide additional information about impaired loans at December 31, 2018 and 2017, respectively, segregated
between loans for which an allowance has been provided and loans for which no allowance has been provided.
(in thousands)
December 31, 2018
With no related allowance recorded:
Recorded
Investment
Unpaid
Principal
Balance
Specific
Reserves
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate - construction commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
With an allowance recorded:
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,264 $
153
561
115
2,093 $
1,164 $
4,232
735
254
6,385 $
8,478 $
1,550 $
180
602
119
2,451 $
1,236 $
4,458
1,093
280
7,067 $
9,518 $
—
—
—
—
—
551
579
37
27
1,194
1,194
(in thousands)
December 31, 2017
With no related allowance recorded:
Recorded
Investment
Unpaid
Principal
Balance
Specific
Reserves
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,393 $
674
366
2,433 $
1,445 $
688
395
2,528 $
With an allowance recorded:
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate - construction commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,614 $
97
4,398
1,638
176
7,923 $
10,356 $
1,834 $
97
4,500
1,743
196
8,370 $
10,898 $
—
—
—
—
500
48
521
243
21
1,333
1,333
43
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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, 2018 and 2017:
(in thousands)
With no related allowance recorded:
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate - construction commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
With an allowance recorded:
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate - construction commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
Interest
Recognized
For the
Period Ended
Average
Recorded
Investment
2017
Interest
Recognized
For the
Period Ended
Average
Recorded
Investment
1,302
120
901
59
34
2,416
1,394
15
4,169
763
206
6,547
8,963
$
$
$
$
$
—
—
10
22
—
32
32
—
99
34
2
167
199
$
$
$
$
$
957
—
826
373
2,156
1,536
49
4,575
1,641
114
7,915
10,071
$
$
$
$
$
—
—
13
—
13
33
—
149
61
—
243
256
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 $199,000 and $256,000, for the years ended December 31, 2018 and 2017, respectively. The average
recorded investment in impaired loans is calculated on a monthly basis during the years reported.
Delinquent and Non-Accrual Loans
The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent
once payments become 30 days or more past due. The Company's policy is to discontinue the accrual of interest income on any loan when,
in the opinion of management, the ultimate collectability of interest or principal is no longer probable. In general, loans are placed on non-
accrual when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual,
including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management's collection
efforts and the value of the underlying collateral. Non-accrual loans are returned to accrual status when, in the opinion of management,
the financial condition of the borrower indicates that the timely collectability of interest and principal is probable and the borrower
demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six
months.
44
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The following table provides aging information for the Company's past due and non-accrual loans at December 31, 2018 and 2017.
Current or
Less Than
30 Days
Past Due
90 Days
Past Due
30 - 89 Days And Still
Past Due Accruing Non-Accrual
Total
(in thousands)
December 31, 2018
Commercial, Financial, and Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . $ 205,597 $
Real Estate Construction - Residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Construction - Commercial . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage - Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage - Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and Other Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,404
106,531
235,734
527,968
32,002
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,136,236 $
December 31, 2017
Commercial, Financial, and Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . $ 189,537 $
Real Estate Construction - Residential . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Construction - Commercial . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage - Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate Mortgage - Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Installment and Other Consumer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,930
98,243
242,597
471,476
31,715
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,059,498 $
Credit Quality
266 $
206
100
2,907
1,094
242
4,815 $
— $
—
—
156
—
6
162 $
1,857 $
—
153
2,720
474
210
207,720
28,610
106,784
241,517
529,536
32,460
5,414 $ 1,146,627
192 $
287
—
2,173
43
239
2,934 $
2 $
275
—
28
—
23
328 $
2,507 $
—
97
1,956
936
176
192,238
26,492
98,340
246,754
472,455
32,153
5,672 $ 1,068,432
The Company categorizes loans into risk categories based upon an internal rating system reflecting management's risk assessment. Loans
are placed on watch status when one or more weaknesses that may result in the deterioration of the repayment exits or the Company's
credit position at some future date. Loans classified as substandard are inadequately protected by the current sound worth and paying
capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses that
jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if
the deficiencies are not corrected. A loan is classified as a troubled debt restructuring (TDR) when a borrower is experiencing financial
difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would
not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans classified as TDRs
which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation
purposes. It is the Company's policy to discontinue the accrual of interest income on loans when management believes that the collection
of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower
exists for which payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a
period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received
on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as
interest income on a cash basis.
45
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The following table presents the risk categories by class at December 31, 2018 and 2017.
Commercial, Real Estate Real Estate Real Estate Real Estate Installment
Financial, & Construction - Construction - Mortgage - Mortgage -
Agricultural Residential
Residential Commercial Consumer
Commercial
and other
Total
(in thousands)
At December 31, 2018
Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performing TDRs . . . . . . . . . . . . . . . . . . . . . . . .
Non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,871 $
53
570
1,857
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,351 $
At December 31, 2017
Watch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performing TDRs . . . . . . . . . . . . . . . . . . . . . . . .
Non-accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,868 $
658
500
2,507
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,533 $
Troubled Debt Restructurings
588 $
—
—
—
588 $
4,063 $ 12,790 $ 36,408 $
—
—
153
1,411
2,073
2,720
702
377
474
4,216 $ 18,994 $ 37,961 $
8 $ 62,728
2,169
3
3,064
44
210
5,414
265 $ 73,375
1,459 $
462
—
—
1,921 $
1,284 $ 9,978 $ 49,197 $
—
—
97
2,262
3,116
1,956
723
1,068
936
1,381 $ 17,312 $ 51,924 $
— $ 71,786
4,121
16
4,684
—
176
5,672
192 $ 86,263
At December 31, 2018, loans classified as TDRs totaled $5.0 million, of which $2.0 million were classified as nonperforming TDRs and
included in non-accrual loans and $3.0 million were classified as performing TDRs. At December 31, 2017, loans classified as TDRs
totaled $6.4 million, of which $1.7 million were classified as nonperforming TDRs and included in non-accrual loans and $4.7 million
were classified as performing TDRs. Both performing and nonperforming TDRs are considered impaired loans. When an individual loan
is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of
$543,000 and $577,000 related to TDRs were allocated to the allowance for loan losses at December 31, 2018 and 2017, respectively.
The following table summarizes loans that were modified as TDRs during the years ended December 31, 2018 and 2017.
(in thousands)
Troubled Debt Restructurings
Commercial, financial and agricultural . . . . . . . . . . . . . . . . . .
Real estate mortgage - residential . . . . . . . . . . . . . . . . . . . . . . .
Real estate mortgage - commercial . . . . . . . . . . . . . . . . . . . . . .
Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
Recorded Investment (1)
Pre-
2017
Recorded Investment (1)
Pre-
Number of
Contracts Modification Modification Contracts Modification Modification
Number of
Post-
Post-
3 $
2
—
5
10 $
510 $
149
—
185
844 $
502
147
—
117
766
3 $
2
1
—
6 $
773 $
118
55
—
946 $
773
116
49
—
938
(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans
modified as a TDR that were fully paid down, charged-off, or foreclosed upon during the period ended are not reported.
The Company's portfolio of loans classified as TDRs include concessions for the borrower due to deteriorated financial condition such as
interest rates below the current market rate, deferring principal payments, and extending maturity dates. During the year ended
December 31, 2018, ten loans meeting the TDR criteria were modified compared to six loans during the year ended December 31, 2017.
The Company considers a TDR to be in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or it is
the process of foreclosure. There was one consumer TDR with a $3,000 balance, where a concession was made and subsequently defaulted
and was charged off during the year ended December 31, 2018, within twelve months of its modification date. This is compared to one
46
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
commercial TDR with a $123,000 balance where a concession was made and subsequently defaulted and was charged off during the year
ended December 31, 2017.
(3) Other Real Estate and Repossessed 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 and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
Changes in the net carrying amount of other real estate owned and repossessed assets were as follows:
2018
2017
1,168
179
12,101
336
2,909
—
16,693
(3,002)
13,691
$
$
$
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs against the valuation allowance for other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs against the valuation allowance for other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less valuation allowance for other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
727
—
12,380
382
2,909
5
16,403
(3,221)
13,182
17,291
374
(1,115)
(192)
45
16,403
1,106
(585)
(245)
14
16,693
(3,002)
13,691
At December 31, 2018, $200,000 of consumer mortgage loans secured by residential real estate properties were in the process of
foreclosure compared to no loans in the process of foreclosure at December 31, 2017.
Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2018, 2017 and
2016, respectively, is summarized as follows:
(in thousands)
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Provision for other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
3,221 $
26
(245)
3,002 $
2017
3,129 $
284
(192)
3,221 $
2016
3,233
213
(317)
3,129
47
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
(4) Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of debt securities classified as available-for-sale at December 31,
2018 and 2017 are shown below.
Total
Amortized
Gross Unrealized
Gains
Losses
Fair
Value
(in thousands)
December 31, 2018
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. government and federal agency obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank issued trust preferred securities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 222,578 $
1,984 $
10,235
43,784
40,859
121,230
3,000
1,486
Cost
(32) $
1,952
— $
9,966
(269)
—
43,335
(472)
23
40,386
(501)
28
118,192
(3,110)
72
—
3,000
—
—
1,374
(112)
123 $ (4,496) $ 218,205
December 31, 2017
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. government and federal agency obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other debt securities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank issued trust preferred securities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 234,192 $
1,980 $
12,341
37,321
47,019
131,045
3,000
1,486
(13) $
1,967
— $
12,073
(268)
—
—
36,897
(424)
46,656
(477)
114
128,949
(2,140)
44
—
3,000
—
—
1,486
—
158 $ (3,322) $ 231,028
(a) Certain hybrid instruments possessing characteristics typically associated with debt obligations were reclassified from other securities
carried at cost to available for sale securities carried at fair value in the years presented.
The Company's investment securities are classified as available for sale. Agency bonds and notes, Small Business Administration
guaranteed loan certificates (SBA), residential and commercial agency mortgage-backed securities, and agency collateralized mortgage
obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, 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.
Debt securities with carrying values aggregating approximately $153.0 million and $181.7 million at December 31, 2018 and
December 31, 2017, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other
purposes as required or permitted by law.
48
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2018, by contractual maturity are
shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations
with or without prepayment penalties.
(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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost
18,076
63,424
13,750
6,098
101,348
121,230
222,578
$
$
$
$
Amortized
Fair
Value
17,964
62,599
13,505
5,945
100,013
118,192
218,205
Other investment securities
Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have
readily determinable fair values. Investments in Federal Home Loan Bank (FHLB) stock, and Midwest Independent Bank (MIB) bankers
bank stock, that do not have readily determinable fair values, are required for membership in those organizations.
(in thousands)
Other securities:
FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MIB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities with readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
2017
5,512
151
12
5,675
$
$
6,390
151
10
6,551
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, 2018 and December 31, 2017 were as
follows:
Less than 12 months
Fair
Value
Unrealized
Losses
12 months or more
Fair
Value
Losses
Unrealized
Total
Fair
Value
Total
Unrealized
Losses
(in thousands)
At December 31, 2018
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. government and federal agency obligations . . . . . . . . . . . . . .
Government sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank issued trust preferred securities . . . . . . . . . . . . . . . . . . . . . . .
— $
—
1,997
5,851
10,085
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,933 $
(in thousands)
At December 31, 2017
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,967 $
U.S. government and federal agency obligations . . . . . . . . . . . . . .
Government sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . .
Mortgage-backed securities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
16,471
22,013
52,829
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,280 $
49
(32) $ 1,952 $
1,952 $
9,966
33,346
28,832
99,321
1,374
— $
(32)
—
(269)
(269)
(3)
(469)
(472)
(16)
(485)
(501)
(61)
(3,049)
(3,110)
(112)
(112)
—
(80) $ 174,791 $ (4,416) $ 192,724 $ (4,496)
9,966
35,343
34,683
109,406
1,374
— $
— $ 1,967 $
(13) $
(13)
—
(268)
(119)
(424)
(165)
(477)
(2,140)
(488)
(785) $ 114,649 $ (2,537) $ 207,929 $ (3,322)
12,073
36,897
34,583
122,409
12,073
20,426
12,570
69,580
(268)
(305)
(312)
(1,652)
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The total available for sale portfolio consisted of approximately 366 securities at December 31, 2018. The portfolio included 317 securities
having an aggregate fair value of $192.7 million that were in a loss position at December 31, 2018. Securities identified as temporarily
impaired which had been in a loss position for 12 months or longer had a fair value of $174.8 million at December 31, 2018. The $4.5
million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2018 was caused by interest rate
fluctuations.
The total available for sale portfolio consisted of approximately 355 securities at December 31, 2017. The portfolio included 280 securities
having an aggregate fair value of $207.9 million that were in a loss position at December 31, 2017. Securities identified as temporarily
impaired which had been in a loss position for 12 months or longer had a fair value of $114.6 million at December 31, 2017. The $3.3
million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2017 was caused by interest rate
fluctuations.
Because the decline in fair value is attributable to changes in interest rates and not credit quality, these investments were not considered
other-than-temporarily impaired at December 31, 2018 and 2017, respectively. In the absence of changes in credit quality of these
investments, the fair value is expected to recover on all debt securities as they approach their maturity date, or re-pricing date or if market
yields for such investments decline. In addition, the Company does not have the intent to sell these investments over the period of recovery,
and it is not more likely than not that the Company will be required to sell such investment securities.
The table presents the components of investment securities gains and losses, which have been recognized in earnings:
(in thousands)
Investment securities gains, net
Available for sale securities:
Gains realized on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Losses realized on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investment securities:
Fair value adjustments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
2016
253 $
—
—
2
255 $
38 $
(33)
—
—
5 $
623
(21)
—
—
602
(5) Premises and Equipment
A summary of premises and equipment at December 31, 2018 and 2017 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2018
9,917
35,674
14,163
754
60,508
25,614
34,894
$
$
2017
9,980
35,993
12,973
289
59,235
24,424
34,811
Depreciation expense for the years ended December 31, 2018, 2017, and 2016 was as follows:
(in thousands)
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
1,797 $
2017
1,735 $
2016
1,782
50
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
(6) Intangible Assets
Mortgage Servicing Rights
At December 31, 2018 and 2017, respectively, the Company serviced mortgage loans for others totaling $279.9 million and $285.8 million,
respectively. Mortgage loan servicing fees earned on loans sold and serviced for others were $821,000, $833,000, and $854,000, for the
years ended December 31, 2018, 2017, and 2016, respectively, and are recorded in real estate servicing fees, net in the consolidated
statements of income.
The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2018, 2017, and 2016.
(in thousands)
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Originated mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value:
Due to changes in model inputs and assumptions (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other changes in fair value (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2,713 $
245
2017
2,584 $
222
2016
2,847
266
286
(313)
(27)
2,931 $
364
(457)
(93)
2,713 $
108
(637)
(529)
2,584
(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.
Total changes in fair value are reported in real estate servicing fees, net, reported in non-interest income in the Company's consolidated
statements of income.
The following key data and assumptions were used in estimating the fair value of the Company's mortgage servicing rights as of
December 31, 2018 and 2017:
Weighted average constant prepayment rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average note rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
8.87 %
3.95 %
10.28 %
6.30
2017
9.73 %
3.85 %
10.09 %
5.90
(7) Deposits
The aggregate amount of time deposits with balances that met or exceeded the Federal Deposit Insurance Corporation (FDIC) insurance
limit of $250,000 was $104.9 million and $63.2 million at December 31, 2018 and 2017, respectively. The Company had brokered deposits
totaling $39.8 million and $9.8 million at December 31, 2018 and 2017, respectively.
51
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The scheduled maturities of total time deposits at December 31, 2018 were as follows:
(in thousands)
Due within:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 198,609
43,250
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,054
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,666
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,992
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321,571
The Federal Reserve Bank required the Bank to maintain cash or balances of $1.8 million at both December 31, 2018 and 2017,
respectively, to satisfy reserve requirements. Average compensating balances held at correspondent banks were $787,000 and $1.5 million
at December 31, 2018 and 2017, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges
for services rendered by those banks.
(8) Federal funds purchased and securities sold under agreements to repurchase
Information relating to federal funds purchased and repurchase agreements is as follows:
(in thousands)
2018
Year End Average
Weighted Weighted
Rate
Rate
Average
Balance
Outstanding
Maximum
Outstanding at
any Month End
Balance at
December 31,
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term repurchase agreements - Bank . . . . . . . . . . . . .
Short-term repurchase agreements - Company . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.64 %
0.35
—
2.29 % $
0.67
3.51
$
1,242 $
27,142
11,180
39,564 $
2017
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term repurchase agreements . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.64 %
0.29
0.99 % $
0.38
$
322 $
29,190
29,512 $
12,863 $
36,103
25,944
74,910 $
1,067 $
32,555
33,622 $
8,000
16,647
—
24,647
—
27,560
27,560
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 $42.0 million on an unsecured basis and $16.4 million on a secured basis at December 31, 2018.
During 2018, the Company had purchased U.S. Treasury securities with repurchase agreements in order to generate capital gains to offset
capital losses expiring in 2018 and 2019. See Note 10 Income taxes for further discussion.
The Company offers a sweep account program whereby amounts in excess of an established limit are “swept” from the customer's demand
deposit account on a daily basis into retail repurchase agreements pursuant to individual repurchase agreements between the Company and
its customers. Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities.
They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral
pledged for the repurchase agreements with customers is maintained by a designated third party custodian. The collateral amounts pledged
52
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
to repurchase agreements by remaining maturity in the table below are limited to the outstanding balances of the related asset or liability;
thus amounts of excess collateral are not shown.
Repurchase Agreements
Remaining Contractual Maturity of the Agreements
(in thousands)
At December 31, 2018
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Government sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,464 $
12,976
2,207
Overnight
and
continuous
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,647 $
At December 31, 2017
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S. government and federal agency obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Government sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,964 $
2,977
8,382
14,237
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,560 $
(9) Borrowings
Federal Home Loan Bank and other borrowings of the Company consisted of the following:
Less
than
90 days
Greater
than
90 days
Total
— $
—
—
— $
— $
—
—
—
— $
— $
1,464
—
12,976
2,207
—
— $ 16,647
1,964
— $
2,977
—
8,382
—
—
14,237
— $ 27,560
2018
2017
Year End
Maturity Year End Weighted
(in thousands)
FHLB advances . . . . . . . . . . . . The Bank
Borrower
Date
2018 $
2019
2020
2021
2022
2023
Balance
—
28,231
42,236
20,241
4,418
—
Year End
Year End Weighted
Balance
Rate
— % $ 63,226
1.63 % 28,231
2.49 % 21,236
4,241
2.77 %
4,418
2.14 %
—
— %
Rate
1.65 %
1.63 %
1.90 %
1.73 %
2.14 %
— %
Other borrowings . . . . . . . . . . .
Total Bank . . . . . . . . . . . . . . .
2022
27
$ 95,153
4.00 %
30
$ 121,382
4.00 %
Subordinated notes . . . . . . . . . The Company
Total Company . . . . . . . . . . .
2034 $ 25,774
23,712
2035
$ 49,486
5.49 % $ 25,774
4.62 % 23,712
$ 49,486
4.30 %
3.43 %
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, which are all fixed rate, are secured under a blanket agreement which assigns all investment in FHLB stock, as well as
qualifying first mortgage loans as collateral to secure amounts borrowed by the Bank. As of December 31, 2018, the Bank had $95.2
million in outstanding borrowings with the FHLB. Based upon the collateral pledged to the FHLB at December 31, 2018, the Bank could
borrow up to an additional $126.5 million under the agreement.
53
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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 (4.62% at December 31, 2018). 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 (5.49% at December 31, 2018).
The TPS are fully, irrevocably, and unconditionally guaranteed on a subordinated basis by the Company.
The TPS represent preferred interests in the trust. The Company invested approximately $774,000 in common interests in the trust and
the purchaser in the private placement purchased $25.0 million in preferred interests. 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, 2018 and 2017 was $49.5
million, respectively. The Company has recorded the investments in the common securities issued by the Exchange Statutory Trusts
aggregating $1.4 and $1.5 million at December 31, 2018 and 2017, respectively, 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.
(10) Income Taxes
The composition of income tax expense for the years ended December 31, 2018, 2017, and 2016 was as follows:
(in thousands)
Current:
2018
2017
2016
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,175 $ 2,761 $ 3,578
489
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,067
Deferred:
385
3,146
(181)
994
(267)
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(50)
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(317)
Total income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,668 $ 7,902 $ 3,750
3,189
1,567
4,756
674
—
674
54
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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, 2018, 2017, and 2016 are as follows:
2018
2017
2016
Amount %
(in thousands)
Income before provision for income tax expense . . . . . . . . . . . . . . $ 12,382
Tax at statutory federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . $ 2,600 21.00 % $ 3,847 34.00 % $ 3,751 34.00 %
Tax Cuts and Jobs Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income tax, net of federal tax benefit . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,668 13.47 % $ 7,902 69.83 % $ 3,750 33.99 %
3,139 27.74
8.54
(3.48)
2.85
0.18
—
—
(314)
290
23
—
—
(2.85)
2.63
0.21
(343)
(143)
(432)
—
(14)
(2.77)
(1.16)
(3.49)
—
(0.11)
966
(394)
323
21
Amount %
Amount %
$ 11,032
$ 11,316
Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 13.5% for the year
ended December 31, 2018 compared to 69.8% and 34.0% for the years ended December 31, 2017 and 2016, respectively. As further
described below, the decrease in the effective tax rate in 2018 over 2017 and 2016 is primarily due to a decrease in the federal corporate
tax rate, the release of the valuation allowance related to capital losses, a pension contribution made during the second quarter of 2018
that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives.
The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act, (Tax
Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation
allowance related to capital loss carryforwards, and a pension contribution made during the second quarter of 2018 that was attributable
to the 2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter
of 2017 related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax
return, within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's
ASC Topic 740, Income Taxes. The finalization of the Company's Tax Act adjustments included a $343,000 benefit, while the Company's
additional tax planning initiatives included a $143,000 benefit. The total benefits are comprised of $306,000 benefit attributable to the
pension contribution discussed above and a $180,000 benefit attributable to various accounting method changes made on the Company's
2017 tax return. Such adjustments were recorded in the second and third quarters of 2018 respectively.
55
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The components of deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 were as follows:
(in thousands)
Deferred tax assets:
2018
2017
Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Impairment of other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonaccrual loan interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core deposit intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred tax liabilities:
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accelerated prepaids . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,285 $
630
227
895
119
90
1,516
160
282
6,204 $
483 $
616
261
321
10
1,691
4,513 $
2,279
672
409
664
167
160
1,669
87
257
6,364
333
570
—
356
34
1,293
5,071
The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the appropriate character
during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning initiatives in making this assessment. In management's opinion, the Company
will more likely than not realize the benefits of its deferred tax assets and, therefore, has not established a valuation allowance against its
deferred tax assets as of December 31, 2018. Management arrived at this conclusion based upon the level of historical taxable income and
projections for future taxable income of the appropriate character over the periods in which the deferred tax assets are deductible. As
indicated above, the Company released a $46,000 valuation allowance against certain capital loss carryforwards during the second quarter
of 2018 as a result of the execution of certain tax planning initiatives that generated sufficient capital gain income prior to the expiration
of the carryforwards.
The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. For each of the years
ended December 31, 2018 and 2017, respectively, the Company did not have any uncertain tax provisions, and did not record any related
tax liabilities.
56
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
(11) Stockholders' Equity
Accumulated Other Comprehensive Loss
The following details the change in the components of the Company's accumulated other comprehensive loss for the years ended
December 31, as indicated.
Accumulated
(in thousands)
Balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive (loss) income, before reclassifications . . . . . . . . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . .
Other comprehensive loss, before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive loss
per ASU 2018-02 (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive (loss) income, before reclassifications . . . . . . . . . . . . . . . . . . .
Amounts reclassified from accumulated other comprehensive loss . . . . . . . . . . . . . .
Other comprehensive (loss) income, before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unrecognized Net
Pension and
Postretirement
Other
Comprehensive
Unrealized Loss
on Securities (1)
(1,936) $
(37)
(5)
(42)
16
(26)
(538)
(2,500) $
(1,209)
—
(1,209)
254
(955)
(3,455) $
Costs (2)
(1,865) $
90
(1,085)
(995)
378
(617)
(680)
(3,162) $
219
436
655
(137)
518
(2,644) $
(Loss)
Income
(3,801)
53
(1,090)
(1,037)
394
(643)
(1,218)
(5,662)
(990)
436
(554)
117
(437)
(6,099)
(1) The pre-tax amounts reclassified from accumulated other comprehensive loss are included in gain on sale of investment securities in
the consolidated statements of income.
(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic
pension cost. See Note 12.
(3) As of December 31, 2017, the Company elected to early adopt and retrospectively apply the reclassification of stranded income tax
effects from accumulated other comprehensive loss to retained earnings, as permitted under ASU 2018-02.
(12) 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 and profit sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
1,156 $
2,109
956
1,707
67
5,995 $
2017
1,167 $
2,026
873
1,344
82
5,492 $
2016
1,122
1,881
825
1,179
172
5,179
The Company's profit-sharing plan includes a matching 401(k) 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.
57
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
Other Plans
On November 7, 2018, the Board of Directors of the Company adopted a supplemental executive retirement plan (SERP) which became
effective on January 1, 2018. The SERP provides select employees who satisfy certain eligibility requirement with certain benefits upon
retirement, termination of employment or death.
As of the year ended December 31, 2018, the accrued liability and expense for this plan was $320,000, and is recognized over the required
service period.
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 made a pension contribution in the amount of $1.8 million on May 10, 2018. There was no 2019
minimum required contribution for the 2018 plan year, and the Company has not determined if will make more than the minimum required
contribution. Effective July 1, 2017, the Company amended the pension plan to effectuate a “soft freeze” such that no individual hired (or
rehired in the case of a former employee) by the Company after September 30, 2017, whether or not such individual is or was a vested
member in the plan, will be eligible to be an active member and be entitled to accrue any benefits under the plan.
Obligations and Funded Status at December 31,
(in thousands)
Change in projected benefit obligation:
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
2017
27,871 $
1,707
1,037
(3,122)
(601)
26,892 $
23,234
1,343
1,009
2,843
(558)
27,871
19,924 $
(1,329)
1,800
(122)
(601)
19,672 $
(7,220) $
21,244 $
16,502
2,890
1,183
(93)
(558)
19,924
(7,947)
21,940
58
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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 (a) . . . . . . . . . . . . . . . . . .
Expected return on plan assets (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected administrative expenses (a) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost (a) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of unrecognized net loss (a) . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
1,707 $
1,037
(1,327)
93
79
140
1,729 $
2017
1,343 $
1,009
(1,127)
88
79
11
1,403 $
2016
1,179
956
(1,057)
70
79
—
1,227
(a) The components of net periodic pension cost other than the service cost component are included in other non-interest expense.
Net periodic pension benefit costs include interest costs based on an assumed discount rate, the expected return on plan assets based on
actuarially derived market-related values, and the amortization of net actuarial losses. Net periodic postretirement benefit costs include
service costs, interest costs based on an assumed discount rate, and the amortization of prior service credits and net actuarial gains.
Differences between expected and actual results in each year are included in the net actuarial gain or loss amount, which is recognized in
other comprehensive income. The net actuarial gain or loss in excess of a 10% corridor is amortized in net periodic benefit cost over the
average remaining service period of active participants in the Plans. The prior service credit is amortized over the average remaining
service period to full eligibility for participating employees expected to receive benefits.
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss at December 31, 2018 and
2017 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 loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic benefit cost in excess of cumulative employer contributions . . . . . .
Net amount recognized at December 31, balance sheet . . . . . . . . . . . . . . . . . . $
Net gain (loss) arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service cost amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total recognized in net periodic pension cost and other comprehensive
2018
(128) $
(3,219)
(3,347)
(3,873)
(7,220) $
436 $
79
140
655 $
2017
(207)
(3,796)
(4,003)
(3,944)
(7,947)
(1,085)
79
11
(995)
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,073 $
2,398
Assumptions utilized to determine benefit obligations as of December 31, 2018, 2017 and 2016 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.40 %
4.00 %
3.75 %
4.00 %
4.40 %
4.00 %
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 . . . . . . . . . . . . . . . . . . . . . .
3.75 %
4.00 %
6.75 %
4.40 %
4.00 %
6.75 %
4.70 %
3.78 %
7.00 %
2018
2017
2016
59
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
The assumed overall expected long-term rate of return on pension plan assets used in calculating 2018 pension expense was 6.75%.
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: -6.2% in 2018, 17.4% in 2017, 8.2% in 2016, -0.4% in 2015,
and 8.3% in 2014. 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. Primarily due to an increase in the discount rate used in the actuarial calculation of plan
income, the Company expects to incur $1.5 million of expense in 2019 compared to $1.7 million 2018.
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 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 regularly reviews its
policies on the investment mix and may make changes depending on economic conditions and perceived investment mix.
The fair value of the Company's pension plan assets at December 31, 2018 and 2017 by asset category was as follows:
Fair Value Measurements
Quoted Prices
in Active
Markets for
Other
Significant
(in thousands)
December 31, 2018
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
U.S gov't agency obligations . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,672 $
1,777
295
16,893
Fair Value
707 $
December 31, 2017
Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,307 $
U.S gov't agency obligations . . . . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,924 $
1,781
16,836
The following future benefit payments are expected to be paid:
Identical
Assets
(Level 1)
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
707 $
— $
—
1,777
—
295
—
16,893
17,600 $ 2,072 $
— $
1,307 $
1,781
—
16,836
—
18,143 $ 1,781 $
—
—
—
—
—
—
—
—
—
Year
(in thousands)
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 to 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
680
801
874
1,026
1,052
6,370
Pension
benefits
60
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
(13) Stock Compensation
The Company has one equity compensation plan for its employees pursuant to which options were granted.
The following table summarizes the Company's stock option activity:
Number of shares
December 31,
2017
Weighted average
exercise price
December 31,
Weighted average
Contractual Term
(in years)
Aggregate
Intrinsic Value
($000)
2017
2018
2016
2018 2017 2016 2018 2017 2016 2018
2016
Outstanding, beginning of year . . . . . . .
20,909
—
Granted . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . (20,909)
Forfeited or expired . . . . . . . . . . . . . . .
Outstanding, end of year . . . . . . . . . . .
Exercisable, end of year . . . . . . . . . . . .
48,097
—
—
—
—
— (27,188) (22,519)
—
—
70,616 $ 14.20 $ 18.59 $ 19.12
—
—
—
14.20
—
20.24
— $ 14.20 $ 18.59
— $ 14.20 $ 18.72
—
—
21.20
48,097 $
46,725 $
20,909
20,909
0.00
0.00
0.73
0.73
0.99 $
0.97 $
0 $ 120,242 $ 49,842
0 $ 120,242 $ 46,874
Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2018.
Total stock-based compensation expense for the years ended December 31, 2018, 2017, and 2016 was zero, $3,000, and $17,000,
respectively. There is no remaining unrecognized compensation expense related to non-vested stock awards. The Plan expired on
February 28, 2010, except as to outstanding options under the Plan, and no further options may be granted pursuant to the Plan. During
the third quarter of 2018, the remaining 20,909 options to purchase common shares were exercised at a weighted average price of $14.20
a share.
(14) Earnings per Share
Stock Dividend On July 1, 2018, the Company paid a special stock dividend of four percent to common shareholders of record at the close
of business on June 15, 2018. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted
retroactively to reflect this change.
Basic earnings per share is computed by dividing income available to 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.
Presented below is a summary of the components used to calculate basic and diluted earnings per common share, which have been restated
for all stock dividends.
(dollars in thousands, except per share data)
Basic earnings per share:
Net income available to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share:
Net income available to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,026,971
Effect of dilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,042
Average shares outstanding including dilutive stock options . . . . . . . . . . . . . . . . . . . . . . . . 6,032,013
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2018
10,714 $
1.78 $
10,714 $
3,414 $
6,057,920
5,497
6,063,417
7,282
6,095,727
—
6,095,727
1.19
1.78 $
0.56 $
2017
2016
3,414 $
0.56 $
7,282
1.19
61
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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, 2018, 2017 and 2016 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Weighted average Shares
December 31,
2017
2018
2016
48,097
Repurchase Program The Company's share repurchase plan expired on September 8, 2018. As of December 31, 2018, the Company had
repurchased a total of 95,709 shares of common stock pursuant to the plan at an average price of $17.90 per share, including 8,668 shares
of common stock repurchased pursuant to the plan during the year ended December 31, 2018 at an average price of $20.63 per share.
(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.
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required
by the Dodd-Frank Act. The phase-in period for the Company began on January 1, 2015. The Federal Reserve System's (FRB) capital
adequacy guidelines require that bank holding companies maintain a Common Equity Tier 1 risk-based capital ratio equal to at least 4.5%
of its risk-weighted assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital
ratio equal to at least 8% of its risk-weighted assets. In addition, bank holding companies generally are required to maintain a Tier 1
leverage ratio of at least 4%.
In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all
banking organizations. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent
limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary
bonuses to senior executive management. The capital conservation buffer requirement will be phased in over four years beginning in
2016. On January 1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and the requirement will
increase each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk weighted assets on January 1,
2019. Once fully phase in , the capital conservation buffer requirement effectively raises the minimum required risk-based capital ratios
to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.
62
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
Under the Basel III requirements, at December 31, 2018 and December 31, 2017, the Company met all capital adequacy requirements and
had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of
periods indicated:
Actual
Required for Capital
Adequacy Purposes
Well-Capitalized Under
Prompt Corrective Action
Provision
Ratio Amount Ratio
Amount
Ratio
Amount
163,814 13.19
152,002 12.24
(in thousands)
December 31, 2018
Total Capital (to risk-weighted assets):
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 165,325 13.28 % $ 99,578
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99,327
Tier 1 Capital (to risk-weighted assets):
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139,532 11.21 % $ 74,683
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,495
Common Equity Tier 1 Capital
(to risk-weighted assets)
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 105,513
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage ratio:
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139,532
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in thousands)
December 31, 2017
Total Capital (to risk-weighted assets):
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,045 12.93 % $ 96,577
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96,326
Tier 1 Capital (to risk-weighted assets):
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129,369 10.72 % $ 72,433
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72,245
Common Equity Tier 1 Capital
(to risk-weighted assets)
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,033
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage ratio:
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129,369
Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8.48 % $ 56,013
55,872
9.33 % $ 55,488
55,315
9.55 % $ 58,467
58,272
8.04 % $ 54,325
54,184
143,483 10.38
154,495 12.83
152,002 10.43
143,483 11.92
152,002 12.24
143,483 11.92
8.00 % $
8.00
N.A.
124,159
N.A. %
10.00
6.00 % $
6.00
N.A.
99,327
N.A. %
8.00
4.50 % $
4.50
N.A.
80,703
N.A. %
6.50
4.00 % $
4.00
N.A.
72,839
N.A. %
5.00
8.00 % $
8.00
N.A.
120,408
N.A. %
10.00
6.00 % $
6.00
N.A.
96,326
N.A. %
8.00
4.50 % $
4.50
N.A.
78,265
N.A. %
6.50
4.00 % $
4.00
N.A.
69,144
N.A. %
5.00
(16) Fair Value Measurements
Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous
market in an orderly transaction between market participants at the measurement date.
Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair
value. The measurement of fair value under US GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize
the use of unobservable inputs.
The fair value hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:
Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.
63
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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.
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 rates, 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,
64
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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.
Fair Value Measurements
Quoted Prices
in Active
Markets for
Other
Significant
Fair Value
Identical
Assets
(Level 1)
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(in thousands)
December 31, 2018
Assets:
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,952 $
U.S. government and federal agency obligations . . . .
Government sponsored enterprises . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-issued trust preferred securities . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . .
9,966
43,335
40,386
118,192
3,000
1,374
12
2,931
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 221,148 $
1,952
— $
—
9,966
—
43,335
40,386
—
— 118,192
—
—
—
—
3,000
1,374
12
—
1,952 $ 216,265 $
December 31, 2017
Assets:
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,967 $
U.S. government and federal agency obligations . . . .
Government sponsored enterprises . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . .
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . .
Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank-issued trust preferred securities . . . . . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . .
12,073
36,897
46,656
128,949
3,000
1,486
10
2,713
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 233,751 $
1,967
—
—
—
—
—
—
—
—
— $
12,073
36,897
46,656
128,949
3,000
1,486
10
—
1,967 $ 229,071 $
—
—
—
—
—
—
—
—
2,931
2,931
—
—
—
—
—
—
—
—
2,713
2,713
65
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
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, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total gains or (losses) (realized/unrealized):
Included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total gains or losses (realized/unrealized):
Included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Mortgage Servicing Rights
2,584
(93)
—
—
—
222
—
2,713
(27)
—
—
—
245
—
2,931
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:
Collateral dependent impaired loans
While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the
carrying value of impaired loans based on fair value measurements for partial charge-offs of the uncollectible portions of those
loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the
allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In
determining the fair value of real estate collateral, the Company relies on external and internal appraisals of property values
depending on the size and complexity of the real estate collateral. The appraisals may be discounted based on the Company's
historical knowledge, changes in market conditions from the time of appraisal, or other information available. The Company
maintains staff that is trained to perform in-house evaluations and also review third party appraisal reports for reasonableness. In
the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and
judgments based on the experience and expertise of internal specialists. Fair values of all loan collateral are regularly reviewed
by senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of
December 31, 2018, the Company identified $3.8 million in impaired loans that had specific allowances for losses aggregating
$867,000. Related to these loans, there were $370,000 in charge-offs recorded during the year ended December 31, 2018. As of
December 31, 2017, the Company identified $4.0 million in impaired loans that had specific allowances for losses aggregating
$870,000. Related to these loans, there were $788,000 in charge-offs recorded during the year ended December 31, 2017.
66
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
Other Real Estate Owned and Repossessed Assets
Other real estate owned (OREO) and repossessed assets consisted of loan collateral that has been repossessed through foreclosure.
This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos,
manufactured homes, and construction equipment. Subsequent to foreclosure, these assets initially are carried at fair value of the
collateral less estimated selling costs. Fair value, when recorded, is generally based upon appraisals by approved, independent
state certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on the Company's historical
knowledge, changes in market conditions from the time of appraisal or other information available. During the holding period,
valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs
are not observable, the measurements are classified as Level 3.
Fair Value Measurements Using
(in thousands)
December 31, 2018
Assets:
Collateral dependent impaired loans:
Total
Fair Value
Identical
Assets
(Level 1)
Quoted Prices
in Active
Markets for
Other
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
Total Gains
(Losses)*
Commercial, financial, & agricultural . . . . $ 1,320 $
Real estate construction - commercial . . . .
Real estate mortgage - residential . . . . . . .
Real estate mortgage - commercial . . . . . .
Installment and other consumer . . . . . . . . .
153
1,317
115
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,905 $
Other real estate and repossessed assets . . $ 13,691 $
— $
—
—
—
—
— $
— $
— $
—
—
—
—
— $
— $
1,320 $
153
1,317
115
—
2,905 $
13,691 $
(244)
(27)
(44)
(20)
(35)
(370)
(15)
December 31, 2017
Assets:
Collateral dependent impaired loans:
Commercial, financial, & agricultural . . . . $ 1,583 $
Real estate construction - commercial . . . .
Real estate mortgage - residential . . . . . . .
Real estate mortgage - commercial . . . . . .
Installment and other consumer . . . . . . . . .
153
49
880
593
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,258 $
Other real estate and repossessed assets . . $ 13,182 $
— $
—
—
—
—
— $
— $
— $
—
—
—
—
— $
— $
1,583 $
153
49
880
—
2,665 $
13,182 $
(521)
—
(204)
(26)
(37)
(788)
(250)
* Total gains (losses) reported for other real estate owned and repossessed assets includes charge-offs, valuation write-downs, and net
losses taken during the periods reported.
(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:
67
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
Loans
Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial,
real estate, and consumer. Each loan category is further segmented into fixed and variable interest rate categories. The fair value
of loans, or exit price, is estimated by using the future value of discounted cash flows using comparable market rates for similar
types of loan products and adjusted for market factors. The discount rates used are estimated using comparable market rates for
similar types of loan products adjusted to be commensurate with the credit risk, overhead costs, and optionality of such
instruments.
Investment Securities
A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment
security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and
maturity is provided in the notes on Investment Securities.
Other investment securities
Other investment securities include equity securities with readily determinable fair values and other investment securities that do
not have readily determinable fair values. Investments in Federal Home Loan Bank (FHLB) stock, and Midwest Independent
Bank (MIB) bankers bank stock, that do not have readily determinable fair values, are required for membership in those
organizations.
Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings.
Equity securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment.
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.
Certificates of Deposit in other banks
Certificates of deposit are other investments made by the Company with other financial institutions that are carried at cost.
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.
68
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
Federal funds purchased and Securities Sold under Agreements to Repurchase
For Federal funds purchased and securities sold under agreements to repurchase, the carrying amount is a reasonable estimate of
fair value, as such instruments reprice in a short time period.
Subordinated Notes and Other Borrowings
The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.
A summary of the carrying amounts and fair values of the Company's financial instruments at December 31, 2018 and 2017 is
as follows:
interest-bearing deposits . . . . . . . .
18,396
18,396
18,396
—
December 31, 2018
Fair Value Measurements
Quoted Prices
in Active
Markets for
Other
Net
Significant
December 31, 2018
Carrying
amount
Fair
value
Identical
Assets
(Level 1)
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
23,687 $
23,687 $
23,687 $
— $
—
—
12,247
218,205
5,675
1,134,975
2,931
12,247
218,205
5,675
1,115,003
2,931
12,247
1,952
—
—
—
—
216,253
5,675
—
—
—
— 1,115,003
2,931
—
2,542
6,162
2,542
6,162
$ 1,424,820 $ 1,404,848 $
—
—
6,162
—
62,444 $ 224,470 $ 1,117,934
2,542
—
(in thousands)
Assets:
Cash and due from banks . . . . . . . . . $
Federal funds sold and overnight
Certificates of deposit in other
banks . . . . . . . . . . . . . . . . . . . . . . . .
Available for sale securities . . . . . . .
Other investment securities . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . .
Cash surrender value - life
insurance . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . .
Liabilities:
Deposits:
Non-interest bearing demand . . . . . $
Savings, interest checking and
262,857 $
262,857 $
262,857 $
— $
—
money market . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . .
614,040
321,571
614,040
318,949
614,040
—
—
—
—
318,949
Federal funds purchased and
securities sold under agreements
to repurchase . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank
advances and other borrowings . . .
Subordinated notes . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . .
24,647
24,647
24,647
—
—
—
—
—
318,949
95,153
49,486
1,035
94,326
45,749
1,035
—
—
1,035
94,326
45,749
—
$ 1,368,789 $ 1,361,603 $
902,579 $ 140,075 $
69
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
December 31, 2017
Fair Value Measurements
interest-bearing deposits . . . . . . . . .
39,553
39,553
39,553
—
(in thousands)
Assets:
Cash and due from banks . . . . . . . . . . $
Federal funds sold and overnight
Certificates of deposit in other
banks . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities . . . . . . . .
Other investment securities . . . . . . . . .
Loans, net . . . . . . . . . . . . . . . . . . . . . . .
Mortgage servicing rights . . . . . . . . . .
Cash surrender value - life
insurance . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . .
December 31, 2017
Carrying
amount
Fair
value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Other
Net
Significant
Observable Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
23,325 $
23,325 $
23,325 $
— $
—
—
3,460
231,028
6,551
1,057,580
2,713
3,460
231,028
6,551
1,058,153
2,713
3,460
1,967
—
—
—
—
229,061
6,551
—
—
—
— 1,058,153
2,713
—
2,484
5,627
2,484
5,627
—
—
5,627
—
73,932 $ 238,096 $ 1,060,866
2,484
—
Liabilities:
Deposits:
$ 1,372,321 $ 1,372,894 $
Non-interest bearing demand . . . . . . $ 245,380 $ 245,380 $ 245,380 $
Savings, interest checking and
— $
—
money market . . . . . . . . . . . . . . . . .
Time deposits . . . . . . . . . . . . . . . . . .
584,468
295,964
584,468
294,778
584,468
—
—
—
—
294,778
Federal funds purchased and
securities sold under agreements
to repurchase . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank
27,560
27,560
27,560
—
—
advances and other borrowings . . . .
Subordinated notes . . . . . . . . . . . . . . .
Accrued interest payable . . . . . . . . . . .
121,382
49,486
554
121,291
39,692
—
$ 1,324,794 $ 1,313,723 $ 857,962 $ 160,983 $
121,291
39,692
554
—
—
554
—
—
—
294,778
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such
financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been
made on terms that are competitive in the markets in which it operates.
Limitations
The fair value estimates provided are made at a point in time based on market information and information about the financial
instruments. Because no market exists for a portion of the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment
and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.
70
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
(18) 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, 2018, 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, 2018 and 2017 is as follows:
(in thousands)
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267,314 $ 238,527
1,471
Commitments to originate residential first and second mortgage loans . . . . . . . . . . . .
1,759
Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,895
74,004
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 351,968 $ 314,002
2018
2017
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, 2018.
Pending Litigation
The Company and its subsidiaries are defendants in various legal actions incidental to the Company's past and current business activities.
Based on the Company's analysis, and considering the inherent uncertainties associated with litigation, management does not believe that
it is reasonably possible that these legal actions will materially adversely affect the Company's consolidated financial condition or results
of operations in the near term. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be
reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss
amount can be estimated.
(19) Revenue Recognition
On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent
ASUs that modified Topic 606. As stated in Note 1 Summary of Significant Accounting Policies, the implementation of the new standard
did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained
earnings was not deemed necessary.
71
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain
noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit
card fees are not in the scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue,
service charges and fees, debit card income, ATM surcharge income, and sales of other real estate owned. However, the recognition of
these revenue streams did not change current business practices or result in any changes to the Company's consolidated financial
statements.
Descriptions of our revenue-generating activities within the scope of this guidance, which are presented in our income statement as
components of noninterest income are as follows:
Trust Department Revenue
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other
customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly,
based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few
days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional
services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers.
The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a
point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking
accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account
analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is
provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance
obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily
received immediately or in the following month through a direct charge to customers’ accounts.
Fees, Exchange, and Other Service Charges
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income,
and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit
and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company
cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents
fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges
include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance
obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are
rendered or upon completion. Payment is typically received immediately or in the following month.
Gains/Losses on Sales of Other Real Estate Owned (OREO)
The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs
at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is
committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria
are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.
72
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
(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
December 31,
(in thousands)
Assets
1,415
Cash and due from bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Investment in bank-issued trust preferred securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,486
152,735 144,589
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,677
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,153 $ 149,300
1,334 $
1,374
1,307
403
2017
2018
Liabilities and Stockholders' Equity
Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,486 $ 49,486
8,443
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99,414 91,371
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,153 $ 149,300
8,253
Condensed Statements of Income
For the Years Ended December 31,
2017
2016
2018
Income
Interest and dividends received from subsidiaries . . . . . . . . . . . . . . . . . . . . $ 2,653 $ 2,653 $
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses
Interest on subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income tax benefit and equity in undistributed income
2,229
3,461
5,690
428
3,081
2,653
—
1,751 1,494
2,358 2,039
4,109 3,533
46
—
46
(1,456) (3,487)
of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
191 1,337
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . .
4,679 9,432
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,714 $ 3,414 $ 7,282
(195)
1,397
9,512
73
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
Condensed Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,714 $ 3,414 $ 7,282
Adjustments to reconcile net income to net cash provided (used) by
For the Years Ended December 31,
2017
2016
2018
operating activities:
Equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Stock based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,512)
—
370
(116)
(4,679) (9,432)
17
3
(442)
881
769
453
72 $ (1,806)
Net cash provided (used) by operating activities . . . . . . . . . . . . . . . . . . . $ 1,456 $
Cash flows from investing activities:
Decrease (increase) in investment in subsidiaries, net . . . . . . . . . . . . . . . . . $
Net cash provided (used) by investing activities . . . . . . . . . . . . . . . . . . . . $
Cash flows from financing activities:
Cash dividends paid - common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,993) $ (1,474) $ (1,097)
Issuance of stock under equity compensation plan . . . . . . . . . . . . . . . . . . . .
—
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(623)
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,037) $ (2,352) $ (1,720)
(2,530) (1,026)
Net decrease in cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,945 4,971
Cash and due from banks at beginning of year . . . . . . . . . . . . . . . . . . . .
Cash and due from banks at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,334 $ 1,415 $ 3,945
(250) $ 2,500
(250) $ 2,500
—
(878)
500 $
500 $
(81)
1,415
135
(179)
74
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 2018, 2017, and 2016
(21) Quarterly Financial Information (Unaudited)
First
Second
quarter
Third
quarter
Fourth
quarter
Year
to
quarter
(In thousands except per share data)
Year Ended December 31, 2018
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,544 $ 14,288 $ 14,751 $ 15,196 $ 57,779
3,692 13,186
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,504 44,593
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,475
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,341
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
255
10,259 40,332
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,668
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,090 $ 2,907 $ 3,098 $ 2,619 $ 10,714
Net income per share:
3,443
11,308
250
2,324
50
9,888
446
3,261
11,027
450
2,378
108
9,931
225
2,790
10,754
300
2,203
98
10,254
411
475
2,436
(1)
586
Date
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.35 $
0.35
0.48 $
0.48
0.51 $
0.51
0.44 $
0.44
1.78
1.78
Year Ended December 31, 2017
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,099 $ 12,681 $ 12,936 $ 13,219 $ 50,935
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,007
10,868 42,928
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,765
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,950
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment gains (losses), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
9,999 38,802
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,902
4,979
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,101 $ 1,919 $ 1,766 $ (2,372) $ 3,414
Net income per share:
2,183
10,753
555
2,181
—
9,766
847
1,861
10,820
330
2,099
—
9,687
983
1,612
10,487
350
2,407
—
9,350
1,093
530
2,263
5
2,351
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.35 $
0.35
0.32 $
0.32
0.29 $ (0.39) $
(0.39)
0.29
0.56
0.56
75
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 2018 and 2017 in
which the stock was traded.
2018
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
20.38 $
22.22 $
24.80 $
24.88 $
19.23
19.52
21.65
20.05
2017
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21.50 $
20.76 $
20.67 $
19.95 $
15.04
15.99
17.38
18.37
Shares Outstanding
As of December 31, 2018, the Company had issued 6,278,481 shares of common stock, of which 6,034,843 shares were
outstanding. The outstanding shares were held of record by approximately 1,687 shareholders.
Dividends
The following table sets forth information on dividends paid by the Company in 2018 and 2017.
Dividends Paid
Month Paid
January, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
April, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total for 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
January, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
April, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
July, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
October, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total for 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Per Share
0.07
0.07
0.10
0.10
0.34
0.06
0.06
0.07
0.07
0.26
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.
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, 2013, through December 31, 2018. 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,
2013. The performance graph assumes that the value of an investment in the Company's common stock and each index was $100
76
at December 31, 2013 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 Index
SNL Bank $1B-$5B Index
250
200
150
100
e
u
l
a
V
x
e
d
n
I
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
The comparison of cumulative total returns presented in the above graph was plotted using the following index values and
common stock price values:
12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18
Hawthorn Bancshares, Inc. . . . . . . . . . . $ 100.00 $ 123.79 $ 144.31 $ 171.01 $ 211.24 $ 226.32
Nasdaq Composite (U.S. Companies) . $ 100.00 $ 114.75 $ 122.74 $ 133.62 $ 173.22 $ 168.30
Index of financial institutions ($1
billion to $5 billion) . . . . . . . . . . . . . . $ 100.00 $ 104.56 $ 117.04 $ 168.38 $ 179.51 $ 157.27
Period Ending
77
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Name
Position with the Company
Position with Subsidiary Bank
Principal Occupation
David T. Turner . . . . . . . . . . . . . . Chairman, Chief Executive
Chairman, Chief Executive
Kathleen L. Bruegenhemke . . . . .
Officer, President and
Director -Class III
Officer, President and Director
Senior Vice President, Chief
Risk Officer, Corporate
Secretary, and Director-Class
I
Senior Vice President, Chief
Operating Officer, Chief Risk
Officer, Secretary to the Board,
and Director
W. Bruce Phelps . . . . . . . . . . . . . .
Senior Vice President and
Chief Financial Officer
Senior Vice President and Chief
Financial Officer
Kevin L. Riley . . . . . . . . . . . . . . . Director-Class III
Director
Frank E. Burkhead . . . . . . . . . . . . Director-Class II
Director
Philip D. Freeman . . . . . . . . . . . . Director-Class I
Director
Gus S. (Jack) Wetzel III . . . . . . . . Director-Class II
Director
Jonathan D. Holtaway . . . . . . . . . Director – Class I
Director
Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank
Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank
Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank
Co-owner, Riley Chevrolet,
Inc., Riley Toyota-Scion-
Cadillac, Inc., Riley
Brothers, LLC, and Riley
Brothers II, LLC, Jefferson
City, Missouri
Owner, Burkhead Wealth
Management, Co-owner,
Burkhead & Associates,
LLC, Pro 356, LLC, and
FACT Properties, LLC,
Jefferson City, Missouri
Owner, Freeman Properties,
JCMO, LLC, Jefferson City,
Missouri
President, Meadows
Construction Company and
Meadows Development
Company, Clinton, Missouri
Co-owner, Ategra GP, LLC,
and Ategra Capital
Management LLC, and
Managing Member of Ategra
Financial Institution Fund,
LP, all of Vienna, Virginia
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange
Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2018 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.
78