UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 |
For the quarterly period ended September 30, 2015
or
| ¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ______________ to______________
Commission File Number: 0-23636
HAWTHORN BANCSHARES,
INC.
(Exact name of registrant as specified in
its charter)
Missouri |
|
43-1626350 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification No.) |
132 East High Street, Box 688, Jefferson
City, Missouri 65102
(Address
of principal executive offices)
(Zip Code)
(573) 761-6100
(Registrant’s telephone number, including
area code)
N/A
(Former name, former address and former fiscal
year, if changed since last report.)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. x
Yes ¨ No
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes ¨
No
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer |
¨ |
Accelerated filer ¨ |
Non-accelerated filer |
x (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). ¨
Yes x No
As of November 16, 2015, the registrant had 5,443,344 shares of
common stock, par value $1.00 per share, outstanding
Part I - Financial Information
Item 1. Financial Statements
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
| |
September 30, | | |
December 31, | |
(In thousands, except per share
data) | |
2015 | | |
2014 | |
ASSETS | |
| | | |
| | |
Cash and due from banks | |
$ | 17,664 | | |
$ | 22,364 | |
Federal funds sold and other overnight interest-bearing deposits | |
| 14,463 | | |
| 20,445 | |
Cash and cash equivalents | |
| 32,127 | | |
| 42,809 | |
Investment in available-for-sale securities, at fair value | |
| 244,250 | | |
| 198,998 | |
Other investments and securities, at cost | |
| 9,237 | | |
| 4,722 | |
Total investment securities | |
| 253,487 | | |
| 203,720 | |
Loans | |
| 879,474 | | |
| 861,213 | |
Allowances for loan losses | |
| (9,246 | ) | |
| (9,099 | ) |
Net loans | |
| 870,228 | | |
| 852,114 | |
Premises and equipment - net | |
| 36,727 | | |
| 37,498 | |
Mortgage servicing rights | |
| 2,774 | | |
| 2,762 | |
Other real estate and repossessed assets - net | |
| 15,148 | | |
| 11,885 | |
Accrued interest receivable | |
| 4,909 | | |
| 4,816 | |
Cash surrender value - life insurance | |
| 2,329 | | |
| 2,284 | |
Other assets | |
| 9,895 | | |
| 11,843 | |
Total assets | |
$ | 1,227,624 | | |
$ | 1,169,731 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | |
Deposits | |
| | | |
| | |
Non-interest bearing demand | |
$ | 209,714 | | |
$ | 207,700 | |
Savings, interest checking and money market | |
| 452,878 | | |
| 442,059 | |
Time deposits $100,000 and over | |
| 138,891 | | |
| 134,945 | |
Other time deposits | |
| 170,685 | | |
| 184,810 | |
Total deposits | |
| 972,168 | | |
| 969,514 | |
Federal funds purchased and securities sold under agreements to repurchase | |
| 27,762 | | |
| 17,970 | |
Subordinated notes | |
| 49,486 | | |
| 49,486 | |
Federal Home Loan Bank advances | |
| 80,000 | | |
| 43,000 | |
Accrued interest payable | |
| 378 | | |
| 373 | |
Other liabilities | |
| 10,757 | | |
| 8,820 | |
Total liabilities | |
| 1,140,551 | | |
| 1,089,163 | |
Stockholders’ equity: | |
| | | |
| | |
Common stock, $1 par value, authorized 15,000,000 shares; issued 5,605,202 and 5,395,844 shares, respectively | |
| 5,605 | | |
| 5,396 | |
Surplus | |
| 38,544 | | |
| 35,901 | |
Retained earnings | |
| 46,979 | | |
| 44,016 | |
Accumulated other comprehensive loss, net of tax | |
| (538 | ) | |
| (1,228 | ) |
Treasury stock; 161,858 shares, at cost | |
| (3,517 | ) | |
| (3,517 | ) |
Total stockholders’ equity | |
| 87,073 | | |
| 80,568 | |
Total liabilities and stockholders’ equity | |
$ | 1,227,624 | | |
$ | 1,169,731 | |
See accompanying notes to the consolidated financial statements
(unaudited).
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September
30, | | |
September
30, | |
(In thousands,
except per share amounts) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
INTEREST INCOME | |
| | | |
| | | |
| | | |
| | |
Interest and fees on loans | |
$ | 10,713 | | |
$ | 10,146 | | |
$ | 30,891 | | |
$ | 30,059 | |
Interest on investment securities: | |
| | | |
| | | |
| | | |
| | |
Taxable | |
| 872 | | |
| 845 | | |
| 2,663 | | |
| 2,600 | |
Nontaxable | |
| 169 | | |
| 180 | | |
| 524 | | |
| 543 | |
Federal funds sold and other overnight interest-bearing deposits | |
| 3 | | |
| 5 | | |
| 24 | | |
| 23 | |
Dividends on other securities | |
| 72 | | |
| 20 | | |
| 139 | | |
| 59 | |
Total interest income | |
| 11,829 | | |
| 11,196 | | |
| 34,241 | | |
| 33,284 | |
INTEREST EXPENSE | |
| | | |
| | | |
| | | |
| | |
Interest on deposits: | |
| | | |
| | | |
| | | |
| | |
Savings, interest checking and money market | |
| 241 | | |
| 229 | | |
| 738 | | |
| 750 | |
Time deposit accounts $100,000 and over | |
| 222 | | |
| 237 | | |
| 653 | | |
| 723 | |
Other time deposits | |
| 269 | | |
| 331 | | |
| 831 | | |
| 1,067 | |
Interest on federal funds purchased and securities sold under agreements to repurchase | |
| 12 | | |
| 5 | | |
| 28 | | |
| 14 | |
Interest on subordinated notes | |
| 325 | | |
| 318 | | |
| 958 | | |
| 945 | |
Interest on Federal Home Loan Bank advances | |
| 202 | | |
| 120 | | |
| 513 | | |
| 328 | |
Total interest expense | |
| 1,271 | | |
| 1,240 | | |
| 3,721 | | |
| 3,827 | |
Net interest income | |
| 10,558 | | |
| 9,956 | | |
| 30,520 | | |
| 29,457 | |
Provision for loan losses | |
| 0 | | |
| 0 | | |
| 250 | | |
| 0 | |
Net interest income after provision for loan losses | |
| 10,558 | | |
| 9,956 | | |
| 30,270 | | |
| 29,457 | |
NON-INTEREST INCOME | |
| | | |
| | | |
| | | |
| | |
Service charges and other fees | |
| 903 | | |
| 979 | | |
| 2,597 | | |
| 2,808 | |
Bank card income and fees | |
| 632 | | |
| 621 | | |
| 1,849 | | |
| 1,780 | |
Trust department income | |
| 235 | | |
| 211 | | |
| 714 | | |
| 641 | |
Real estate servicing fees, net | |
| 177 | | |
| 86 | | |
| 357 | | |
| 285 | |
Gain on sale of mortgage loans, net | |
| 322 | | |
| 330 | | |
| 1,103 | | |
| 778 | |
Other | |
| 67 | | |
| 86 | | |
| 165 | | |
| 290 | |
Total non-interest income | |
| 2,336 | | |
| 2,313 | | |
| 6,785 | | |
| 6,582 | |
NON-INTEREST EXPENSE | |
| | | |
| | | |
| | | |
| | |
Salaries and employee benefits | |
| 5,320 | | |
| 5,582 | | |
| 15,798 | | |
| 15,573 | |
Occupancy expense, net | |
| 685 | | |
| 705 | | |
| 2,064 | | |
| 1,997 | |
Furniture and equipment expense | |
| 464 | | |
| 438 | | |
| 1,379 | | |
| 1,334 | |
Processing, network, and bank card expense | |
| 806 | | |
| 780 | | |
| 2,402 | | |
| 2,359 | |
Legal, examination, and professional fees | |
| 332 | | |
| 341 | | |
| 943 | | |
| 849 | |
FDIC insurance assessment | |
| 175 | | |
| 244 | | |
| 673 | | |
| 724 | |
Advertising and promotion | |
| 273 | | |
| 305 | | |
| 780 | | |
| 852 | |
Postage, printing, and supplies | |
| 250 | | |
| 268 | | |
| 794 | | |
| 813 | |
Real estate foreclosure expense and (gains), net | |
| (329 | ) | |
| 361 | | |
| (352 | ) | |
| 657 | |
Other | |
| 1,001 | | |
| 875 | | |
| 2,472 | | |
| 2,259 | |
Total non-interest expense | |
| 8,977 | | |
| 9,899 | | |
| 26,953 | | |
| 27,417 | |
Income before income taxes | |
| 3,917 | | |
| 2,370 | | |
| 10,102 | | |
| 8,622 | |
Income tax expense | |
| 1,378 | | |
| 802 | | |
| 3,497 | | |
| 2,969 | |
Net income | |
| 2,539 | | |
| 1,568 | | |
| 6,605 | | |
| 5,653 | |
Basic earnings per share | |
$ | 0.47 | | |
$ | 0.29 | | |
$ | 1.21 | | |
$ | 1.04 | |
Diluted earnings per share | |
$ | 0.47 | | |
$ | 0.29 | | |
$ | 1.21 | | |
$ | 1.04 | |
See accompanying notes to the consolidated financial statements
(unaudited).
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September
30, | | |
September
30, | |
(In thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net income | |
$ | 2,539 | | |
$ | 1,568 | | |
$ | 6,605 | | |
$ | 5,653 | |
Other comprehensive income, net of tax | |
| | | |
| | | |
| | | |
| | |
Investment securities available-for-sale: | |
| | | |
| | | |
| | | |
| | |
Unrealized gain (loss) on investment securities available-for-sale, net of tax | |
| 993 | | |
| (328 | ) | |
| 617 | | |
| 1,202 | |
Adjustment for gain on sale of investment securities, net of tax | |
| 0 | | |
| 0 | | |
| 5 | | |
| 0 | |
Defined benefit pension plans: | |
| | | |
| | | |
| | | |
| | |
Amortization of prior service cost included in net periodic pension cost, net of tax | |
| 24 | | |
| 12 | | |
| 68 | | |
| 36 | |
Total other comprehensive income (loss) | |
| 1,017 | | |
| (316 | ) | |
| 690 | | |
| 1,238 | |
Total comprehensive income | |
$ | 3,556 | | |
$ | 1,252 | | |
$ | 7,295 | | |
$ | 6,891 | |
See accompanying notes to the consolidated financial statements
(unaudited).
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (unaudited)
| |
| | |
| | |
| | |
Accumulated | | |
| | |
| |
| |
| | |
| | |
| | |
Other | | |
| | |
Total | |
| |
| | |
| | |
| | |
Comprehensive | | |
| | |
Stock - | |
| |
Common | | |
| | |
Retained | | |
Income | | |
Treasury | | |
holders' | |
(In thousands) | |
Stock | | |
Surplus | | |
Earnings | | |
(Loss) | | |
Stock | | |
Equity | |
Balance, December 31, 2013 | |
$ | 5,195 | | |
$ | 33,385 | | |
$ | 40,086 | | |
$ | (769 | ) | |
$ | (3,517 | ) | |
$ | 74,380 | |
Net income | |
| 0 | | |
| 0 | | |
| 5,653 | | |
| 0 | | |
| 0 | | |
| 5,653 | |
Other comprehensive income | |
| 0 | | |
| 0 | | |
| 0 | | |
| 1,238 | | |
| 0 | | |
| 1,238 | |
Stock dividend | |
| 201 | | |
| 2,496 | | |
| (2,697 | ) | |
| 0 | | |
| 0 | | |
| 0 | |
Stock based compensation expense | |
| 0 | | |
| 15 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 15 | |
Cash dividends declared, common stock | |
| 0 | | |
| 0 | | |
| (765 | ) | |
| 0 | | |
| 0 | | |
| (765 | ) |
Balance, September 30, 2014 | |
$ | 5,396 | | |
$ | 35,896 | | |
$ | 42,277 | | |
$ | 469 | | |
$ | (3,517 | ) | |
$ | 80,521 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance, December 31, 2014 | |
$ | 5,396 | | |
$ | 35,901 | | |
$ | 44,016 | | |
$ | (1,228 | ) | |
$ | (3,517 | ) | |
$ | 80,568 | |
Net income | |
| 0 | | |
| 0 | | |
| 6,605 | | |
| 0 | | |
| 0 | | |
| 6,605 | |
Other comprehensive income | |
| 0 | | |
| 0 | | |
| 0 | | |
| 690 | | |
| 0 | | |
| 690 | |
Stock dividend | |
| 209 | | |
| 2,638 | | |
| (2,847 | ) | |
| 0 | | |
| 0 | | |
| 0 | |
Stock based compensation expense | |
| 0 | | |
| 5 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 5 | |
Cash dividends declared, common stock | |
| 0 | | |
| 0 | | |
| (795 | ) | |
| 0 | | |
| 0 | | |
| (795 | ) |
Balance, September 30, 2015 | |
$ | 5,605 | | |
$ | 38,544 | | |
$ | 46,979 | | |
$ | (538 | ) | |
$ | (3,517 | ) | |
$ | 87,073 | |
See accompanying notes to the consolidated financial statements
(unaudited).
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
| |
Nine
Months Ended September 30, | |
(In thousands) | |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
$ | 6,605 | | |
$ | 5,653 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Provision for loan losses | |
| 250 | | |
| 0 | |
Depreciation expense | |
| 1,454 | | |
| 1,305 | |
Net amortization of investment securities, premiums, and discounts | |
| 1,007 | | |
| 809 | |
Stock based compensation expense | |
| 5 | | |
| 15 | |
Change in fair value of mortgage servicing rights | |
| 291 | | |
| 386 | |
Gain on sale of investment securities | |
| (8 | ) | |
| 0 | |
Gain on sales and dispositions of premises and equipment | |
| (8 | ) | |
| (41 | ) |
Gain on sales and dispositions of other real estate and repossessed assets | |
| (151 | ) | |
| (149 | ) |
Provision for other real estate owned | |
| (6 | ) | |
| 450 | |
Increase (decrease) in accrued interest receivable | |
| (93 | ) | |
| 264 | |
Increase in cash surrender value -life insurance | |
| (45 | ) | |
| (56 | ) |
Decrease (increase) in other assets | |
| 2,224 | | |
| (181 | ) |
Increase (decrease) in accrued interest payable | |
| 5 | | |
| (44 | ) |
Increase in other liabilities | |
| 1,251 | | |
| 2,603 | |
Origination of mortgage loans for sale | |
| (40,008 | ) | |
| (25,576 | ) |
Proceeds from the sale of mortgage loans | |
| 40,090 | | |
| 25,568 | |
Gain on sale of mortgage loans, net | |
| (1,103 | ) | |
| (778 | ) |
Other, net | |
| (194 | ) | |
| (377 | ) |
Net cash provided by operating activities | |
| 11,566 | | |
| 9,851 | |
Cash flows from investing activities: | |
| | | |
| | |
Net increase in loans | |
| (21,892 | ) | |
| (24,155 | ) |
Purchase of available-for-sale debt securities | |
| (81,595 | ) | |
| (41,321 | ) |
Proceeds from maturities of available-for-sale debt securities | |
| 24,188 | | |
| 18,015 | |
Proceeds from calls of available-for-sale debt securities | |
| 11,440 | | |
| 24,605 | |
Proceeds from sales of available-for-sale debt securities | |
| 720 | | |
| 0 | |
Proceeds from sales of FHLB stock | |
| 400 | | |
| 39 | |
Purchases of FHLB stock | |
| (4,915 | ) | |
| (440 | ) |
Purchases of premises and equipment | |
| (709 | ) | |
| (1,181 | ) |
Proceeds from sales of premises and equipment | |
| 11 | | |
| 45 | |
Proceeds from sales of other real estate and foreclosed assets | |
| 1,443 | | |
| 3,945 | |
Net cash used in investing activities | |
| (70,909 | ) | |
| (20,448 | ) |
Cash flows from financing activities: | |
| | | |
| | |
Net increase in demand deposits | |
| 2,014 | | |
| 12,898 | |
Net increase in interest-bearing transaction accounts | |
| 10,819 | | |
| 14,748 | |
Net decrease in time deposits | |
| (10,179 | ) | |
| (19,412 | ) |
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase | |
| 9,792 | | |
| (11,541 | ) |
Repayment of FHLB advances | |
| (55,000 | ) | |
| (10,000 | ) |
FHLB advances | |
| 92,000 | | |
| 21,000 | |
Cash dividends paid - common stock | |
| (785 | ) | |
| (755 | ) |
Net cash provided by financing activities | |
| 48,661 | | |
| 6,938 | |
Net (decrease) increase in cash and cash equivalents | |
| (10,682 | ) | |
| (3,659 | ) |
Cash and cash equivalents, beginning of period | |
| 42,809 | | |
| 28,439 | |
Cash and cash equivalents, end of period | |
$ | 32,127 | | |
$ | 24,780 | |
See accompanying notes to the consolidated financial statements.
(unaudited)
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued) (unaudited)
| |
Nine
Months Ended September 30, | |
(In
thousands) | |
2015 | | |
2014 | |
Supplemental disclosures of cash flow information: | |
| | | |
| | |
Cash paid during the year for: | |
| | | |
| | |
Interest | |
$ | 3,717 | | |
$ | 3,872 | |
Income taxes | |
$ | 1,559 | | |
$ | 1,650 | |
Noncash investing activities: | |
| | | |
| | |
Other real estate and repossessed assets acquired in settlement of loans | |
$ | 4,549 | | |
$ | 1,817 | |
See accompanying notes to the consolidated financial statements
(unaudited).
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
| (1) | Summary of Significant Accounting Policies |
Hawthorn Bancshares, Inc.
(the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and corporate
customers located within the communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson, and
Lee’s Summit, Missouri. The Company is subject to competition from other financial and nonfinancial institutions providing
financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies
and undergo periodic examinations by those regulatory agencies.
The accompanying
unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting
principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X.
Accordingly, the unaudited consolidated financial statements do not include all of the information and disclosures required by
U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and related
notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Certain amounts in the 2014
condensed consolidated financial statements have been reclassified to conform to the 2014 condensed consolidated presentation.
Such reclassifications have no effect on previously reported net income or stockholders’ equity.
The preparation of the consolidated
financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements
not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan
losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities
available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent
events or transactions requiring recognition or disclosure in the consolidated financial statements.
Stock Dividend On
July 1, 2015, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June
15, 2015. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively
to reflect this change.
The following represents significant new
accounting principles adopted in 2015:
Investments - Equity Method and Joint
Ventures
The FASB issued ASU No. 2014-01, Accounting
for Investments in Qualified Affordable Housing Projects, in January 2014. These amendments allow investors in low income housing
tax credit entities to account for the investments using a proportional amortization method, provided that certain conditions are
met, and recognize amortization of the investment as a component of income tax expense. In addition, disclosures are required that
will enable users to understand the nature of the investments, and the effect of the measurement of the investments and the related
tax credits on the investor's financial statements. This ASU was effective January 1, 2015, and the adoption of this pronouncement
did not have a significant effect on the Company's consolidated financial statements.
Troubled Debt Restructurings by Creditors
The FASB issued ASU No. 2014-04, Reclassification
of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, in January 2014. These amendments require
companies to disclose the amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage
loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local
requirements of the applicable jurisdiction. The ASU also defines when a creditor is considered to have received physical possession
of residential real estate property collateralizing a consumer mortgage loan. This ASU was effective January 1, 2015, and the adoption
of this pronouncement did not have a significant effect on the Company's consolidated financial statements.
The FASB issued ASU No. 2014-14, Classification
of Certain Government-Guaranteed Mortgage Loans upon Foreclosure in August 2014. The objective of this update is to reduce
diversity in practice by addressing the classification of foreclosed mortgage loans that are fully or partially guaranteed under
government programs, including those guaranteed by the FHA and the VA. Some creditors reclassify those loans to real estate consistent
with other foreclosed loans that do not have guarantees; others
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
reclassify the loans to
other receivables. The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable
be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable
from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property
to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the
time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon
foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest)
expected to be recovered from the guarantor. This ASU was effective January 1, 2015, and the adoption of this pronouncement did
not have a significant effect on the Company's consolidated financial statements.
| (2) | Loans and Allowance for Loan Losses |
Loans
A summary of loans, by major class within the
Company’s loan portfolio, at September 30, 2015 and December 31, 2014 is as follows:
| |
September 30, | | |
December 31, | |
(in thousands) | |
2015 | | |
2014 | |
Commercial, financial, and agricultural | |
$ | 173,485 | | |
$ | 154,834 | |
Real estate construction - residential | |
| 13,531 | | |
| 18,103 | |
Real estate construction - commercial | |
| 32,560 | | |
| 48,822 | |
Real estate mortgage - residential | |
| 249,512 | | |
| 247,117 | |
Real estate mortgage - commercial | |
| 388,220 | | |
| 372,321 | |
Installment and other consumer | |
| 22,166 | | |
| 20,016 | |
| |
| | | |
| | |
Total loans | |
$ | 879,474 | | |
$ | 861,213 | |
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 Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities.
The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily
of the financing of automotive vehicles. At September 30, 2015, loans with a carrying value of $396.4 million, or $330.5 million
fair value, were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Allowance for Loan Losses
The following is a summary of the allowance
for loan losses during the periods indicated.
| |
Three
Months Ended September 30, 2015 | |
| |
Commercial, | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Installment | | |
| | |
| |
| |
Financial, & | | |
Construction - | | |
Construction - | | |
Mortgage - | | |
Mortgage - | | |
Loans to | | |
Un- | | |
| |
(in thousands) | |
Agricultural | | |
Residential | | |
Commercial | | |
Residential | | |
Commercial | | |
Individuals | | |
allocated | | |
Total | |
Balance at beginning of period | |
$ | 3,124 | | |
$ | 17 | | |
$ | 414 | | |
$ | 2,332 | | |
$ | 3,870 | | |
$ | 185 | | |
$ | 44 | | |
$ | 9,986 | |
Additions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Provision for loan losses | |
| 439 | | |
| (27 | ) | |
| 137 | | |
| (233 | ) | |
| (503 | ) | |
| 66 | | |
| 121 | | |
| 0 | |
Deductions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans charged off | |
| 591 | | |
| 0 | | |
| 0 | | |
| 87 | | |
| 126 | | |
| 80 | | |
| 0 | | |
| 884 | |
Less recoveries on loans | |
| (28 | ) | |
| (28 | ) | |
| 0 | | |
| (45 | ) | |
| (5 | ) | |
| (38 | ) | |
| 0 | | |
| (144 | ) |
Net loans charged off | |
| 563 | | |
| (28 | ) | |
| 0 | | |
| 42 | | |
| 121 | | |
| 42 | | |
| 0 | | |
| 740 | |
Balance at end of period | |
$ | 3,000 | | |
$ | 18 | | |
$ | 551 | | |
$ | 2,057 | | |
$ | 3,246 | | |
$ | 209 | | |
$ | 165 | | |
$ | 9,246 | |
| |
Nine
Months Ended September 30, 2015 | |
| |
Commercial, | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Installment | | |
| | |
| |
| |
Financial, & | | |
Construction - | | |
Construction - | | |
Mortgage - | | |
Mortgage - | | |
Loans to | | |
Un- | | |
| |
(in thousands) | |
Agricultural | | |
Residential | | |
Commercial | | |
Residential | | |
Commercial | | |
Individuals | | |
allocated | | |
Total | |
Balance at beginning of period | |
$ | 1,779 | | |
$ | 171 | | |
$ | 466 | | |
$ | 2,527 | | |
$ | 3,846 | | |
$ | 270 | | |
$ | 40 | | |
$ | 9,099 | |
Additions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Provision for loan losses | |
| 1,319 | | |
| (475 | ) | |
| 90 | | |
| (277 | ) | |
| (598 | ) | |
| 66 | | |
| 125 | | |
| 250 | |
Deductions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans charged off | |
| 741 | | |
| 0 | | |
| 5 | | |
| 298 | | |
| 159 | | |
| 241 | | |
| 0 | | |
| 1,444 | |
Less recoveries on loans | |
| (643 | ) | |
| (322 | ) | |
| 0 | | |
| (105 | ) | |
| (157 | ) | |
| (114 | ) | |
| 0 | | |
| (1,341 | ) |
Net loans (recovered) charged off | |
| 98 | | |
| (322 | ) | |
| 5 | | |
| 193 | | |
| 2 | | |
| 127 | | |
| 0 | | |
| 103 | |
Balance at end of period | |
$ | 3,000 | | |
$ | 18 | | |
$ | 551 | | |
$ | 2,057 | | |
$ | 3,246 | | |
$ | 209 | | |
$ | 165 | | |
$ | 9,246 | |
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
| |
Three
Months Ended September 30, 2014 | |
| |
Commercial, | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Installment | | |
| | |
| |
| |
Financial, & | | |
Construction - | | |
Construction - | | |
Mortgage - | | |
Mortgage - | | |
Loans to | | |
Un- | | |
| |
(in thousands) | |
Agricultural | | |
Residential | | |
Commercial | | |
Residential | | |
Commercial | | |
Individuals | | |
allocated | | |
Total | |
Balance at beginning of period | |
$ | 1,943 | | |
$ | 473 | | |
$ | 618 | | |
$ | 2,405 | | |
$ | 6,428 | | |
$ | 274 | | |
$ | 9 | | |
$ | 12,150 | |
Additions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Provision for loan losses | |
| (188 | ) | |
| (94 | ) | |
| (96 | ) | |
| 313 | | |
| 7 | | |
| 38 | | |
| 20 | | |
| 0 | |
Deductions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans charged off | |
| 105 | | |
| 0 | | |
| 0 | | |
| 41 | | |
| 80 | | |
| 71 | | |
| 0 | | |
| 297 | |
Less recoveries on loans | |
| (55 | ) | |
| 0 | | |
| 0 | | |
| (26 | ) | |
| (67 | ) | |
| (32 | ) | |
| 0 | | |
| (180 | ) |
Net loans charged off | |
| 50 | | |
| 0 | | |
| 0 | | |
| 15 | | |
| 13 | | |
| 39 | | |
| 0 | | |
| 117 | |
Balance at end of period | |
$ | 1,705 | | |
$ | 379 | | |
$ | 522 | | |
$ | 2,703 | | |
$ | 6,422 | | |
$ | 273 | | |
$ | 29 | | |
$ | 12,033 | |
| |
Nine
Months Ended September 30, 2014 | |
| |
Commercial, | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Installment | | |
| | |
| |
| |
Financial, & | | |
Construction - | | |
Construction - | | |
Mortgage - | | |
Mortgage - | | |
Loans to | | |
Un- | | |
| |
(in thousands) | |
Agricultural | | |
Residential | | |
Commercial | | |
Residential | | |
Commercial | | |
Individuals | | |
allocated | | |
Total | |
Balance at beginning of period | |
$ | 2,374 | | |
$ | 931 | | |
$ | 631 | | |
$ | 2,959 | | |
$ | 6,523 | | |
$ | 294 | | |
$ | 7 | | |
$ | 13,719 | |
Additions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Provision for loan losses | |
| (660 | ) | |
| (553 | ) | |
| 382 | | |
| (171 | ) | |
| 891 | | |
| 89 | | |
| 22 | | |
| 0 | |
Deductions: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans charged off | |
| 291 | | |
| 59 | | |
| 491 | | |
| 236 | | |
| 1,152 | | |
| 270 | | |
| 0 | | |
| 2,499 | |
Less recoveries on loans | |
| (282 | ) | |
| (60 | ) | |
| 0 | | |
| (151 | ) | |
| (160 | ) | |
| (160 | ) | |
| 0 | | |
| (813 | ) |
Net loans charged off | |
| 9 | | |
| (1 | ) | |
| 491 | | |
| 85 | | |
| 992 | | |
| 110 | | |
| 0 | | |
| 1,686 | |
Balance at end of period | |
$ | 1,705 | | |
$ | 379 | | |
$ | 522 | | |
$ | 2,703 | | |
$ | 6,422 | | |
$ | 273 | | |
$ | 29 | | |
$ | 12,033 | |
Loans, or portions of loans, are charged off
to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries
of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts
due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These
loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific
reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and
reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies,
current economic conditions, loan risk ratings and industry concentration.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table provides the balance in the allowance for loan
losses at September 30, 2015 and December 31, 2014, and the related loan balance by impairment methodology.
| |
Commercial, | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Real Estate | | |
Installment | | |
| | |
| |
| |
Financial, and | | |
Construction - | | |
Construction - | | |
Mortgage - | | |
Mortgage - | | |
Loans to | | |
Un- | | |
| |
(in thousands) | |
Agricultural | | |
Residential | | |
Commercial | | |
Residential | | |
Commercial | | |
Individuals | | |
allocated | | |
Total | |
September 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance for loan losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually
evaluated for impairment | |
$ | 305 | | |
$ | 0 | | |
$ | 8 | | |
$ | 1,178 | | |
$ | 459 | | |
$ | 20 | | |
$ | 0 | | |
$ | 1,970 | |
Collectively evaluated
for impairment | |
| 2,695 | | |
| 18 | | |
| 543 | | |
| 879 | | |
| 2,787 | | |
| 189 | | |
| 165 | | |
| 7,276 | |
Total | |
$ | 3,000 | | |
$ | 18 | | |
$ | 551 | | |
$ | 2,057 | | |
$ | 3,246 | | |
$ | 209 | | |
$ | 165 | | |
$ | 9,246 | |
Loans
outstanding: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated
for impairment | |
$ | 3,643 | | |
$ | 0 | | |
$ | 54 | | |
$ | 6,891 | | |
$ | 3,481 | | |
$ | 141 | | |
$ | 0 | | |
$ | 14,210 | |
Collectively
evaluated for impairment | |
| 169,842 | | |
| 13,531 | | |
| 32,506 | | |
| 242,621 | | |
| 384,739 | | |
| 22,025 | | |
| 0 | | |
| 865,264 | |
Total | |
$ | 173,485 | | |
$ | 13,531 | | |
$ | 32,560 | | |
$ | 249,512 | | |
$ | 388,220 | | |
$ | 22,166 | | |
$ | 0 | | |
$ | 879,474 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December
31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Allowance
for loan losses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated
for impairment | |
$ | 134 | | |
$ | 0 | | |
$ | 0 | | |
$ | 1,343 | | |
$ | 246 | | |
$ | 26 | | |
$ | 0 | | |
$ | 1,749 | |
Collectively evaluated
for impairment | |
| 1,645 | | |
| 171 | | |
| 466 | | |
| 1,184 | | |
| 3,600 | | |
| 244 | | |
| 40 | | |
| 7,350 | |
Total | |
$ | 1,779 | | |
$ | 171 | | |
$ | 466 | | |
$ | 2,527 | | |
$ | 3,846 | | |
$ | 270 | | |
$ | 40 | | |
$ | 9,099 | |
Loans
outstanding: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Individually evaluated
for impairment | |
$ | 7,541 | | |
$ | 1,750 | | |
$ | 2,096 | | |
$ | 7,878 | | |
$ | 16,464 | | |
$ | 234 | | |
$ | 0 | | |
$ | 35,963 | |
Collectively
evaluated for impairment | |
| 147,293 | | |
| 16,353 | | |
| 46,726 | | |
| 239,239 | | |
| 355,857 | | |
| 19,782 | | |
| 0 | | |
| 825,250 | |
Total | |
$ | 154,834 | | |
$ | 18,103 | | |
$ | 48,822 | | |
$ | 247,117 | | |
$ | 372,321 | | |
$ | 20,016 | | |
$ | 0 | | |
$ | 861,213 | |
Impaired Loans
Loans evaluated under ASC 310-10-35 include
loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20.
Impaired loans individually evaluated for impairment totaled $14.2 million and $36.0 million at September 30, 2015 and December
31, 2014, 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 September 30, 2015 and December 31, 2014, $11.9 million and $15.6 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 September 30, 2015, $2.0 million of the Company’s allowance
for loan losses was allocated to impaired loans totaling $14.2 million compared to $1.7 million of the Company's allowance for
loan losses allocated to impaired loans totaling approximately $36.0 million at December 31, 2014. Management determined that $7.4
million, or 52%, of total impaired loans required no reserve allocation at September 30, 2015 compared to $28.5 million, or 79%,
at December 31, 2014 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The categories of impaired loans at September
30, 2015 and December 31, 2014 are as follows:
| |
September 30, | | |
December 31, | |
(in
thousands) | |
2015 | | |
2014 | |
Non-accrual loans | |
$ | 8,957 | | |
$ | 18,243 | |
Troubled debt restructurings continuing to accrue interest | |
| 5,253 | | |
| 17,720 | |
Total impaired loans | |
$ | 14,210 | | |
$ | 35,963 | |
The following tables provide additional information
about impaired loans at September 30, 2015 and December 31, 2014, respectively, segregated between loans for which an allowance
has been provided and loans for which no allowance has been provided.
| |
| | |
Unpaid | | |
| |
| |
Recorded | | |
Principal | | |
Specific | |
(in thousands) | |
Investment | | |
Balance | | |
Reserves | |
September 30, 2015 | |
| | | |
| | | |
| | |
With no related allowance recorded: | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
$ | 2,877 | | |
$ | 3,403 | | |
$ | 0 | |
Real estate - construction residential | |
| 0 | | |
| 0 | | |
| 0 | |
Real estate - construction commercial | |
| 0 | | |
| 0 | | |
| 0 | |
Real estate - residential | |
| 2,095 | | |
| 2,532 | | |
| 0 | |
Real estate - commercial | |
| 2,450 | | |
| 2,579 | | |
| 0 | |
Total | |
$ | 7,422 | | |
$ | 8,514 | | |
$ | 0 | |
With an allowance recorded: | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
$ | 766 | | |
$ | 778 | | |
$ | 305 | |
Real estate - construction commercial | |
| 54 | | |
| 56 | | |
| 8 | |
Real estate - residential | |
| 4,796 | | |
| 4,928 | | |
| 1,178 | |
Real estate - commercial | |
| 1,031 | | |
| 1,315 | | |
| 459 | |
Consumer | |
| 141 | | |
| 176 | | |
| 20 | |
Total | |
$ | 6,788 | | |
$ | 7,253 | | |
$ | 1,970 | |
Total impaired loans | |
$ | 14,210 | | |
$ | 15,767 | | |
$ | 1,970 | |
| |
| | |
Unpaid | | |
| |
| |
Recorded | | |
Principal | | |
Specific | |
(in thousands) | |
Investment | | |
Balance | | |
Reserves | |
December 31, 2014 | |
| | | |
| | | |
| | |
With no related allowance recorded: | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
$ | 6,021 | | |
$ | 6,232 | | |
$ | 0 | |
Real estate - construction residential | |
| 1,750 | | |
| 2,259 | | |
| 0 | |
Real estate - construction commercial | |
| 2,096 | | |
| 2,319 | | |
| 0 | |
Real estate - residential | |
| 3,213 | | |
| 3,270 | | |
| 0 | |
Real estate - commercial | |
| 15,409 | | |
| 18,950 | | |
| 0 | |
Consumer | |
| 36 | | |
| 36 | | |
| 0 | |
Total | |
$ | 28,525 | | |
$ | 33,066 | | |
$ | 0 | |
With an allowance recorded: | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
$ | 1,520 | | |
$ | 1,528 | | |
$ | 134 | |
Real estate - construction residential | |
| 0 | | |
| 0 | | |
| 0 | |
Real estate - construction commercial | |
| 0 | | |
| 0 | | |
| 0 | |
Real estate - residential | |
| 4,665 | | |
| 3,546 | | |
| 1,343 | |
Real estate - commercial | |
| 1,055 | | |
| 1,171 | | |
| 246 | |
Consumer | |
| 198 | | |
| 237 | | |
| 26 | |
Total | |
$ | 7,438 | | |
$ | 6,482 | | |
$ | 1,749 | |
Total impaired loans | |
$ | 35,963 | | |
$ | 39,548 | | |
$ | 1,749 | |
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table presents by class, information related to the
average recorded investment and interest income recognized on impaired loans during the periods indicated.
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
Interest | | |
| | |
Interest | | |
| | |
Interest | | |
| | |
Interest | |
| |
Average | | |
Recognized | | |
Average | | |
Recognized | | |
Average | | |
Recognized | | |
Average | | |
Recognized | |
| |
Recorded | | |
For the | | |
Recorded | | |
For the | | |
Recorded | | |
For the | | |
Recorded | | |
For the | |
(in thousands) | |
Investment | | |
Period
Ended | | |
Investment | | |
Period
Ended | | |
Investment | | |
Period
Ended | | |
Investment | | |
Period
Ended | |
With no related allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
$ | 3,416 | | |
$ | 6 | | |
$ | 2,618 | | |
$ | 22 | | |
$ | 4,033 | | |
$ | 33 | | |
$ | 2,592 | | |
$ | 69 | |
Real estate - construction residential | |
| 0 | | |
| 0 | | |
| 16 | | |
| 2 | | |
| 1,101 | | |
| 0 | | |
| 65 | | |
| 2 | |
Real estate - construction commercial | |
| 0 | | |
| 0 | | |
| 6,524 | | |
| 0 | | |
| 2,002 | | |
| 0 | | |
| 6,737 | | |
| 0 | |
Real estate - residential | |
| 2,326 | | |
| 5 | | |
| 3,941 | | |
| 26 | | |
| 2,924 | | |
| 26 | | |
| 3,374 | | |
| 40 | |
Real estate - commercial | |
| 2,958 | | |
| 17 | | |
| 12,578 | | |
| 84 | | |
| 8,978 | | |
| 103 | | |
| 12,334 | | |
| 255 | |
Consumer | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 10 | | |
| 1 | | |
| 11 | | |
| 0 | |
Total | |
$ | 8,700 | | |
$ | 28 | | |
$ | 25,677 | | |
$ | 134 | | |
$ | 19,048 | | |
$ | 163 | | |
$ | 25,113 | | |
$ | 366 | |
With an allowance recorded: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
$ | 787 | | |
$ | 5 | | |
$ | 1,940 | | |
$ | 4 | | |
$ | 1,389 | | |
$ | 18 | | |
$ | 2,128 | | |
$ | 19 | |
Real estate - construction residential | |
| 0 | | |
| 0 | | |
| 2,260 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 2,263 | | |
| 0 | |
Real estate - construction commercial | |
| 55 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 28 | | |
| 0 | | |
| 56 | | |
| 93 | |
Real estate - residential | |
| 4,850 | | |
| 30 | | |
| 5,458 | | |
| 0 | | |
| 4,713 | | |
| 80 | | |
| 5,384 | | |
| 11 | |
Real estate - commercial | |
| 1,228 | | |
| 0 | | |
| 4,587 | | |
| 28 | | |
| 1,216 | | |
| 0 | | |
| 4,695 | | |
| 0 | |
Consumer | |
| 162 | | |
| 0 | | |
| 310 | | |
| 11 | | |
| 209 | | |
| 0 | | |
| 324 | | |
| 0 | |
Total | |
$ | 7,082 | | |
$ | 35 | | |
$ | 14,555 | | |
$ | 43 | | |
$ | 7,555 | | |
$ | 98 | | |
$ | 14,850 | | |
$ | 123 | |
Total impaired loans | |
$ | 15,782 | | |
$ | 63 | | |
$ | 40,232 | | |
$ | 177 | | |
$ | 26,603 | | |
$ | 261 | | |
$ | 39,963 | | |
$ | 489 | |
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 $63,000
and $261,000, for the three months and nine months ended September 30, 2015, respectively, compared to $177,000 and $489,000 for
the three and nine months ended September 30, 2014, respectively. The average recorded investment in impaired loans is calculated
on a monthly basis during the periods reported.
Delinquent and Non-Accrual Loans
The delinquency status of loans is determined
based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more
past due. The Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management,
the ultimate collectibility 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 collectibility of interest and principal is probable and the
borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which
is generally six months.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table provides aging information
for the Company’s past due and non-accrual loans at September 30, 2015 and December 31, 2014.
| |
Current or | | |
| | |
90 Days | | |
| | |
| |
| |
Less Than | | |
| | |
Past Due | | |
| | |
| |
| |
30 Days | | |
30 - 89 Days | | |
And Still | | |
| | |
| |
(in thousands) | |
Past
Due | | |
Past
Due | | |
Accruing | | |
Non-Accrual | | |
Total | |
September 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial, Financial, and Agricultural | |
$ | 170,230 | | |
$ | 424 | | |
$ | 0 | | |
$ | 2,831 | | |
$ | 173,485 | |
Real Estate Construction - Residential | |
| 13,459 | | |
| 72 | | |
| 0 | | |
| 0 | | |
| 13,531 | |
Real Estate Construction - Commercial | |
| 32,447 | | |
| 59 | | |
| 0 | | |
| 54 | | |
| 32,560 | |
Real Estate Mortgage - Residential | |
| 244,144 | | |
| 1,431 | | |
| 348 | | |
| 3,589 | | |
| 249,512 | |
Real Estate Mortgage - Commercial | |
| 385,253 | | |
| 625 | | |
| 0 | | |
| 2,342 | | |
| 388,220 | |
Installment and Other Consumer | |
| 21,794 | | |
| 230 | | |
| 1 | | |
| 141 | | |
| 22,166 | |
Total | |
$ | 867,327 | | |
$ | 2,841 | | |
$ | 349 | | |
$ | 8,957 | | |
$ | 879,474 | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial, Financial, and Agricultural | |
$ | 149,366 | | |
$ | 189 | | |
$ | 0 | | |
$ | 5,279 | | |
$ | 154,834 | |
Real Estate Construction - Residential | |
| 16,352 | | |
| 0 | | |
| 0 | | |
| 1,751 | | |
| 18,103 | |
Real Estate Construction - Commercial | |
| 46,670 | | |
| 0 | | |
| 56 | | |
| 2,096 | | |
| 48,822 | |
Real Estate Mortgage - Residential | |
| 239,469 | | |
| 3,229 | | |
| 0 | | |
| 4,419 | | |
| 247,117 | |
Real Estate Mortgage - Commercial | |
| 366,653 | | |
| 1,203 | | |
| 0 | | |
| 4,465 | | |
| 372,321 | |
Installment and Other Consumer | |
| 19,551 | | |
| 230 | | |
| 2 | | |
| 233 | | |
| 20,016 | |
Total | |
$ | 838,061 | | |
$ | 4,851 | | |
$ | 58 | | |
$ | 18,243 | | |
$ | 861,213 | |
Credit Quality
The Company categorizes loans into risk categories
based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch status when
one or more weaknesses that may result in the deterioration of the repayment exits or the Company’s credit position at some
future date. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of
the obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize
the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the
deficiencies are not corrected. A loan is classified as a troubled debt restructuring (TDR) when a borrower is experiencing
financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring
that it would not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans
classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual
loans for presentation purposes. It is the Company’s policy to discontinue the accrual of interest income on loans when management
believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration
in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment
of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the
process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the
collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table presents the risk categories
by class at September 30, 2015 and December 31, 2014.
(in thousands) | |
Commercial,
Financial, & Agricultural | | |
Real
Estate Construction
- Residential | | |
Real
Estate Construction
- Commercial | | |
Real
Estate Mortgage -
Residential | | |
Real
Estate Mortgage -
Commercial | | |
Installment
and other Consumer | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| |
At September 30, 2015 | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Watch | |
$ | 12,500 | | |
| 1,249 | | |
$ | 1,146 | | |
$ | 27,451 | | |
$ | 28,987 | | |
$ | 193 | | |
$ | 71,526 | |
Substandard | |
| 332 | | |
| 0 | | |
| 98 | | |
| 2,841 | | |
| 2,577 | | |
| 38 | | |
| 5,886 | |
Performing TDRs | |
| 812 | | |
| 0 | | |
| 0 | | |
| 3,302 | | |
| 1,139 | | |
| 0 | | |
| 5,253 | |
Non-accrual | |
| 2,831 | | |
| 0 | | |
| 54 | | |
| 3,589 | | |
| 2,342 | | |
| 141 | | |
| 8,957 | |
Total | |
$ | 16,475 | | |
$ | 1,249 | | |
$ | 1,298 | | |
$ | 37,183 | | |
$ | 35,045 | | |
$ | 372 | | |
$ | 91,622 | |
At December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Watch | |
$ | 13,651 | | |
$ | 1,103 | | |
$ | 4,757 | | |
$ | 27,172 | | |
$ | 18,191 | | |
$ | 199 | | |
$ | 65,073 | |
Substandard | |
| 926 | | |
| 90 | | |
| 1,211 | | |
| 3,124 | | |
| 4,102 | | |
| 139 | | |
| 9,592 | |
Performing TDRs | |
| 2,262 | | |
| 0 | | |
| 0 | | |
| 3,459 | | |
| 11,999 | | |
| 0 | | |
| 17,720 | |
Non-accrual | |
| 5,279 | | |
| 1,751 | | |
| 2,096 | | |
| 4,419 | | |
| 4,465 | | |
| 233 | | |
| 18,243 | |
Total | |
$ | 22,118 | | |
$ | 2,944 | | |
$ | 8,064 | | |
$ | 38,174 | | |
$ | 38,757 | | |
$ | 571 | | |
$ | 110,628 | |
Troubled Debt Restructurings
At September 30, 2015, loans classified
as TDRs totaled $6.7 million, of which $1.4 million were classified as nonperforming TDRs and included in non-accrual loans and
$5.3 million were classified as performing TDRs. At December 31, 2014, TDRs totaled $19.3 million, of which $1.6 million were classified
as nonperforming TDRs included in non-accrual loans and $17.7 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 $1.2 million and $1.0 million related to TDRs were
allocated to the allowance for loan losses at September 30, 2015 and December 31, 2014, respectively.
The following table summarizes loans that were modified as TDRs
during the periods indicated.
| |
Nine
Months Ended September 30, | |
| |
2015 | | |
2014 | |
| |
Recorded
Investment (1) | | |
Recorded
Investment (1) | |
(in thousands) | |
Number
of Contracts | | |
Pre-
Modification | | |
Post-
Modification | | |
Number
of Contracts | | |
Pre-
Modification | | |
Post-
Modification | |
Troubled Debt Restructurings | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
| 3 | | |
$ | 250 | | |
$ | 240 | | |
| 3 | | |
$ | 244 | | |
$ | 225 | |
Real estate mortgage - residential | |
| 3 | | |
| 510 | | |
| 352 | | |
| 1 | | |
| 1,256 | | |
| 1,171 | |
Real estate mortgage - commercial | |
| 4 | | |
| 1,273 | | |
| 1,263 | | |
| 0 | | |
| 0 | | |
| 0 | |
Total | |
| 10 | | |
$ | 2,033 | | |
$ | 1,855 | | |
| 4 | | |
$ | 1,500 | | |
$ | 1,396 | |
(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. There were no modified loans that met the
TDR criteria during the three months ended September 30, 2015 and 2014. During the nine months ended September 30, 2015, ten loans
meeting the TDR criteria were modified compared to four loans during the nine months ended September 30, 2014.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Upon default of a TDR, which is considered
to be 90 days or more past due under the modified terms, impairment is measured based on the fair value of the underlying collateral
less applicable selling costs. The impairment amount is either charged off as a reduction to the allowance for loan losses, provided
for as a specific reserve within the allowance for loan losses, or in the process of foreclosure. There were no TDRs that defaulted
within twelve months of its modification date during the three and nine months ended September 30, 2015 and 2014, respectively.
| (3) | Other Real Estate and Repossessed Assets |
| |
September 30, | | |
December 31, | |
(in thousands) | |
2015 | | |
2014 | |
Commercial, financial and agricultural | |
$ | 585 | | |
$ | 0 | |
Real estate construction - residential | |
| 0 | | |
| 23 | |
Real estate construction - commercial | |
| 12,380 | | |
| 9,831 | |
Real estate mortgage - residential | |
| 483 | | |
| 417 | |
Real estate mortgage - commercial | |
| 4,923 | | |
| 4,831 | |
Repossessed assets | |
| 10 | | |
| 38 | |
Total | |
$ | 18,381 | | |
$ | 15,140 | |
Less valuation allowance for other real estate owned | |
| (3,233 | ) | |
| (3,255 | ) |
Total other real estate and repossessed assets | |
$ | 15,148 | | |
$ | 11,885 | |
Changes in the net carrying amount of other real estate and repossessed
assets were as follows for the periods indicated:
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Balance at beginning of period | |
$ | 15,749 | | |
$ | 15,231 | | |
$ | 15,140 | | |
$ | 19,542 | |
Additions | |
| 3,032 | | |
| 1,512 | | |
| 4,549 | | |
| 1,817 | |
Proceeds from sales | |
| (407 | ) | |
| (821 | ) | |
| (1,443 | ) | |
| (3,945 | ) |
Charge-offs against the valuation allowance for other real estate owned | |
| 0 | | |
| (199 | ) | |
| (16 | ) | |
| (1,843 | ) |
Repossessed assets impairment write-downs | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Net gain (loss) on sales | |
| 7 | | |
| (3 | ) | |
| 151 | | |
| 149 | |
Total other real estate and repossessed assets | |
$ | 18,381 | | |
$ | 15,720 | | |
$ | 18,381 | | |
$ | 15,720 | |
Less valuation allowance for other real estate owned | |
| (3,233 | ) | |
| (3,282 | ) | |
| (3,233 | ) | |
| (3,282 | ) |
Balance at end of period | |
$ | 15,148 | | |
$ | 12,438 | | |
$ | 15,148 | | |
$ | 12,438 | |
Net charge-offs against the allowance for loan losses at the time
of foreclosure were approximately $180,000 and $323,000 during the three and nine months ended September 30, 2015, respectively,
compared to $51,000 and $280,000 during the three and nine months ended September 30, 2014, respectively.
Activity in the valuation allowance for other real estate owned
was as follows for the periods indicated:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
(in thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Balance, beginning of period | |
$ | 3,233 | | |
$ | 3,205 | | |
$ | 3,255 | | |
$ | 4,675 | |
Provision for other real estate owned | |
| 0 | | |
| 276 | | |
| (6 | ) | |
| 450 | |
Charge-offs | |
| 0 | | |
| (199 | ) | |
| (16 | ) | |
| (1,843 | ) |
Balance, end of period | |
$ | 3,233 | | |
$ | 3,282 | | |
$ | 3,233 | | |
$ | 3,282 | |
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The amortized cost and fair value of debt securities
classified as available-for-sale at September 30, 2015 and December 31, 2014 were as follows:
| |
| | |
Gross | | |
Gross | | |
| |
| |
Amortized | | |
Unrealized | | |
Unrealized | | |
| |
(in thousands) | |
Cost | | |
Gains | | |
Losses | | |
Fair
value | |
September 30, 2015 | |
| | | |
| | | |
| | | |
| | |
Government sponsored enterprises | |
$ | 87,618 | | |
$ | 444 | | |
$ | 12 | | |
| 88,050 | |
Asset-backed securities | |
| 122,348 | | |
| 1,046 | | |
| 668 | | |
| 122,726 | |
Obligations of states and political subdivisions | |
| 32,935 | | |
| 555 | | |
| 16 | | |
| 33,474 | |
Total available-for-sale securities | |
$ | 242,901 | | |
$ | 2,045 | | |
$ | 696 | | |
$ | 244,250 | |
| |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | |
Government sponsored enterprises | |
$ | 57,002 | | |
$ | 240 | | |
$ | 143 | | |
| 57,099 | |
Asset-backed securities | |
| 106,726 | | |
| 855 | | |
| 1,119 | | |
| 106,462 | |
Obligations of states and political subdivisions | |
| 34,925 | | |
| 583 | | |
| 71 | | |
| 35,437 | |
Total available-for-sale securities | |
$ | 198,653 | | |
$ | 1,678 | | |
$ | 1,333 | | |
$ | 198,998 | |
All of the Company’s investment securities
are classified as available for sale. Agency bonds and notes, agency mortgage-backed securities and agency collateralized mortgage
obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and
the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan
Bank (FHLB), which are U.S. government-sponsored enterprises.
Other investments and securities primarily
consist of Federal Home Loan Bank stock, subordinated debt securities, and the Company’s interest in statutory trusts. These
securities are reported at cost in the amount of $9.2 million and $4.7 million as of September 30, 2015 and December 31, 2014,
respectively.
Debt securities with carrying values aggregating
approximately $208.9 million and $145.5 million at September 30, 2015 and December 31, 2014, respectively, were pledged to
secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt securities
classified as available-for-sale at September 30, 2015, by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
| |
Amortized | | |
Fair | |
(in thousands) | |
Cost | | |
Value | |
Due in one year or less | |
$ | 29,157 | | |
$ | 29,204 | |
Due after one year through five years | |
| 77,519 | | |
| 78,157 | |
Due after five years through ten years | |
| 13,043 | | |
| 13,332 | |
Due after ten years | |
| 834 | | |
| 831 | |
Total | |
| 120,553 | | |
| 121,524 | |
Asset-backed securities | |
| 122,348 | | |
| 122,726 | |
Total available-for-sale securities | |
$ | 242,901 | | |
$ | 244,250 | |
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Gross unrealized losses on debt securities
and the fair value of the related securities, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014 were as follows:
| |
Less
than 12 months | | |
12
months or more | | |
Total | | |
Total | |
| |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | | |
Fair | | |
Unrealized | |
(in thousands) | |
Value | | |
Losses | | |
Value | | |
Losses | | |
Value | | |
Losses | |
At September 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Government sponsored enterprises | |
$ | 17,015 | | |
$ | (12 | ) | |
$ | 0 | | |
$ | 0 | | |
$ | 17,015 | | |
$ | (12 | ) |
Asset-backed securities | |
| 25,801 | | |
| (136 | ) | |
| 35,885 | | |
| (532 | ) | |
| 61,686 | | |
| (668 | ) |
Obligations of states and political subdivisions | |
| 2,125 | | |
| (14 | ) | |
| 501 | | |
| (2 | ) | |
| 2,626 | | |
| (16 | ) |
Total | |
$ | 44,941 | | |
$ | (162 | ) | |
$ | 36,386 | | |
$ | (534 | ) | |
$ | 81,327 | | |
$ | (696 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
(in
thousands) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
At December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Government sponsored enterprises | |
$ | 2,983 | | |
$ | (4 | ) | |
$ | 17,862 | | |
$ | (139 | ) | |
$ | 20,845 | | |
$ | (143 | ) |
Asset-backed securities | |
| 10,314 | | |
| (50 | ) | |
| 45,445 | | |
| (1,069 | ) | |
| 55,759 | | |
| (1,119 | ) |
Obligations of states and political subdivisions | |
| 3,667 | | |
| (15 | ) | |
| 1,942 | | |
| (56 | ) | |
| 5,609 | | |
| (71 | ) |
Total | |
$ | 16,964 | | |
$ | (69 | ) | |
$ | 65,249 | | |
$ | (1,264 | ) | |
$ | 82,213 | | |
$ | (1,333 | ) |
The total available
for sale portfolio consisted of approximately 317 securities at September 30, 2015. The portfolio included 62 securities having
an aggregate fair value of $81.3 million that were in a loss position at September 30, 2015. Securities identified as temporarily
impaired which had been in a loss position for 12 months or longer totaled $36.4 million at fair value. The $696,000 aggregate
unrealized loss included in accumulated other comprehensive income at September 30, 2015 was caused by interest rate fluctuations.
The total available for sale portfolio consisted
of approximately 300 securities at December 31, 2014. The portfolio included 74 securities having an aggregate fair value of $82.2
million that were in a loss position at December 31, 2014. Securities identified as temporarily impaired which had been in a loss
position for 12 months or longer totaled $65.2 million at fair value. The $1.3 million aggregate unrealized loss included in accumulated
other comprehensive income at December 31, 2014 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 September
30, 2015 and December 31, 2014, respectively. 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 it will be required to sell such investment securities. There have
been no investment securities gains and losses which have been recognized in earnings for the three months ended September 30,
2015 and 2014.
The table below presents the components of
investment securities gains and losses which have been recognized in earnings.
| |
Three Months Ended September
30, | | |
Nine Months Ended September 30, | |
(in thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Gains realized on sales | |
$ | 0 | | |
$ | 0 | | |
$ | 8 | | |
$ | 0 | |
Losses realized on sales | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Other-than-temporary impairment recognized | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Investment securities gains | |
$ | 0 | | |
$ | 0 | | |
$ | 8 | | |
$ | 0 | |
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Mortgage Servicing Rights
At September 30, 2015, the Company was servicing
approximately $311.8 million of loans sold to the secondary market compared to $313.9 million at December 31, 2014, and $315.3
million at September 30, 2014. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $206,000
and $648,000 for the three and nine months ended September 30, 2015, respectively, compared to $226,000 and $672,000 for the three
and nine months ended September 30, 2014, respectively.
The table below presents changes in mortgage
servicing rights (MSRs) for the periods indicated.
| |
Three Months Ended September
30, | | |
Nine Months Ended September
30, | |
(in
thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Balance at beginning of period | |
$ | 2,727 | | |
$ | 2,911 | | |
$ | 2,762 | | |
$ | 3,036 | |
Originated mortgage servicing rights | |
| 76 | | |
| 95 | | |
| 303 | | |
| 217 | |
Changes in fair value: | |
| | | |
| | | |
| | | |
| | |
Due to change in model inputs and assumptions (1) | |
| 136 | | |
| 27 | | |
| 223 | | |
| 97 | |
Other changes in fair value (2) | |
| (165 | ) | |
| (166 | ) | |
| (514 | ) | |
| (483 | ) |
Balance at end of period | |
$ | 2,774 | | |
$ | 2,867 | | |
$ | 2,774 | | |
$ | 2,867 | |
(1) The change in fair value resulting from
changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed
assumptions primarily due to changes in interest rates.
(2) Other changes in fair value reflect changes
due to customer payments and passage of time.
The following key data and assumptions were
used in estimating the fair value of the Company’s MSRs as of the nine months ended September 30, 2015 and 2014:
| |
Nine Months Ended September
30, | |
| |
2015 | | |
2014 | |
Weighted average constant prepayment rate | |
| 10.06 | % | |
| 10.05 | % |
Weighted average note rate | |
| 3.92 | % | |
| 4.00 | % |
Weighted average discount rate | |
| 9.35 | % | |
| 9.18 | % |
Weighted average expected life (in years) | |
| 5.80 | | |
| 5.90 | |
Income taxes as a percentage of earnings before
income taxes as reported in the consolidated financial statements were 35.2% for the three months ended September 30, 2015 compared
to 33.8% for the three months ended September 30, 2014. Income taxes as a percentage of earnings before income taxes as reported
in the consolidated financial statements were 34.6% for the nine months ended September 30, 2015 compared to 34.4% for the nine
months ended September 30, 2014
The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, taxable income available
in carryback years, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of these temporary differences at September 30, 2015 and, therefore,
did not establish a valuation reserve.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Accumulated Other Comprehensive Income
(Loss)
The following details the change in the
components of the Company’s accumulated other comprehensive (loss) income for the nine months ended September 30, 2015 and
2014:
| |
Nine
months ended September 30, 2015 | |
| |
| | |
| | |
Accumulated | |
| |
| | |
Unrecognized Net | | |
Other | |
| |
Unrealized | | |
Pension and | | |
Comprehensive | |
| |
Gain (Loss) | | |
Postretirement | | |
(Loss) | |
(in
thousands) | |
on
Securities (1) | | |
Costs
(2) | | |
Income | |
Balance at beginning of period | |
$ | 214 | | |
$ | (1,442 | ) | |
$ | (1,228 | ) |
Other comprehensive income before reclassifications | |
| 996 | | |
| 0 | | |
| 996 | |
Amounts reclassified from accumulated other comprehensive income | |
| 8 | | |
| 108 | | |
| 116 | |
Current period other comprehensive income, before tax | |
| 1,004 | | |
| 108 | | |
| 1,112 | |
Income tax expense | |
| (382 | ) | |
| (40 | ) | |
| (422 | ) |
Current period other comprehensive income, net of tax | |
| 622 | | |
| 68 | | |
| 690 | |
Balance at end of period | |
$ | 836 | | |
$ | (1,374 | ) | |
$ | (538 | ) |
| |
| | | |
| | | |
| | |
| |
Nine
months ended September 30, 2014 | |
| |
| | |
| | |
Accumulated | |
| |
| | |
Unrecognized Net | | |
Other | |
| |
Unrealized | | |
Pension and | | |
Comprehensive | |
| |
Gain (Loss) | | |
Postretirement | | |
(Loss) | |
(in thousands) | |
on
Securities (1) | | |
Costs
(2) | | |
Income | |
Balance at beginning of period | |
$ | (1,491 | ) | |
$ | 722 | | |
$ | (769 | ) |
Other comprehensive income before reclassifications | |
| 1,939 | | |
| 0 | | |
| 1,939 | |
Amounts reclassified from accumulated other comprehensive income | |
| 0 | | |
| 59 | | |
| 59 | |
Current period other comprehensive income, before tax | |
| 1,939 | | |
| 59 | | |
| 1,998 | |
Income tax expense | |
| (737 | ) | |
| (23 | ) | |
| (760 | ) |
Current period other comprehensive income, net of tax | |
| 1,202 | | |
| 36 | | |
| 1,238 | |
Balance at end of period | |
$ | (289 | ) | |
$ | 758 | | |
$ | 469 | |
(1) The pre-tax amounts reclassified from accumulated other
comprehensive income (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 (loss) are included in the computation of net periodic pension cost.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
| (8) | Employee Benefit Plans |
Employee Benefits
Employee benefits charged to operating
expenses are summarized in the table below for the periods indicated.
| |
Three Months Ended September
30, | | |
Nine Months Ended September
30, | |
(in
thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Payroll taxes | |
$ | 261 | | |
$ | 272 | | |
$ | 860 | | |
$ | 840 | |
Medical plans | |
| 491 | | |
| 510 | | |
| 1,462 | | |
| 1,512 | |
401k match and profit sharing | |
| 225 | | |
| 159 | | |
| 720 | | |
| 488 | |
Pension plan | |
| 348 | | |
| 236 | | |
| 1,044 | | |
| 708 | |
Other | |
| 56 | | |
| 42 | | |
| 99 | | |
| 81 | |
Total employee benefits | |
$ | 1,381 | | |
$ | 1,219 | | |
$ | 4,185 | | |
$ | 3,629 | |
The Company’s profit-sharing plan
includes a matching 401k portion, in which the Company matches the first 3% of eligible employee contributions. The Company made
annual contributions in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension
plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown.
In addition, employees were able to make additional tax-deferred contributions.
Pension
The Company provides a noncontributory
defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension
plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities
over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might
not be made in a particular year. The pension contribution for the 2015 plan year of $716,000 is equal to the minimum annual required
contribution and was paid April 15, 2015, which was determined under the pension relief provision of Moving Ahead for Progress
in the 21st Century Act (MAP 21) and Highway and Transportation Funding Act of 2014 (HATFA). Without the pension relief
provisions, the minimum required contribution for the 2015 plan year would have been approximately $1,034,000.
Components of Net Pension Cost and Other
Amounts Recognized in Accumulated Other Comprehensive Income
The following items are components of net
pension cost for the periods indicated:
| |
Estimated | | |
Actual | |
(in
thousands) | |
2015 | | |
2014 | |
Service cost - benefits earned during the year | |
$ | 1,325 | | |
$ | 981 | |
Interest costs on projected benefit obligations | |
| 838 | | |
| 732 | |
Expected return on plan assets | |
| (957 | ) | |
| (872 | ) |
Expected administrative expenses | |
| 40 | | |
| 40 | |
Amortization of prior service cost | |
| 79 | | |
| 79 | |
Amortization of unrecognized net loss | |
| 66 | | |
| 0 | |
Net periodic pension expense | |
$ | 1,391 | | |
$ | 960 | |
| |
| | | |
| | |
Pension expense - three months ended September 30, (actual) | |
$ | 348 | | |
$ | 236 | |
Pension expense - nine months ended September 30, (actual) | |
$ | 1,044 | | |
$ | 708 | |
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The Company’s stock option plan provides
for the grant of options to purchase up to 592,168 shares of the Company’s common stock to officers and other key employees
of the Company and its subsidiaries. All options have been granted at exercise prices equal to fair value and vest over periods
ranging from four to five years.
The following table summarizes the Company’s
stock option activity:
| |
| | |
| | |
Weighted | | |
| |
| |
| | |
Weighted | | |
Average | | |
Aggregate | |
| |
Number | | |
average | | |
Contractual | | |
Intrinsic | |
| |
of | | |
Exercise | | |
Term | | |
Value | |
| |
Shares | | |
Price | | |
(in
years) | | |
($000) | |
Outstanding, beginning of period | |
| 100,361 | | |
$ | 21.56 | | |
| | | |
| | |
Granted | |
| 0 | | |
| 0.00 | | |
| | | |
| | |
Exercised | |
| 0 | | |
| 0.00 | | |
| | | |
| | |
Forfeited or expired | |
| (33,929 | ) | |
| 21.66 | | |
| | | |
| | |
Outstanding, September 30, 2015 | |
| 66,432 | | |
$ | 21.51 | | |
| 1.70 | | |
$ | 0.00 | |
Exercisable, September 30, 2015 | |
| 58,949 | | |
$ | 22.21 | | |
| 1.50 | | |
$ | 0.00 | |
Options have been adjusted to reflect a 4% stock dividend paid
on July 1, 2015.
Total stock-based compensation expense
was $1,000 and $5,000 for the three and nine months ended September 30, 2015, respectively, compared to $5,000 and $15,000 for
the three and nine months ended September 30, 2014, respectively. As of September 30, 2015, the total unrecognized compensation
expense related to non-vested stock awards was $25,000 and the related weighted average period over which it is expected to be
recognized is approximately 1.0 years.
Basic earnings per share is computed by
dividing income available to shareholders by the weighted average number of shares outstanding during the year. Diluted earnings
per share gives effect to all dilutive potential shares that were outstanding during the year. The calculations of basic and diluted
earnings per share are as follows for the periods indicated:
| |
Three Months Ended September
30, | | |
Nine Months Ended September
30, | |
(dollars
in thousands, except per share data) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Basic earnings per share: | |
| | | |
| | | |
| | | |
| | |
Net income available to shareholders | |
$ | 2,539 | | |
$ | 1,568 | | |
$ | 6,605 | | |
$ | 5,653 | |
Basic earnings per share | |
$ | 0.47 | | |
$ | 0.29 | | |
$ | 1.21 | | |
$ | 1.04 | |
Diluted earnings per share: | |
| | | |
| | | |
| | | |
| | |
Net income available to shareholders | |
$ | 2,539 | | |
$ | 1,568 | | |
$ | 6,605 | | |
$ | 4,085 | |
Average shares outstanding | |
| 5,443,344 | | |
| 5,443,344 | | |
| 5,443,344 | | |
| 5,443,344 | |
Effect of dilutive stock options | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Average shares outstanding including dilutive stock options | |
| 5,443,344 | | |
| 5,443,344 | | |
| 5,443,344 | | |
| 5,443,344 | |
Diluted earnings per share | |
$ | 0.47 | | |
| 0.29 | | |
$ | 1.21 | | |
| 1.04 | |
Under the treasury stock method, outstanding
stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of
any unamortized compensation expense, exceeds the option price during the period, except when the Company has a loss from continuing
operations available to shareholders. In addition, proceeds from the assumed
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
exercise of dilutive options along with
the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the
period.
Options
to purchase 66,432 shares during the three and nine months ended September 30, 2015, compared to 101,330 shares during the three
and nine months ended September 30, 2014 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.
| (11) | Fair Value Measurements |
The Company uses fair value measurements
to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820, Fair
Value Measurements and Disclosures, defines fair value, establishes a framework for the measurement of fair value, and enhances
disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities
to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified
the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.
In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. As of September 30, 2015 and December 31, 2014, respectively, there were no transfers into or out of Levels
1-3.
The fair value hierarchy is
as follows:
Level 1 – Inputs are unadjusted
quoted prices for identical assets or liabilities in active markets.
Level 2 – Inputs other
than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might
include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable
at commonly quoted intervals.
Level 3 – Inputs are unobservable
inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s
best information and assumptions that a market participant would consider.
ASC Topic 820 also provides
guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased
and on identifying circumstances when a transaction may not be considered orderly.
The Company is required to disclose
assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring
basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate, long-lived
assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may
have occurred.
Valuation Methods
for Instruments Measured at Fair Value on a Recurring Basis
Following is a description of
the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:
Available-for-Sale Securities
The fair value measurements of
the Company’s investment securities are determined by a third party pricing service which considers observable data that
may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data,
market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair
value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness.
Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Mortgage Servicing Rights
The fair value of mortgage
servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate,
constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation
model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market
participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost
to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value
of estimated future net servicing income. The Company classifies its servicing rights as Level 3.
| |
| | |
Fair
Value Measurements | |
| |
| | |
Quoted Prices | | |
| | |
| |
| |
| | |
in Active | | |
| | |
| |
| |
| | |
Markets for | | |
Other | | |
Significant | |
| |
| | |
Identical | | |
Observable | | |
Unobservable | |
| |
| | |
Assets | | |
Inputs | | |
Inputs | |
(in
thousands) | |
Fair
Value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
September 30, 2015 | |
| | | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Government sponsored enterprises | |
$ | 88,050 | | |
$ | 0 | | |
$ | 88,050 | | |
$ | 0 | |
Asset-backed securities | |
| 122,726 | | |
| 0 | | |
| 122,726 | | |
| 0 | |
Obligations of states and political subdivisions | |
| 33,474 | | |
| 0 | | |
| 33,474 | | |
| 0 | |
Mortgage servicing rights | |
| 2,774 | | |
| 0 | | |
| 0 | | |
| 2,774 | |
Total | |
$ | 247,024 | | |
$ | 0 | | |
$ | 244,250 | | |
$ | 2,774 | |
| |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Government sponsored enterprises | |
$ | 57,099 | | |
$ | 0 | | |
| 57,099 | | |
| 0 | |
Asset-backed securities | |
| 106,462 | | |
| 0 | | |
| 106,462 | | |
| 0 | |
Obligations of states and political subdivisions | |
| 35,437 | | |
| 0 | | |
| 35,437 | | |
| 0 | |
Mortgage servicing rights | |
| 2,762 | | |
| 0 | | |
| 0 | | |
| 2,762 | |
Total | |
$ | 201,760 | | |
$ | 0 | | |
$ | 198,998 | | |
$ | 2,762 | |
The changes in Level 3 assets
and liabilities measured at fair value on a recurring basis are summarized as follows:
| |
Fair Value Measurements
Using | |
| |
Significant Unobservable
Inputs | |
| |
(Level 3) | |
| |
Mortgage
Servicing Rights | |
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
(in thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Balance at beginning of period | |
$ | 2,727 | | |
$ | 2,911 | | |
$ | 2,762 | | |
$ | 3,036 | |
Total gains or losses (realized/unrealized): | |
| | | |
| | | |
| | | |
| | |
Included in earnings | |
| (29 | ) | |
| (139 | ) | |
| (291 | ) | |
| (386 | ) |
Included in other comprehensive income | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Purchases | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Sales | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Issues | |
| 76 | | |
| 95 | | |
| 303 | | |
| 217 | |
Settlements | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Balance at end of period | |
$ | 2,774 | | |
$ | 2,867 | | |
$ | 2,774 | | |
$ | 2,867 | |
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Total gains (losses) included
in earnings attributable to the change in unrealized gains or losses related to assets still held were $136,000 and $223,000 for
the three and nine months ended September 30, 2015, respectively, compared to $27,000 and $97,000 for the three and nine months
ended September 30, 2014, respectively. MSR values have been falling steadily since 2014. The lower values are primarily related
to faster prepay speed assumptions, consistent with lower long term interest rates. (See table below) The cost of compliance with
new government regulations also has had an impact.
| |
Quantitative
Information about Level 3 Fair Value Measurements | |
| | |
| |
| |
Valuation
Technique | |
Unobservable
Inputs | |
Input
Value | |
| |
| |
| |
Nine
Months Ended September 30, | |
| |
| |
| |
2015 | | |
2014 | |
Mortgage servicing rights | |
Discounted cash flows | |
Weighted average constant prepayment rate | |
| 10.06 | % | |
| 10.05 | % |
| |
| |
Weighted average discount rate | |
| 9.35 | % | |
| 9.18 | % |
| |
| |
Weighted average expected life (in years) | |
| 5.80 | | |
| 5.90 | |
Valuation methods for instruments
measured at fair value on a nonrecurring basis
Following is a description of
the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:
Impaired Loans
The Company does not record loans
at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally
based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting
the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated,
a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level
3. As of September 30, 2015, the Company identified $6.8 million in impaired loans that had specific allowances for losses aggregating
$2.0 million. Related to these loans, there was $695,000 and $1.0 million in charge-offs recorded during the three and nine months
ended September 30, 2015, respectively. As of September 30, 2014, the Company identified $14.7 million in impaired loans that had
specific allowances for losses aggregating $4.7 million. Related to these loans, there was $204,000 and $2.1 million in charge-offs
recorded during the three and nine months ended September 30, 2014, respectively.
Other Real Estate and Repossessed
Assets
Other real estate 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. Other
real estate assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less
estimated selling costs. The Company relies on external appraisals and assessment of property values by internal staff. In the
case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment
based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and
the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are
classified as Level 3.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
| |
Fair Value Measurements Using | |
| |
| | |
Quoted Prices | | |
| | |
| | |
Three | | |
Nine | |
| |
| | |
in Active | | |
| | |
| | |
Months | | |
Months | |
| |
| | |
Markets for | | |
Other | | |
Significant | | |
Ended | | |
Ended | |
| |
| | |
Identical | | |
Observable | | |
Unobservable | | |
September 30, | | |
September 30, | |
| |
Total | | |
Assets | | |
Inputs | | |
Inputs | | |
Total Gains | | |
Total Gains | |
(in
thousands) | |
Fair
Value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | | |
(Losses)* | | |
(Losses)* | |
September 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Impaired loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial,
financial, & agricultural | |
$ | 462 | | |
$ | 0 | | |
$ | 0 | | |
$ | 462 | | |
$ | (540 | ) | |
$ | (561 | ) |
Real estate construction
- residential | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | |
Real estate construction
- commercial | |
| 45 | | |
| 0 | | |
| 0 | | |
| 45 | | |
| 0 | | |
| 0 | |
Real estate mortgage -
residential | |
| 3,618 | | |
| 0 | | |
| 0 | | |
| 3,618 | | |
| (61 | ) | |
| (267 | ) |
Real estate mortgage -
commercial | |
| 572 | | |
| 0 | | |
| 0 | | |
| 572 | | |
| (89 | ) | |
| (118 | ) |
Consumer | |
| 121 | | |
| 0 | | |
| 0 | | |
| 121 | | |
| (5 | ) | |
| (54 | ) |
Total | |
$ | 4,818 | | |
$ | 0 | | |
$ | 0 | | |
$ | 4,818 | | |
$ | (695 | ) | |
$ | (1,000 | ) |
Other
real estate and foreclosed assets | |
$ | 15,148 | | |
$ | 0 | | |
$ | 0 | | |
$ | 15,148 | | |
$ | (80 | ) | |
$ | 112 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
September 30, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Impaired loans: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial, financial,
& agricultural | |
$ | 1,364 | | |
$ | 0 | | |
$ | 0 | | |
$ | 1,364 | | |
$ | (28 | ) | |
$ | (150 | ) |
Real estate construction
- residential | |
| 1,767 | | |
| 0 | | |
| 0 | | |
| 1,767 | | |
| 0 | | |
| (60 | ) |
Real estate construction
- commercial | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| 0 | | |
| (491 | ) |
Real estate mortgage -
residential | |
| 3,795 | | |
| 0 | | |
| 0 | | |
| 3,795 | | |
| (41 | ) | |
| (179 | ) |
Real estate mortgage -
commercial | |
| 2,887 | | |
| 0 | | |
| 0 | | |
| 2,887 | | |
| (131 | ) | |
| (1,200 | ) |
Consumer | |
| 213 | | |
| 0 | | |
| 0 | | |
| 213 | | |
| (4 | ) | |
| (74 | ) |
Total | |
$ | 10,026 | | |
$ | 0 | | |
$ | 0 | | |
$ | 10,026 | | |
$ | (204 | ) | |
$ | (2,154 | ) |
Other
real estate and repossessed assets | |
$ | 12,438 | | |
$ | 0 | | |
$ | 0 | | |
$ | 12,438 | | |
$ | (203 | ) | |
$ | (1,733 | ) |
* Total gains (losses) reported
for other real estate and repossessed assets includes charge-offs, valuation write downs, and net losses taken during the periods
reported.
| (12) | Fair Value of Financial Instruments |
The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
Loans
The
fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans
could be made to borrowers with similar credit ratings and for the same remaining maturities. The net carrying amount
of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations,
or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price
concept of fair value prescribed by ASC Topic 820.
Investment Securities
A detailed description of the
fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided
in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in
the notes on Investment Securities.
Federal Home Loan Bank
(FHLB) Stock
Ownership of equity securities
of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair
value.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Federal Funds Sold,
Cash, and Due from Banks
The carrying amounts of short-term
federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due
from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell classified as short-term
generally mature in 90 days or less.
Mortgage Servicing
Rights
The fair value of mortgage servicing
rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant
prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model
that calculates the present value of estimated future net servicing income. The
model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment
speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.
Cash
Surrender Value - Life Insurance
The fair
value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company
would receive the cash surrender value which equals the carrying amount.
Accrued
Interest Receivable and Payable
For accrued
interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these
financial instruments.
Deposits
The fair
value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is
equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities
Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury
For securities
sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable
estimate of fair value, as such instruments reprice in a short time period.
Subordinated Notes and
Other Borrowings
The fair value of subordinated
notes and other borrowings is based on the discounted value of contractual cashflows. The discount rate is estimated using the
rates currently offered for other borrowed money of similar remaining maturities.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
A summary of the carrying amounts and fair
values of the Company’s financial instruments at September 30, 2015 and December 31, 2014 is as follows:
| |
| | |
| | |
September 30, 2015 | |
| |
| | |
| | |
Fair
Value Measurements | |
| |
| | |
| | |
Quoted Prices | | |
| | |
| |
| |
| | |
| | |
in Active | | |
| | |
Net | |
| |
| | |
| | |
Markets for | | |
Other | | |
Significant | |
| |
September
30, 2015 | | |
Identical | | |
Observable | | |
Unobservable | |
| |
Carrying | | |
Fair | | |
Assets | | |
Inputs | | |
Inputs | |
(in
thousands) | |
Amount | | |
Value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
$ | 17,664 | | |
$ | 17,664 | | |
$ | 17,664 | | |
$ | 0 | | |
$ | 0 | |
Federal funds sold and overnight interest-bearing deposits | |
| 14,463 | | |
| 14,463 | | |
| 14,463 | | |
| 0 | | |
| 0 | |
Investment in available-for-sale securities | |
| 244,250 | | |
| 244,250 | | |
| 0 | | |
| 244,250 | | |
| 0 | |
Loans, net | |
| 870,228 | | |
| 868,077 | | |
| 0 | | |
| 0 | | |
| 868,077 | |
Investment in FHLB stock | |
| 4,590 | | |
| 4,590 | | |
| 0 | | |
| 4,590 | | |
| 0 | |
Mortgage servicing rights | |
| 2,774 | | |
| 2,774 | | |
| 0 | | |
| 0 | | |
| 2,774 | |
Cash surrender value - life insurance | |
| 2,329 | | |
| 2,329 | | |
| 0 | | |
| 2,329 | | |
| 0 | |
Accrued interest receivable | |
| 4,909 | | |
| 4,909 | | |
| 4,909 | | |
| 0 | | |
| 0 | |
| |
$ | 1,161,207 | | |
$ | 1,159,056 | | |
$ | 37,036 | | |
$ | 251,169 | | |
$ | 870,851 | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits: | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-interest bearing demand | |
$ | 209,714 | | |
$ | 209,714 | | |
$ | 209,714 | | |
$ | 0 | | |
$ | 0 | |
Savings, interest checking and money market | |
| 452,878 | | |
| 452,878 | | |
| 452,878 | | |
| 0 | | |
| 0 | |
Time deposits | |
| 309,576 | | |
| 310,674 | | |
| 0 | | |
| 0 | | |
| 310,674 | |
Federal funds purchased and securities sold under agreements to repurchase | |
| 27,762 | | |
| 27,762 | | |
| 27,762 | | |
| 0 | | |
| 0 | |
Subordinated notes | |
| 49,486 | | |
| 35,056 | | |
| 0 | | |
| 35,056 | | |
| 0 | |
Federal Home Loan Bank advances | |
| 80,000 | | |
| 82,572 | | |
| 0 | | |
| 82,572 | | |
| 0 | |
Accrued interest payable | |
| 378 | | |
| 378 | | |
| 378 | | |
| 0 | | |
| 0 | |
| |
$ | 1,129,794 | | |
$ | 1,119,034 | | |
$ | 690,732 | | |
$ | 117,628 | | |
$ | 310,674 | |
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
| |
| | |
| | |
December 31, 2014 | |
| |
| | |
| | |
Fair
Value Measurements | |
| |
| | |
| | |
Quoted Prices | | |
| | |
| |
| |
| | |
| | |
in Active | | |
| | |
Net | |
| |
| | |
| | |
Markets for | | |
Other | | |
Significant | |
| |
December
31, 2014 | | |
Identical | | |
Observable | | |
Unobservable | |
| |
Carrying | | |
Fair | | |
Assets | | |
Inputs | | |
Inputs | |
(in
thousands) | |
amount | | |
value | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
Assets: | |
| | | |
| | | |
| | | |
| | | |
| | |
Cash and due from banks | |
$ | 22,364 | | |
$ | 22,364 | | |
$ | 22,364 | | |
$ | 0 | | |
$ | 0 | |
Federal funds sold and overnight interest-bearing deposits | |
| 20,445 | | |
| 20,445 | | |
| 20,445 | | |
| 0 | | |
| 0 | |
Investment in available-for-sale securities | |
| 198,998 | | |
| 198,998 | | |
| 0 | | |
| 198,998 | | |
| 0 | |
Loans, net | |
| 852,114 | | |
| 854,062 | | |
| 0 | | |
| 0 | | |
| 854,062 | |
Investment in FHLB stock | |
| 3,075 | | |
| 3,075 | | |
| 0 | | |
| 3,075 | | |
| 0 | |
Mortgage servicing rights | |
| 2,762 | | |
| 2,762 | | |
| 0 | | |
| 0 | | |
| 2,762 | |
Cash surrender value - life insurance | |
| 2,284 | | |
| 2,284 | | |
| 0 | | |
| 2,284 | | |
| 0 | |
Accrued interest receivable | |
| 4,816 | | |
| 4,816 | | |
| 4,816 | | |
| 0 | | |
| 0 | |
| |
$ | 1,106,858 | | |
$ | 1,108,806 | | |
$ | 47,625 | | |
$ | 204,357 | | |
$ | 856,824 | |
Liabilities: | |
| | | |
| | | |
| | | |
| | | |
| | |
Deposits: | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-interest bearing demand | |
$ | 207,700 | | |
$ | 207,700 | | |
$ | 207,700 | | |
$ | 0 | | |
$ | 0 | |
Savings, interest checking and money market | |
| 442,059 | | |
| 442,059 | | |
| 442,059 | | |
| 0 | | |
| 0 | |
Time deposits | |
| 319,755 | | |
| 321,041 | | |
| 0 | | |
| 0 | | |
| 321,041 | |
Federal funds purchased and securities sold under agreements to repurchase | |
| 17,970 | | |
| 17,970 | | |
| 17,970 | | |
| 0 | | |
| 0 | |
Subordinated notes | |
| 49,486 | | |
| 33,371 | | |
| 0 | | |
| 33,371 | | |
| 0 | |
Federal Home Loan Bank advances | |
| 43,000 | | |
| 44,396 | | |
| 0 | | |
| 44,396 | | |
| 0 | |
Accrued interest payable | |
| 373 | | |
| 373 | | |
| 373 | | |
| 0 | | |
| 0 | |
| |
$ | 1,080,343 | | |
$ | 1,066,910 | | |
$ | 668,102 | | |
$ | 77,767 | | |
$ | 321,041 | |
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.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
| (13) | Repurchase Reserve Liability |
The Company’s repurchase reserve
liability for estimated losses incurred on sold loans was $160,000 at September 30, 2015 and December 31, 2014, respectively. This
liability represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans
originated for sale that may arise from representation and warranty claims that could relate to a variety of issues, including
but not limited to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines.
At September 30, 2015, the Company was servicing 3,024 loans sold to the secondary market with a balance of approximately $311.8
million compared to 3,057 loans sold with a balance of approximately $313.9 million at December 31, 2014.
| (14) | 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 September 30, 2015, no amounts have been accrued for any estimated losses for these financial
instruments.
The contractual amounts of off-balance-sheet
financial instruments were as follows as of the dates indicated:
| |
September 30, | | |
December 31, | |
(in thousands) | |
2015 | | |
2014 | |
Commitments to extend credit | |
$ | 147,341 | | |
$ | 135,137 | |
Commitments to originate residential first and second mortgage loans | |
| 5,097 | | |
| 1,640 | |
Standby letters of credit | |
| 1,432 | | |
| 1,621 | |
Total | |
| 153,870 | | |
| 138,398 | |
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 September 30, 2015.
Pending Litigation
The Company and its subsidiaries are defendants
in various legal actions incidental to the Company’s past and current business activities. Based on the Company’s analysis,
and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably possible
that these legal actions will materially adversely affect the Company’s consolidated financial condition or results of operations
in the near term. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably
estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss
is deemed probable or an amount can be estimated.
Item 2 - Management’s Discussion
and Analysis of Financial Condition
And Results of Operations
Forward-Looking Statements
This report contains certain forward-looking
statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of
the Company, Hawthorn Bancshares, Inc., and its subsidiaries, including, without limitation:
| · | statements that are not historical in nature, and |
| · | statements preceded by, followed by or that include the words believes, expects, may,
will, should, could, anticipates, estimates, intends or similar expressions. |
Forward-looking statements are not guarantees
of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from
those contemplated by the forward-looking statements due to, among others, the following factors:
| · | competitive pressures among financial services companies may increase significantly, |
| · | changes in the interest rate environment may reduce interest margins, |
| · | general economic conditions, either nationally or in Missouri, may be less favorable than expected
and may adversely affect the quality of our loans and other assets, |
| · | increases in non-performing assets in the Company’s loan portfolios and adverse economic
conditions may necessitate increases to our provisions for loan losses, |
| · | costs or difficulties related to the integration of the business of the Company and its acquisition
targets may be greater than expected, |
| · | legislative or regulatory changes may adversely affect the business in which the Company and its
subsidiaries are engaged, and |
| · | changes may occur in the securities markets. |
We have described under the caption Risk
Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and in other reports filed
with the SEC from time to time, additional factors that could cause actual results to be materially different from those described
in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You
are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.
Overview
Crucial to the Company’s
community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through
the branch network of its subsidiary bank, the Company, with $1.2 billion in assets at September 30, 2015, 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 (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 communities in and surrounding Jefferson
City, Columbia, Clinton, Warsaw, Springfield, Branson, and Lee's Summit, Missouri.
The Company's primary
source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company's business
is commercial, commercial real estate development, and mortgage lending. The Company's income from mortgage brokerage activities
is directly dependent on mortgage rates and the level of home purchases and refinancings.
The success of the Company's
growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans and deposits
at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated.
The Company's financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce
additional financial products and services by expanding new and
existing customer relationships,
utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends
on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable
and despite economic conditions being beyond its control.
The Company’s subsidiary
bank is a full-service bank conducting a general banking business, offering its customers checking and savings accounts, debit
cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial
loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the
Bank provides trust services.
The deposit accounts
of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the
Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted
by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally
for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination
by the Board of Governors of the Federal Reserve System.
CRITICAL ACCOUNTING
POLICIES
The following accounting
policies are considered most critical to the understanding of the Company’s financial condition and results of operations.
These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that
are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or
prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and
depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations
could reasonably be expected. The impact and any associated risks related to the critical accounting policies on the business operations
are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, where
such policies affect the reported and expected financial results.
Allowance for Loan
Losses
Management has identified
the accounting policy related to the allowance for loan losses as critical to the understanding of the Company's results of operations,
since the application of this policy requires significant management assumptions and estimates that could result in materially
different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology
used in establishing the allowance and the impact of any associated risks related to these policies on the Company’s business
operations is provided in note 1 to the Company’s unaudited consolidated financial statements and is also discussed in the
Lending and Credit Management section below. Many of the loans are deemed collateral dependent for purposes of the measurement
of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market
conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility
can have an impact on the financial performance of the Company.
Other Real Estate
and Repossessed Assets
Other real estate 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
assets are initially recorded as held for sale at the fair value of the collateral less estimated selling costs. Any adjustment
is recorded as a charge-off against the allowance for loan losses. The Company relies on external appraisals and assessment of
property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including
external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure,
valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The write-downs are recorded
as other real estate expense, net. The Company establishes a valuation allowance related to other real estate owned on an asset-by-asset
basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the cost
of the property.
SELECTED CONSOLIDATED
FINANCIAL DATA
The following table presents
selected consolidated financial information for the Company as of and for each of the three and nine months ended September 30,
2015 and 2014, respectively. The selected consolidated financial data should be read in conjunction with the unaudited consolidated
financial statements of the Company, including the related notes, presented elsewhere herein.
Selected Financial Data | |
| |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September
30, | | |
September
30, | |
(In thousands, except per share data) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Per Share Data | |
| | |
| | |
| | |
| |
Basic earnings per share | |
$ | 0.47 | | |
$ | 0.29 | | |
$ | 1.21 | | |
$ | 1.04 | |
Diluted earnings per share | |
| 0.47 | | |
| 0.29 | | |
| 1.21 | | |
| 1.04 | |
Dividends paid on common stock | |
| 262 | | |
| 252 | | |
| 785 | | |
| 755 | |
Book value per share | |
| | | |
| | | |
| 16.00 | | |
| 14.79 | |
Market price per share | |
| | | |
| | | |
| 13.97 | | |
| 13.22 | |
Selected Ratios | |
| | | |
| | | |
| | | |
| | |
(Based on average balance sheets) | |
| | | |
| | | |
| | | |
| | |
Return on total assets | |
| 0.84 | % | |
| 0.54 | % | |
| 0.74 | % | |
| 0.65 | % |
Return on stockholders' equity | |
| 11.82 | % | |
| 7.71 | % | |
| 10.55 | % | |
| 9.69 | % |
Stockholders' equity to total assets | |
| 7.09 | % | |
| 6.97 | % | |
| 7.00 | % | |
| 6.74 | % |
Efficiency ratio (1) | |
| 69.62 | % | |
| 80.68 | % | |
| 72.25 | % | |
| 76.08 | % |
| |
| | | |
| | | |
| | | |
| | |
(Based on end-of-period data) | |
| | | |
| | | |
| | | |
| | |
Stockholders' equity to assets | |
| | | |
| | | |
| 7.09 | % | |
| 6.96 | % |
Total Capital Ratio (to risk weighted assets) | |
| | | |
| | | |
| 14.91 | % | |
| 15.68 | % |
Tier 1 Capital Ratio (to risk weighted assets) | |
| | | |
| | | |
| 12.01 | % | |
| 12.02 | % |
Tier 1 Capital Ratio (to average assets) (2) | |
| | | |
| | | |
| 9.70 | % | |
| 9.18 | % |
Common Equity Tier 1 Capital (to risk weighted assets) (3) | |
| | | |
| | | |
| 9.02 | % | |
| NA | % |
| (1) | Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue
includes net interest income and non-interest income. |
| (2) | Tier I Capital (leverage) Ratio is calculated by dividing Tier 1 capital by average total consolidated
assets. |
| (3) | Calculated under Basel III rules, which became effective January 1, 2015. |
RESULTS OF OPERATIONS ANALYSIS
The Company
has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, the
Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting
period. There can be no assurances that actual results will not differ from those estimates.
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
(In
thousands) | |
2015 | | |
2014 | | |
$
Change | | |
%
Change | | |
2015 | | |
2014 | | |
$
Change | | |
%
Change | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Net interest income | |
$ | 10,558 | | |
$ | 9,956 | | |
$ | 602 | | |
| 6.0 | % | |
$ | 30,520 | | |
$ | 29,457 | | |
$ | 1,063 | | |
| 3.6 | % |
Provision for loan losses | |
| - | | |
| - | | |
| - | | |
| - | | |
| 250 | | |
| - | | |
| 250 | | |
| - | |
Noninterest income | |
| 2,336 | | |
| 2,313 | | |
| 23 | | |
| 1.0 | | |
| 6,785 | | |
| 6,582 | | |
| 203 | | |
| 3.1 | |
Noninterest expense | |
| 8,977 | | |
| 9,899 | | |
| (922 | ) | |
| (9.3 | ) | |
| 26,953 | | |
| 27,417 | | |
| (464 | ) | |
| (1.7 | ) |
Income before income taxes | |
| 3,917 | | |
| 2,370 | | |
| 1,547 | | |
| 65.3 | | |
| 10,102 | | |
| 8,622 | | |
| 1,480 | | |
| 17.2 | |
Income tax expense | |
| 1,378 | | |
| 802 | | |
| 576 | | |
| 71.8 | | |
| 3,497 | | |
| 2,969 | | |
| 528 | | |
| 17.8 | |
Net income | |
$ | 2,539 | | |
$ | 1,568 | | |
$ | 971 | | |
| 61.9 | % | |
$ | 6,605 | | |
$ | 5,653 | | |
$ | 952 | | |
| 16.8 | % |
Business Events
For the seventh consecutive year, on July 1, 2015, the Company distributed a four percent stock dividend to shareholders
of record at the close of business on June 15, 2015. For all periods presented, share information, including basic and diluted
earnings per share, has been adjusted retroactively to reflect the stock dividend.
Consolidated net
income increased $971,000 to $2.5 million, or $0.47 per diluted share, for the three months ended September 30, 2015 compared
to $1.6 million, or $0.29 per diluted share, for the three months ended September 30, 2014. For the three months ended September
30, 2015, the return on average assets was 0.84%, the return on average stockholders’ equity was 11.82%, and the efficiency
ratio was 69.62%.
Consolidated net income
increased $952,000 to $6.6 million, or $1.21 per diluted share, for the nine months ended September 30, 2015 compared to $5.7 million,
or $1.04 per diluted share, for the nine months ended September 30, 2014. For the nine months ended September 30, 2015, the return
on average assets was 0.74%, the return on average stockholders’ equity was 10.55%, and the efficiency ratio was 72.25%.
Net interest income
was $10.6 million and $30.5 million for the three and nine months ended September 30, 2015, respectively, compared to $10.0 million
and $29.4 million for the three and nine months ended September 30, 2014, respectively. The net interest margin (expressed on a
fully taxable equivalent basis) increased to 3.78% for the three months ended September 30, 2015 compared to 3.71% for the three
months ended September 30, 2014, respectively, and remained consistent at 3.71% for both the nine months ended September 30, 2015
and 2014, respectively. These changes are discussed in greater detail under the Average Balance Sheets and Rate and Volume Analysis
section below.
No provision for
loan losses was recorded for the third quarter of 2015 and $250,000 was recorded for the nine months ended September 30,
2015 compared to no provision for the three and nine months ended September 30, 2014. The increase over 2014 was primarily due
to an increase in specific reserves primarily related to two loan relationships.
The Company’s net
charge-offs were $740,000, or 0.08% of average loans, for the three months ended September 30, 2015 compared to $117,000, or 0.01%
of average loans, for the three months ended September 30, 2014. The Company’s net charge-offs were $103,000 for the nine
months ended September 30, 2015, or 0.01% of average loans, compared to net charge-offs of $1.7 million, or 0.20% of average loans,
for the nine months ended September 30, 2014. Non-performing loans totaled $14.6 million, or 1.66% of total loans, at September
30, 2015 compared to $36.0 million, or 4.18% of total loans, at December 31, 2014, and $35.7 million, or 4.15% of total loans,
at September 30, 2014. These changes are discussed in greater detail under the Lending and Credit Management section below.
Non-interest income increased
$23,000, or 1.0%, for the three months ended September 30, 2015, and increased $203,000, or 3.1%, for the nine months ended September
30, 2015 compared to the three and nine months ended September 30, 2014, respectively. These changes are discussed in greater detail
below under Non-interest Income.
Non-interest expense decreased
$922,000, or 9.3%, for the three months ended September 30, 2015, and decreased $464,000, or 1.7%, for the nine months ended September
30, 2015 compared to the three and nine months ended September 30, 2014, respectively. These changes are discussed in greater detail
below under Non-interest Expense.
Average Balance
Sheets
Net interest income
is the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit gathering activities.
It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and
interest bearing liabilities. The following table presents average balance sheets, net interest income, average yields of earning
assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent
basis for each of the periods ended September 30, 2015 and 2014, respectively.
| |
Three
Months Ended September 30, | |
(In thousands) | |
2015 | | |
2014 | |
| |
| | |
Interest | | |
Rate | | |
| | |
Interest | | |
Rate | |
| |
Average | | |
Income/ | | |
Earned/ | | |
Average | | |
Income/ | | |
Earned/ | |
| |
Balance | | |
Expense(1) | | |
Paid(1) | | |
Balance | | |
Expense(1) | | |
Paid(1) | |
ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: (2) (4) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 165,978 | | |
$ | 1,938 | | |
| 4.63 | % | |
$ | 146,143 | | |
$ | 1,749 | | |
| 4.75 | % |
Real estate construction - residential | |
| 14,102 | | |
| 385 | | |
| 10.83 | | |
| 21,603 | | |
| 260 | | |
| 4.77 | |
Real estate construction - commercial | |
| 41,977 | | |
| 709 | | |
| 6.70 | | |
| 63,071 | | |
| 657 | | |
| 4.13 | |
Real estate mortgage - residential | |
| 245,660 | | |
| 2,849 | | |
| 4.60 | | |
| 235,124 | | |
| 2,790 | | |
| 4.71 | |
Real estate mortgage - commercial | |
| 382,707 | | |
| 4,616 | | |
| 4.79 | | |
| 373,138 | | |
| 4,470 | | |
| 4.75 | |
Consumer | |
| 21,036 | | |
| 268 | | |
| 5.05 | | |
| 18,683 | | |
| 259 | | |
| 5.50 | |
Total loans | |
$ | 871,460 | | |
$ | 10,765 | | |
| 4.90 | % | |
$ | 857,762 | | |
$ | 10,185 | | |
| 4.71 | % |
Investment securities: (3) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Government sponsored enterprises | |
$ | 75,326 | | |
$ | 261 | | |
| 1.37 | % | |
$ | 63,211 | | |
$ | 229 | | |
| 1.44 | % |
Asset backed securities | |
| 125,188 | | |
| 598 | | |
| 1.90 | | |
| 112,350 | | |
| 601 | | |
| 2.12 | |
State and municipal | |
| 33,984 | | |
| 265 | | |
| 3.09 | | |
| 34,195 | | |
| 284 | | |
| 3.30 | |
Total investment securities | |
$ | 234,498 | | |
$ | 1,124 | | |
| 1.90 | % | |
$ | 209,756 | | |
$ | 1,114 | | |
| 2.11 | % |
Other investments and securities, at cost | |
| 8,485 | | |
| 72 | | |
| 3.37 | | |
| 4,123 | | |
| 20 | | |
| 1.92 | |
Federal funds sold and interest bearing deposits in other financial institutions | |
| 8,347 | | |
| 3 | | |
| 0.14 | | |
| 7,056 | | |
| 5 | | |
| 0.28 | |
Total interest earning assets | |
$ | 1,122,790 | | |
$ | 11,964 | | |
| 4.23 | % | |
$ | 1,078,697 | | |
$ | 11,324 | | |
| 4.16 | % |
All other assets | |
| 90,248 | | |
| | | |
| | | |
| 92,234 | | |
| | | |
| | |
Allowance for loan losses | |
| (9,971 | ) | |
| | | |
| | | |
| (12,180 | ) | |
| | | |
| | |
Total assets | |
$ | 1,203,067 | | |
| | | |
| | | |
$ | 1,158,751 | | |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NOW accounts | |
$ | 191,026 | | |
$ | 114 | | |
| 0.24 | % | |
$ | 195,162 | | |
$ | 115 | | |
| 0.23 | % |
Savings | |
| 90,851 | | |
| 12 | | |
| 0.05 | | |
| 83,837 | | |
| 12 | | |
| 0.06 | |
Money market | |
| 176,380 | | |
| 115 | | |
| 0.26 | | |
| 164,001 | | |
| 102 | | |
| 0.25 | |
Time deposits of $100,000 and over | |
| 137,542 | | |
| 222 | | |
| 0.64 | | |
| 142,806 | | |
| 237 | | |
| 0.66 | |
Other time deposits | |
| 172,945 | | |
| 269 | | |
| 0.62 | | |
| 194,144 | | |
| 331 | | |
| 0.68 | |
Total time deposits | |
$ | 768,744 | | |
$ | 732 | | |
| 0.38 | % | |
$ | 779,950 | | |
$ | 797 | | |
| 0.41 | % |
Federal funds purchased and securities sold under agreements to repurchase | |
| 26,296 | | |
| 11 | | |
| 0.17 | | |
| 21,029 | | |
| 5 | | |
| 0.09 | |
Subordinated notes | |
| 49,486 | | |
| 326 | | |
| 2.61 | | |
| 49,486 | | |
| 318 | | |
| 2.55 | |
Federal Home Loan Bank Advances | |
| 61,207 | | |
| 202 | | |
| 1.31 | | |
| 28,043 | | |
| 120 | | |
| 1.70 | |
Total borrowings | |
$ | 136,989 | | |
$ | 539 | | |
| 1.56 | % | |
$ | 98,558 | | |
$ | 443 | | |
| 1.78 | % |
Total interest bearing liabilities | |
$ | 905,733 | | |
$ | 1,271 | | |
| 0.56 | % | |
$ | 878,508 | | |
$ | 1,240 | | |
| 0.56 | % |
Demand deposits | |
| 202,138 | | |
| | | |
| | | |
| 193,230 | | |
| | | |
| | |
Other liabilities | |
| 9,937 | | |
| | | |
| | | |
| 6,297 | | |
| | | |
| | |
Total liabilities | |
| 1,117,808 | | |
| | | |
| | | |
| 1,078,035 | | |
| | | |
| | |
Stockholders' equity | |
| 85,259 | | |
| | | |
| | | |
| 80,716 | | |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 1,203,067 | | |
| | | |
| | | |
$ | 1,158,751 | | |
| | | |
| | |
Net interest income (FTE) | |
| | | |
| 10,693 | | |
| | | |
| | | |
| 10,084 | | |
| | |
Net interest spread | |
| | | |
| | | |
| 3.67 | % | |
| | | |
| | | |
| 3.60 | % |
Net interest margin | |
| | | |
| | | |
| 3.78 | % | |
| | | |
| | | |
| 3.71 | % |
| (1) | Interest income and yields are presented on a fully taxable equivalent basis using the federal
statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $135,000 and $128,000 for the
three months ended September 30, 2015 and 2014, respectively. |
| (2) | Non-accruing loans are included in the average amounts outstanding. |
| (3) | Average balances based on amortized cost. |
| (4) | Fees and costs on loans are included in interest income. |
| |
Nine
Months Ended September 30, | |
(In thousands) | |
2015 | | |
2014 | |
| |
| | |
Interest | | |
Rate | | |
| | |
Interest | | |
Rate | |
| |
Average | | |
Income/ | | |
Earned/ | | |
Average | | |
Income/ | | |
Earned/ | |
| |
Balance | | |
Expense(1) | | |
Paid(1) | | |
Balance | | |
Expense(1) | | |
Paid(1) | |
ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: (2) (4) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 157,077 | | |
$ | 5,594 | | |
| 4.76 | % | |
$ | 142,802 | | |
$ | 5,060 | | |
| 4.74 | % |
Real estate construction - residential | |
| 15,077 | | |
| 789 | | |
| 7.00 | | |
| 22,894 | | |
| 755 | | |
| 4.41 | |
Real estate construction - commercial | |
| 46,055 | | |
| 1,776 | | |
| 5.16 | | |
| 59,851 | | |
| 1,902 | | |
| 4.25 | |
Real estate mortgage - residential | |
| 246,399 | | |
| 8,633 | | |
| 4.68 | | |
| 231,493 | | |
| 8,312 | | |
| 4.80 | |
Real estate mortgage - commercial | |
| 378,344 | | |
| 13,455 | | |
| 4.75 | | |
| 373,427 | | |
| 13,351 | | |
| 4.78 | |
Consumer | |
| 20,304 | | |
| 798 | | |
| 5.25 | | |
| 18,972 | | |
| 789 | | |
| 5.56 | |
Total loans | |
$ | 863,256 | | |
$ | 31,045 | | |
| 4.81 | % | |
$ | 849,439 | | |
$ | 30,169 | | |
| 4.75 | % |
Investment securities: (3) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury | |
$ | 0 | | |
$ | 0 | | |
| 0.00 | % | |
$ | 382 | | |
$ | 3 | | |
| 1.05 | % |
Government sponsored enterprises | |
| 73,680 | | |
| 772 | | |
| 1.40 | | |
| 66,627 | | |
| 697 | | |
| 1.40 | |
Asset backed securities | |
| 126,256 | | |
| 1,848 | | |
| 1.96 | | |
| 111,498 | | |
| 1,859 | | |
| 2.23 | |
State and municipal | |
| 34,834 | | |
| 828 | | |
| 3.18 | | |
| 33,319 | | |
| 854 | | |
| 3.43 | |
Total investment securities | |
$ | 234,770 | | |
$ | 3,448 | | |
| 1.96 | % | |
$ | 211,826 | | |
$ | 3,413 | | |
| 2.15 | % |
Other investments and securities, at cost | |
| 6,252 | | |
| 138 | | |
| 2.95 | | |
| 4,044 | | |
| 59 | | |
| 1.95 | |
Federal funds sold and interest bearing deposits in other financial institutions | |
| 11,716 | | |
| 24 | | |
| 0.27 | | |
| 10,428 | | |
| 23 | | |
| 0.29 | |
Total interest earning assets | |
$ | 1,115,994 | | |
$ | 34,655 | | |
| 4.15 | % | |
$ | 1,075,737 | | |
$ | 33,664 | | |
| 4.18 | % |
All other assets | |
| 89,568 | | |
| | | |
| | | |
| 94,310 | | |
| | | |
| | |
Allowance for loan losses | |
| (9,757 | ) | |
| | | |
| | | |
| (12,895 | ) | |
| | | |
| | |
Total assets | |
$ | 1,195,805 | | |
| | | |
| | | |
$ | 1,157,152 | | |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NOW accounts | |
$ | 205,448 | | |
$ | 375 | | |
| 0.24 | % | |
$ | 204,141 | | |
$ | 406 | | |
| 0.27 | % |
Savings | |
| 88,651 | | |
| 36 | | |
| 0.05 | | |
| 82,157 | | |
| 45 | | |
| 0.07 | |
Money market | |
| 173,014 | | |
| 328 | | |
| 0.25 | | |
| 162,753 | | |
| 299 | | |
| 0.25 | |
Time deposits of $100,000 and over | |
| 138,598 | | |
| 653 | | |
| 0.63 | | |
| 143,934 | | |
| 723 | | |
| 0.67 | |
Other time deposits | |
| 177,617 | | |
| 830 | | |
| 0.62 | | |
| 198,778 | | |
| 1,068 | | |
| 0.72 | |
Total time deposits | |
$ | 783,328 | | |
$ | 2,222 | | |
| 0.38 | % | |
$ | 791,763 | | |
$ | 2,541 | | |
| 0.43 | % |
Federal funds purchased and securities sold under agreements to repurchase | |
| 22,589 | | |
| 28 | | |
| 0.17 | | |
| 20,085 | | |
| 13 | | |
| 0.09 | |
Subordinated notes | |
| 49,486 | | |
| 958 | | |
| 2.59 | | |
| 49,486 | | |
| 945 | | |
| 2.55 | |
Federal Home Loan Bank Advances | |
| 47,960 | | |
| 513 | | |
| 1.43 | | |
| 25,747 | | |
| 328 | | |
| 1.70 | |
Total borrowings | |
$ | 120,035 | | |
$ | 1,499 | | |
| 1.67 | % | |
$ | 95,318 | | |
$ | 1,286 | | |
| 1.80 | % |
Total interest bearing liabilities | |
$ | 903,363 | | |
$ | 3,721 | | |
| 0.55 | % | |
$ | 887,081 | | |
$ | 3,827 | | |
| 0.58 | % |
Demand deposits | |
| 198,690 | | |
| | | |
| | | |
| 185,843 | | |
| | | |
| | |
Other liabilities | |
| 10,085 | | |
| | | |
| | | |
| 6,231 | | |
| | | |
| | |
Total liabilities | |
| 1,112,138 | | |
| | | |
| | | |
| 1,079,155 | | |
| | | |
| | |
Stockholders' equity | |
| 83,667 | | |
| | | |
| | | |
| 77,997 | | |
| | | |
| | |
Total liabilities and stockholders' equity | |
$ | 1,195,805 | | |
| | | |
| | | |
$ | 1,157,152 | | |
| | | |
| | |
Net interest income (FTE) | |
| | | |
| 30,934 | | |
| | | |
| | | |
| 29,837 | | |
| | |
Net interest spread | |
| | | |
| | | |
| 3.60 | % | |
| | | |
| | | |
| 3.60 | % |
Net interest margin | |
| | | |
| | | |
| 3.71 | % | |
| | | |
| | | |
| 3.71 | % |
| (1) | Interest income and yields are presented on a fully taxable equivalent basis using the federal
statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $414,000 and $380,000 for the
nine months ended September 30, 2015 and 2014, respectively. |
| (2) | Non-accruing loans are included in the average amounts outstanding. |
| (3) | Average balances based on amortized cost. |
| (4) | Fees and costs on loans are included in interest income. |
Rate and Volume
Analysis
The following table summarizes
the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest
bearing liabilities, identifying changes related to volumes and rates for the three and nine months ended September 30, 2015 compared
to the three and nine months ended September 30, 2014. The change in interest due to the combined rate/volume variance has been
allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.
| |
Three Months Ended September
30, | | |
Nine Months Ended September
30, | |
| |
2015
vs. 2014 | | |
2015
vs. 2014 | |
| |
| | |
Change due
to | | |
| | |
Change due
to | |
| |
Total | | |
Average | | |
Average | | |
Total | | |
Average | | |
Average | |
(In thousands) | |
Change | | |
Volume | | |
Rate | | |
Change | | |
Volume | | |
Rate | |
Interest income on a fully taxable equivalent basis: (1) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loans: (2) (4) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial | |
$ | 189 | | |
$ | 232 | | |
$ | (43 | ) | |
$ | 534 | | |
$ | 508 | | |
$ | 26 | |
Real estate construction - residential | |
| 125 | | |
| (115 | ) | |
| 240 | | |
| 34 | | |
| (314 | ) | |
| 348 | |
Real estate construction - commercial | |
| 52 | | |
| (268 | ) | |
| 320 | | |
| (126 | ) | |
| (487 | ) | |
| 361 | |
Real estate mortgage - residential | |
| 59 | | |
| 123 | | |
| (64 | ) | |
| 321 | | |
| 526 | | |
| (205 | ) |
Real estate mortgage - commercial | |
| 146 | | |
| 116 | | |
| 30 | | |
| 104 | | |
| 175 | | |
| (71 | ) |
Consumer | |
| 9 | | |
| 31 | | |
| (22 | ) | |
| 9 | | |
| 53 | | |
| (44 | ) |
Investment securities: (3) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
U.S. Treasury | |
| 0 | | |
| 0 | | |
| 0 | | |
| (3 | ) | |
| (1 | ) | |
| (2 | ) |
Government sponsored entities | |
| 32 | | |
| 42 | | |
| (10 | ) | |
| 75 | | |
| 74 | | |
| 1 | |
Asset backed securities | |
| (3 | ) | |
| 65 | | |
| (68 | ) | |
| (11 | ) | |
| 230 | | |
| (241 | ) |
State and municipal | |
| (19 | ) | |
| (2 | ) | |
| (17 | ) | |
| (26 | ) | |
| 38 | | |
| (64 | ) |
Other investments and securities, at cost | |
| 52 | | |
| 30 | | |
| 22 | | |
| 79 | | |
| 41 | | |
| 38 | |
Federal funds sold and interest bearing deposits in other financial institutions | |
| (2 | ) | |
| 1 | | |
| (3 | ) | |
| 1 | | |
| 3 | | |
| (2 | ) |
Total interest income | |
| 640 | | |
| 255 | | |
| 385 | | |
| 991 | | |
| 846 | | |
| 145 | |
Interest expense: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
NOW accounts | |
| (1 | ) | |
| (2 | ) | |
| 1 | | |
| (31 | ) | |
| 3 | | |
| (34 | ) |
Savings | |
| 0 | | |
| 1 | | |
| (1 | ) | |
| (9 | ) | |
| 4 | | |
| (13 | ) |
Money market | |
| 13 | | |
| 8 | | |
| 5 | | |
| 29 | | |
| 19 | | |
| 10 | |
Time deposits of $100,000 and over | |
| (15 | ) | |
| (9 | ) | |
| (6 | ) | |
| (70 | ) | |
| (26 | ) | |
| (44 | ) |
Other time deposits | |
| (62 | ) | |
| (34 | ) | |
| (28 | ) | |
| (238 | ) | |
| (107 | ) | |
| (131 | ) |
Federal funds purchased and securities sold under agreements to repurchase | |
| 6 | | |
| 1 | | |
| 5 | | |
| 15 | | |
| 2 | | |
| 13 | |
Subordinated notes | |
| 8 | | |
| 0 | | |
| 8 | | |
| 13 | | |
| 0 | | |
| 13 | |
Federal Home Loan Bank advances | |
| 82 | | |
| 115 | | |
| (33 | ) | |
| 185 | | |
| 245 | | |
| (60 | ) |
Total interest expense | |
| 31 | | |
| 80 | | |
| (49 | ) | |
| (106 | ) | |
| 140 | | |
| (246 | ) |
Net interest income on a fully taxable equivalent basis | |
$ | 609 | | |
$ | 175 | | |
$ | 434 | | |
$ | 1,097 | | |
$ | 706 | | |
$ | 391 | |
| (1) | Interest income and yields are presented on a fully taxable equivalent basis using the Federal
statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $135,000 and $414,000 for the
three and nine months September 30, 2015, respectively, compared to $128,000 and $380,000 for the three and nine months ended September
30, 2014, respectively. |
| (2) | Non-accruing loans are included in the average amounts outstanding. |
| (3) | Average balances based on amortized cost. |
| (4) | Fees and costs on loans are included in interest income. |
Financial results for
the three months ended September 30, 2015 compared to the three months ended September 30, 2014, reflected an increase in net interest
income, on a tax equivalent basis, of $609,000, or 6.04%, respectively, and financial results for the nine months ended September
30, 2015 compared to the nine months ended September 30, 2014 reflected an increase of $1.1 million, or 3.68%, respectively.
Measured as a percentage
of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) increased to 3.78% for the three
months ended September 30, 2015 compared to 3.71% for the three months ended September 30, 2014, respectively, and remained consistent
at 3.71% for both the nine months ended September 30, 2015 and 2014, respectively.
The increase in net interest
income for the three and nine months ended September 30, 2015 over the three and nine months ended September 30, 2014 was primarily
due to an increase in average earning assets. The increase in the net interest margin quarter over quarter was primarily due to
interest recognized on two construction loans.
Average interest-earning
assets increased $44.1 million, or 4.09%, to $1.12 billion for the three months ended September 30, 2015 compared to $1.08 billion
for the three months ended September 30, 2014, and average interest bearing liabilities increased $27.2 million, or 3.10%, to $905.7
million for the three months ended September 30, 2015 compared to $878.5 million for the three months ended September 30, 2014.
Average interest-earning
assets increased $40.3 million, or 3.74%, to $1.16 billion for the nine months ended September 30, 2015 compared to $1.08 billion
for the nine months ended September 30, 2014, and average interest bearing liabilities increased $16.3 million, or 1.84%, to $903.4
million for the nine months ended September 30, 2015 compared to $887.1 million for the nine months ended September 30, 2014.
Total interest
income (expressed on a fully taxable equivalent basis) increased to $12.0 million and $34.7 million for the three and nine
months ended September 30, 2015, respectively, compared to $11.3 million and $33.7 million for the three and nine months ended
September 30, 2014, respectively. The Company’s rates earned on interest earning assets were 4.23% and 4.15% for the three
and nine months ended September 30, 2015, respectively, compared to 4.16% and 4.18% for the three and nine months ended September
30, 2014, respectively.
Interest income
on loans was $10.8 million and $31.0 million for the three and nine months ended September 30, 2015, respectively, compared
to $10.2 million and $30.2 million for the three and nine months ended September 30, 2014, respectively.
Average loans outstanding
increased $13.7 million, or 1.6%, to $871.5 million for the three months ended September 30, 2015 compared to $857.8 million for
the three months ended September 30, 2014. The average yield on loans receivable increased to 4.90% for the three months ended
September 30, 2015 compared to 4.71% for the three months ended September 30, 2014.
For the nine months ended
September 30, 2015, average loans outstanding increased $13.8 million, or 1.6%, to $863.3 million compared to $849.4 million for
the nine months ended September 30, 2014. The average yield on loans receivable increased to 4.81% for the nine months ended September
30, 2015 compared to 4.75% for the nine months ended September 30, 2014. See the Lending and Credit Management section for
further discussion of changes in the composition of the lending portfolio.
Total interest
expense was $1.3 million and $3.7 million for the three and nine months ended September 30, 2015, respectively, compared
to $1.2 million and $3.8 million for the three and nine months ended September 30, 2014, respectively. The Company’s rates
paid on interest bearing liabilities were 0.56% and 0.55% for the three and nine months ended September 30, 2015 compared to 0.56%
and 0.58% for the three and nine months ended September 30, 2014, respectively. See the Liquidity Management section for
further discussion.
Interest expense
on deposits decreased to $732,000 and $2.2 million for the three and nine months ended September 30, 2015, respectively,
compared to $797,000 and $2.5 million for the three and nine months ended September 30, 2014, respectively.
Average time deposits
decreased $11.2 million, or 1.44%, to $768.7 million for the three months ended September 30, 2015 compared to $779.9 million for
the three months ended September 30, 2014. The average cost of deposits decreased to 0.38% for the three months ended September
30, 2015 compared to 0.41% for the three months ended September 30, 2014 primarily as a result of lower market interest rates.
For the nine months ended
September 30, 2015, average time deposits decreased $8.4 million, or 1.07%, to $783.3 million for the nine months ended September
30, 2015 compared to $791.7 million for the nine months ended September 30, 2014. The average cost of deposits decreased to 0.38%
for the nine months ended September 30, 2015 compared to 0.43% for the nine months ended September 30, 2014 primarily as a result
of lower market interest rates.
Interest expense
on borrowings increased to $539,000 and $1.5 million for the three and nine months ended September 30, 2015, respectively,
compared to $443,000 and $1.3 million for the three and nine months ended September 30, 2014, respectively. Average borrowings
increased to $137.0 million and $120.0 million for the three and nine months ended September 30, 2015, respectively, compared to
$98.6 million and $95.3 million for the three and nine months ended September 30, 2014, respectively. See the Liquidity Management
section for further discussion.
Non-interest Income and Expense
Non-interest income
for the periods indicated was as follows:
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
| | |
| | |
$ | | |
% | | |
| | |
| | |
$ | | |
% | |
(In
thousands) | |
2015 | | |
2014 | | |
Change | | |
Change | | |
2015 | | |
2014 | | |
Change | | |
Change | |
Non-interest Income | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Service charges and other fees | |
$ | 903 | | |
$ | 979 | | |
$ | (76 | ) | |
| (7.8 | )% | |
$ | 2,597 | | |
$ | 2,808 | | |
$ | (211 | ) | |
| (7.5 | )% |
Bank card income and fees | |
| 632 | | |
| 621 | | |
| 11 | | |
| 1.8 | | |
| 1,849 | | |
| 1,780 | | |
| 69 | | |
| 3.9 | |
Trust department income | |
| 235 | | |
| 211 | | |
| 24 | | |
| 11.4 | | |
| 714 | | |
| 641 | | |
| 73 | | |
| 11.4 | |
Real estate servicing fees, net | |
| 177 | | |
| 86 | | |
| 91 | | |
| 105.8 | | |
| 357 | | |
| 285 | | |
| 72 | | |
| 25.3 | |
Gain on sales of mortgage loans, net | |
| 322 | | |
| 330 | | |
| (8 | ) | |
| (2.4 | ) | |
| 1,103 | | |
| 778 | | |
| 325 | | |
| 41.8 | |
Other | |
| 67 | | |
| 86 | | |
| (19 | ) | |
| (22.1 | ) | |
| 165 | | |
| 290 | | |
| (125 | ) | |
| (43.1 | ) |
Total non-interest income | |
$ | 2,336 | | |
$ | 2,313 | | |
$ | 23 | | |
| 1.0 | % | |
$ | 6,785 | | |
$ | 6,582 | | |
$ | 203 | | |
| 3.1 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Non-interest income as a %
of total revenue * | |
| 18.1 | % | |
| 18.9 | % | |
| | | |
| | | |
| 18.2 | % | |
| 18.3 | % | |
| | | |
| | |
Total revenue per full time equivalent
employee | |
$ | 37.9 | | |
$ | 35.7 | | |
| | | |
| | | |
$ | 109.7 | | |
$ | 104.8 | | |
| | | |
| | |
* Total revenue is calculated
as net interest income plus non-interest income.
Total non-interest
income was consistent at $2.3 million for both quarters ended September 30, 2015 and 2014, and increased $203,000, or 3.1%,
to $6.8 million for the nine months ended September 30, 2015 compared to $6.6 million for the nine months ended September 30, 2014.
Real estate servicing
fees, net of the change in the valuation of mortgage servicing rights increased $91,000 to $177,000 for the quarter ended September
30, 2015 compared to $86,000 for the quarter ended September 30, 2014, and increased $72,000 to $357,000 for the nine months ended
September 30, 2015 compared to $285,000 for the nine months ended September 30, 2014.
Mortgage loan servicing fees earned on loans
sold were $206,000 and $648,000 for the three and nine months ended September 30, 2015, respectively, compared to $226,000 and
$672,000 for the three and nine months ended September 30, 2014.
The change in valuation
of mortgage servicing rights arising from inputs and assumptions increased $136,000 for the quarter ended September 30,
2015 compared to a $27,000 increase for the quarter ended September 30, 2014, and increased $223,000 for the nine months ended
September 30, 2015 compared to a $97,000 increase for the nine months ended September 30, 2014. Total realized losses included
in earnings attributable to the change in unrealized gains or losses related to assets still held were $(165,000) for the quarter
ended September 30, 2015 compared to $(166,000) for the quarter ended September 30, 2014, and $(514,000) for the nine months ended
September 30, 2015 compared to $(483,000) for the nine months ended September 30, 2014. The Company was servicing $311.8 million
of mortgage loans at September 30, 2015 compared to $313.9 million and $315.3 million at December 31, 2014 and September 30, 2014,
respectively.
Gain on sales of mortgage
loans decreased $8,000, or 2.4%, to $322,000 for the quarter ended September 30, 2015 compared to $330,000 for the quarter
ended September 30, 2014, and increased $325,000, or 41.8%, to $1.1 million for the nine months ended September 30, 2015 compared
to $778,000. The Company sold loans of $11.2 million and $40.1 million for the three and nine months ended September 30, 2015,
respectively, compared to $11.0 million and $25.6 million for the three and nine months ended September 30, 2014, respectively.
Refinancing activity during the first nine months of 2015 impacting both the volume of loans sold and gains recognized contributed
to this increase.
Other income decreased
$19,000, or 22.1%, to $67,000 for the quarter ended September 30, 2015 compared to $86,000 for the quarter ended September 30,
2014, and decreased $125,000, or 43.1%, to $165,000 for the nine months ended September 30, 2015 compared to $290,000. The decrease
in other income primarily related to a decrease in rental income received on other real estate owned during 2014 and an increase
in the servicing repurchase liability during the first quarter of 2015 for reimbursement of costs incurred by Freddie Mac related
to a foreclosure.
Non-interest expense for the periods indicated was as follows:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
(In
thousands) | |
2015 | | |
2014 | | |
$
Change | | |
%
Change | | |
2015 | | |
2014 | | |
$
Change | | |
%
Change | |
Non-interest Expense | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Salaries | |
$ | 3,939 | | |
$ | 4,363 | | |
$ | (424 | ) | |
| (9.7 | )% | |
$ | 11,613 | | |
$ | 11,944 | | |
$ | (331 | ) | |
| (2.8 | )% |
Employee benefits | |
| 1,381 | | |
| 1,219 | | |
| 162 | | |
| 13.3 | | |
| 4,185 | | |
| 3,629 | | |
| 556 | | |
| 15.3 | |
Occupancy expense, net | |
| 685 | | |
| 705 | | |
| (20 | ) | |
| (2.8 | ) | |
| 2,064 | | |
| 1,997 | | |
| 67 | | |
| 3.4 | |
Furniture and equipment
expense | |
| 464 | | |
| 438 | | |
| 26 | | |
| 5.9 | | |
| 1,379 | | |
| 1,334 | | |
| 45 | | |
| 3.4 | |
Processing, network, and bank card expense | |
| 806 | | |
| 780 | | |
| 26 | | |
| 3.3 | | |
| 2,402 | | |
| 2,359 | | |
| 43 | | |
| 1.8 | |
Legal, examination, and
professional fees | |
| 332 | | |
| 341 | | |
| (9 | ) | |
| (2.6 | ) | |
| 943 | | |
| 849 | | |
| 94 | | |
| 11.1 | |
FDIC insurance assessment | |
| 175 | | |
| 244 | | |
| (69 | ) | |
| (28.3 | ) | |
| 673 | | |
| 724 | | |
| (51 | ) | |
| (7.0 | ) |
Advertising and promotion | |
| 273 | | |
| 305 | | |
| (32 | ) | |
| (10.5 | ) | |
| 780 | | |
| 852 | | |
| (72 | ) | |
| (8.5 | ) |
Postage, printing, and supplies | |
| 250 | | |
| 268 | | |
| (18 | ) | |
| (6.7 | ) | |
| 794 | | |
| 813 | | |
| (19 | ) | |
| (2.3 | ) |
Real estate foreclosure expense and (gains), net | |
| (329 | ) | |
| 361 | | |
| (690 | ) | |
| (191.1 | ) | |
| (352 | ) | |
| 657 | | |
| (1,009 | ) | |
| (153.6 | ) |
Other | |
| 1,001 | | |
| 875 | | |
| 126 | | |
| 14.4 | | |
| 2,472 | | |
| 2,259 | | |
| 213 | | |
| 9.4 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total non-interest expense | |
$ | 8,977 | | |
$ | 9,899 | | |
$ | (922 | ) | |
| (9.3 | )% | |
$ | 26,953 | | |
$ | 27,417 | | |
$ | (464 | ) | |
| (1.7 | )% |
Efficiency ratio * | |
| 69.6 | % | |
| 80.7 | % | |
| | | |
| | | |
| 72.3 | % | |
| 76.1 | % | |
| | | |
| | |
Salaries and benefits as a % of
total non-interest expense | |
| 59.3 | % | |
| 56.4 | % | |
| | | |
| | | |
| 58.6 | % | |
| 56.8 | % | |
| | | |
| | |
Number of full-time equivalent
employees | |
| 340 | | |
| 344 | | |
| | | |
| | | |
| 340 | | |
| 344 | | |
| | | |
| | |
* Efficiency ratio is calculated
as non-interest expense as a percent of revenue. Total revenue includes net interest income and non-interest income.
Total non-interest
expense decreased $922,000, or 9.3%, to $9.0 million for the quarter ended September 30, 2015 compared to $9.9 million for
the quarter ended September 30, 2014, and decreased $464,000, or 1.7%, to $26.9 million for the nine months ended September 30,
2015 compared to $27.4 million for the nine months ended September 30, 2014.
Salary expense decreased
$424,000, or 9.7%, to $3.9 million for the quarter ended September 30, 2015 compared to $4.4 million for the quarter ended September
30, 2014, and decreased $331,000, or 2.8%, to 11.6 million for the nine months ended September 30, 2015 compared to $11.9 million
for the nine months ended September 30, 2014. The decrease for both the three and nine months ended September 30, 2015 was primarily
due to the accrual of a new incentive program approved by the Board of Directors in the third quarter of 2014.
Employee benefits increased $162,000,
or 13.3%, to $1.4 million for the quarter ended September 30, 2015 compared to $1.2 million for the quarter ended September 30,
2014, and increased $556,000, or 15.3%, to 2.8 million for the nine months ended September 30, 2015 compared to $3.6 million for
the nine months ended September 30, 2014. The increase was primarily due to a $178,000 and $568,000 increase in the 401(k) profit-sharing
and pension expenses for the three and nine months ended September 30, 2015, respectively.
FDIC insurance assessment decreased
$69,000, or 28.3%, to 175,000 for the quarter ended September 30, 2015 compared to $244,000 for the quarter ended September 30,
2014, and decreased $51,000, or 07.0%, to $673,000 for the nine months ended September 30, 2015 compared to $724,000 for the nine
months ended September 30, 2014. The decrease for the quarter and nine months ended September 30, 2015 over the prior periods primarily
consisted of a decrease in the assessment base.
Real estate foreclosure expense and
(gains), net decreased $690,000, or 191.1%, to $(329,000) for the quarter ended September 30, 2015 compared to $361,000 for
the quarter ended September 30, 2014, and decreased $1.0 million, or 153.6%, to $(352,000) for the nine months ended September
30, 2015 compared to $657,000 for the nine months ended September 30, 2014.
Net gains recognized on other real estate
owned were $435,000 and $690,000 for the three and nine months ended September 30, 2015 compared to net losses of $21,000 and $295,000
for the three and nine months ended September 30, 2014. Expenses to maintain these foreclosed properties were $107,000 and $338,000
for the three and nine months ended September 30, 2015 compared to $87,000 and $362,000 for the three and nine months ended September
30, 2014. Gains were recognized on two properties sold during the first quarter of 2015 and one new foreclosure in the third quarter
resulting in a net gain for both the three and nine months ended September 30, 2015.
Other non-interest expense increased $126,000, or 14.4%,
to $1.0 million for the quarter ended September 30, 2015 compared to $875,000 for the quarter ended September 30, 2014, and increased
$213,000, or 9.4%, to $2.5 million for the nine months ended September 30, 2015 compared to $2.3 million for the nine months ended
September 30, 2014. The increase was primarily due to a $176,000 impairment write-down on a building held for sale partially offset
by the $136,000 loss recorded due to employee fraud that management discovered during the third quarter of 2014.
Income taxes
Income taxes as a percentage of
earnings before income taxes as reported in the consolidated financial statements were 35.2% for the quarter ended September 30,
2015 compared to 33.8% for the quarter ended September 30, 2014, and 34.6% for the nine months ended September 30, 2015 compared
to 34.4% for the nine months ended September 30, 2014.
Lending and Credit Management
Interest earned on the
loan portfolio is a primary source of interest income for the Company. Net loans represented 70.9% of total assets as of September
30, 2015 compared to 72.9% as of December 31, 2014.
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:
| |
September 30, | | |
December 31, | |
(In
thousands) | |
2015 | | |
2014 | |
Commercial, financial, and agricultural | |
$ | 173,485 | | |
$ | 154,834 | |
Real estate construction - residential | |
| 13,531 | | |
| 18,103 | |
Real estate construction - commercial | |
| 32,560 | | |
| 48,822 | |
Real estate mortgage - residential | |
| 249,512 | | |
| 247,117 | |
Real estate mortgage - commercial | |
| 388,220 | | |
| 372,321 | |
Installment loans to individuals | |
| 22,166 | | |
| 20,016 | |
Total loans | |
$ | 879,474 | | |
$ | 861,213 | |
Percent of categories to total loans: | |
| | | |
| | |
Commercial, financial, and agricultural | |
| 19.7 | % | |
| 18.0 | % |
Real estate construction - residential | |
| 1.5 | | |
| 2.1 | |
Real estate construction - commercial | |
| 3.7 | | |
| 5.7 | |
Real estate mortgage - residential | |
| 28.4 | | |
| 28.7 | |
Real estate mortgage - commercial | |
| 44.1 | | |
| 43.2 | |
Installment loans to individuals | |
| 2.6 | | |
| 2.3 | |
Total | |
| 100.0 | % | |
| 100.0 | % |
The Company experienced
positive trends in commercial, financial, and agricultural loans, and real estate mortgage loans at September 30, 2015 compared
to December 31, 2014, and real estate construction loans saw a slight decrease. At both September 30, 2015 and December 31, 2014,
the Company benefited from commercial borrowers being more willing to expand operations, and new calling programs resulted in new
customers and expanded loan relationships with existing customers. The Company extends credit to its local community market through
traditional real estate mortgage products. The Company does not participate in extending credit to sub-prime residential real estate
markets. The Company does not lend funds for the type of transactions defined as “highly leveraged” by bank regulatory
authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans
that are not otherwise disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets
that would have been included in nonaccrual, past due, or restructured loans if such assets were loans.
The Company generally
does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required
by the secondary market are offered to qualified borrowers, but are not funded until the Company has a non-recourse purchase commitment
from the secondary market at a predetermined price. During the three months ended September 30, 2015, the Company saw an increase
in refinancing activity due to low interest rates and uncertainty of rate increases by the Federal Reserve. The Company sold loans
of $11.2 million and $40.1 million for the three and nine months ended September 30, 2015, respectively, compared to $11.0 million
and $25.6 million for the three and nine months ended September 30, 2014, respectively. Refinancing activity during the
first nine months of 2015 impacting both the volume of loans sold and gains recognized contributed to this increase. At September
30, 2015, the Company was servicing approximately $311.8 million of loans sold to the secondary market compared to $313.9 million
at December 31, 2014, and $315.3 million at September 30, 2014.
Risk Elements of the
Loan Portfolio
Management, the senior
loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established)
at least annually. Currently, loans in excess of $2.0 million in aggregate and all adversely classified credits identified by management
are reviewed. In addition, all other loans are reviewed on a sample basis. The senior loan
committee reviews and
reports to the board of directors, on a monthly basis, past due, classified, and watch list loans in order to classify or reclassify
loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans
should be considered impaired. Management follows the guidance provided in the FASB’s ASC Topic 310, Accounting by Creditors
for Impairment of a Loan, in identifying and measuring loan impairment. If management determines that it is probable that all
amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired.
These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience,
specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded
using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions,
loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management
informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted
to maintain the allowance at a level considered adequate by management to provide for probable losses inherent in the loan portfolio.
Nonperforming Assets
The following table summarizes nonperforming assets at the dates
indicated:
| |
September 30, | | |
December 31, | |
(In
thousands) | |
2015 | | |
2014 | |
Nonaccrual loans: | |
| | | |
| | |
Commercial, financial, and agricultural | |
$ | 2,831 | | |
$ | 5,279 | |
Real estate construction - residential | |
| 0 | | |
| 1,751 | |
Real estate construction - commercial | |
| 54 | | |
| 2,096 | |
Real estate mortgage - residential | |
| 3,589 | | |
| 4,419 | |
Real estate mortgage - commercial | |
| 2,342 | | |
| 4,465 | |
Installment loans to individuals | |
| 141 | | |
| 233 | |
Total | |
$ | 8,957 | | |
$ | 18,243 | |
Loans contractually past - due 90 days or more and
still accruing: | |
| | | |
| | |
Real estate construction - commercial | |
$ | 0 | | |
$ | 56 | |
Real estate mortgage - residential | |
| 348 | | |
| 0 | |
Installment loans to individuals | |
| 1 | | |
| 2 | |
Total | |
$ | 349 | | |
$ | 58 | |
Performing Troubled debt restructurings | |
| 5,253 | | |
| 17,720 | |
Total nonperforming loans | |
| 14,559 | | |
| 36,021 | |
Other real estate owned and repossessed assets | |
| 15,148 | | |
| 11,885 | |
Total nonperforming assets | |
$ | 29,707 | | |
$ | 47,906 | |
| |
| | | |
| | |
Loans | |
$ | 879,474 | | |
$ | 861,213 | |
Allowance for loan losses to loans | |
| 1.05 | % | |
| 1.06 | % |
Nonperforming loans to loans | |
| 1.66 | % | |
| 4.18 | % |
Allowance for loan losses to nonperforming loans | |
| 63.51 | % | |
| 25.26 | % |
Allowance for loan losses to nonperforming loans, excluding performing TDR's | |
| 99.36 | % | |
| 49.72 | % |
Nonperforming assets to loans, other real estate owned and repossessed assets | |
| 3.32 | % | |
| 5.49 | % |
Total nonperforming assets
totaled $29.7 million at September 30, 2015 compared to $47.9 million at December 31, 2014. Nonperforming loans, defined as loans
on nonaccrual status, loans 90 days or more past due and still accruing, and TDRs totaled $14.6 million, or 1.66%, of total loans
at September 30, 2015 compared to $36.0 million, or 4.18%, of total loans at December 31, 2014. Non-accrual loans included $1.4
million and $1.6 million of loans classified as TDRs at September 30, 2015 and December 31, 2014, respectively.
As of September 30, 2015
and December 31, 2014, approximately $5.9 million and $9.6 million, respectively, of loans classified as substandard, not included
in the nonperforming asset table, were identified as potential problem loans having more than normal risk which raised doubts as
to the ability of the borrower to comply with present loan repayment terms. Even though borrowers are experiencing moderate cash
flow problems as well as some deterioration in collateral value, management believes the general allowance was sufficient to cover
the risks and probable losses related to such loans at September 30, 2015 and December 31, 2014, respectively.
Total non-accrual loans
decreased $9.3 million to $9.0 million at September 30, 2015 from December 31, 2014. This decrease primarily consisted of a $2.4
million decrease in commercial, financial and agricultural loans, $1.8 million decrease in real estate construction – residential
loans, $2.0 million decrease in real estate construction – commercial loans, and a $2.1 million decrease in real estate mortgage
– commercial loans. The decrease in non-accrual loans primarily resulted from the sale of a piece of collateral, transfers
of impaired loans to other real estate owned and repossessed assets, and four loan relationships that returned to performing status.
Loans
past due 90 days and still accruing interest at September 30, 2015 were $349,000 compared to $58,000 at December 31, 2014. Other
real estate and repossessed assets at September 30, 2015 were $15.1 million compared to $11.9 million at December 31, 2014. During
the nine months ended September 30, 2015, $4.5 million of nonaccrual loans, net of charge-offs taken, moved to other real estate
owned and repossessed assets compared to $1.8 million during the nine months ended September 30, 2014.
The following
table summarizes the Company’s TDRs at the dates indicated:
| |
September
30, 2015 | | |
December
31, 2014 | |
(In
thousands) | |
Number
of Contracts | | |
Recorded
Investment | | |
Specific
Reserves | | |
Number
of Contracts | | |
Recorded
Investment | | |
Specific
Reserves | |
Performing TDRs | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
| 9 | | |
$ | 812 | | |
$ | 70 | | |
| 10 | | |
$ | 2,262 | | |
$ | 6 | |
Real estate mortgage - residential | |
| 6 | | |
| 3,302 | | |
| 832 | | |
| 6 | | |
| 3,459 | | |
| 752 | |
Real estate mortgage - commercial | |
| 2 | | |
| 1,139 | | |
| - | | |
| 8 | | |
| 11,999 | | |
| - | |
Total performing TDRs | |
| 17 | | |
$ | 5,253 | | |
$ | 902 | | |
| 24 | | |
$ | 17,720 | | |
$ | 758 | |
Nonperforming TDRs | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Commercial, financial and agricultural | |
| 1 | | |
$ | 56 | | |
$ | - | | |
| 2 | | |
$ | 71 | | |
$ | - | |
Real estate mortgage - residential | |
| 2 | | |
| 467 | | |
| 44 | | |
| 2 | | |
| 347 | | |
| 140 | |
Real estate mortgage - commercial | |
| 5 | | |
| 886 | | |
| 223 | | |
| 3 | | |
| 1,167 | | |
| 10 | |
Total nonperforming TDRs | |
| 8 | | |
$ | 1,409 | | |
$ | 267 | | |
| 7 | | |
$ | 1,585 | | |
$ | 150 | |
Total TDRs | |
| 25 | | |
$ | 6,662 | | |
$ | 1,169 | | |
| 31 | | |
$ | 19,305 | | |
$ | 908 | |
At September 30, 2015,
loans classified as TDRs totaled $6.7 million, of which $1.4 million were classified as nonperforming TDRs and included in non-accrual
loans and $5.3 million were classified as performing TDRs. At December 31, 2014, TDRs totaled $19.3 million, of which $1.6 million
were classified as nonperforming TDRs included in non-accrual loans and $17.7 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 $1.2 million and
$1.0 million related to TDRs were allocated to the allowance for loan losses at September 30, 2015 and December 31, 2014, respectively.
The net decrease in total TDRs from December 31, 2014 to September 30, 2015 was primarily due to $2.0 million additions to TDRs
that were offset by $273,000 charged off, $100,000 moved to ORE, approximately $2.0 million of payments received, and $12.3 million
from five loan relationships moved to performing loans due to subsequent restructuring at market rates and terms followed by satisfactory
payment performance.
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:
| |
September 30, | | |
December 31, | |
(In
thousands) | |
2015 | | |
2014 | |
Allocation of allowance for loan losses at end of
period: | |
| | | |
| | |
Commercial, financial, and agricultural | |
$ | 3,000 | | |
$ | 1,779 | |
Real estate construction - residential | |
| 18 | | |
| 171 | |
Real estate construction - commercial | |
| 551 | | |
| 466 | |
Real estate mortgage - residential | |
| 2,057 | | |
| 2,527 | |
Real estate mortgage - commercial | |
| 3,246 | | |
| 3,846 | |
Installment loans to individuals | |
| 209 | | |
| 270 | |
Unallocated | |
| 165 | | |
| 40 | |
Total | |
$ | 9,246 | | |
$ | 9,099 | |
The allowance for loan losses was $9.2
million, or 1.05%, of loans outstanding at September 30, 2015 compared to $9.1 million, or 1.06%, of loans outstanding at December
31, 2014, and $12.0 million, or 1.40%, of loans outstanding at September 30, 2014. The ratio of the allowance for loan losses to
nonperforming loans, excluding TDR’s – accruing, was 99.36% at September 30, 2015, compared to 49.72% at December 31,
2014, and 49.14% at September 30, 2014.
Provision
No provision for loan
losses was recorded for the third quarter of 2015 and $250,000 was recorded for the nine months ended September 30,
2015 compared to no provision for the three and nine months ended September 30, 2014. The increase over 2014 was primarily due
to an increase in specific reserves primarily related to two loan relationships.
The following table summarizes loan loss
experience for the periods indicated:
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September
30, | | |
September
30, | |
(In
thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Analysis of allowance for loan losses: | |
| | | |
| | | |
| | | |
| | |
Balance beginning of period | |
$ | 9,986 | | |
$ | 12,150 | | |
$ | 9,099 | | |
$ | 13,719 | |
Charge-offs: | |
| | | |
| | | |
| | | |
| | |
Commercial, financial, and agricultural | |
| 591 | | |
| 105 | | |
| 741 | | |
| 291 | |
Real estate construction - residential | |
| - | | |
| - | | |
| - | | |
| 59 | |
Real estate construction - commercial | |
| - | | |
| - | | |
| 5 | | |
| 491 | |
Real estate mortgage - residential | |
| 87 | | |
| 41 | | |
| 298 | | |
| 236 | |
Real estate mortgage - commercial | |
| 126 | | |
| 80 | | |
| 159 | | |
| 1,152 | |
Installment loans to individuals | |
| 80 | | |
| 71 | | |
| 241 | | |
| 270 | |
Total charge-offs | |
| 884 | | |
| 297 | | |
| 1,444 | | |
| 2,499 | |
Recoveries: | |
| | | |
| | | |
| | | |
| | |
Commercial, financial, and agricultural | |
$ | 28 | | |
$ | 55 | | |
$ | 643 | | |
$ | 282 | |
Real estate construction - residential | |
| 28 | | |
| - | | |
| 322 | | |
| 60 | |
Real estate mortgage - residential | |
| 45 | | |
| 26 | | |
| 105 | | |
| 151 | |
Real estate mortgage - commercial | |
| 5 | | |
| 67 | | |
| 157 | | |
| 160 | |
Installment loans to individuals | |
| 38 | | |
| 32 | | |
| 114 | | |
| 160 | |
Total recoveries | |
| 144 | | |
| 180 | | |
| 1,341 | | |
| 813 | |
Net charge-offs | |
| 740 | | |
| 117 | | |
| 103 | | |
| 1,686 | |
Provision for loan losses | |
| - | | |
| - | | |
| 250 | | |
| - | |
Balance end of period | |
$ | 9,246 | | |
$ | 12,033 | | |
$ | 9,246 | | |
$ | 12,033 | |
Net Loan Charge-offs (Recoveries)
The Company’s net charge-offs were
$740,000, 0.08% of average loans, for the quarter ended September 30, 2015 compared to $117,000, or 0.01%, of average loans, for
the quarter ended September 30, 2014. Detailed in the table above, the increase in net charge-offs quarter over quarter was primarily
due to a $513,000 increase in commercial, financial, and agricultural charge-offs related to one loan relationship.
The Company’s net charge-offs were $103,000 for the nine
months ended September 30, 2015, or 0.01% of average loans, compared to net charge-offs of $1.7 million, or 0.20% of average loans,
for the nine months ended September 30, 2014. Detailed in the table above, the Company’s recoveries increased for the nine
months ended September 30, 2015 over the prior year primarily due to one loan relationship in commercial loans, and one loan relationship
in real estate construction loans. In addition to the increase in recoveries recorded during the nine months ended September 30,
2015, the Company also noted a decrease in charge-offs of $1.0 million compared to the nine months ended September 30, 2014.
The following table is a summary of the general and specific
allocations of the allowance for loan losses:
| |
September 30, | | |
December 31, | |
(In
thousands) | |
2015 | | |
2014 | |
Allocation of allowance for loan losses: | |
| | | |
| | |
Individually evaluated for impairment - specific reserves | |
$ | 1,970 | | |
$ | 1,749 | |
Collectively evaluated for impairment - general reserves | |
| 7,276 | | |
| 7,350 | |
Total | |
$ | 9,246 | | |
$ | 9,099 | |
Specific reserves increased to $2.0 million
at September 30, 2015 compared to $1.7 million at December 31, 2014. The increase in reserves from December 31, 2014 primarily
occurred in commercial, financial, and agricultural loans, and real estate mortgage commercial loans. The increase in commercial,
financial, and agricultural reserves primarily related to one loan relationship due to increased exposure resulting from liquidation
of collateral during the current quarter. The increase in real estate mortgage reserves was primarily due to additional reserves
required for one loan relationship resulting from the reevaluation of collateral values.
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 September 30, 2015, $2.0 million
of the Company’s allowance for loan losses was allocated to impaired loans totaling approximately $14.2 million compared
to $1.7 million of the Company’s allowance for loan losses (ALL) allocated to impaired loans totaling approximately $36.0
million at December 31, 2014. Management determined that $7.4 million, or 52%, of total impaired loans required no reserve allocation
at September 30, 2015 compared to $28.5 million, or 79%, at December 31, 2014 primarily due to adequate collateral values,
acceptable payment history and adequate cash flow ability.
The incurred loss component of the
general reserve, or loans collectively evaluated for impairment, is determined by applying percentages to pools of loans by asset
type. Loans not individually evaluated are aggregated 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 adjusted for certain qualitative factors to reflect current risk characteristics of the portfolio. In addition,
the combined historical loan loss rates and qualitative factors 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. Management
determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio
during the recent economic environment. These historical loss rates for each risk group are used as the starting point to determine
allowance provisions. The Company’s methodology includes qualitative factors that allow management to adjust its estimates
of losses based on the most recent information available. These factors reflect actual changes and anticipated changes such as
changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition
of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general
economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions
within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk
factors are generally reviewed and updated quarterly, as appropriate.
Loss Emergence Periods While the
historical loss rates and qualitative factors (discussed above) provide a good foundation as to the incurred losses in the current
portfolio, the portfolio is comprised of very unique loan categories that inherently may need more time to produce a loss than
other loan categories (given these unique segments and workout periods). As such, a review of the Company’s LEP is necessary
to ensure the ALL estimate is appropriately stated as of the balance sheet date, rather than relying on a singular annualized loss
rate based upon the historical charge-off activity. Determination of the LEP allows for loans with effective useful lives other
than twelve months, often loans with extended workout periods, to be incorporated into the reserve estimate, given the incurred
loss event had occurred prior to the balance sheet date. This approach is consistent with the Interagency ALL Guidance noted above.
The specific and general reserve allocations
represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although
the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any
credit losses.
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.
| |
September 30, | | |
December 31, | |
(In
thousands) | |
2015 | | |
2014 | |
Federal funds sold and other overnight interest-bearing deposits | |
$ | 14,463 | | |
$ | 20,445 | |
Available-for-sale investment securities | |
| 244,250 | | |
| 198,998 | |
Total | |
$ | 258,713 | | |
$ | 219,443 | |
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 $258.7 million at September 30, 2015 and included an unrealized net gain of $1.3 million. The portfolio
includes projected maturities and mortgage backed securities pay-downs of
approximately $31.0 million over the next
twelve months, which offer resources to meet either new loan demand or reductions in the Company’s deposit base.
The Company pledges portions of its investment
securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase,
borrowing capacity at the Federal Reserve Bank, and for other purposes required by law. At September 30, 2015 and December 31,
2014, the Company’s unpledged securities in the available for sale portfolio totaled approximately $35.3 million and $53.4
million, respectively.
Total investment securities pledged for
these purposes were as follows:
| |
September 30, | | |
December 31, | |
(In
thousands) | |
2015 | | |
2014 | |
Investment securities pledged for the purpose of securing: | |
| | | |
| | |
Federal Reserve Bank borrowings | |
$ | 3,502 | | |
$ | 3,504 | |
Federal funds purchased and securities sold under agreements to repurchase | |
| 73,576 | | |
| 26,770 | |
Other deposits | |
| 131,851 | | |
| 115,272 | |
Total pledged, at fair value | |
$ | 208,929 | | |
$ | 145,546 | |
Liquidity is available from the Company’s
base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At September
30, 2015, such deposits totaled $662.6 million and represented 68.2% of the Company’s total deposits. These core deposits
are normally less volatile and are often tied to other products of the Company through long lasting relationships. Time deposits
and certificates of deposit of $100,000 and over totaled $309.6 million at September 30, 2015. These accounts are normally considered
more volatile and higher costing representing 31.8% of total deposits at September 30, 2015.
Core deposits at September 30, 2015 and
December 31, 2014 were as follows:
| |
September 30, | | |
December 31, | |
(In
thousands) | |
2015 | | |
2014 | |
Core deposit base: | |
| | | |
| | |
Non-interest bearing demand | |
$ | 209,714 | | |
$ | 207,700 | |
Interest checking | |
| 183,538 | | |
| 191,902 | |
Savings and money market | |
| 269,340 | | |
| 250,157 | |
Total | |
$ | 662,592 | | |
$ | 649,759 | |
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 September 30, 2015, under agreements with these unaffiliated banks, the Bank may borrow up to $40.0 million in federal
funds on an unsecured basis and $8.6 million on a secured basis. There were no federal funds purchased outstanding at September
30, 2015. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s
investment portfolio. At September 30, 2015, there was $27.8 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 September 30, 2015.
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 September 30,
2015, the Bank had $80.0 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding
subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.
Borrowings outstanding at September 30,
2015 and December 31, 2014 were as follows:
| |
September 30, | | |
December 31, | |
(In
thousands) | |
2015 | | |
2014 | |
Borrowings: | |
| | | |
| | |
Securities sold under agreements to repurchase | |
$ | 27,762 | | |
$ | 17,970 | |
Federal Home Loan Bank advances | |
| 80,000 | | |
| 43,000 | |
Subordinated notes | |
| 49,486 | | |
| 49,486 | |
Total | |
$ | 157,248 | | |
$ | 110,456 | |
The Company pledges certain assets, including
loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines
of credit and borrow from these entities. Based on the type and value of collateral pledged, the Company may draw advances against
this collateral.
The following table reflects the advance
equivalent of the assets pledged, borrowings, and letters of credit outstanding in addition to the estimated future funding capacity
available to the Company as follows:
| |
September 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
(In
thousands) | |
FHLB | | |
Federal
Reserve Bank | | |
Federal
Funds Purchased
Lines | | |
Total | | |
FHLB | | |
Federal
Reserve Bank | | |
Federal
Funds Purchased
Lines | | |
Total | |
Advance equivalent | |
$ | 243,414 | | |
$ | 3,432 | | |
$ | 45,200 | | |
$ | 292,046 | | |
$ | 273,613 | | |
$ | 3,433 | | |
$ | 44,340 | | |
$ | 321,386 | |
Advances outstanding | |
| (80,000 | ) | |
| 0 | | |
| 0 | | |
| (80,000 | ) | |
| (43,000 | ) | |
| 0 | | |
| 0 | | |
| (43,000 | ) |
Total available | |
$ | 163,414 | | |
$ | 3,432 | | |
$ | 45,200 | | |
$ | 212,046 | | |
$ | 230,613 | | |
$ | 3,433 | | |
$ | 44,340 | | |
$ | 278,386 | |
At September 30, 2015, loans with a market
value of $330.5 million were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit. At September
30, 2015, investments with a market value of $9.5 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 $32.1 million
at September 30, 2015 compared to $42.8 million at December 31, 2014. The $10.7 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 nine months ended September 30, 2015. Cash flow provided from operating activities consists mainly
of net income adjusted for certain non-cash items. Operating activities provided cash flow of $11.6 million for the nine months
ended September 30, 2015.
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 $70.9 million. The cash outflow primarily consisted of $81.6 million purchases of investment securities, and a $21.9 million
increase in loans, partially offset by $35.6 million proceeds from maturities, calls, and pay-downs of investment securities.
Financing activities provided cash of $48.7
million, resulting primarily from a $37.0 million net increase in FHLB advances, a $10.8 million increase in interest bearing transaction
accounts, and a $9.8 million increase in federal funds purchased and securities sold under agreements to repurchase, partially
offset by a $10.2 million decrease in time deposits. Future short-term liquidity needs arising from daily operations are not expected
to vary significantly during 2015.
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 $153.9 million in unused loan commitments and
standby letters of credit as of September 30, 2015. Although the Company's current liquidity resources are adequate to fund this
commitment level the nature of these commitments is such that the likelihood of such a funding demand is very low.
The Company is a legal entity, separate
and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing
liquidity needs primarily include funding its operating expenses and paying cash dividends to its shareholders. The Company paid
cash dividends to its shareholders totaling approximately $785,000 and $755,000 for the nine months ended September 30, 2015 and
2014, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank
declared and paid $1.0 million in dividends to the Company during the nine months ended September 30, 2015. At September 30, 2015
and December 31, 2014, the Company had cash and cash equivalents totaling $5.5 million and $1.0 million, respectively.
Capital Management
The Company and the Bank are subject to
various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a
direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company
and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are
subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
Quantitative measures established by regulations
to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following
table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. The Company
made a one-time election not to include accumulated other comprehensive income (AOCI) components in regulatory capital. Management
believes, as of September 30, 2015 and December 31, 2014, the Company and the Bank each met all capital adequacy requirements.
In July 2013, the federal banking
agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
The phase-in period for community banking organizations began January 1, 2015, while larger institutions (generally those
with assets of $250 billion or more) must begin compliance on January 1, 2014. The final rules call for the following
capital requirements:
| · | A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%. |
| · | A minimum ratio of tier 1 capital to risk-weighted assets of 6%. |
| · | A minimum leverage ratio of 4%. |
In addition, the final rules establish
a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If
a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject
to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation
and countercyclical capital buffers for all banking organizations will begin on January 1, 2016.
The following table summarizes regulatory
capital information as of September 30, 2015 and December 31, 2014 on a consolidated basis and for the Bank, as defined. Regulatory
capital ratios for September 30, 2015 were calculated in accordance with the Basel III rules, whereas the December 31, 2014 regulatory
ratios were calculated in accordance with Basel I rules.
| |
| | |
| | |
| | |
| | |
Well-Capitalized
Under | |
| |
| | |
| | |
Required
for Capital | | |
Prompt
Corrective Action | |
| |
Actual | | |
Adequacy
Purposes | | |
Provision | |
(in
thousands) | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | | |
Amount | | |
Ratio | |
September 30, 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Capital (to
risk-weighted assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Company | |
$ | 144,837 | | |
| 14.91 | % | |
$ | 77,721 | | |
| 8.00 | % | |
$ | N.A. | | |
| N.A. | % |
Bank | |
| 135,619 | | |
| 14.03 | | |
| 77,332 | | |
| 8.00 | | |
| 96,665 | | |
| 10.00 | |
Tier I Capital (to
risk-weighted assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Company | |
$ | 116,635 | | |
| 12.01 | % | |
$ | 58,291 | | |
| 6.00 | % | |
$ | N.A. | | |
| N.A. | % |
Bank | |
| 126,213 | | |
| 13.06 | | |
| 57,999 | | |
| 6.00 | | |
| 77,332 | | |
| 8.00 | |
Common Equity Tier
I Capital (to risk-weighted
assets) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Company | |
$ | 87,611 | | |
| 9.02 | % | |
$ | 43,718 | | |
| 4.50 | % | |
$ | N.A. | | |
| N.A. | % |
Bank | |
| 126,213 | | |
| 13.06 | | |
| 43,499 | | |
| 4.50 | | |
| 62,832 | | |
| 6.50 | |
Tier I Capital (to
adjusted average assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Company | |
$ | 116,635 | | |
| 9.70 | % | |
$ | 48,084 | | |
| 4.00 | % | |
$ | N.A. | | |
| N.A. | % |
Bank | |
| 126,213 | | |
| 10.55 | | |
| 47,850 | | |
| 4.00 | | |
| 59,813 | | |
| 5.00 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
(in
thousands) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
December 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Total Capital (to
risk-weighted assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Company | |
$ | 138,619 | | |
| 15.78 | % | |
$ | 70,282 | | |
| 8.00 | % | |
| N.A. | | |
| N.A. | % |
Bank | |
| 128,311 | | |
| 14.78 | | |
| 69,430 | | |
| 8.00 | | |
$ | 86,788 | | |
| 10.00 | |
Tier I Capital (to
risk-weighted assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Company | |
$ | 108,785 | | |
| 12.38 | % | |
$ | 35,141 | | |
| 4.00 | % | |
| N.A. | | |
| N.A. | % |
Bank | |
| 119,212 | | |
| 13.74 | | |
| 34,715 | | |
| 4.00 | | |
$ | 52,073 | | |
| 6.00 | |
Tier I capital (to
adjusted average assets): | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Company | |
$ | 108,785 | | |
| 9.42 | % | |
$ | 46,197 | | |
| 4.00 | % | |
$ | N.A. | | |
| N.A. | % |
Bank | |
| 119,212 | | |
| 10.42 | | |
| 45,784 | | |
| 4.00 | | |
| 57,230 | | |
| 5.00 | |
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
Interest Sensitivity
Market risk arises from exposure to changes
in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk
through transactions other than trading activities. The Company uses financial modeling techniques to measure interest rate risk.
These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established
by the Company's Asset/Liability Committee and approved by the board of directors are used to monitor exposure of earnings at risk.
General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to specific points
on the yield curve. For the three months ended September 30, 2015, our Company utilized a 400 basis point immediate and gradual
move in interest rates (both upward and downward) applied to both a parallel and proportional yield curve. However, there are no
assurances that the change will not be more or less than this estimate.
The following table represents estimated
interest rate sensitivity and periodic and cumulative gap positions calculated as of September 30, 2015. Significant assumptions
used for this table included: loans will repay at historic repayment rates; certain interest-bearing demand accounts are interest
sensitive due to immediate repricing, and fixed maturity deposits will not be withdrawn prior to maturity. A significant variance
in actual results from one or more of these assumptions could materially affect the results reflected in the table.
| |
| | |
| | |
| | |
| | |
| | |
Over | | |
| |
| |
| | |
| | |
| | |
| | |
| | |
5 Years or | | |
| |
| |
| | |
| | |
| | |
| | |
| | |
No stated | | |
| |
(In
thousands) | |
Year
1 | | |
Year
2 | | |
Year
3 | | |
Year
4 | | |
Year
5 | | |
Maturity | | |
Total | |
ASSETS | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Investment
securities | |
$ | 36,986 | | |
$ | 16,365 | | |
$ | 29,971 | | |
$ | 32,754 | | |
$ | 24,071 | | |
$ | 104,103 | | |
$ | 244,250 | |
Federal funds sold and
other over-night interest-bearing deposits | |
| 14,463 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 14,463 | |
Other restricted investments | |
| 6,237 | | |
| - | | |
| - | | |
| - | | |
| 3,000 | | |
| - | | |
| 9,237 | |
Loans | |
| 305,071 | | |
| 151,320 | | |
| 138,926 | | |
| 103,964 | | |
| 117,147 | | |
| 63,046 | | |
| 879,474 | |
Total | |
$ | 362,757 | | |
$ | 167,685 | | |
$ | 168,897 | | |
$ | 136,718 | | |
$ | 144,218 | | |
$ | 167,149 | | |
$ | 1,147,424 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
LIABILITIES | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Savings, interest checking,
and money market deposits | |
$ | 261,988 | | |
$ | - | | |
$ | 190,890 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 452,878 | |
Time deposits | |
| 203,067 | | |
| 61,693 | | |
| 32,029 | | |
| 6,896 | | |
| 5,891 | | |
| - | | |
| 309,576 | |
Federal funds purchased
and securities sold under agreements to repurchase | |
| 27,762 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 27,762 | |
Subordinated notes | |
| 49,486 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 49,486 | |
Federal
Home Loan Bank advances | |
| 38,000 | | |
| 5,000 | | |
| 22,000 | | |
| 4,000 | | |
| 11,000 | | |
| - | | |
| 80,000 | |
Total | |
$ | 580,303 | | |
$ | 66,693 | | |
$ | 244,919 | | |
$ | 10,896 | | |
$ | 16,891 | | |
$ | - | | |
$ | 919,702 | |
Interest-sensitivity GAP | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Periodic
GAP | |
$ | (217,546 | ) | |
$ | 100,992 | | |
$ | (76,022 | ) | |
$ | 125,822 | | |
$ | 127,327 | | |
$ | 167,149 | | |
$ | 227,722 | |
Cumulative
GAP | |
$ | (217,546 | ) | |
$ | (116,554 | ) | |
$ | (192,576 | ) | |
$ | (66,754 | ) | |
$ | 60,573 | | |
$ | 227,722 | | |
$ | 227,722 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ratio of interest-earning
assets to interest-bearing liabilities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Periodic GAP | |
| 0.63 | | |
| 2.51 | | |
| 0.69 | | |
| 12.55 | | |
| 8.54 | | |
| NM | | |
| 1.25 | |
Cumulative
GAP | |
| 0.63 | | |
| 0.82 | | |
| 0.78 | | |
| 0.93 | | |
| 1.07 | | |
| 1.25 | | |
| 1.25 | |
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 three months ended September 30, 2015.
Item 4. Controls and Procedures
Our Company's management
has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure
controls and procedures as defined in Rules 13a – 15(e) or 15d – 15(e) of the Securities Exchange Act of 1934 as of
September 30, 2015. Based upon and as of the date of that evaluation, our principal executive and principal financial officers
concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed in the
reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when
required. It should be noted that any system of disclosure controls and procedures, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of
any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because
of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving
its stated goals under all potential future conditions, regardless of how remote.
There has been no change in our Company's
internal control over financial reporting that occurred during the three months ended September 30, 2015 that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting.
Impact of New Accounting Standards
Revenue from Contracts with Customers
The FASB issued ASU 2014-09, Revenue from Contracts with Customers, in May 2014. The ASU supersedes revenue recognition
requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance in the FASB
Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order
to achieve this principle. The amendments are effective for interim and annual periods beginning January 1, 2017 and must be applied
retrospectively. The Company is in the process of evaluating the impact of the ASU's adoption on the Company’s consolidated
financial statements.
Transfers and Servicing The
FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, in September
2014. The amendments require that repurchase-to-maturity transactions and repurchase agreements that are part of financing arrangements
be accounted for as secured borrowings. The amendments also require additional disclosures for certain transfers accounted for
as sales. The accounting changes and the disclosures on sales are required to be presented in interim and annual periods beginning
January 1, 2015. This ASU also requires disclosures about types of collateral, contractual tenor and potential risks for transactions
accounted for as secured borrowings. These disclosures are required in interim and annual periods beginning April 1, 2015. The
adoption is not expected to have a significant effect on the Company’s consolidated financial statements.
Presentation of Financial Statements
- Going Concern Uncertainties. The FASB has issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern in August 2014. ASU 2014-15 is intended to define management’s responsibility
to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide
related footnote disclosures. Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the
presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial
reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting
is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.
Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the
organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance
to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and
content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are
effective for interim and annual periods ending after December 15, 2016. The adoption is not expected to have a significant effect
on the Company's consolidated financial statements.
Consolidation The FASB has issued
ASU No. 2015-02, Amendments to the Consolidation Analysis. The amendment substantially changes the way reporting entities
are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation
under the new amendment. Specifically, the amendments modify the evaluation of whether limited partnerships and similar legal entities
are variable interest entities (VIEs) or voting interest entities, eliminate the presumption that a general partner should consolidate
a limited partnership, and affect the consolidation analysis of reporting entities that are involved with VIEs. The amendments
in this update are effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. The
standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating
the effect that ASU 2015-02 will have on its consolidated financial statements and related disclosures. The adoption is not expected
to have a significant effect on the Company’s consolidated financial statements.
PART II - OTHER INFORMATION
Item 1. |
Legal Proceedings |
|
|
|
|
|
The information required by this Item is set forth in Commitments and Contingencies, Pending Litigation, in our Company’s Notes to Consolidated Financial Statements (unaudited). |
Item 1A. |
Risk Factors |
None |
|
|
|
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None |
|
|
|
Item 3. |
Defaults Upon Senior Securities |
None |
|
|
|
Item 4. |
Mine Safety Disclosures |
None |
|
|
|
Item 5. |
Other Information |
None |
|
|
|
Item 6. |
Exhibits |
|
Exhibit
No. |
|
Description |
|
|
|
3.1 |
|
Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company's current report on Form 8-K on August 9, 2007 and incorporated herein by reference). |
|
|
|
3.2 |
|
Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company's current report on Form 8-K on June 8, 2009 and incorporated herein by reference). |
|
|
|
4.1 |
|
Specimen certificate representing shares of our Company’s $1.00 par value common stock (filed as Exhibit 4.1 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number 0-23636) and incorporated herein by reference). |
|
|
|
31.1 |
|
Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
|
Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
|
Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
|
Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101 |
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL) |
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HAWTHORN BANCSHARES, INC.
Date
|
/s/ David T. Turner |
|
|
|
|
November 16, 2015 |
David T. Turner, Chairman of the Board and |
|
|
Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
|
/s/ W. Bruce Phelps |
|
|
|
|
November 16, 2015 |
W. Bruce Phelps, Chief Financial Officer (Principal Financial |
|
|
Officer and Principal Accounting Officer)
|
|
HAWTHORN BANCSHARES, INC.
INDEX TO EXHIBITS
September 30, 2015 Form 10-Q
Exhibit
No. |
|
Description |
|
|
|
3.1 |
|
Restated Articles of Incorporation of our Company (filed as Exhibit 3.1 to our Company's current report on Form 8-K on August 9, 2007 and incorporated herein by reference). |
|
|
|
3.2 |
|
Amended and Restated Bylaws of our Company (filed as Exhibit 3.1 to our Company's current report on Form 8-K on June 8, 2009 and incorporated herein by reference). |
|
|
|
4.1 |
|
Specimen certificate representing shares
of our Company’s $1.00 par value common stock (filed as
Exhibit 4.1 to our Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (Commission file number
0-23636) and incorporated herein by reference). |
|
|
|
31.1 |
|
Certificate of the Chief Executive Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
|
Certificate of the Chief Financial Officer of our Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
|
Certificate of the Chief Executive Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
|
Certificate of the Chief Financial Officer of our Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
101 |
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL) |
| *As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12
of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended. |
| **Incorporated by reference. |
Exhibit 31.1
CERTIFICATIONS
I, David T. Turner, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Hawthorn Bancshares, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s)
and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change
in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s)
and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date:
November 16, 2015 |
|
|
/s/ David T. Turner |
|
David T. Turner |
|
Chairman of the Board and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, W. Bruce Phelps, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Hawthorn Bancshares, Inc.;
2. Based on my knowledge, this report does
not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial
statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s)
and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over
financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change
in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s)
and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material
weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect
the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material,
that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 16, 2015
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/s/ W. Bruce Phelps |
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W. Bruce Phelps |
|
Chief Financial Officer |
Exhibit 32.1
Certification of Chief Executive Officer
In connection with the Quarterly Report
of Hawthorn Bancshares, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015 as filed with the
Securities and Exchange Commission (the “Report”), I, David T. Turner, Chairman of the Board and Chief Executive Officer
of our Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(a) The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(b) The information contained in the
Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.
Dated: November 16, 2015
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/s/ David T. Turner |
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David T. Turner |
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Chairman of the Board and Chief Executive Officer |
Exhibit 32.2
Certification of Chief Financial Officer
In connection with the Quarterly Report
of Hawthorn Bancshares, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2015 as filed with the
Securities and Exchange Commission (the “Report”), I, W. Bruce Phelps, Chief Financial Officer of our Company, hereby
certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(a) The Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(b) The information contained in the
Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.
Dated: November 16, 2015
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/s/ W. Bruce Phelps |
|
W. Bruce Phelps |
|
Chief Financial Officer |
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