Notes to the Consolidated Financial Statements
(Unaudited)
|
(1)
|
Summary of Significant Accounting Policies
|
Hawthorn Bancshares,
Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and
corporate customers located within the communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson,
and the greater Kansas City metropolitan area. The Company is subject to competition from other financial and nonfinancial institutions
providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory
agencies and undergo periodic examinations by those regulatory agencies.
The accompanying unaudited
consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles
(U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly,
the unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for
complete financial statements and should be read in conjunction with the consolidated financial statements and related notes included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Certain amounts in the 2015 condensed consolidated
financial statements have been reclassified to conform to the 2016 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 2016:
Consolidation
The FASB issued
ASU No. 2015-02,
Amendments to the Consolidation Analysis,
in February 2015. 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 were effective for interim and annual periods beginning January 1, 2016. The adoption did not have a
significant effect on the Company’s consolidated financial statements.
Intangible Assets
The FASB
issued ASU 2015-05,
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
, in April 2015. The amendments
provide guidance to customers about whether a cloud computing arrangement includes a software license. Arrangements containing
a license should be recorded as consistent with the acquisition of software licenses, whereas arrangements that do not include
a software license should be recorded as consistent with the accounting for service contracts. These amendments were effective
for interim and annual periods beginning January 1, 2016. The adoption did not have a significant effect on the Company's consolidated
financial statements.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(2)
|
Loans and Allowance for Loan Losses
|
Loans
A summary of loans, by major class within
the Company’s loan portfolio, at March 31, 2016 and December 31, 2015 is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
148,040
|
|
|
$
|
149,091
|
|
Real estate construction - residential
|
|
|
18,017
|
|
|
|
16,895
|
|
Real estate construction - commercial
|
|
|
36,322
|
|
|
|
33,943
|
|
Real estate mortgage - residential
|
|
|
254,933
|
|
|
|
256,086
|
|
Real estate mortgage - commercial
|
|
|
392,991
|
|
|
|
385,869
|
|
Installment and other consumer
|
|
|
25,009
|
|
|
|
23,196
|
|
Total loans
|
|
$
|
875,312
|
|
|
$
|
865,080
|
|
The Bank grants real estate, commercial,
installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton,
Warsaw, Springfield, Branson and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes in the
economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment
and other consumer loans consist primarily of the financing of automotive vehicles. At March 31, 2016, loans with a carrying value
of $435.7 million, or $362.4 million fair value, were pledged to the Federal Home Loan Bank as collateral for borrowings and letters
of credit.
Allowance for Loan Losses
The following is a summary of the allowance
for loan losses during the periods indicated.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three Months Ended March 31, 2016
|
|
|
|
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
|
|
$
|
2,153
|
|
|
$
|
59
|
|
|
$
|
644
|
|
|
$
|
2,439
|
|
|
$
|
2,935
|
|
|
$
|
273
|
|
|
$
|
101
|
|
|
$
|
8,604
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(12
|
)
|
|
|
(15
|
)
|
|
|
33
|
|
|
|
32
|
|
|
|
276
|
|
|
|
(6
|
)
|
|
|
(58
|
)
|
|
|
250
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
103
|
|
|
|
0
|
|
|
|
1
|
|
|
|
206
|
|
|
|
82
|
|
|
|
56
|
|
|
|
0
|
|
|
|
448
|
|
Less recoveries on loans
|
|
|
(97
|
)
|
|
|
0
|
|
|
|
(11
|
)
|
|
|
(8
|
)
|
|
|
(61
|
)
|
|
|
(48
|
)
|
|
|
0
|
|
|
|
(225
|
)
|
Net loans charged off
|
|
|
6
|
|
|
|
0
|
|
|
|
(10
|
)
|
|
|
198
|
|
|
|
21
|
|
|
|
8
|
|
|
|
0
|
|
|
|
223
|
|
Balance at end of period
|
|
$
|
2,135
|
|
|
$
|
44
|
|
|
$
|
687
|
|
|
$
|
2,273
|
|
|
$
|
3,190
|
|
|
$
|
259
|
|
|
$
|
43
|
|
|
$
|
8,631
|
|
|
|
Three Months Ended March 31, 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
|
|
|
(185
|
)
|
|
|
(300
|
)
|
|
|
(92
|
)
|
|
|
241
|
|
|
|
259
|
|
|
|
(67
|
)
|
|
|
144
|
|
|
|
0
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
28
|
|
|
|
0
|
|
|
|
0
|
|
|
|
71
|
|
|
|
24
|
|
|
|
48
|
|
|
|
0
|
|
|
|
171
|
|
Less recoveries on loans
|
|
|
(575
|
)
|
|
|
(177
|
)
|
|
|
0
|
|
|
|
(12
|
)
|
|
|
(34
|
)
|
|
|
(35
|
)
|
|
|
0
|
|
|
|
(833
|
)
|
Net loans charged off
|
|
|
(547
|
)
|
|
|
(177
|
)
|
|
|
0
|
|
|
|
59
|
|
|
|
(10
|
)
|
|
|
13
|
|
|
|
0
|
|
|
|
(662
|
)
|
Balance at end of period
|
|
$
|
2,141
|
|
|
$
|
48
|
|
|
$
|
374
|
|
|
$
|
2,709
|
|
|
$
|
4,115
|
|
|
$
|
190
|
|
|
$
|
184
|
|
|
$
|
9,761
|
|
Loans, or portions of loans, are charged
off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries
of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts
due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These
loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific
reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and
reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies,
current economic conditions, loan risk ratings and industry concentration.
Beginning in the first quarter of 2016,
the Company began to lengthen its look-back period with the intent to increase such period from three to five years over the next
two years. The Company believes that the five-year look-back period, which is consistent with the Company’s practices prior
to the start of the economic recession in 2008, provides a representative historical loss period in the current economic environment.
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 March 31, 2016 and December 31, 2015, 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
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
260
|
|
|
$
|
0
|
|
|
$
|
8
|
|
|
$
|
980
|
|
|
$
|
69
|
|
|
$
|
31
|
|
|
$
|
0
|
|
|
$
|
1,348
|
|
Collectively evaluated for impairment
|
|
|
1,875
|
|
|
|
44
|
|
|
|
679
|
|
|
|
1,293
|
|
|
|
3,121
|
|
|
|
228
|
|
|
|
43
|
|
|
|
7,283
|
|
Total
|
|
$
|
2,135
|
|
|
$
|
44
|
|
|
$
|
687
|
|
|
$
|
2,273
|
|
|
$
|
3,190
|
|
|
$
|
259
|
|
|
$
|
43
|
|
|
$
|
8,631
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
941
|
|
|
$
|
0
|
|
|
$
|
52
|
|
|
$
|
5,365
|
|
|
$
|
2,435
|
|
|
$
|
131
|
|
|
$
|
0
|
|
|
$
|
8,924
|
|
Collectively evaluated for impairment
|
|
|
147,099
|
|
|
|
18,017
|
|
|
|
36,270
|
|
|
|
249,568
|
|
|
|
390,556
|
|
|
|
24,878
|
|
|
|
0
|
|
|
|
866,388
|
|
Total
|
|
$
|
148,040
|
|
|
$
|
18,017
|
|
|
$
|
36,322
|
|
|
$
|
254,933
|
|
|
$
|
392,991
|
|
|
$
|
25,009
|
|
|
$
|
0
|
|
|
$
|
875,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
285
|
|
|
$
|
0
|
|
|
$
|
15
|
|
|
$
|
955
|
|
|
$
|
266
|
|
|
$
|
19
|
|
|
$
|
0
|
|
|
$
|
1,540
|
|
Collectively evaluated for impairment
|
|
|
1,868
|
|
|
|
59
|
|
|
|
629
|
|
|
|
1,484
|
|
|
|
2,669
|
|
|
|
254
|
|
|
|
101
|
|
|
|
7,064
|
|
Total
|
|
$
|
2,153
|
|
|
$
|
59
|
|
|
$
|
644
|
|
|
$
|
2,439
|
|
|
$
|
2,935
|
|
|
$
|
273
|
|
|
$
|
101
|
|
|
$
|
8,604
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,005
|
|
|
$
|
0
|
|
|
$
|
102
|
|
|
$
|
5,936
|
|
|
$
|
3,081
|
|
|
$
|
144
|
|
|
$
|
0
|
|
|
$
|
10,268
|
|
Collectively evaluated for impairment
|
|
|
148,086
|
|
|
|
16,895
|
|
|
|
33,841
|
|
|
|
250,150
|
|
|
|
382,788
|
|
|
|
23,052
|
|
|
|
0
|
|
|
|
854,812
|
|
Total
|
|
$
|
149,091
|
|
|
$
|
16,895
|
|
|
$
|
33,943
|
|
|
$
|
256,086
|
|
|
$
|
385,869
|
|
|
$
|
23,196
|
|
|
$
|
0
|
|
|
$
|
865,080
|
|
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 $8.9 million and $10.3 million at March 31, 2016 and December 31,
2015, 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 generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting
the total expected future cash flows. At March 31, 2016 and December 31, 2015, $5.5 million and $6.4 million, respectively, of
impaired loans were evaluated based on the fair value less estimated selling costs of the loan’s collateral. Once the impairment
amount is calculated a specific reserve allocation is recorded. At March 31, 2016, $1.3 million of the Company’s allowance
for loan losses was allocated to impaired loans totaling $8.9 million compared to $1.5 million of the Company's allowance for loan
losses allocated to impaired loans totaling approximately $10.3 million at December 31, 2015. Management determined that $3.8 million,
or 42%, of total impaired loans required no reserve allocation at March 31, 2016 compared to $4.5 million, or 44%, at December
31, 2015 primarily due to adequate collateral values
,
acceptable payment history and adequate
cash flow ability.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The categories of impaired loans at March
31, 2016 and December 31, 2015 are as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Non-accrual loans
|
|
$
|
3,072
|
|
|
$
|
4,418
|
|
Performing TDRs
|
|
|
5,852
|
|
|
|
5,850
|
|
Total impaired loans
|
|
$
|
8,924
|
|
|
$
|
10,268
|
|
The following tables provide additional
information about impaired loans at March 31, 2016 and December 31, 2015, respectively, segregated between loans for which an allowance
has been provided and loans for which no allowance has been provided.
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
(in thousands)
|
|
Investment
|
|
|
Balance
|
|
|
Reserves
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
433
|
|
|
$
|
433
|
|
|
$
|
0
|
|
Real estate - residential
|
|
|
1,215
|
|
|
|
1,219
|
|
|
|
0
|
|
Real estate - commercial
|
|
|
2,123
|
|
|
|
2,523
|
|
|
|
0
|
|
Total
|
|
$
|
3,771
|
|
|
$
|
4,175
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
508
|
|
|
$
|
526
|
|
|
$
|
260
|
|
Real estate - construction commercial
|
|
|
52
|
|
|
|
56
|
|
|
|
8
|
|
Real estate - residential
|
|
|
4,150
|
|
|
|
4,178
|
|
|
|
980
|
|
Real estate - commercial
|
|
|
312
|
|
|
|
371
|
|
|
|
69
|
|
Consumer
|
|
|
131
|
|
|
|
171
|
|
|
|
31
|
|
Total
|
|
$
|
5,153
|
|
|
$
|
5,302
|
|
|
$
|
1,348
|
|
Total impaired loans
|
|
$
|
8,924
|
|
|
$
|
9,477
|
|
|
$
|
1,348
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
(in thousands)
|
|
Investment
|
|
|
Balance
|
|
|
Reserves
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
448
|
|
|
$
|
450
|
|
|
$
|
0
|
|
Real estate - residential
|
|
|
1,645
|
|
|
|
1,712
|
|
|
|
0
|
|
Real estate - commercial
|
|
|
2,446
|
|
|
|
2,572
|
|
|
|
0
|
|
Total
|
|
$
|
4,539
|
|
|
$
|
4,734
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
557
|
|
|
$
|
572
|
|
|
$
|
285
|
|
Real estate - construction commercial
|
|
|
102
|
|
|
|
115
|
|
|
|
15
|
|
Real estate - residential
|
|
|
4,291
|
|
|
|
4,320
|
|
|
|
955
|
|
Real estate - commercial
|
|
|
635
|
|
|
|
884
|
|
|
|
266
|
|
Consumer
|
|
|
144
|
|
|
|
182
|
|
|
|
19
|
|
Total
|
|
$
|
5,729
|
|
|
$
|
6,073
|
|
|
$
|
1,540
|
|
Total impaired loans
|
|
$
|
10,268
|
|
|
$
|
10,807
|
|
|
$
|
1,540
|
|
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 March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Average
|
|
|
Recognized
|
|
|
Average
|
|
|
Recognized
|
|
|
|
Recorded
|
|
|
For the
|
|
|
Recorded
|
|
|
For the
|
|
(in thousands)
|
|
Investment
|
|
|
Period Ended
|
|
|
Investment
|
|
|
Period Ended
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,520
|
|
|
$
|
15
|
|
|
$
|
5,525
|
|
|
$
|
20
|
|
Real estate - construction residential
|
|
|
0
|
|
|
|
0
|
|
|
|
2,143
|
|
|
|
0
|
|
Real estate - construction commercial
|
|
|
118
|
|
|
|
0
|
|
|
|
2,319
|
|
|
|
0
|
|
Real estate - residential
|
|
|
1,513
|
|
|
|
39
|
|
|
|
3,180
|
|
|
|
12
|
|
Real estate - commercial
|
|
|
2,622
|
|
|
|
42
|
|
|
|
10,899
|
|
|
|
65
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
28
|
|
|
|
0
|
|
Total
|
|
$
|
5,773
|
|
|
$
|
96
|
|
|
$
|
24,094
|
|
|
$
|
97
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
984
|
|
|
$
|
12
|
|
|
$
|
1,798
|
|
|
$
|
6
|
|
Real estate - construction commercial
|
|
|
65
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate - residential
|
|
|
4,553
|
|
|
|
120
|
|
|
|
4,457
|
|
|
|
26
|
|
Real estate - commercial
|
|
|
764
|
|
|
|
0
|
|
|
|
1,286
|
|
|
|
0
|
|
Consumer
|
|
|
135
|
|
|
|
0
|
|
|
|
237
|
|
|
|
0
|
|
Total
|
|
$
|
6,501
|
|
|
$
|
132
|
|
|
$
|
7,778
|
|
|
$
|
32
|
|
Total impaired loans
|
|
$
|
12,274
|
|
|
$
|
228
|
|
|
$
|
31,872
|
|
|
$
|
129
|
|
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 $228,000
and $129,000, for the three months ended March 31, 2016 and 2015, 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.
The following table provides aging information
for the Company’s past due and non-accrual loans at March 31, 2016 and December 31, 2015.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Current or
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
30 Days
|
|
|
30 - 89 Days
|
|
|
And Still
|
|
|
|
|
|
|
|
(in thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Total
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
147,386
|
|
|
$
|
395
|
|
|
$
|
0
|
|
|
$
|
259
|
|
|
$
|
148,040
|
|
Real Estate Construction - Residential
|
|
|
18,017
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,017
|
|
Real Estate Construction - Commercial
|
|
|
36,270
|
|
|
|
0
|
|
|
|
0
|
|
|
|
52
|
|
|
|
36,322
|
|
Real Estate Mortgage - Residential
|
|
|
251,366
|
|
|
|
1,783
|
|
|
|
58
|
|
|
|
1,726
|
|
|
|
254,933
|
|
Real Estate Mortgage - Commercial
|
|
|
391,798
|
|
|
|
289
|
|
|
|
0
|
|
|
|
904
|
|
|
|
392,991
|
|
Installment and Other Consumer
|
|
|
24,766
|
|
|
|
104
|
|
|
|
8
|
|
|
|
131
|
|
|
|
25,009
|
|
Total
|
|
$
|
869,603
|
|
|
$
|
2,571
|
|
|
$
|
66
|
|
|
$
|
3,072
|
|
|
$
|
875,312
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
148,597
|
|
|
$
|
185
|
|
|
$
|
1
|
|
|
$
|
308
|
|
|
$
|
149,091
|
|
Real Estate Construction - Residential
|
|
|
16,830
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,830
|
|
Real Estate Construction - Commercial
|
|
|
33,472
|
|
|
|
65
|
|
|
|
0
|
|
|
|
102
|
|
|
|
33,639
|
|
Real Estate Mortgage - Residential
|
|
|
251,253
|
|
|
|
2,511
|
|
|
|
0
|
|
|
|
2,322
|
|
|
|
256,086
|
|
Real Estate Mortgage - Commercial
|
|
|
384,053
|
|
|
|
643
|
|
|
|
0
|
|
|
|
1,542
|
|
|
|
386,238
|
|
Installment and Other Consumer
|
|
|
22,840
|
|
|
|
207
|
|
|
|
5
|
|
|
|
144
|
|
|
|
23,196
|
|
Total
|
|
$
|
857,045
|
|
|
$
|
3,611
|
|
|
$
|
6
|
|
|
$
|
4,418
|
|
|
$
|
865,080
|
|
Credit Quality
The Company categorizes loans into risk
categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on
watch
status
when one or more weaknesses that may result in the deterioration of the repayment exits or the Company’s credit position
at some future date. Loans classified as
substandard
are inadequately protected by the current sound worth and paying capacity
of the obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize
the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the
deficiencies are not corrected. A loan is classified as a
troubled debt restructuring
(
TDR)
when a borrower is experiencing
financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring
that it would not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans
classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual
loans for presentation purposes. It is the Company’s policy to discontinue the accrual of interest income on loans when management
believes that the collection of interest or principal is doubtful. Loans are placed on
non-accrual
status when (1) deterioration
in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment
of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the
process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the
collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table presents the risk categories
by class at March 31, 2016 and December 31, 2015.
(in thousands)
|
|
Commercial,
Financial, &
Agricultural
|
|
|
Real Estate
Construction -
Residential
|
|
|
Real Estate
Construction -
Commercial
|
|
|
Real Estate
Mortgage -
Residential
|
|
|
Real Estate
Mortgage -
Commercial
|
|
|
Installment
and other
Consumer
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
7,152
|
|
|
$
|
1,064
|
|
|
$
|
1,162
|
|
|
$
|
23,291
|
|
|
$
|
22,909
|
|
|
$
|
0
|
|
|
$
|
55,578
|
|
Substandard
|
|
|
230
|
|
|
|
0
|
|
|
|
37
|
|
|
|
1,929
|
|
|
|
1,613
|
|
|
|
0
|
|
|
|
3,809
|
|
Performing TDRs
|
|
|
683
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,639
|
|
|
|
1,530
|
|
|
|
0
|
|
|
|
5,852
|
|
Non-accrual
|
|
|
259
|
|
|
|
0
|
|
|
|
52
|
|
|
|
1,726
|
|
|
|
904
|
|
|
|
131
|
|
|
|
3,072
|
|
Total
|
|
$
|
8,324
|
|
|
$
|
1,064
|
|
|
$
|
1,251
|
|
|
$
|
30,585
|
|
|
$
|
26,956
|
|
|
$
|
131
|
|
|
$
|
68,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
8,663
|
|
|
$
|
1,267
|
|
|
$
|
1,296
|
|
|
$
|
22,191
|
|
|
$
|
24,303
|
|
|
$
|
186
|
|
|
$
|
57,906
|
|
Substandard
|
|
|
421
|
|
|
|
0
|
|
|
|
37
|
|
|
|
3,737
|
|
|
|
1,485
|
|
|
|
36
|
|
|
|
5,716
|
|
Performing TDRs
|
|
|
697
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,615
|
|
|
|
1,538
|
|
|
|
0
|
|
|
|
5,850
|
|
Non-accrual
|
|
|
308
|
|
|
|
0
|
|
|
|
102
|
|
|
|
2,322
|
|
|
|
1,542
|
|
|
|
144
|
|
|
|
4,418
|
|
Total
|
|
$
|
10,089
|
|
|
$
|
1,267
|
|
|
$
|
1,435
|
|
|
$
|
31,865
|
|
|
$
|
28,868
|
|
|
$
|
366
|
|
|
$
|
73,890
|
|
Troubled Debt Restructurings
At March 31, 2016, loans classified as TDRs totaled $6.0 million,
of which $194,000 were classified as nonperforming TDRs and included in non-accrual loans and $5.9 million were classified as performing
TDRs. At December 31, 2015, loans classified as TDRs totaled $6.4 million, of which $527,000 were classified as nonperforming TDRs
and included in non-accrual loans and $5.9 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 $764,000 and $910,000 related to TDRs were allocated
to the allowance for loan losses at March 31, 2016 and December 31, 2015, respectively.
The following table summarizes loans that were modified as TDRs
during the periods indicated.
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Recorded Investment (1)
|
|
|
Recorded Investment (1)
|
|
(in thousands)
|
|
Number of
Contracts
|
|
|
Pre-
Modification
|
|
|
Post-
Modification
|
|
|
Number of
Contracts
|
|
|
Pre-
Modification
|
|
|
Post-
Modification
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
3
|
|
|
$
|
250
|
|
|
$
|
250
|
|
Real estate mortgage - residential
|
|
|
1
|
|
|
|
78,148
|
|
|
|
78,148
|
|
|
|
2
|
|
|
|
144
|
|
|
|
144
|
|
Real estate mortgage - commercial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3
|
|
|
|
473
|
|
|
|
473
|
|
Total
|
|
|
1
|
|
|
$
|
78,148
|
|
|
$
|
78,148
|
|
|
|
8
|
|
|
$
|
867
|
|
|
$
|
867
|
|
(1) The amounts reported post-modification
are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were
fully paid down, charged-off or foreclosed upon during the period ended are not reported.
The Company’s
portfolio of loans classified as TDRs include concessions for the borrower given financial condition such as interest rates below
the current market rate, deferring principal payments, and extending maturity dates. During the three months ended March 31, 2016,
one loan meeting the TDR criteria was modified compared to eight loans during the three months ended March 31, 2015. There were
no loans modified as a TDR that defaulted during the three months ended March 31, 2016 and 2015, respectively, and within twelve
months of their modification date. See
Lending and Credit Management
section for further information.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(3)
|
Other Real Estate and Repossessed Assets
|
|
|
March 31,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Commercial
|
|
$
|
1,444
|
|
|
$
|
1,445
|
|
Real estate construction - commercial
|
|
|
12,380
|
|
|
|
12,380
|
|
Real estate mortgage - residential
|
|
|
835
|
|
|
|
477
|
|
Real estate mortgage - commercial
|
|
|
4,037
|
|
|
|
4,923
|
|
Total
|
|
$
|
18,696
|
|
|
$
|
19,225
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,225
|
)
|
|
|
(3,233
|
)
|
Total other real estate and repossessed assets
|
|
$
|
15,471
|
|
|
$
|
15,992
|
|
Changes in the net carrying amount of other real estate and
repossessed assets were as follows for the periods indicated:
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
19,225
|
|
|
$
|
15,140
|
|
Additions
|
|
|
742
|
|
|
|
603
|
|
Proceeds from sales
|
|
|
(1,274
|
)
|
|
|
(883
|
)
|
Charge-offs against the valuation allowance for other real estate owned, net
|
|
|
(46
|
)
|
|
|
(16
|
)
|
Net gain on sales
|
|
|
49
|
|
|
|
140
|
|
Total other real estate and repossessed assets
|
|
$
|
18,696
|
|
|
$
|
14,984
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,225
|
)
|
|
|
(3,233
|
)
|
Balance at end of period
|
|
$
|
15,471
|
|
|
$
|
11,751
|
|
During the three months ended March 31,
2016 and 2015, net charge-offs against the allowance for loan losses at the time of foreclosure were approximately $381,000 and
$41,000, respectively. At March 31, 2016 $565,000 of consumer mortgage loans secured by residential real estate properties were
in the process of foreclosure compared to $390,000 at December 31, 2015.
Activity in the valuation allowance for other real estate owned
was as follows for the periods indicated:
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Balance, beginning of period
|
|
$
|
3,233
|
|
|
$
|
3,255
|
|
Provision for other real estate owned
|
|
|
38
|
|
|
|
(6
|
)
|
Charge-offs
|
|
|
(46
|
)
|
|
|
(16
|
)
|
Balance, end of period
|
|
$
|
3,225
|
|
|
$
|
3,233
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(4)
|
Investment Securities
|
The amortized cost and fair value of debt
securities classified as available-for-sale at March 31, 2016 and December 31, 2015 were as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
(
in
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair value
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
42,111
|
|
|
$
|
110
|
|
|
$
|
9
|
|
|
|
42,212
|
|
Asset-backed securities
|
|
|
175,869
|
|
|
|
866
|
|
|
|
892
|
|
|
|
175,843
|
|
Obligations of states and political subdivisions
|
|
|
27,212
|
|
|
|
523
|
|
|
|
17
|
|
|
|
27,718
|
|
Total available-for-sale securities
|
|
$
|
245,192
|
|
|
$
|
1,499
|
|
|
$
|
918
|
|
|
$
|
245,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
73,605
|
|
|
$
|
127
|
|
|
$
|
235
|
|
|
$
|
73,497
|
|
Asset-backed securities
|
|
|
130,179
|
|
|
|
440
|
|
|
|
1,768
|
|
|
|
128,851
|
|
Obligations of states and political subdivisions
|
|
|
32,224
|
|
|
|
493
|
|
|
|
11
|
|
|
|
32,706
|
|
Total available-for-sale securities
|
|
$
|
236,008
|
|
|
$
|
1,060
|
|
|
$
|
2,014
|
|
|
$
|
235,054
|
|
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 and the Company’s interest in statutory trusts. These securities are reported at
cost in the amount of $8.1 and $8.0 million as of March 31, 2016 and December 31, 2015, respectively.
Debt securities with carrying values aggregating
approximately $202.3 million and $182.7 million at March 31, 2016 and December 31, 2015, respectively, were pledged to secure
public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.
The amortized cost and fair value of debt
securities classified as available-for-sale at March 31, 2016, 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
|
|
$
|
18,149
|
|
|
$
|
18,155
|
|
Due after one year through five years
|
|
|
40,630
|
|
|
|
40,934
|
|
Due after five years through ten years
|
|
|
10,013
|
|
|
|
10,312
|
|
Due after ten years
|
|
|
531
|
|
|
|
529
|
|
Total
|
|
|
69,323
|
|
|
|
69,930
|
|
Asset-backed securities
|
|
|
175,869
|
|
|
|
175,843
|
|
Total available-for-sale securities
|
|
$
|
245,192
|
|
|
$
|
245,773
|
|
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 March 31, 2016 and December 31, 2015 were as follows:
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
At March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
17,997
|
|
|
$
|
(9
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
17,997
|
|
|
$
|
(9
|
)
|
Asset-backed securities
|
|
|
57,446
|
|
|
|
(523
|
)
|
|
|
40,267
|
|
|
|
(369
|
)
|
|
|
97,713
|
|
|
|
(892
|
)
|
political subdivisions
|
|
|
3,039
|
|
|
|
(16
|
)
|
|
|
251
|
|
|
|
(1
|
)
|
|
|
3,290
|
|
|
|
(17
|
)
|
Total
|
|
$
|
78,482
|
|
|
$
|
(548
|
)
|
|
$
|
40,518
|
|
|
$
|
(370
|
)
|
|
$
|
119,000
|
|
|
$
|
(918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
43,539
|
|
|
$
|
(222
|
)
|
|
$
|
1,002
|
|
|
$
|
(13
|
)
|
|
$
|
44,541
|
|
|
$
|
(235
|
)
|
Asset-backed securities
|
|
|
56,095
|
|
|
|
(620
|
)
|
|
|
43,576
|
|
|
|
(1,148
|
)
|
|
|
99,671
|
|
|
|
(1,768
|
)
|
Obligations of states and political subdivisions
|
|
|
2,571
|
|
|
|
(6
|
)
|
|
|
718
|
|
|
|
(5
|
)
|
|
|
3,289
|
|
|
|
(11
|
)
|
Total
|
|
$
|
102,205
|
|
|
$
|
(848
|
)
|
|
$
|
45,296
|
|
|
$
|
(1,166
|
)
|
|
$
|
147,501
|
|
|
$
|
(2,014
|
)
|
The total
available for sale portfolio consisted of approximately 268 securities at March 31, 2016. The portfolio included 67 securities
having an aggregate fair value of $119.0 million that were in a loss position at March 31, 2016. Securities identified as temporarily
impaired which had been in a loss position for 12 months or longer totaled $40.5 million at fair value. The $918,000 aggregate
unrealized loss included in accumulated other comprehensive income at March 31, 2016 was caused by interest rate fluctuations
.
The total available for sale portfolio
consisted of approximately 316 securities at December 31, 2015. The portfolio included 111 securities having an aggregate fair
value of $147.5 million that were in a loss position at December 31, 2015. Securities identified as temporarily impaired which
had been in a loss position for 12 months or longer totaled $45.3 million at fair value. The $2.0 million aggregate unrealized
loss included in accumulated other comprehensive income at December 31, 2015 was caused by interest rate fluctuations.
Because the decline in fair value is attributable
to changes in interest rates and not credit quality, these investments were not considered other-than-temporarily impaired at March
31, 2016 and December 31, 2015, 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.
The table presents the components of investment
securities gains and losses, which have been recognized in earnings:
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Gains realized on sales
|
|
$
|
472
|
|
|
$
|
0
|
|
Losses realized on sales
|
|
|
0
|
|
|
|
0
|
|
Other-than-temporary impairment recognized
|
|
|
0
|
|
|
|
0
|
|
Investment securities gains
|
|
$
|
472
|
|
|
$
|
0
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Mortgage Servicing Rights
At March 31, 2016, the Company was servicing
approximately $308.1 million of loans sold to the secondary market compared to $312.1 million at December 31, 2015, and $312.3
million at March 31, 2015. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $210,000 for
the three ended March 31, 2016 compared to $214,000 for the three months ended March 31, 2015, respectively.
The table below presents changes in mortgage
servicing rights (MSRs) for the periods indicated.
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
2,847
|
|
|
$
|
2,762
|
|
Originated mortgage servicing rights
|
|
|
53
|
|
|
|
119
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
Due to change in model inputs and assumptions (1)
|
|
|
(3
|
)
|
|
|
(41
|
)
|
Other changes in fair value (2)
|
|
|
(152
|
)
|
|
|
(178
|
)
|
Balance at end of period
|
|
$
|
2,745
|
|
|
$
|
2,662
|
|
(1) The change in fair value resulting
from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment
speed assumptions primarily due to changes in interest rates.
(2) Other changes in fair value reflect
changes due to customer payments and passage of time.
The following key data and assumptions
were used in estimating the fair value of the Company’s MSRs as of the three months ended March 31, 2016 and 2015:
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average constant prepayment rate
|
|
|
10.30
|
%
|
|
|
11.19
|
%
|
Weighted average note rate
|
|
|
3.91
|
%
|
|
|
3.94
|
%
|
Weighted average discount rate
|
|
|
9.19
|
%
|
|
|
9.26
|
%
|
Weighted average expected life (in years)
|
|
|
5.70
|
|
|
|
5.40
|
|
|
(6)
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal funds purchased
|
|
$
|
0
|
|
|
$
|
0
|
|
Repurchase agreements
|
|
|
41,523
|
|
|
|
56,834
|
|
Total
|
|
$
|
41,523
|
|
|
$
|
56,834
|
|
The Company offers a sweep account program whereby amounts
in excess of an established limit are “swept” from the customer’s demand deposit account on a daily basis into
retail repurchase agreements pursuant to individual repurchase agreements between the Company and its customers
.
Repurchase
agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities. They are accounted
for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral
pledged for the repurchase agreements with customers is maintained by a designated third party custodian
.
The collateral
amounts pledged to repurchase agreements by remaining maturity in the table below are limited to the outstanding balances of the
related asset or liability; thus amounts of excess collateral are not shown.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Repurchase Agreements
|
|
Remaining Contractual Maturity of the Agreements
|
|
|
|
Overnight
|
|
|
Less
|
|
|
Greater
|
|
|
|
|
|
|
and
|
|
|
than
|
|
|
than
|
|
|
|
|
(in thousands)
|
|
continuous
|
|
|
90 days
|
|
|
90 days
|
|
|
Total
|
|
At March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
23,854
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
23,854
|
|
Asset-backed securities
|
|
|
17,669
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17,669
|
|
Total
|
|
$
|
41,523
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
41,523
|
|
Repurchase Agreements
|
|
Remaining Contractual Maturity of the Agreements
|
|
|
|
Overnight
|
|
|
Less
|
|
|
Greater
|
|
|
|
|
|
|
and
|
|
|
than
|
|
|
than
|
|
|
|
|
(in thousands)
|
|
continuous
|
|
|
90 days
|
|
|
90 days
|
|
|
Total
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
46,819
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
46,819
|
|
Asset-backed securities
|
|
|
10,015
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10,015
|
|
Total
|
|
$
|
56,834
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
56,834
|
|
Income taxes as a percentage of earnings
before income taxes as reported in the consolidated financial statements were 32.6% for the three months ended March 31, 2016 compared
to 34.4% for the three months ended March 31, 2015. The decrease in tax rates quarter over quarter is primarily due to an immaterial
return to provision adjustment.
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 March 31, 2016 and, therefore,
did not establish a valuation reserve.
Accumulated Other Comprehensive (Loss)
Income
The following details the change in the
components of the Company’s accumulated other comprehensive (loss) income for the three months ended March 31, 2016 and 2015:
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
(591
|
)
|
|
$
|
(1,427
|
)
|
|
$
|
(2,018
|
)
|
Other comprehensive income, before reclassifications
|
|
|
2,006
|
|
|
|
21
|
|
|
|
2,027
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
(472
|
)
|
|
|
0
|
|
|
|
(472
|
)
|
Current period other comprehensive income, before tax
|
|
|
1,534
|
|
|
|
21
|
|
|
|
1,555
|
|
Income tax expense
|
|
|
(583
|
)
|
|
|
(8
|
)
|
|
|
(591
|
)
|
Current period other comprehensive income, net of tax
|
|
|
951
|
|
|
|
13
|
|
|
|
964
|
|
Balance at end of period
|
|
$
|
360
|
|
|
$
|
(1,414
|
)
|
|
$
|
(1,054
|
)
|
|
|
Three months ended March 31, 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
|
|
|
781
|
|
|
|
0
|
|
|
|
781
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
0
|
|
|
|
36
|
|
|
|
36
|
|
Current period other comprehensive income, before tax
|
|
|
781
|
|
|
|
36
|
|
|
|
817
|
|
Income tax expense
|
|
|
(297
|
)
|
|
|
(13
|
)
|
|
|
(310
|
)
|
Current period other comprehensive income, net of tax
|
|
|
484
|
|
|
|
23
|
|
|
|
507
|
|
Balance at end of period
|
|
$
|
698
|
|
|
$
|
(1,419
|
)
|
|
$
|
(721
|
)
|
(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)
|
(9)
|
Employee Benefit Plans
|
Employee Benefits
Employee benefits charged to operating
expenses are summarized in the table below for the periods indicated.
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Payroll taxes
|
|
$
|
296
|
|
|
$
|
329
|
|
Medical plans
|
|
|
512
|
|
|
|
508
|
|
401k match and profit sharing
|
|
|
181
|
|
|
|
272
|
|
Pension plan
|
|
|
307
|
|
|
|
348
|
|
Other
|
|
|
16
|
|
|
|
19
|
|
Total employee benefits
|
|
$
|
1,312
|
|
|
$
|
1,476
|
|
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. A pension contribution in the amount of $772,000 was made on April 15, 2016.
Components of Net Pension Cost and Other
Amounts Recognized in Accumulated Other Comprehensive Income
The following items are components of net
pension cost for the periods indicated:
|
|
Estimated
|
|
|
Actual
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Service cost - benefits earned during the year
|
|
$
|
1,179
|
|
|
$
|
1,325
|
|
Interest costs on projected benefit obligations
|
|
|
956
|
|
|
|
838
|
|
Expected return on plan assets
|
|
|
(1,057
|
)
|
|
|
(957
|
)
|
Expected administrative expenses
|
|
|
70
|
|
|
|
40
|
|
Amortization of prior service cost
|
|
|
79
|
|
|
|
79
|
|
Amortization of unrecognized net loss
|
|
|
0
|
|
|
|
66
|
|
Net periodic pension expense
|
|
$
|
1,227
|
|
|
$
|
1,391
|
|
|
|
|
|
|
|
|
|
|
Pension expense - three months ended March 31, (actual)
|
|
$
|
307
|
|
|
$
|
348
|
|
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
|
|
|
62,745
|
|
|
$
|
21.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(20,007
|
)
|
|
|
22.77
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2016
|
|
|
42,738
|
|
|
$
|
20.91
|
|
|
|
1.75
|
|
|
$
|
0.00
|
|
Exercisable, March 31, 2016
|
|
|
35,255
|
|
|
$
|
21.96
|
|
|
|
1.59
|
|
|
$
|
0.00
|
|
Options have been adjusted to reflect a 4% stock dividend paid
on July 1, 2015.
Total stock-based compensation expense
was $5,000 and $4,000 for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, the total unrecognized
compensation expense related to non-vested stock awards was $15,000 and the related weighted average period over which it is expected
to be recognized is approximately 0.47 years.
Stock Dividend
On July 1,
2015, the Company paid a special stock dividend of 4% to common 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.
Basic earnings per share is computed by
dividing income available to shareholders by the weighted average number of shares outstanding during the year. Diluted earnings
per share gives effect to all dilutive potential shares that were outstanding during the year. The calculations of basic and diluted
earnings per share are as follows for the periods indicated:
|
|
Three Months Ended March 31,
|
|
(dollars in thousands,
except per share data)
|
|
2016
|
|
|
2015
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
1,998
|
|
|
$
|
2,138
|
|
Basic earnings per share
|
|
$
|
0.37
|
|
|
$
|
0.39
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
1,998
|
|
|
$
|
2,138
|
|
Average shares outstanding
|
|
|
5,436,604
|
|
|
|
5,443,344
|
|
Effect of dilutive stock options
|
|
|
0
|
|
|
|
0
|
|
Average shares outstanding including dilutive stock options
|
|
|
5,436,604
|
|
|
|
5,443,344
|
|
Diluted earnings per share
|
|
$
|
0.37
|
|
|
|
0.39
|
|
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
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
period,
except when the Company has a loss from continuing operations available to shareholders. In addition, proceeds from the assumed
exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average
market price of such stock during the period.
Options to purchase 42,738 and 84,830 shares
during the three months ended March 31, 2016 and 2015, respectively, were not included in the respective computations of diluted
earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense,
was greater than the average market price of the common shares and were considered anti-dilutive.
Repurchase Program
On
August 6, 2015, the Board of Directors authorized a share repurchase plan to purchase through open market transactions $2.0 million
market value of the Company’s common stock. During 2016, the Company repurchased 8,635 shares of common stock pursuant to
the plan at an average price of $14.94 per share.
The
table below shows activity in the outstanding shares of the Company's common stock during the past three years. Shares in the table
below are presented on a historical basis and have not been restated for the annual 4% stock dividends.
|
|
Number of shares
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Outstanding, beginning of year
|
|
|
5,441,190
|
|
|
|
5,233,986
|
|
|
|
5,233,986
|
|
Issuance of stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
4% stock dividend
|
|
|
0
|
|
|
|
209,359
|
|
|
|
209,359
|
|
Purchase of treasury stock
|
|
|
(8,635
|
)
|
|
|
(2,155
|
)
|
|
|
0
|
|
Outstanding, end of year
|
|
|
5,432,555
|
|
|
|
5,441,190
|
|
|
|
5,443,344
|
|
Except
as noted in the above table, all share and per share amounts in this note have been restated for the 4% common stock dividend distributed
July 1, 2015.
|
(12)
|
Fair Value Measurements
|
The Company uses fair value measurements
to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820,
Fair
Value Measurements and Disclosures,
defines fair value, establishes a framework for the measurement of fair value, and enhances
disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities
to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified
the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.
In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. As of March 31, 2016 and December 31, 2015, 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
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
include foreclosed real estate,
long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment
may have occurred.
Valuation Methods
for Instruments Measured at Fair Value on a Recurring Basis
Following is a description of
the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:
Available-for-Sale Securities
The fair value measurements of the Company’s
investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes,
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject
to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale
are reported at fair value utilizing Level 2 inputs.
Mortgage Servicing Rights
The fair value of mortgage
servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate,
constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation
model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market
participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost
to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value
of estimated future net servicing income. The Company classifies its servicing rights as Level 3.
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in thousands)
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
42,212
|
|
|
$
|
0
|
|
|
$
|
42,212
|
|
|
$
|
0
|
|
Asset-backed securities
|
|
|
175,843
|
|
|
|
0
|
|
|
|
175,843
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
27,718
|
|
|
|
0
|
|
|
|
27,718
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,745
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,745
|
|
Total
|
|
$
|
248,518
|
|
|
$
|
0
|
|
|
$
|
245,773
|
|
|
$
|
2,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
73,497
|
|
|
$
|
0
|
|
|
|
73,497
|
|
|
|
0
|
|
Asset-backed securities
|
|
|
128,851
|
|
|
|
0
|
|
|
|
128,851
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
32,706
|
|
|
|
0
|
|
|
|
32,706
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,847
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,847
|
|
Total
|
|
$
|
237,901
|
|
|
$
|
0
|
|
|
$
|
235,054
|
|
|
$
|
2,847
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
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 March 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
2,847
|
|
|
$
|
2,762
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(155
|
)
|
|
|
(219
|
)
|
Included in other comprehensive income
|
|
|
0
|
|
|
|
0
|
|
Purchases
|
|
|
0
|
|
|
|
0
|
|
Sales
|
|
|
0
|
|
|
|
0
|
|
Issues
|
|
|
53
|
|
|
|
119
|
|
Settlements
|
|
|
0
|
|
|
|
0
|
|
Balance at end of period
|
|
$
|
2,745
|
|
|
$
|
2,662
|
|
The change in valuation of mortgage
servicing rights
arising from inputs and assumptions decreased $3,000 and $41,000 for the three months ended March 31, 2016
and 2015, respectively.
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Input Value
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Mortgage servicing rights
|
|
Discounted cash flows
|
|
Weighted average constant prepayment rate
|
|
|
10.30
|
%
|
|
|
11.19
|
%
|
|
|
|
|
Weighted average note rate
|
|
|
3.91
|
%
|
|
|
3.94
|
%
|
|
|
|
|
Weighted average discount rate
|
|
|
9.19
|
%
|
|
|
9.26
|
%
|
|
|
|
|
Weighted average expected life (in years)
|
|
|
5.70
|
|
|
|
5.40
|
|
Valuation methods for instruments
measured at fair value on a nonrecurring basis
Following is a description of
the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:
Impaired Loans
The Company does not record loans
at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally
based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting
the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated,
a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level
3. As of March 31, 2016, the Company identified $5.2 million in impaired loans that had specific allowances for losses aggregating
$1.3 million. Related to these loans, there was $560,000 in charge-offs recorded during the three months ended March 31, 2016.
As of March 31, 2015, the Company identified $7.7 million in impaired loans that had specific allowances for losses aggregating
$2.4 million. Related to these loans, there was $95,000 in charge-offs recorded during the three months ended March 31, 2015.
Other Real Estate and Foreclosed
Assets
Other real estate and foreclosed
assets consisted of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and
residential real estate and other non-real estate property, including autos,
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
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.
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
Three
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
Months
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
Ended
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
March 31,
|
|
|
|
Total
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total Gains
|
|
(in thousands)
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
(Losses)*
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
248
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
248
|
|
|
$
|
(359
|
)
|
Real estate construction - commercial
|
|
|
44
|
|
|
|
0
|
|
|
|
0
|
|
|
|
44
|
|
|
|
0
|
|
Real estate mortgage - residential
|
|
|
3,170
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,170
|
|
|
|
(35
|
)
|
Real estate mortgage - commercial
|
|
|
243
|
|
|
|
0
|
|
|
|
0
|
|
|
|
243
|
|
|
|
(154
|
)
|
Consumer
|
|
|
100
|
|
|
|
0
|
|
|
|
0
|
|
|
|
100
|
|
|
|
(12
|
)
|
Total
|
|
$
|
3,805
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,805
|
|
|
$
|
(560
|
)
|
Other real estate and foreclosed assets
|
|
$
|
15,471
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
15,471
|
|
|
$
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
1,130
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,130
|
|
|
$
|
0
|
|
Real estate mortgage - residential
|
|
|
3,169
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,169
|
|
|
|
(71
|
)
|
Real estate mortgage - commercial
|
|
|
818
|
|
|
|
0
|
|
|
|
0
|
|
|
|
818
|
|
|
|
(23
|
)
|
Consumer
|
|
|
174
|
|
|
|
0
|
|
|
|
0
|
|
|
|
174
|
|
|
|
(1
|
)
|
Total
|
|
$
|
5,291
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,291
|
|
|
$
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate and foreclosed assets
|
|
$
|
11,751
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
11,751
|
|
|
$
|
228
|
|
* Total gains (losses) reported
for other real estate and foreclosed assets includes charge-offs, valuation write downs, and net losses taken during the periods
reported.
|
(13)
|
Fair Value of Financial Instruments
|
The following methods and assumptions were
used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
Loans
The
fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans
could be made to borrowers with similar credit ratings and for the same remaining maturities
. The net carrying amount
of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations,
or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price
concept of fair value prescribed by ASC Topic 820.
Investment Securities
A detailed description of the
fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided
in the
Fair Value Measurement
section above. A schedule of investment securities by category and maturity is provided in
the notes on
Investment Securities
.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Federal Home Loan Bank
(FHLB) Stock
Ownership of equity securities
of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair
value.
Federal Funds Sold,
Cash, and Due from Banks
The carrying amounts
of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and
cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell classified
as short-term generally mature in 90 days or less.
Mortgage Servicing
Rights
The fair value of mortgage servicing
rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant
prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model
that calculates the present value of estimated future net servicing income.
The
model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment
speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.
Cash
Surrender Value - Life Insurance
The fair
value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company
would receive the cash surrender value which equals the carrying amount.
Accrued
Interest Receivable and Payable
For accrued
interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these
financial instruments.
Deposits
The fair
value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is
equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities
Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury
For securities
sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable
estimate of fair value, as such instruments reprice in a short time period.
Subordinated Notes and
Other Borrowings
The fair
value of subordinated notes and other borrowings is based on the discounted value of contractual cashflows. The discount rate is
estimated using the rates currently offered for other borrowed money of similar remaining maturities.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
A summary of the carrying amounts
and fair values of the Company’s financial instruments at March 31, 2016 and December 31, 2015 is as follows:
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
March
31, 2016
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in thousands)
|
|
Amount
|
|
|
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
18,184
|
|
|
$
|
18,184
|
|
|
$
|
18,184
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight interest-bearing deposits
|
|
|
24,587
|
|
|
|
24,587
|
|
|
|
24,587
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
245,773
|
|
|
|
245,773
|
|
|
|
0
|
|
|
|
245,773
|
|
|
|
0
|
|
Loans, net
|
|
|
866,681
|
|
|
|
867,720
|
|
|
|
0
|
|
|
|
0
|
|
|
|
867,720
|
|
Investment in FHLB stock
|
|
|
3,433
|
|
|
|
3,433
|
|
|
|
0
|
|
|
|
3,433
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,745
|
|
|
|
2,745
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,745
|
|
Cash surrender value - life insurance
|
|
|
2,361
|
|
|
|
2,361
|
|
|
|
0
|
|
|
|
2,361
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
4,510
|
|
|
|
4,510
|
|
|
|
4,510
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,168,274
|
|
|
$
|
1,169,313
|
|
|
$
|
47,281
|
|
|
$
|
251,567
|
|
|
$
|
870,465
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
216,886
|
|
|
$
|
216,886
|
|
|
$
|
216,886
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
485,759
|
|
|
|
485,759
|
|
|
|
485,759
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
289,915
|
|
|
|
289,896
|
|
|
|
0
|
|
|
|
0
|
|
|
|
289,896
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
41,523
|
|
|
|
41,523
|
|
|
|
41,523
|
|
|
|
0
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
33,455
|
|
|
|
0
|
|
|
|
33,455
|
|
|
|
0
|
|
Federal Home Loan Bank advances
|
|
|
50,000
|
|
|
|
50,927
|
|
|
|
0
|
|
|
|
50,927
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
379
|
|
|
|
379
|
|
|
|
379
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,133,948
|
|
|
$
|
1,118,825
|
|
|
$
|
744,547
|
|
|
$
|
84,382
|
|
|
$
|
289,896
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
December
31, 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
|
|
$
|
20,484
|
|
|
$
|
20,484
|
|
|
$
|
20,484
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight interest-bearing deposits
|
|
|
7,893
|
|
|
|
7,893
|
|
|
|
7,893
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
235,054
|
|
|
|
235,054
|
|
|
|
0
|
|
|
|
235,054
|
|
|
|
0
|
|
Loans, net
|
|
|
856,476
|
|
|
|
854,775
|
|
|
|
0
|
|
|
|
0
|
|
|
|
854,775
|
|
Investment in FHLB stock
|
|
|
3,390
|
|
|
|
3,390
|
|
|
|
0
|
|
|
|
3,390
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,847
|
|
|
|
2,847
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,847
|
|
Cash surrender value - life insurance
|
|
|
2,348
|
|
|
|
2,348
|
|
|
|
0
|
|
|
|
2,348
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
4,853
|
|
|
|
4,853
|
|
|
|
4,853
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,133,345
|
|
|
$
|
1,131,644
|
|
|
$
|
33,230
|
|
|
$
|
240,792
|
|
|
$
|
857,622
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
208,035
|
|
|
$
|
208,035
|
|
|
$
|
208,035
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
441,080
|
|
|
|
441,080
|
|
|
|
441,080
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
298,082
|
|
|
|
298,323
|
|
|
|
0
|
|
|
|
0
|
|
|
|
298,323
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
56,834
|
|
|
|
56,834
|
|
|
|
56,834
|
|
|
|
0
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
40,821
|
|
|
|
0
|
|
|
|
40,821
|
|
|
|
0
|
|
Federal Home Loan Bank advances
|
|
|
50,000
|
|
|
|
52,340
|
|
|
|
0
|
|
|
|
52,340
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
382
|
|
|
|
382
|
|
|
|
382
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,103,899
|
|
|
$
|
1,097,815
|
|
|
$
|
706,331
|
|
|
$
|
93,161
|
|
|
$
|
298,323
|
|
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)
|
(14)
|
Repurchase Reserve Liability
|
The Company’s repurchase reserve
liability for estimated losses incurred on sold loans was $160,000 at both March 31, 2016 and December 31, 2015. This liability
represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans originated
for sale that may arise from representation and warranty claims that could relate to a variety of issues, including but not limited
to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines. At March
31, 2015, the Company accrued $39,000 for one repurchase loss that was remitted in April 2015. At March 31, 2016, the Company was
servicing 2,986 loans sold to the secondary market with a balance of approximately $308.1 million compared to 3,024 loans sold
with a balance of approximately $312.1 million at December 31, 2015.
|
|
Three Months Ended March 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
160
|
|
|
$
|
160
|
|
Provision for repurchase liability
|
|
|
0
|
|
|
|
40
|
|
Reimbursement of expenses
|
|
|
0
|
|
|
|
(40
|
)
|
Balance at end of year
|
|
$
|
160
|
|
|
$
|
160
|
|
|
(15)
|
Commitments and Contingencies
|
The Company issues financial instruments
with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement
and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company
uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on
its consolidated balance sheets. At March 31, 2016, no amounts have been accrued for any estimated losses for these financial instruments.
The contractual amount of off-balance-sheet
financial instruments were as follows as of the dates indicated:
|
|
March 31,
|
|
|
December 31,
|
|
(in
thousands)
|
|
2016
|
|
|
2015
|
|
Commitments to extend credit
|
|
$
|
232,687
|
|
|
$
|
161,306
|
|
Commitments to originate residential first and second mortgage loans
|
|
|
5,611
|
|
|
|
3,175
|
|
Standby letters of credit
|
|
|
1,462
|
|
|
|
1,466
|
|
Total
|
|
|
239,760
|
|
|
|
165,947
|
|
Commitments
Commitments to extend credit are agreements
to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have
fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters
of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the
customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.
Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit
are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby
letters of credit range from one month to five years at March 31, 2016.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
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.