Item 1. Financial Statements
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited)
|
|
September 30,
|
|
|
December 31,
|
|
(In
thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
19,106
|
|
|
$
|
20,484
|
|
Federal funds sold and other overnight interest-bearing deposits
|
|
|
19,788
|
|
|
|
7,893
|
|
Cash and cash equivalents
|
|
|
38,894
|
|
|
|
28,377
|
|
Investment in available-for-sale securities, at fair value
|
|
|
221,824
|
|
|
|
235,054
|
|
Other investments and securities, at cost
|
|
|
9,240
|
|
|
|
8,037
|
|
Total investment securities
|
|
|
231,064
|
|
|
|
243,091
|
|
Loans
|
|
|
947,771
|
|
|
|
865,080
|
|
Allowances for loan losses
|
|
|
(9,470
|
)
|
|
|
(8,604
|
)
|
Net loans
|
|
|
938,301
|
|
|
|
856,476
|
|
Premises and equipment - net
|
|
|
35,591
|
|
|
|
36,389
|
|
Mortgage servicing rights
|
|
|
2,370
|
|
|
|
2,847
|
|
Other real estate and repossessed assets - net
|
|
|
14,438
|
|
|
|
15,992
|
|
Accrued interest receivable
|
|
|
4,624
|
|
|
|
4,853
|
|
Cash surrender value - life insurance
|
|
|
2,396
|
|
|
|
2,348
|
|
Other assets
|
|
|
10,041
|
|
|
|
10,548
|
|
Total assets
|
|
$
|
1,277,719
|
|
|
$
|
1,200,921
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
229,987
|
|
|
$
|
208,035
|
|
Savings, interest checking and money market
|
|
|
477,945
|
|
|
|
441,080
|
|
Time deposits $100,000 and over
|
|
|
153,651
|
|
|
|
132,244
|
|
Other time deposits
|
|
|
156,448
|
|
|
|
165,838
|
|
Total deposits
|
|
|
1,018,031
|
|
|
|
947,197
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
28,504
|
|
|
|
56,834
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
49,486
|
|
Federal Home Loan Bank advances
|
|
|
79,000
|
|
|
|
50,000
|
|
Accrued interest payable
|
|
|
408
|
|
|
|
382
|
|
Other liabilities
|
|
|
9,502
|
|
|
|
9,736
|
|
Total liabilities
|
|
|
1,184,931
|
|
|
|
1,113,635
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $1 par value, authorized 15,000,000 shares; issued 5,822,357 and 5,605,202 shares, respectively
|
|
|
5,822
|
|
|
|
5,605
|
|
Surplus
|
|
|
41,497
|
|
|
|
38,549
|
|
Retained earnings
|
|
|
50,021
|
|
|
|
48,700
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
(567
|
)
|
|
|
(2,018
|
)
|
Treasury stock; 194,045 and 164,013 shares, at cost
|
|
|
(3,985
|
)
|
|
|
(3,550
|
)
|
Total stockholders’ equity
|
|
|
92,788
|
|
|
|
87,286
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,277,719
|
|
|
$
|
1,200,921
|
|
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)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
10,634
|
|
|
$
|
10,713
|
|
|
$
|
30,929
|
|
|
$
|
30,891
|
|
Interest on investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
754
|
|
|
|
872
|
|
|
|
2,523
|
|
|
|
2,663
|
|
Nontaxable
|
|
|
119
|
|
|
|
169
|
|
|
|
381
|
|
|
|
524
|
|
Federal funds sold and other overnight interest-bearing deposits
|
|
|
19
|
|
|
|
3
|
|
|
|
69
|
|
|
|
24
|
|
Dividends on other securities
|
|
|
80
|
|
|
|
72
|
|
|
|
231
|
|
|
|
139
|
|
Total interest income
|
|
|
11,606
|
|
|
|
11,829
|
|
|
|
34,133
|
|
|
|
34,241
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings, interest checking and money market
|
|
|
291
|
|
|
|
241
|
|
|
|
874
|
|
|
|
738
|
|
Time deposit accounts $100,000 and over
|
|
|
267
|
|
|
|
222
|
|
|
|
708
|
|
|
|
653
|
|
Other time deposits
|
|
|
231
|
|
|
|
269
|
|
|
|
707
|
|
|
|
831
|
|
Interest on federal funds purchased and securities sold under agreements to repurchase
|
|
|
13
|
|
|
|
12
|
|
|
|
51
|
|
|
|
28
|
|
Interest on subordinated notes
|
|
|
375
|
|
|
|
325
|
|
|
|
1,095
|
|
|
|
958
|
|
Interest on Federal Home Loan Bank advances
|
|
|
282
|
|
|
|
202
|
|
|
|
732
|
|
|
|
513
|
|
Total interest expense
|
|
|
1,459
|
|
|
|
1,271
|
|
|
|
4,167
|
|
|
|
3,721
|
|
Net interest income
|
|
|
10,147
|
|
|
|
10,558
|
|
|
|
29,966
|
|
|
|
30,520
|
|
Provision for loan losses
|
|
|
300
|
|
|
|
0
|
|
|
|
975
|
|
|
|
250
|
|
Net interest income after provision for loan losses
|
|
|
9,847
|
|
|
|
10,558
|
|
|
|
28,991
|
|
|
|
30,270
|
|
NON-INTEREST INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
|
882
|
|
|
|
903
|
|
|
|
2,544
|
|
|
|
2,597
|
|
Bank card income and fees
|
|
|
593
|
|
|
|
632
|
|
|
|
1,875
|
|
|
|
1,849
|
|
Trust department income
|
|
|
216
|
|
|
|
235
|
|
|
|
699
|
|
|
|
714
|
|
Real estate servicing fees, net
|
|
|
(4
|
)
|
|
|
177
|
|
|
|
(36
|
)
|
|
|
357
|
|
Gain on sale of mortgage loans, net
|
|
|
266
|
|
|
|
322
|
|
|
|
653
|
|
|
|
1,103
|
|
Gain on sale of investment securities
|
|
|
111
|
|
|
|
0
|
|
|
|
602
|
|
|
|
8
|
|
Other
|
|
|
61
|
|
|
|
67
|
|
|
|
185
|
|
|
|
157
|
|
Total non-interest income
|
|
|
2,125
|
|
|
|
2,336
|
|
|
|
6,522
|
|
|
|
6,785
|
|
NON-INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
5,063
|
|
|
|
5,320
|
|
|
|
15,718
|
|
|
|
15,798
|
|
Occupancy expense, net
|
|
|
730
|
|
|
|
685
|
|
|
|
2,037
|
|
|
|
2,064
|
|
Furniture and equipment expense
|
|
|
438
|
|
|
|
464
|
|
|
|
1,288
|
|
|
|
1,379
|
|
Processing, network, and bank card expense
|
|
|
878
|
|
|
|
806
|
|
|
|
2,490
|
|
|
|
2,402
|
|
Legal, examination, and professional fees
|
|
|
277
|
|
|
|
332
|
|
|
|
939
|
|
|
|
943
|
|
FDIC insurance assessment
|
|
|
196
|
|
|
|
175
|
|
|
|
560
|
|
|
|
673
|
|
Advertising and promotion
|
|
|
283
|
|
|
|
273
|
|
|
|
734
|
|
|
|
780
|
|
Postage, printing, and supplies
|
|
|
244
|
|
|
|
250
|
|
|
|
771
|
|
|
|
794
|
|
Real estate foreclosure expense (gains), net
|
|
|
49
|
|
|
|
(329
|
)
|
|
|
232
|
|
|
|
(352
|
)
|
Other
|
|
|
927
|
|
|
|
1,001
|
|
|
|
2,753
|
|
|
|
2,472
|
|
Total non-interest expense
|
|
|
9,085
|
|
|
|
8,977
|
|
|
|
27,522
|
|
|
|
26,953
|
|
Income before income taxes
|
|
|
2,887
|
|
|
|
3,917
|
|
|
|
7,991
|
|
|
|
10,102
|
|
Income tax expense
|
|
|
1,003
|
|
|
|
1,378
|
|
|
|
2,697
|
|
|
|
3,497
|
|
Net income
|
|
|
1,884
|
|
|
|
2,539
|
|
|
|
5,294
|
|
|
|
6,605
|
|
Basic earnings per share
|
|
$
|
0.33
|
|
|
$
|
0.45
|
|
|
$
|
0.94
|
|
|
$
|
1.17
|
|
Diluted earnings per share
|
|
$
|
0.33
|
|
|
$
|
0.45
|
|
|
$
|
0.94
|
|
|
$
|
1.17
|
|
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)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Net income
|
|
$
|
1,884
|
|
|
$
|
2,539
|
|
|
$
|
5,294
|
|
|
$
|
6,605
|
|
Other comprehensive income (loss), net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investment securities available-for-sale, net of tax
|
|
|
(294
|
)
|
|
|
993
|
|
|
|
1,788
|
|
|
|
627
|
|
Adjustment for gain on sale of investment securities, net of tax
|
|
|
(69
|
)
|
|
|
0
|
|
|
|
(373
|
)
|
|
|
(5
|
)
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost included in net periodic pension cost, net of tax
|
|
|
12
|
|
|
|
24
|
|
|
|
36
|
|
|
|
68
|
|
Total other comprehensive income (loss)
|
|
|
(351
|
)
|
|
|
1,017
|
|
|
|
1,451
|
|
|
|
690
|
|
Total comprehensive income
|
|
$
|
1,533
|
|
|
$
|
3,556
|
|
|
$
|
6,745
|
|
|
$
|
7,295
|
|
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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2015
|
|
$
|
5,605
|
|
|
$
|
38,549
|
|
|
$
|
48,700
|
|
|
$
|
(2,018
|
)
|
|
$
|
(3,550
|
)
|
|
$
|
87,286
|
|
Net income
|
|
|
0
|
|
|
|
0
|
|
|
|
5,294
|
|
|
|
0
|
|
|
|
0
|
|
|
|
5,294
|
|
Other comprehensive income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,451
|
|
|
|
0
|
|
|
|
1,451
|
|
Stock dividend
|
|
|
217
|
|
|
|
2,932
|
|
|
|
(3,149
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Stock based compensation expense
|
|
|
0
|
|
|
|
16
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16
|
|
Purchases of treasury stock
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
(435
|
)
|
|
|
(435
|
)
|
Cash dividends declared, common stock
|
|
|
0
|
|
|
|
0
|
|
|
|
(824
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(824
|
)
|
Balance, September 30, 2016
|
|
$
|
5,822
|
|
|
$
|
41,497
|
|
|
$
|
50,021
|
|
|
$
|
(567
|
)
|
|
$
|
(3,985
|
)
|
|
$
|
92,788
|
|
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)
|
|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,294
|
|
|
$
|
6,605
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
975
|
|
|
|
250
|
|
Depreciation expense
|
|
|
1,432
|
|
|
|
1,454
|
|
Net amortization of investment securities, premiums, and discounts
|
|
|
1,418
|
|
|
|
1,007
|
|
Stock based compensation expense
|
|
|
16
|
|
|
|
5
|
|
Change in fair value of mortgage servicing rights
|
|
|
690
|
|
|
|
291
|
|
Gain on sale of investment securities
|
|
|
(602
|
)
|
|
|
(8
|
)
|
Gain on sales and dispositions of premises and equipment
|
|
|
(9
|
)
|
|
|
(8
|
)
|
Gain on sales and dispositions of other real estate and repossessed assets
|
|
|
(215
|
)
|
|
|
(151
|
)
|
Provision for other real estate owned
|
|
|
176
|
|
|
|
(6
|
)
|
Decrease (increase) in accrued interest receivable
|
|
|
229
|
|
|
|
(93
|
)
|
Increase in cash surrender value -life insurance
|
|
|
(48
|
)
|
|
|
(45
|
)
|
(Increase) decrease in other assets
|
|
|
(135
|
)
|
|
|
2,224
|
|
Increase in accrued interest payable
|
|
|
26
|
|
|
|
5
|
|
(Decrease) increase in other liabilities
|
|
|
(243
|
)
|
|
|
1,251
|
|
Origination of mortgage loans for sale
|
|
|
(27,849
|
)
|
|
|
(40,008
|
)
|
Proceeds from the sale of mortgage loans
|
|
|
28,769
|
|
|
|
40,090
|
|
Gain on sale of mortgage loans, net
|
|
|
(653
|
)
|
|
|
(1,103
|
)
|
Other, net
|
|
|
(155
|
)
|
|
|
(194
|
)
|
Net cash provided by operating activities
|
|
|
9,116
|
|
|
|
11,566
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Net increase in loans
|
|
|
(85,087
|
)
|
|
|
(21,892
|
)
|
Purchase of available-for-sale debt securities
|
|
|
(102,000
|
)
|
|
|
(81,595
|
)
|
Proceeds from maturities of available-for-sale debt securities
|
|
|
42,441
|
|
|
|
24,188
|
|
Proceeds from calls of available-for-sale debt securities
|
|
|
13,535
|
|
|
|
11,440
|
|
Proceeds from sales of available-for-sale debt securities
|
|
|
60,720
|
|
|
|
720
|
|
Proceeds from sales of FHLB stock
|
|
|
0
|
|
|
|
400
|
|
Purchases of FHLB stock
|
|
|
(1,203
|
)
|
|
|
(4,915
|
)
|
Purchases of premises and equipment
|
|
|
(881
|
)
|
|
|
(709
|
)
|
Proceeds from sales of premises and equipment
|
|
|
9
|
|
|
|
11
|
|
Proceeds from sales of other real estate and foreclosed assets
|
|
|
3,613
|
|
|
|
1,443
|
|
Net cash used in investing activities
|
|
|
(68,853
|
)
|
|
|
(70,909
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net increase in demand deposits
|
|
|
21,952
|
|
|
|
2,014
|
|
Net increase in interest-bearing transaction accounts
|
|
|
36,865
|
|
|
|
10,819
|
|
Net increase (decrease) in time deposits
|
|
|
12,017
|
|
|
|
(10,179
|
)
|
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase
|
|
|
(28,330
|
)
|
|
|
9,792
|
|
Repayment of FHLB advances
|
|
|
(16,000
|
)
|
|
|
(55,000
|
)
|
FHLB advances
|
|
|
45,000
|
|
|
|
92,000
|
|
Purchases of treasury stock
|
|
|
(435
|
)
|
|
|
0
|
|
Cash dividends paid - common stock
|
|
|
(815
|
)
|
|
|
(785
|
)
|
Net cash provided by financing activities
|
|
|
70,254
|
|
|
|
48,661
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
10,517
|
|
|
|
(10,682
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
28,377
|
|
|
|
42,809
|
|
Cash and cash equivalents, end of period
|
|
$
|
38,894
|
|
|
$
|
32,127
|
|
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)
|
|
2016
|
|
|
2015
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
4,141
|
|
|
$
|
3,717
|
|
Income taxes
|
|
$
|
2,705
|
|
|
$
|
1,559
|
|
Noncash investing activities:
|
|
|
|
|
|
|
|
|
Other real estate and repossessed assets acquired in settlement of loans
|
|
$
|
2,020
|
|
|
$
|
4,549
|
|
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 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 Form10-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, 2016, the Company paid a special stock dividend of four percent to shareholders of record at the close of business
on June 15, 2016. 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 September 30, 2016 and December 31, 2015 is as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Commercial, financial, and agricultural
|
|
$
|
172,274
|
|
|
$
|
149,091
|
|
Real estate construction - residential
|
|
|
17,066
|
|
|
|
16,895
|
|
Real estate construction - commercial
|
|
|
48,743
|
|
|
|
33,943
|
|
Real estate mortgage - residential
|
|
|
256,786
|
|
|
|
256,086
|
|
Real estate mortgage - commercial
|
|
|
423,779
|
|
|
|
385,869
|
|
Installment and other consumer
|
|
|
29,123
|
|
|
|
23,196
|
|
Total loans
|
|
$
|
947,771
|
|
|
$
|
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 automobile financing. At September 30, 2016, loans with a carrying value of $472.9
million, or $388.3 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.
|
|
Three
Months Ended September 30, 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
|
|
$
|
2,996
|
|
|
$
|
63
|
|
|
$
|
249
|
|
|
$
|
2,293
|
|
|
$
|
3,411
|
|
|
$
|
284
|
|
|
$
|
96
|
|
|
$
|
9,392
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(94
|
)
|
|
|
(4
|
)
|
|
|
44
|
|
|
|
(152
|
)
|
|
|
450
|
|
|
|
50
|
|
|
|
6
|
|
|
|
300
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
157
|
|
|
|
0
|
|
|
|
0
|
|
|
|
92
|
|
|
|
27
|
|
|
|
86
|
|
|
|
0
|
|
|
|
362
|
|
Less recoveries on loans
|
|
|
(26
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(31
|
)
|
|
|
(36
|
)
|
|
|
(47
|
)
|
|
|
0
|
|
|
|
(140
|
)
|
Net loans charged off
|
|
|
131
|
|
|
|
0
|
|
|
|
0
|
|
|
|
61
|
|
|
|
(9
|
)
|
|
|
39
|
|
|
|
0
|
|
|
|
222
|
|
Balance at end of period
|
|
$
|
2,771
|
|
|
$
|
59
|
|
|
$
|
293
|
|
|
$
|
2,080
|
|
|
$
|
3,870
|
|
|
$
|
295
|
|
|
$
|
102
|
|
|
$
|
9,470
|
|
|
|
Nine
Months Ended September 30, 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
|
|
|
710
|
|
|
|
0
|
|
|
|
(852
|
)
|
|
|
66
|
|
|
|
944
|
|
|
|
106
|
|
|
|
1
|
|
|
|
975
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
295
|
|
|
|
0
|
|
|
|
1
|
|
|
|
474
|
|
|
|
137
|
|
|
|
209
|
|
|
|
0
|
|
|
|
1,116
|
|
Less recoveries on loans
|
|
|
(203
|
)
|
|
|
0
|
|
|
|
(502
|
)
|
|
|
(49
|
)
|
|
|
(128
|
)
|
|
|
(125
|
)
|
|
|
0
|
|
|
|
(1,007
|
)
|
Net loans charged off
|
|
|
92
|
|
|
|
0
|
|
|
|
(501
|
)
|
|
|
425
|
|
|
|
9
|
|
|
|
84
|
|
|
|
0
|
|
|
|
109
|
|
Balance at end of period
|
|
$
|
2,771
|
|
|
$
|
59
|
|
|
$
|
293
|
|
|
$
|
2,080
|
|
|
$
|
3,870
|
|
|
$
|
295
|
|
|
$
|
102
|
|
|
$
|
9,470
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
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
|
|
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 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 September 30, 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
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
632
|
|
|
$
|
0
|
|
|
$
|
8
|
|
|
$
|
386
|
|
|
$
|
262
|
|
|
$
|
14
|
|
|
$
|
0
|
|
|
$
|
1,302
|
|
Collectively evaluated for impairment
|
|
|
2,139
|
|
|
|
59
|
|
|
|
285
|
|
|
|
1,694
|
|
|
|
3,608
|
|
|
|
281
|
|
|
|
102
|
|
|
|
8,168
|
|
Total
|
|
$
|
2,771
|
|
|
$
|
59
|
|
|
$
|
293
|
|
|
$
|
2,080
|
|
|
$
|
3,870
|
|
|
$
|
295
|
|
|
$
|
102
|
|
|
$
|
9,470
|
|
Loans outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
1,811
|
|
|
$
|
0
|
|
|
$
|
51
|
|
|
$
|
5,195
|
|
|
$
|
2,068
|
|
|
$
|
117
|
|
|
$
|
0
|
|
|
$
|
9,242
|
|
Collectively evaluated for impairment
|
|
|
170,463
|
|
|
|
17,066
|
|
|
|
48,692
|
|
|
|
251,591
|
|
|
|
421,711
|
|
|
|
29,006
|
|
|
|
0
|
|
|
|
938,529
|
|
Total
|
|
$
|
172,274
|
|
|
$
|
17,066
|
|
|
$
|
48,743
|
|
|
$
|
256,786
|
|
|
$
|
423,779
|
|
|
$
|
29,123
|
|
|
$
|
0
|
|
|
$
|
947,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $9.2 million and $10.3 million at September 30, 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, less selling
costs, or by discounting the total expected future cash flows. At September 30, 2016 and December 31, 2015, $4.7 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 September 30, 2016, $1.3 million
of the Company’s allowance for loan losses was allocated to impaired loans totaling $9.2 million compared to $1.5 million
of the Company's allowance for loan losses allocated to impaired loans totaling $10.3 million at December 31, 2015. Management
determined that $2.1 million, or 23%, of total impaired loans required no reserve allocation at September 30, 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 September
30, 2016 and December 31, 2015 are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Non-accrual loans
|
|
$
|
3,587
|
|
|
$
|
4,418
|
|
Performing TDRs
|
|
|
5,655
|
|
|
|
5,850
|
|
Total impaired loans
|
|
$
|
9,242
|
|
|
$
|
10,268
|
|
The following tables provide additional
information about impaired loans at September 30, 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
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
787
|
|
|
$
|
927
|
|
|
$
|
0
|
|
Real estate - residential
|
|
|
1,345
|
|
|
|
1,346
|
|
|
|
0
|
|
Total
|
|
$
|
2,132
|
|
|
$
|
2,273
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,024
|
|
|
$
|
1,059
|
|
|
$
|
632
|
|
Real estate - construction commercial
|
|
|
51
|
|
|
|
56
|
|
|
|
8
|
|
Real estate - residential
|
|
|
3,850
|
|
|
|
3,914
|
|
|
|
386
|
|
Real estate - commercial
|
|
|
2,068
|
|
|
|
2,404
|
|
|
|
262
|
|
Consumer
|
|
|
117
|
|
|
|
147
|
|
|
|
14
|
|
Total
|
|
$
|
7,110
|
|
|
$
|
7,580
|
|
|
$
|
1,302
|
|
Total impaired loans
|
|
$
|
9,242
|
|
|
$
|
9,853
|
|
|
$
|
1,302
|
|
|
|
|
|
|
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 September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
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
|
|
$
|
460
|
|
|
$
|
(9
|
)
|
|
$
|
3,416
|
|
|
$
|
6
|
|
|
$
|
491
|
|
|
$
|
18
|
|
|
$
|
4,033
|
|
|
$
|
33
|
|
Real estate - construction residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,101
|
|
|
|
0
|
|
Real estate - construction commercial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,002
|
|
|
|
0
|
|
Real estate - residential
|
|
|
2,050
|
|
|
|
27
|
|
|
|
2,326
|
|
|
|
5
|
|
|
|
1,640
|
|
|
|
63
|
|
|
|
2,924
|
|
|
|
26
|
|
Real estate - commercial
|
|
|
1,167
|
|
|
|
17
|
|
|
|
2,958
|
|
|
|
17
|
|
|
|
1,769
|
|
|
|
17
|
|
|
|
8,978
|
|
|
|
103
|
|
Consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
10
|
|
|
|
1
|
|
Total
|
|
$
|
3,677
|
|
|
$
|
35
|
|
|
$
|
8,700
|
|
|
$
|
28
|
|
|
$
|
3,900
|
|
|
$
|
98
|
|
|
$
|
19,048
|
|
|
$
|
163
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,398
|
|
|
$
|
(13
|
)
|
|
$
|
787
|
|
|
$
|
5
|
|
|
$
|
924
|
|
|
$
|
9
|
|
|
$
|
1,389
|
|
|
$
|
18
|
|
Real estate - construction residential
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Real estate - construction commercial
|
|
|
51
|
|
|
|
0
|
|
|
|
55
|
|
|
|
0
|
|
|
|
64
|
|
|
|
0
|
|
|
|
28
|
|
|
|
0
|
|
Real estate - residential
|
|
|
2,992
|
|
|
|
20
|
|
|
|
4,850
|
|
|
|
30
|
|
|
|
3,741
|
|
|
|
78
|
|
|
|
4,713
|
|
|
|
80
|
|
Real estate - commercial
|
|
|
811
|
|
|
|
14
|
|
|
|
1,228
|
|
|
|
0
|
|
|
|
717
|
|
|
|
61
|
|
|
|
1,216
|
|
|
|
0
|
|
Consumer
|
|
|
118
|
|
|
|
(1
|
)
|
|
|
162
|
|
|
|
0
|
|
|
|
123
|
|
|
|
0
|
|
|
|
209
|
|
|
|
0
|
|
Total
|
|
$
|
5,370
|
|
|
$
|
20
|
|
|
$
|
7,082
|
|
|
$
|
35
|
|
|
$
|
5,569
|
|
|
$
|
148
|
|
|
$
|
7,555
|
|
|
$
|
98
|
|
Total impaired loans
|
|
$
|
9,047
|
|
|
$
|
55
|
|
|
$
|
15,782
|
|
|
$
|
63
|
|
|
$
|
9,469
|
|
|
$
|
246
|
|
|
$
|
26,603
|
|
|
$
|
261
|
|
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 $55,000
and $246,000, for the three months and nine months ended September 30, 2016, respectively, compared to $63,000 and $261,000 for
the three and nine months ended September 30, 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 September 30, 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
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
170,674
|
|
|
$
|
443
|
|
|
$
|
0
|
|
|
$
|
1,157
|
|
|
$
|
172,274
|
|
Real Estate Construction - Residential
|
|
|
16,815
|
|
|
|
251
|
|
|
|
0
|
|
|
|
0
|
|
|
|
17,066
|
|
Real Estate Construction - Commercial
|
|
|
48,692
|
|
|
|
0
|
|
|
|
0
|
|
|
|
51
|
|
|
|
48,743
|
|
Real Estate Mortgage - Residential
|
|
|
253,884
|
|
|
|
1,138
|
|
|
|
60
|
|
|
|
1,704
|
|
|
|
256,786
|
|
Real Estate Mortgage - Commercial
|
|
|
422,409
|
|
|
|
811
|
|
|
|
0
|
|
|
|
559
|
|
|
|
423,779
|
|
Installment and Other Consumer
|
|
|
28,846
|
|
|
|
160
|
|
|
|
1
|
|
|
|
116
|
|
|
|
29,123
|
|
Total
|
|
$
|
941,320
|
|
|
$
|
2,803
|
|
|
$
|
61
|
|
|
$
|
3,587
|
|
|
$
|
947,771
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
148,597
|
|
|
$
|
185
|
|
|
$
|
1
|
|
|
$
|
308
|
|
|
$
|
149,091
|
|
Real Estate Construction - Residential
|
|
|
16,895
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
16,895
|
|
Real Estate Construction - Commercial
|
|
|
33,776
|
|
|
|
65
|
|
|
|
0
|
|
|
|
102
|
|
|
|
33,943
|
|
Real Estate Mortgage - Residential
|
|
|
251,253
|
|
|
|
2,511
|
|
|
|
0
|
|
|
|
2,322
|
|
|
|
256,086
|
|
Real Estate Mortgage - Commercial
|
|
|
383,684
|
|
|
|
643
|
|
|
|
0
|
|
|
|
1,542
|
|
|
|
385,869
|
|
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, where the Company grants concessions to the borrower in the restructuring
that it would not otherwise consider. Loans classified as TDRs which continue to accrue 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, 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 September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
9,858
|
|
|
$
|
662
|
|
|
$
|
1,167
|
|
|
$
|
18,078
|
|
|
$
|
45,869
|
|
|
$
|
0
|
|
|
$
|
75,634
|
|
Substandard
|
|
|
140
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,201
|
|
|
|
462
|
|
|
|
0
|
|
|
|
1,803
|
|
Performing TDRs
|
|
|
654
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,492
|
|
|
|
1,509
|
|
|
|
0
|
|
|
|
5,655
|
|
Non-accrual
|
|
|
1,157
|
|
|
|
0
|
|
|
|
51
|
|
|
|
1,704
|
|
|
|
559
|
|
|
|
116
|
|
|
|
3,587
|
|
Total
|
|
$
|
11,809
|
|
|
$
|
662
|
|
|
$
|
1,218
|
|
|
$
|
24,475
|
|
|
$
|
48,399
|
|
|
$
|
116
|
|
|
$
|
86,679
|
|
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 September 30, 2016, loans classified as TDRs totaled $6.3
million, of which $597,000 were classified as nonperforming TDRs and included in non-accrual loans and $5.7 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 $445,000 and $910,000 related to TDRs were allocated
to the allowance for loan losses at September 30, 2016 and December 31, 2015, respectively.
The following table summarizes loans that were modified as TDRs
during the periods indicated.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three
Months Ended September 30,
|
|
|
|
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
|
|
|
2
|
|
|
$
|
32
|
|
|
$
|
32
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Real estate mortgage - residential
|
|
|
4
|
|
|
|
298
|
|
|
|
296
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
6
|
|
|
$
|
330
|
|
|
$
|
328
|
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
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
|
|
|
2
|
|
|
$
|
32
|
|
|
$
|
32
|
|
|
|
3
|
|
|
$
|
250
|
|
|
$
|
240
|
|
Real estate mortgage - residential
|
|
|
5
|
|
|
|
376
|
|
|
|
374
|
|
|
|
3
|
|
|
|
510
|
|
|
|
464
|
|
Real estate mortgage - commercial
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
4
|
|
|
|
1,273
|
|
|
|
1,137
|
|
Total
|
|
|
7
|
|
|
$
|
408
|
|
|
$
|
406
|
|
|
|
10
|
|
|
$
|
2,033
|
|
|
$
|
1,841
|
|
(1) The amounts reported post-modification
are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were
fully paid down, charged-off or foreclosed upon during the period ended are not reported.
The Company’s portfolio
of loans classified as TDRs include concessions for the borrower given financial condition such as interest rates below the current
market rate, deferring principal payments, and extending maturity dates. There were six loans and seven loans meeting the TDR criteria
during the three and nine months ended September 30, 2016, respectively, compared to no loans and ten loans during the three and
nine months ended September 30, 2015, respectively.
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
was one TDR that defaulted during the three and nine months ended September 30, 2016 and is in the process of foreclosure within
twelve months of its modification date and no TDR’s defaulted during 2015. See
Lending and Credit Management
section
for further information.
|
(3)
|
Other Real Estate and Repossessed Assets
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Commercial
|
|
$
|
831
|
|
|
$
|
1,445
|
|
Real estate construction - commercial
|
|
|
12,380
|
|
|
|
12,380
|
|
Real estate mortgage - residential
|
|
|
1,020
|
|
|
|
477
|
|
Real estate mortgage - commercial
|
|
|
3,439
|
|
|
|
4,923
|
|
Repossessed assets
|
|
|
28
|
|
|
|
0
|
|
Total
|
|
$
|
17,698
|
|
|
$
|
19,225
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,260
|
)
|
|
|
(3,233
|
)
|
Total other real estate and repossessed assets
|
|
$
|
14,438
|
|
|
$
|
15,992
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
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,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance
at beginning of period
|
|
$
|
18,462
|
|
|
$
|
15,749
|
|
|
$
|
19,225
|
|
|
$
|
15,140
|
|
Additions
|
|
|
386
|
|
|
|
3,032
|
|
|
|
2,020
|
|
|
|
4,549
|
|
Proceeds from sales
|
|
|
(1,214
|
)
|
|
|
(407
|
)
|
|
|
(3,613
|
)
|
|
|
(1,443
|
)
|
Charge-offs against the valuation allowance
for other real estate owned, net
|
|
|
(48
|
)
|
|
|
0
|
|
|
|
(149
|
)
|
|
|
(16
|
)
|
Net gain on sales
|
|
|
112
|
|
|
|
7
|
|
|
|
215
|
|
|
|
151
|
|
Total other real estate and repossessed
assets
|
|
$
|
17,698
|
|
|
$
|
18,381
|
|
|
$
|
17,698
|
|
|
$
|
18,381
|
|
Less valuation
allowance for other real estate owned
|
|
|
(3,260
|
)
|
|
|
(3,233
|
)
|
|
|
(3,260
|
)
|
|
|
(3,233
|
)
|
Balance at end
of period
|
|
$
|
14,438
|
|
|
$
|
15,148
|
|
|
$
|
14,438
|
|
|
$
|
15,148
|
|
At September 30, 2016, $141,000 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 September 30,
|
|
|
Nine
Months Ended September 30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance, beginning of period
|
|
$
|
3,208
|
|
|
$
|
3,233
|
|
|
$
|
3,233
|
|
|
$
|
3,255
|
|
Provision for other real estate owned
|
|
|
100
|
|
|
|
0
|
|
|
|
176
|
|
|
|
(6
|
)
|
Charge-offs
|
|
|
(48
|
)
|
|
|
0
|
|
|
|
(149
|
)
|
|
|
(16
|
)
|
Balance, end of period
|
|
$
|
3,260
|
|
|
$
|
3,233
|
|
|
$
|
3,260
|
|
|
$
|
3,233
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(4)
|
Investment Securities
|
The amortized cost, contractual maturity,
gross unrealized gains and losses, and fair value of debt securities classified as available-for-sale at September 30, 2016 and
December 31, 2015 are shown below:
|
|
Maturity*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
1-5
|
|
|
5-10
|
|
|
After
|
|
|
Amortized
|
|
|
Gross
Unrealized
|
|
|
Fair
|
|
(in
thousands)
|
|
or Less
|
|
|
Years
|
|
|
Years
|
|
|
10 Years
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
10,954
|
|
|
$
|
2,494
|
|
|
$
|
13,448
|
|
|
$
|
13
|
|
|
$
|
(121
|
)
|
|
$
|
13,340
|
|
Government sponsored enterprises
|
|
|
3,010
|
|
|
|
30,595
|
|
|
|
0
|
|
|
|
0
|
|
|
|
33,605
|
|
|
|
82
|
|
|
|
(10
|
)
|
|
|
33,677
|
|
Obligations of states and political subdivisions
|
|
|
2,315
|
|
|
|
16,672
|
|
|
|
16,112
|
|
|
|
1,332
|
|
|
|
36,431
|
|
|
|
436
|
|
|
|
(100
|
)
|
|
|
36,767
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
1,040
|
|
|
|
115,679
|
|
|
|
17,789
|
|
|
|
1,516
|
|
|
|
136,024
|
|
|
|
1,159
|
|
|
|
(159
|
)
|
|
|
137,024
|
|
Commercial - government agencies
|
|
|
0
|
|
|
|
988
|
|
|
|
0
|
|
|
|
0
|
|
|
|
988
|
|
|
|
28
|
|
|
|
0
|
|
|
|
1,016
|
|
Total mortgage-backed securities
|
|
|
1,040
|
|
|
|
116,667
|
|
|
|
17,789
|
|
|
|
1,516
|
|
|
|
137,012
|
|
|
|
1,187
|
|
|
|
(159
|
)
|
|
|
138,040
|
|
Total available-for-sale securities
|
|
$
|
6,365
|
|
|
$
|
163,934
|
|
|
$
|
44,855
|
|
|
$
|
5,342
|
|
|
$
|
220,496
|
|
|
$
|
1,718
|
|
|
$
|
(390
|
)
|
|
$
|
221,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
23,067
|
|
|
$
|
50,538
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
73,605
|
|
|
$
|
127
|
|
|
$
|
(235
|
)
|
|
$
|
73,497
|
|
Obligations of states and political subdivisions
|
|
|
1,827
|
|
|
|
16,975
|
|
|
|
12,593
|
|
|
|
829
|
|
|
|
32,224
|
|
|
|
493
|
|
|
|
(11
|
)
|
|
|
32,706
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
1,508
|
|
|
|
106,648
|
|
|
|
19,291
|
|
|
|
1,746
|
|
|
|
129,193
|
|
|
|
432
|
|
|
|
(1,768
|
)
|
|
|
127,857
|
|
Commercial - government agencies
|
|
|
0
|
|
|
|
986
|
|
|
|
0
|
|
|
|
0
|
|
|
|
986
|
|
|
|
8
|
|
|
|
0
|
|
|
|
994
|
|
Total mortgage-backed securities
|
|
|
1,508
|
|
|
|
107,634
|
|
|
|
19,291
|
|
|
|
1,746
|
|
|
|
130,179
|
|
|
|
440
|
|
|
|
(1,768
|
)
|
|
|
128,851
|
|
Total available-for-sale securities
|
|
$
|
26,402
|
|
|
$
|
175,147
|
|
|
$
|
31,884
|
|
|
$
|
2,575
|
|
|
$
|
236,008
|
|
|
$
|
1,060
|
|
|
$
|
(2,014
|
)
|
|
$
|
235,054
|
|
* Expected maturities may differ from contractual
maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
All of the Company’s investment securities
are classified as available for sale. Agency bonds and notes, small business administration guaranteed loan certificates (SBA),
residential and commercial agency mortgage-backed securities, and agency collateralized mortgage obligations (CMO) include securities
issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB), which are U.S. government-sponsored
enterprises.
Other investments and securities primarily
consist of Federal Home Loan Bank stock and the Company’s interest in statutory trusts. These securities are reported at
cost in the amount of $9.2 million and $8.0 million as of September 30, 2016 and December 31, 2015, respectively.
Debt securities with carrying values aggregating
approximately $183.2 million and $182.7 million at September 30, 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.
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, 2016 and December 31, 2015 were as follows:
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
11,827
|
|
|
$
|
(121
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
11,827
|
|
|
$
|
(121
|
)
|
Government sponsored enterprises
|
|
|
9,001
|
|
|
|
(10
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
9,001
|
|
|
|
(10
|
)
|
Obligations of states and political subdivisions
|
|
|
15,202
|
|
|
|
(100
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
15,202
|
|
|
|
(100
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
31,631
|
|
|
|
(109
|
)
|
|
|
3,376
|
|
|
|
(50
|
)
|
|
|
35,007
|
|
|
|
(159
|
)
|
Total
|
|
$
|
67,661
|
|
|
$
|
(340
|
)
|
|
$
|
3,376
|
|
|
$
|
(50
|
)
|
|
$
|
71,037
|
|
|
$
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
43,539
|
|
|
$
|
(222
|
)
|
|
$
|
1,002
|
|
|
$
|
(13
|
)
|
|
$
|
44,541
|
|
|
$
|
(235
|
)
|
Obligations of states and political subdivisions
|
|
|
2,571
|
|
|
|
(6
|
)
|
|
|
718
|
|
|
|
(5
|
)
|
|
|
3,289
|
|
|
|
(11
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
56,095
|
|
|
|
(620
|
)
|
|
|
43,576
|
|
|
|
(1,148
|
)
|
|
|
99,671
|
|
|
|
(1,768
|
)
|
Total
|
|
$
|
102,205
|
|
|
$
|
(848
|
)
|
|
$
|
45,296
|
|
|
$
|
(1,166
|
)
|
|
$
|
147,501
|
|
|
$
|
(2,014
|
)
|
The total
available for sale portfolio consisted of approximately 282 securities at September 30, 2016. The portfolio included 76 securities
having an aggregate fair value of $71.0 million that were in a loss position at September 30, 2016. Securities identified as temporarily
impaired which had been in a loss position for 12 months or longer had a fair value of $3.4 million at September 30, 2016. The
$390,000 aggregate unrealized loss included in accumulated other comprehensive income at September 30, 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 had a fair value of $45.3 million at December 31, 2015. 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 September
30, 2016 and December 31, 2015, respectively. In the absence of changes in credit quality of these investments, the fair value
is expected to recover on all debt securities as they approach their maturity date, or re-pricing date or if market yields for
such investments decline. In addition, the Company does not have the intent to sell these investments over the period of recovery,
and it is not more likely than not that the Company will be required to sell such investment securities.
The following table 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)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gains realized on sales
|
|
$
|
133
|
|
|
$
|
0
|
|
|
$
|
623
|
|
|
$
|
8
|
|
Losses realized on sales
|
|
|
(21
|
)
|
|
|
0
|
|
|
|
(21
|
)
|
|
|
0
|
|
Other-than-temporary impairment recognized
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Investment securities gains
|
|
$
|
112
|
|
|
$
|
0
|
|
|
$
|
602
|
|
|
$
|
8
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Mortgage Servicing Rights
At September 30, 2016, the Company was
servicing approximately $299.7 million of loans sold to the secondary market compared to $312.1 million at December 31, 2015, and
$311.8 million at September 30, 2015. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were
$233,000 and $654,000 for the three and nine months ended September 30, 2016, respectively, compared to $206,000 and $648,000 for
the three and nine months ended September 30, 2015, 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)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
2,511
|
|
|
$
|
2,727
|
|
|
$
|
2,847
|
|
|
$
|
2,762
|
|
Originated mortgage servicing rights
|
|
|
96
|
|
|
|
76
|
|
|
|
213
|
|
|
|
303
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to change in model inputs and assumptions (1)
|
|
|
(52
|
)
|
|
|
136
|
|
|
|
(197
|
)
|
|
|
223
|
|
Other changes in fair value (2)
|
|
|
(185
|
)
|
|
|
(165
|
)
|
|
|
(493
|
)
|
|
|
(514
|
)
|
Balance at end of period
|
|
$
|
2,370
|
|
|
$
|
2,774
|
|
|
$
|
2,370
|
|
|
$
|
2,774
|
|
(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, 2016 and 2015:
|
|
Nine Months Ended September
30,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average constant prepayment rate
|
|
|
13.20
|
%
|
|
|
10.06
|
%
|
Weighted average note rate
|
|
|
3.88
|
%
|
|
|
3.92
|
%
|
Weighted average discount rate
|
|
|
9.20
|
%
|
|
|
9.35
|
%
|
Weighted average expected life (in years)
|
|
|
4.80
|
|
|
|
5.80
|
|
|
(6)
|
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal funds purchased
|
|
$
|
0
|
|
|
$
|
0
|
|
Repurchase agreements
|
|
|
28,504
|
|
|
|
56,834
|
|
Total
|
|
$
|
28,504
|
|
|
$
|
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 secured borrowings, 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 September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
3,381
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,381
|
|
Mortgage-backed securities
|
|
|
25,123
|
|
|
|
0
|
|
|
|
0
|
|
|
|
25,123
|
|
Total
|
|
$
|
28,504
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
28,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
46,819
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
46,819
|
|
Mortgage-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 34.7% for the three months ended September 30, 2016
compared to 35.2% for the three months ended September 30, 2015. Income taxes as a percentage of earnings before income taxes as
reported in the consolidated financial statements were 33.8% for the nine months ended September 30, 2016 compared to 34.6% for
the nine months ended September 30, 2015. The decrease in tax rates year over year is primarily due to an immaterial return to
provision adjustment recorded in the first quarter of 2016.
The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income of the appropriate character during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, taxable income available in carryback years, and tax planning strategies in making this assessment. With the exception
of certain capital losses generated during 2013 and 2014, it is management’s opinion that the Company will more likely than
not realize the benefits of these temporary differences as of September 30, 2016 and, therefore, only established a valuation
reserve against the Company’s capital loss carry forward. Management arrived at this conclusion 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. As indicated
above, the Company generated approximately $219,000 of capital losses during 2013 and 2014 as a result of disposing of certain
limited partnership interests. The capital losses will expire between 2019 and 2020, and it is management’s opinion that
the Company will not more likely than not generate the capital gain income necessary to utilize the capital loss carry forwards
before the capital losses expire. As such, the Company has established an $83,000 valuation reserve against its capital loss carry
forward deferred tax asset.
Accumulated Other Comprehensive Loss
The following details the change in the
components of the Company’s accumulated other comprehensive income (loss) for the nine months ended September 30, 2016 and
2015:
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Nine
months ended September 30, 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 (loss), before reclassifications
|
|
|
2,884
|
|
|
|
59
|
|
|
|
2,943
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(602
|
)
|
|
|
0
|
|
|
|
(602
|
)
|
Current period other comprehensive income, before tax
|
|
|
2,282
|
|
|
|
59
|
|
|
|
2,341
|
|
Income tax expense
|
|
|
(867
|
)
|
|
|
(23
|
)
|
|
|
(890
|
)
|
Current period other comprehensive income, net of tax
|
|
|
1,415
|
|
|
|
36
|
|
|
|
1,451
|
|
Balance at end of period
|
|
$
|
824
|
|
|
$
|
(1,391
|
)
|
|
$
|
(567
|
)
|
|
|
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 (loss), before reclassifications
|
|
|
1,012
|
|
|
|
108
|
|
|
|
1,120
|
|
Amounts reclassified from accumulated other comprehensive income (loss)
|
|
|
(8
|
)
|
|
|
0
|
|
|
|
(8
|
)
|
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
|
)
|
(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 September 30,
|
|
|
Nine
Months Ended September 30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Payroll taxes
|
|
$
|
251
|
|
|
$
|
261
|
|
|
$
|
883
|
|
|
$
|
860
|
|
Medical plans
|
|
|
415
|
|
|
|
491
|
|
|
|
1,414
|
|
|
|
1,462
|
|
401k match and profit sharing
|
|
|
201
|
|
|
|
225
|
|
|
|
585
|
|
|
|
720
|
|
Pension plan
|
|
|
307
|
|
|
|
348
|
|
|
|
920
|
|
|
|
1,044
|
|
Other
|
|
|
56
|
|
|
|
56
|
|
|
|
118
|
|
|
|
99
|
|
Total employee benefits
|
|
$
|
1,230
|
|
|
$
|
1,381
|
|
|
$
|
3,920
|
|
|
$
|
4,185
|
|
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 September 30, (actual)
|
|
$
|
307
|
|
|
$
|
348
|
|
Pension expense - nine months ended September 30, (actual)
|
|
$
|
920
|
|
|
$
|
1,044
|
|
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 553,361 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, December 31, 2015
|
|
|
65,270
|
|
|
$
|
20.68
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(20,812
|
)
|
|
|
21.89
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
44,458
|
|
|
$
|
20.11
|
|
|
|
1.25
|
|
|
$
|
0.00
|
|
Exercisable, September 30, 2016
|
|
|
43,189
|
|
|
$
|
20.25
|
|
|
|
1.22
|
|
|
$
|
0.00
|
|
Options have been adjusted to reflect a 4% stock dividend paid
on July 1, 2016.
Total stock-based compensation expense
was $5,000 and $16,000 for the three and nine months ended September 30, 2016, respectively, compared to $1,000 and $5,000 for
both the three and nine months ended September 30, 2015, respectively. As of September 30, 2016, the total unrecognized compensation
expense related to non-vested stock awards was $4,000 and the related weighted average period over which it is expected to be recognized
is approximately 0.51 years.
Stock Dividend
On July 1,
2016, the Company paid a special stock dividend of 4% to common shareholders of record at the close of business on June 15, 2016.
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 September
30,
|
|
|
Nine Months Ended September
30,
|
|
(dollars in thousands,
except per share data)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
1,884
|
|
|
$
|
2,539
|
|
|
$
|
5,294
|
|
|
$
|
6,605
|
|
Basic earnings per share
|
|
$
|
0.33
|
|
|
$
|
0.45
|
|
|
$
|
0.94
|
|
|
$
|
1.17
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
1,884
|
|
|
$
|
2,539
|
|
|
$
|
5,294
|
|
|
$
|
6,605
|
|
Average shares outstanding
|
|
|
5,632,362
|
|
|
|
5,660,499
|
|
|
|
5,643,190
|
|
|
|
5,660,499
|
|
Effect of dilutive stock options
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Average shares outstanding including dilutive stock options
|
|
|
5,632,362
|
|
|
|
5,660,499
|
|
|
|
5,643,190
|
|
|
|
5,660,499
|
|
Diluted earnings per share
|
|
$
|
0.33
|
|
|
|
0.45
|
|
|
$
|
0.94
|
|
|
|
1.17
|
|
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Under
the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock,
when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when
the Company has a loss from continuing operations available to shareholders. In addition, proceeds from the assumed exercise of
dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price
of such stock during the period.
Options to purchase 44,458 and 69,106 shares
during the three and nine months ended September 30, 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 30,033 shares of common stock pursuant to the plan at an average price of $14.50 per share. At September
30, 2016, approximately $1.5 million may be used to purchase shares under the plan.
The
table below shows activity in the outstanding shares of the Company's common stock during the periods presented in the table. 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
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
Outstanding, beginning of period
|
|
|
5,441,190
|
|
|
|
5,233,986
|
|
|
|
5,233,986
|
|
Issuance of stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
4% stock dividend
|
|
|
217,155
|
|
|
|
209,359
|
|
|
|
209,359
|
|
Purchase of treasury stock
|
|
|
(30,033
|
)
|
|
|
(2,155
|
)
|
|
|
0
|
|
Outstanding, end of period
|
|
|
5,628,312
|
|
|
|
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, 2016.
|
(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 September 30, 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.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The Company is required
to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a
nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate,
long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment
may have occurred.
Valuation Methods
for Instruments Measured at Fair Value on a Recurring Basis
Following is a description of
the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:
Available-for-Sale Securities
The fair value measurements of the Company’s
investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes,
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject
to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale
are reported at fair value utilizing Level 2 inputs.
Mortgage Servicing Rights
The fair value of mortgage
servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate,
constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation
model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market
participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost
to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value
of estimated future net servicing income. The Company classifies its servicing rights as Level 3.
|
|
|
|
|
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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,340
|
|
|
$
|
0
|
|
|
$
|
13,340
|
|
|
$
|
0
|
|
Government sponsored enterprises
|
|
|
33,677
|
|
|
|
0
|
|
|
|
33,677
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
36,767
|
|
|
|
0
|
|
|
|
36,767
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
138,040
|
|
|
|
0
|
|
|
|
138,040
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,370
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,370
|
|
Total
|
|
$
|
224,194
|
|
|
$
|
0
|
|
|
$
|
221,824
|
|
|
$
|
2,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
73,497
|
|
|
$
|
0
|
|
|
|
73,497
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
32,706
|
|
|
|
0
|
|
|
|
32,706
|
|
|
|
0
|
|
Mortgage and asset-backed securities
|
|
|
128,851
|
|
|
|
0
|
|
|
|
128,851
|
|
|
|
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
|
|
|
Fair Value Measurements
Using
|
|
|
|
Significant Unobservable
Inputs
|
|
|
Significant Unobservable
Inputs
|
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
|
Mortgage
Servicing Rights
|
|
|
Mortgage
Servicing Rights
|
|
(in thousands)
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
2,511
|
|
|
$
|
2,727
|
|
|
$
|
2,847
|
|
|
$
|
2,762
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(237
|
)
|
|
|
(29
|
)
|
|
|
(690
|
)
|
|
|
(291
|
)
|
Included in other comprehensive income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Purchases
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Sales
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Issues
|
|
|
96
|
|
|
|
76
|
|
|
|
213
|
|
|
|
303
|
|
Settlements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Balance at end of period
|
|
$
|
2,370
|
|
|
$
|
2,774
|
|
|
$
|
2,370
|
|
|
$
|
2,774
|
|
The change in valuation of mortgage
servicing rights arising from inputs and assumptions decreased $52,000 and $197,000, compared to an increase of $136,000 and $223,000
for the three and nine months ended September 30, 2016 and 2015, respectively. MSR values have been falling steadily throughout
2016. The lower values are primarily related to faster prepay speed assumptions, consistent with lower long term interest rates.
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
Valuation
Technique
|
|
Unobservable
Inputs
|
|
Input
Value
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Mortgage servicing rights
|
|
Discounted cash flows
|
|
Weighted average constant prepayment rate
|
|
|
13.20
|
%
|
|
|
10.06
|
%
|
|
|
|
|
Weighted average note rate
|
|
|
3.88
|
%
|
|
|
3.92
|
%
|
|
|
|
|
Weighted average discount rate
|
|
|
9.20
|
%
|
|
|
9.35
|
%
|
|
|
|
|
Weighted average expected life (in years)
|
|
|
4.80
|
|
|
|
5.80
|
|
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 less estimated
selling costs, or by discounting the total expected future cash flows. Once the fair value of the collateral less estimated selling
costs 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, 2016, the Company identified $7.1 million in
impaired loans that had specific allowances for losses aggregating $1.3 million. Related to these loans, there was $153,000 and
$920,000 in charge-offs recorded during the three and nine months ended September 30, 2016, respectively. 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.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
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, 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
|
|
|
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, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
392
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
392
|
|
|
$
|
0
|
|
|
|
(359
|
)
|
Real estate construction - commercial
|
|
|
43
|
|
|
|
0
|
|
|
|
0
|
|
|
|
43
|
|
|
|
0
|
|
|
|
0
|
|
Real estate mortgage - residential
|
|
|
3,464
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,464
|
|
|
|
(80
|
)
|
|
|
(295
|
)
|
Real estate mortgage - commercial
|
|
|
1,806
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,806
|
|
|
|
(71
|
)
|
|
|
(248
|
)
|
Consumer
|
|
|
103
|
|
|
|
0
|
|
|
|
0
|
|
|
|
103
|
|
|
|
(2
|
)
|
|
|
(18
|
)
|
Total
|
|
$
|
5,808
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,808
|
|
|
$
|
(153
|
)
|
|
|
(920
|
)
|
Other real estate and foreclosed assets
|
|
$
|
14,438
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
14,438
|
|
|
$
|
21
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
462
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
462
|
|
|
$
|
(540
|
)
|
|
|
(561
|
)
|
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
|
|
* 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.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Investment Securities
A detailed description of the
fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided
in the
Fair Value Measurement
section above. A schedule of investment securities by category and maturity is provided in
the notes on
Investment Securities
.
Federal Home Loan Bank (FHLB)
Stock
Ownership of equity securities
of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair
value.
Federal Funds Sold,
Cash, and Due from Banks
The carrying amounts
of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and
cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell classified
as short-term generally mature in 90 days or less.
Mortgage Servicing
Rights
The fair value of mortgage servicing
rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant
prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model
that calculates the present value of estimated future net servicing income.
The
model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment
speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.
Cash
Surrender Value - Life Insurance
The fair
value of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company
would receive the cash surrender value which equals the carrying amount.
Accrued
Interest Receivable and Payable
For accrued
interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these
financial instruments.
Deposits
The fair
value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is
equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
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, 2016 and December 31, 2015 is as follows:
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
September
30, 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
|
|
$
|
19,106
|
|
|
$
|
19,106
|
|
|
$
|
19,106
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight interest-bearing deposits
|
|
|
19,788
|
|
|
|
19,788
|
|
|
|
19,788
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
221,824
|
|
|
|
221,824
|
|
|
|
0
|
|
|
|
221,824
|
|
|
|
0
|
|
Loans, net
|
|
|
938,301
|
|
|
|
939,573
|
|
|
|
0
|
|
|
|
0
|
|
|
|
939,573
|
|
Investment in FHLB stock
|
|
|
4,593
|
|
|
|
4,593
|
|
|
|
0
|
|
|
|
4,593
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,370
|
|
|
|
2,370
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,370
|
|
Cash surrender value - life insurance
|
|
|
2,396
|
|
|
|
2,396
|
|
|
|
0
|
|
|
|
2,396
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
4,624
|
|
|
|
4,624
|
|
|
|
4,624
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,213,002
|
|
|
$
|
1,214,274
|
|
|
$
|
43,518
|
|
|
$
|
228,813
|
|
|
$
|
941,943
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
229,987
|
|
|
$
|
229,987
|
|
|
$
|
229,987
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
477,945
|
|
|
|
477,945
|
|
|
|
477,945
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
310,099
|
|
|
|
309,188
|
|
|
|
0
|
|
|
|
0
|
|
|
|
309,188
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
28,504
|
|
|
|
28,504
|
|
|
|
28,504
|
|
|
|
0
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
31,970
|
|
|
|
0
|
|
|
|
31,970
|
|
|
|
0
|
|
Federal Home Loan Bank advances
|
|
|
79,000
|
|
|
|
79,510
|
|
|
|
0
|
|
|
|
79,510
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
408
|
|
|
|
408
|
|
|
|
408
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,175,429
|
|
|
$
|
1,157,512
|
|
|
$
|
736,844
|
|
|
$
|
111,480
|
|
|
$
|
309,188
|
|
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 September 30, 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 September
30, 2016, the Company accrued $2,000 for the reimbursement of expenses incurred on one repurchase loss remitted in April 2016 compared
to $40,000 accrued for the expenses on one repurchase loss remitted in April 2015 of the prior year. At September 30, 2016, the
Company was servicing 2,909 loans sold to the secondary market with a balance of approximately $299.7 million compared to 3,024
loans sold with a balance of approximately $312.1 million at December 31, 2015.
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of year
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
Provision for repurchase liability
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
40
|
|
Reimbursement of expenses
|
|
|
0
|
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
(40
|
)
|
Balance at end of year
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
|
(15)
|
Commitments and Contingencies
|
The Company issues financial instruments
with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement
and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company
uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on
its consolidated balance sheets. At September 30, 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:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Commitments to extend credit
|
|
$
|
233,005
|
|
|
$
|
161,306
|
|
Commitments to originate residential first and second mortgage loans
|
|
|
3,273
|
|
|
|
3,175
|
|
Standby letters of credit
|
|
|
1,608
|
|
|
|
1,466
|
|
Total
|
|
|
237,886
|
|
|
|
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 September 30, 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.
Item 2
- Management’s Discussion
and Analysis of Financial Condition
And Results of Operations
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, 2015, 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, 2016, 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 the greater Kansas City metropolitan area.
The Company's primary
source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company's business
is commercial, commercial real estate development, and 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,
2016 and 2015, 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)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.33
|
|
|
$
|
0.45
|
|
|
$
|
0.94
|
|
|
$
|
1.17
|
|
Diluted earnings per share
|
|
|
0.33
|
|
|
|
0.45
|
|
|
|
0.94
|
|
|
|
1.17
|
|
Dividends paid on common stock
|
|
|
273
|
|
|
|
262
|
|
|
|
815
|
|
|
|
785
|
|
Book value per share
|
|
|
|
|
|
|
|
|
|
|
16.44
|
|
|
|
15.38
|
|
Market price per share
|
|
|
|
|
|
|
|
|
|
|
15.25
|
|
|
|
13.43
|
|
Selected Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based on average balance sheets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on total assets
|
|
|
0.59
|
%
|
|
|
0.84
|
%
|
|
|
0.57
|
%
|
|
|
0.74
|
%
|
Return on stockholders' equity
|
|
|
8.09
|
%
|
|
|
11.09
|
%
|
|
|
7.78
|
%
|
|
|
10.55
|
%
|
Stockholders' equity to total assets
|
|
|
7.33
|
%
|
|
|
7.09
|
%
|
|
|
7.31
|
%
|
|
|
7.00
|
%
|
Efficiency ratio (1)
|
|
|
74.03
|
%
|
|
|
69.62
|
%
|
|
|
75.43
|
%
|
|
|
72.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based on end-of-period data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity to assets
|
|
|
|
|
|
|
|
|
|
|
7.26
|
%
|
|
|
7.09
|
%
|
Total risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
14.11
|
%
|
|
|
14.62
|
%
|
Tier 1 risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
11.63
|
%
|
|
|
11.77
|
%
|
Common equity Tier 1 capital
|
|
|
|
|
|
|
|
|
|
|
8.73
|
%
|
|
|
8.84
|
%
|
Tier 1 leverage ratio (2)
|
|
|
|
|
|
|
|
|
|
|
9.86
|
%
|
|
|
9.70
|
%
|
|
(1)
|
Efficiency ratio is calculated as non-interest expense as a percentage of total revenue. Total
revenue includes net interest income and non-interest income.
|
|
(2)
|
Tier I leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets.
|
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)
|
|
2016
|
|
|
2015
|
|
|
$
Change
|
|
|
%
Change
|
|
|
2016
|
|
|
2015
|
|
|
$
Change
|
|
|
%
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
10,147
|
|
|
$
|
10,558
|
|
|
$
|
(411
|
)
|
|
|
(3.9
|
)%
|
|
$
|
29,966
|
|
|
$
|
30,520
|
|
|
$
|
(554
|
)
|
|
|
(1.8
|
)%
|
Provision for loan losses
|
|
|
300
|
|
|
|
-
|
|
|
|
300
|
|
|
|
100.0
|
|
|
|
975
|
|
|
|
250
|
|
|
|
725
|
|
|
|
290.0
|
|
Non-interest income
|
|
|
2,125
|
|
|
|
2,336
|
|
|
|
(211
|
)
|
|
|
(9.0
|
)
|
|
|
6,522
|
|
|
|
6,785
|
|
|
|
(263
|
)
|
|
|
(3.9
|
)
|
Non-interest expense
|
|
|
9,085
|
|
|
|
8,977
|
|
|
|
108
|
|
|
|
1.2
|
|
|
|
27,522
|
|
|
|
26,953
|
|
|
|
569
|
|
|
|
2.1
|
|
Income before income taxes
|
|
|
2,887
|
|
|
|
3,917
|
|
|
|
(1,030
|
)
|
|
|
(26.3
|
)
|
|
|
7,991
|
|
|
|
10,102
|
|
|
|
(2,111
|
)
|
|
|
(20.9
|
)
|
Income tax expense
|
|
|
1,003
|
|
|
|
1,378
|
|
|
|
(375
|
)
|
|
|
(27.2
|
)
|
|
|
2,697
|
|
|
|
3,497
|
|
|
|
(800
|
)
|
|
|
(22.9
|
)
|
Net income
|
|
$
|
1,884
|
|
|
$
|
2,539
|
|
|
$
|
(655
|
)
|
|
|
(25.8
|
)%
|
|
$
|
5,294
|
|
|
$
|
6,605
|
|
|
$
|
(1,311
|
)
|
|
|
(19.8
|
)%
|
Consolidated net
income
decreased $655,000 to $1.9 million, or $0.33 per diluted share, for the three months ended September 30, 2016 compared
to $2.5 million, or $0.45 per diluted share, for the three months ended September 30, 2015. For the three months ended September
30, 2016, the return on average assets was 0.59%, the return on average stockholders’ equity was 8.09%, and the efficiency
ratio was 74.03%.
Consolidated net income
decreased $1.3 million to $5.3 million, or $0.94 per diluted share, for the nine months ended September 30, 2016 compared to $6.6
million, or $1.17 per diluted share, for the nine months ended September 30, 2015. For the nine months ended September 30, 2016,
the return on average assets was 0.94%, the return on average stockholders’ equity was 7.78%, and the efficiency ratio was
75.43%.
Net interest income
was $10.1 million and $30.0 million for the three and nine months ended September 30, 2016, respectively, compared to $10.6 million
and $30.5 million for the three and nine months end September 30, 2015, respectively. The net interest margin (expressed on a fully
taxable equivalent basis) decreased to 3.44% for the three months ended September 30, 2016, compared to 3.78% for the three months
ended September 30, 2015, and decreased to 3.47% for the nine months ended September 30, 2016 compared to 3.71% for the nine months
ended September 30, 2015. These changes are discussed in greater detail under the
Average Balance Sheets and Rate and Volume
Analysis
section below.
A $300,000 and $975,000
provision for loan losses
was recorded for the three and nine months ended September 30, 2016, respectively, compared
to no provision and $250,000 provision for the three and nine months ended September 30, 2015.
The Company’s net
charge-offs were $222,000, or 0.02% of average loans, for the three months ended September 30, 2016 compared to net charge-offs
of $740,000, or 0.08% of average loans, for the three months ended September 30, 2015. For the nine months ended September 30,
2016, the Company’s net charge-offs were $109,000, or 0.01% of average loans compared to net charge-offs of $103,000, or
0.01% of average loans for the nine months ended September 30, 2015.
Non-performing loans
totaled $9.3 million, or 0.98% of total loans, at September 30, 2016 compared to $10.3 million, or 1.19% of total loans, at December
31, 2015, and $14.6 million, or 1.66% of total loans, at September 30, 2015. These changes are discussed in greater detail under
the
Lending and Credit Management
section below.
Non-interest income
decreased
$211,000, or 9.0%, to $2.1 million for the three months ended September 30, 2016 compared to $2.3 million for the three months
ended September 30, 2015, and decreased $263,000, or 3.9%, to $6.5 million for the nine months ended September 30, 2016 compared
to $6.8 million for the nine months ended September 30, 2015. These changes are discussed in greater detail below under
Non-interest
Income
.
Non-interest expense
increased
$108,000, or 1.2%, to $9.1 million for the three months ended September 30, 2016 compared to $9.0 million for the three months
ended September 30, 2015, and increased $569,000, or 2.1%, to $27.5 million for the nine months ended September 30, 2016 compared
to $27.0 million for the nine months ended September 30, 2015. 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, 2016 and 2015, respectively.
|
|
Three
Months Ended September 30,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
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
|
|
$
|
164,558
|
|
|
$
|
1,874
|
|
|
|
4.53
|
%
|
|
$
|
165,978
|
|
|
$
|
1,938
|
|
|
|
4.63
|
%
|
Real estate construction - residential
|
|
|
16,550
|
|
|
|
189
|
|
|
|
4.54
|
|
|
|
14,102
|
|
|
|
385
|
|
|
|
10.83
|
|
Real estate construction - commercial
|
|
|
46,104
|
|
|
|
511
|
|
|
|
4.41
|
|
|
|
41,977
|
|
|
|
709
|
|
|
|
6.70
|
|
Real estate mortgage - residential
|
|
|
251,085
|
|
|
|
2,836
|
|
|
|
4.49
|
|
|
|
245,660
|
|
|
|
2,849
|
|
|
|
4.60
|
|
Real estate mortgage - commercial
|
|
|
425,533
|
|
|
|
4,982
|
|
|
|
4.66
|
|
|
|
382,707
|
|
|
|
4,616
|
|
|
|
4.79
|
|
Consumer
|
|
|
26,937
|
|
|
|
292
|
|
|
|
4.31
|
|
|
|
21,036
|
|
|
|
268
|
|
|
|
5.05
|
|
Total loans
|
|
$
|
930,767
|
|
|
$
|
10,684
|
|
|
|
4.57
|
%
|
|
$
|
871,460
|
|
|
$
|
10,765
|
|
|
|
4.90
|
%
|
Investment securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprises
|
|
$
|
42,340
|
|
|
$
|
123
|
|
|
|
1.16
|
%
|
|
$
|
75,326
|
|
|
$
|
261
|
|
|
|
1.37
|
%
|
Asset backed securities
|
|
|
156,720
|
|
|
|
615
|
|
|
|
1.56
|
|
|
|
125,188
|
|
|
|
598
|
|
|
|
1.90
|
|
State and municipal
|
|
|
31,831
|
|
|
|
193
|
|
|
|
2.41
|
|
|
|
33,984
|
|
|
|
265
|
|
|
|
3.09
|
|
Total investment securities
|
|
$
|
230,891
|
|
|
$
|
931
|
|
|
|
1.60
|
%
|
|
$
|
234,498
|
|
|
$
|
1,124
|
|
|
|
1.90
|
%
|
Other investments and securities, at cost
|
|
|
9,044
|
|
|
|
80
|
|
|
|
3.52
|
|
|
|
8,485
|
|
|
|
72
|
|
|
|
3.37
|
|
Federal funds sold and interest bearing deposits in other financial institutions
|
|
|
14,504
|
|
|
|
19
|
|
|
|
0.52
|
|
|
|
8,347
|
|
|
|
3
|
|
|
|
0.14
|
|
Total interest earning assets
|
|
$
|
1,185,206
|
|
|
$
|
11,714
|
|
|
|
3.93
|
%
|
|
$
|
1,122,790
|
|
|
$
|
11,964
|
|
|
|
4.23
|
%
|
All other assets
|
|
|
87,697
|
|
|
|
|
|
|
|
|
|
|
|
90,248
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(9,377
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,971
|
)
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,263,526
|
|
|
|
|
|
|
|
|
|
|
$
|
1,203,067
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
189,219
|
|
|
$
|
147
|
|
|
|
0.31
|
%
|
|
$
|
191,026
|
|
|
$
|
114
|
|
|
|
0.24
|
%
|
Savings
|
|
|
96,938
|
|
|
|
12
|
|
|
|
0.05
|
|
|
|
90,851
|
|
|
|
12
|
|
|
|
0.05
|
|
Commercial
|
|
|
646
|
|
|
|
1
|
|
|
|
0.62
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.00
|
|
Money market
|
|
|
190,137
|
|
|
|
131
|
|
|
|
0.27
|
|
|
|
176,380
|
|
|
|
115
|
|
|
|
0.26
|
|
Time deposits of $100,000 and over
|
|
|
151,918
|
|
|
|
267
|
|
|
|
0.70
|
|
|
|
137,542
|
|
|
|
222
|
|
|
|
0.64
|
|
Other time deposits
|
|
|
157,836
|
|
|
|
231
|
|
|
|
0.58
|
|
|
|
172,945
|
|
|
|
269
|
|
|
|
0.62
|
|
Total time deposits
|
|
$
|
786,694
|
|
|
$
|
789
|
|
|
|
0.40
|
%
|
|
$
|
768,744
|
|
|
$
|
732
|
|
|
|
0.38
|
%
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
31,393
|
|
|
|
13
|
|
|
|
0.16
|
|
|
|
26,296
|
|
|
|
11
|
|
|
|
0.17
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
375
|
|
|
|
3.01
|
|
|
|
49,486
|
|
|
|
326
|
|
|
|
2.61
|
|
Federal Home Loan Bank Advances
|
|
|
74,109
|
|
|
|
282
|
|
|
|
1.51
|
|
|
|
61,207
|
|
|
|
202
|
|
|
|
1.31
|
|
Total borrowings
|
|
$
|
154,988
|
|
|
$
|
670
|
|
|
|
1.72
|
%
|
|
$
|
136,989
|
|
|
$
|
539
|
|
|
|
1.56
|
%
|
Total interest bearing liabilities
|
|
$
|
941,682
|
|
|
$
|
1,459
|
|
|
|
0.62
|
%
|
|
$
|
905,733
|
|
|
$
|
1,271
|
|
|
|
0.56
|
%
|
Demand deposits
|
|
|
220,036
|
|
|
|
|
|
|
|
|
|
|
|
202,138
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,203
|
|
|
|
|
|
|
|
|
|
|
|
9,937
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,170,921
|
|
|
|
|
|
|
|
|
|
|
|
1,117,808
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
92,605
|
|
|
|
|
|
|
|
|
|
|
|
85,259
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,263,526
|
|
|
|
|
|
|
|
|
|
|
$
|
1,203,067
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
10,255
|
|
|
|
|
|
|
|
|
|
|
|
10,693
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
|
|
|
3.78
|
%
|
|
(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 $108,000 and $135,000 for the
three months ended September 30, 2016 and 2015, 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)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
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
|
|
$
|
155,384
|
|
|
$
|
5,383
|
|
|
|
4.61
|
%
|
|
$
|
157,077
|
|
|
$
|
5,594
|
|
|
|
4.76
|
%
|
Real estate construction - residential
|
|
|
17,624
|
|
|
|
602
|
|
|
|
4.55
|
|
|
|
15,077
|
|
|
|
789
|
|
|
|
7.00
|
|
Real estate construction - commercial
|
|
|
41,489
|
|
|
|
1,460
|
|
|
|
4.69
|
|
|
|
46,055
|
|
|
|
1,776
|
|
|
|
5.16
|
|
Real estate mortgage - residential
|
|
|
251,819
|
|
|
|
8,590
|
|
|
|
4.54
|
|
|
|
246,399
|
|
|
|
8,633
|
|
|
|
4.68
|
|
Real estate mortgage - commercial
|
|
|
406,104
|
|
|
|
14,192
|
|
|
|
4.66
|
|
|
|
378,344
|
|
|
|
13,455
|
|
|
|
4.75
|
|
Consumer
|
|
|
25,513
|
|
|
|
854
|
|
|
|
4.46
|
|
|
|
20,304
|
|
|
|
798
|
|
|
|
5.25
|
|
Total loans
|
|
$
|
897,933
|
|
|
$
|
31,081
|
|
|
|
4.61
|
%
|
|
$
|
863,256
|
|
|
$
|
31,045
|
|
|
|
4.81
|
%
|
Investment securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
49,216
|
|
|
$
|
427
|
|
|
|
1.16
|
%
|
|
$
|
73,680
|
|
|
|
772
|
|
|
|
1.40
|
%
|
Asset backed securities
|
|
|
159,693
|
|
|
|
2,053
|
|
|
|
1.71
|
|
|
|
126,256
|
|
|
|
1,848
|
|
|
|
1.96
|
|
State and municipal
|
|
|
30,549
|
|
|
|
612
|
|
|
|
2.67
|
|
|
|
34,834
|
|
|
|
828
|
|
|
|
3.18
|
|
Total investment securities
|
|
$
|
239,458
|
|
|
$
|
3,092
|
|
|
|
1.72
|
%
|
|
$
|
234,770
|
|
|
$
|
3,448
|
|
|
|
1.96
|
%
|
Other investments and securities, at cost
|
|
|
8,544
|
|
|
|
231
|
|
|
|
3.60
|
|
|
|
6,252
|
|
|
|
138
|
|
|
|
2.95
|
|
Federal funds sold and interest bearing deposits in other financial institutions
|
|
|
17,640
|
|
|
|
69
|
|
|
|
0.52
|
|
|
|
11,716
|
|
|
|
24
|
|
|
|
0.27
|
|
Total interest earning assets
|
|
$
|
1,163,575
|
|
|
$
|
34,473
|
|
|
|
3.95
|
%
|
|
$
|
1,115,994
|
|
|
$
|
34,655
|
|
|
|
4.15
|
%
|
All other assets
|
|
|
88,942
|
|
|
|
|
|
|
|
|
|
|
|
89,568
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(8,959
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,757
|
)
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,243,558
|
|
|
|
|
|
|
|
|
|
|
$
|
1,195,805
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
201,508
|
|
|
$
|
471
|
|
|
|
0.31
|
%
|
|
$
|
205,448
|
|
|
$
|
375
|
|
|
|
0.24
|
%
|
Savings
|
|
|
95,403
|
|
|
|
36
|
|
|
|
0.05
|
|
|
|
88,651
|
|
|
|
36
|
|
|
|
0.05
|
|
Commercial
|
|
|
217
|
|
|
|
1
|
|
|
|
0.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
|
183,491
|
|
|
|
365
|
|
|
|
0.27
|
|
|
|
173,014
|
|
|
|
328
|
|
|
|
0.25
|
|
Time deposits of $100,000 and over
|
|
|
139,140
|
|
|
|
709
|
|
|
|
0.68
|
|
|
|
138,598
|
|
|
|
653
|
|
|
|
0.63
|
|
Other time deposits
|
|
|
161,126
|
|
|
|
707
|
|
|
|
0.58
|
|
|
|
177,617
|
|
|
|
830
|
|
|
|
0.62
|
|
Total time deposits
|
|
$
|
780,885
|
|
|
$
|
2,289
|
|
|
|
0.39
|
%
|
|
$
|
783,328
|
|
|
$
|
2,222
|
|
|
|
0.38
|
%
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
38,979
|
|
|
|
51
|
|
|
|
0.17
|
|
|
|
22,589
|
|
|
|
28
|
|
|
|
0.17
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
1,095
|
|
|
|
2.95
|
|
|
|
49,486
|
|
|
|
958
|
|
|
|
2.59
|
|
Federal Home Loan Bank Advances
|
|
|
61,949
|
|
|
|
732
|
|
|
|
1.57
|
|
|
|
47,960
|
|
|
|
513
|
|
|
|
1.43
|
|
Total borrowings
|
|
$
|
150,414
|
|
|
$
|
1,878
|
|
|
|
1.66
|
%
|
|
$
|
120,035
|
|
|
$
|
1,499
|
|
|
|
1.67
|
%
|
Total interest bearing liabilities
|
|
$
|
931,299
|
|
|
$
|
4,167
|
|
|
|
0.60
|
%
|
|
$
|
903,363
|
|
|
$
|
3,721
|
|
|
|
0.55
|
%
|
Demand deposits
|
|
|
211,930
|
|
|
|
|
|
|
|
|
|
|
|
198,690
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
9,476
|
|
|
|
|
|
|
|
|
|
|
|
10,085
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,152,705
|
|
|
|
|
|
|
|
|
|
|
|
1,112,138
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
90,853
|
|
|
|
|
|
|
|
|
|
|
|
83,667
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,243,558
|
|
|
|
|
|
|
|
|
|
|
$
|
1,195,805
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
30,306
|
|
|
|
|
|
|
|
|
|
|
|
30,934
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
3.60
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.47
|
%
|
|
|
|
|
|
|
|
|
|
|
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 $340,000 and $414,000 for the
nine months ended September 30, 2016 and 2015, 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, 2016 compared
to the three and nine months ended September 30, 2015. 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,
|
|
|
|
2016
vs. 2015
|
|
|
2016
vs. 2015
|
|
|
|
|
|
|
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
|
|
$
|
(64
|
)
|
|
$
|
(17
|
)
|
|
$
|
(47
|
)
|
|
$
|
(211
|
)
|
|
$
|
(60
|
)
|
|
$
|
(151
|
)
|
Real estate construction - residential
|
|
|
(196
|
)
|
|
|
58
|
|
|
|
(254
|
)
|
|
|
(187
|
)
|
|
|
118
|
|
|
|
(305
|
)
|
Real estate construction - commercial
|
|
|
(198
|
)
|
|
|
65
|
|
|
|
(263
|
)
|
|
|
(316
|
)
|
|
|
(168
|
)
|
|
|
(148
|
)
|
Real estate mortgage - residential
|
|
|
(13
|
)
|
|
|
62
|
|
|
|
(75
|
)
|
|
|
(43
|
)
|
|
|
188
|
|
|
|
(231
|
)
|
Real estate mortgage - commercial
|
|
|
366
|
|
|
|
505
|
|
|
|
(139
|
)
|
|
|
737
|
|
|
|
973
|
|
|
|
(236
|
)
|
Consumer
|
|
|
24
|
|
|
|
68
|
|
|
|
(44
|
)
|
|
|
56
|
|
|
|
186
|
|
|
|
(130
|
)
|
Investment securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
|
(138
|
)
|
|
|
(101
|
)
|
|
|
(37
|
)
|
|
|
(345
|
)
|
|
|
(227
|
)
|
|
|
(118
|
)
|
Asset backed securities
|
|
|
17
|
|
|
|
135
|
|
|
|
(118
|
)
|
|
|
205
|
|
|
|
448
|
|
|
|
(243
|
)
|
State and municipal
|
|
|
(72
|
)
|
|
|
(16
|
)
|
|
|
(56
|
)
|
|
|
(216
|
)
|
|
|
(95
|
)
|
|
|
(121
|
)
|
Other investments and securities, at cost
|
|
|
8
|
|
|
|
5
|
|
|
|
3
|
|
|
|
93
|
|
|
|
58
|
|
|
|
35
|
|
Federal funds sold and interest bearing deposits in other financial institutions
|
|
|
16
|
|
|
|
3
|
|
|
|
13
|
|
|
|
45
|
|
|
|
16
|
|
|
|
29
|
|
Total interest income
|
|
|
(250
|
)
|
|
|
767
|
|
|
|
(1,017
|
)
|
|
|
(182
|
)
|
|
|
1,437
|
|
|
|
(1,619
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
33
|
|
|
|
(1
|
)
|
|
|
34
|
|
|
|
96
|
|
|
|
(7
|
)
|
|
|
103
|
|
Savings
|
|
|
0
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
3
|
|
|
|
(3
|
)
|
Commercial
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
Money market
|
|
|
16
|
|
|
|
9
|
|
|
|
7
|
|
|
|
37
|
|
|
|
21
|
|
|
|
16
|
|
Time deposits of $100,000 and over
|
|
|
45
|
|
|
|
24
|
|
|
|
21
|
|
|
|
56
|
|
|
|
3
|
|
|
|
53
|
|
Other time deposits
|
|
|
(38
|
)
|
|
|
(23
|
)
|
|
|
(15
|
)
|
|
|
(123
|
)
|
|
|
(74
|
)
|
|
|
(49
|
)
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
2
|
|
|
|
2
|
|
|
|
0
|
|
|
|
23
|
|
|
|
21
|
|
|
|
2
|
|
Subordinated notes
|
|
|
49
|
|
|
|
0
|
|
|
|
49
|
|
|
|
137
|
|
|
|
0
|
|
|
|
137
|
|
Federal Home Loan Bank advances
|
|
|
80
|
|
|
|
47
|
|
|
|
33
|
|
|
|
219
|
|
|
|
162
|
|
|
|
57
|
|
Total interest expense
|
|
|
188
|
|
|
|
59
|
|
|
|
129
|
|
|
|
446
|
|
|
|
129
|
|
|
|
317
|
|
Net interest income on a fully taxable equivalent basis
|
|
$
|
(438
|
)
|
|
$
|
708
|
|
|
$
|
(1,146
|
)
|
|
$
|
(628
|
)
|
|
$
|
1,308
|
|
|
$
|
(1,936
|
)
|
|
(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 $108,000 and $340,000 for the
three and nine months end September 30, 2016, respectively, compared to $135,000 and $414,000 for the three and nine months September
30, 2015, 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, 2016 compared to the three months ended September 30, 2015, reflected a decrease in net interest
income, on a tax equivalent basis, of $438,000, or 4.10%, and financial results for the nine months ended September 30, 2016 compared
to the nine months ended September 30, 2015 reflected a decrease of $628,000, or 2.03%.
Measured as a percentage
of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.44% for the three
months ended September 30, 2016 compared to 3.78% for the three months ended September 30, 2015, and decreased to 3.47% for the
nine months ended September 30, 2016 compared to 3.71% for the nine months ended September 30, 2015. The decrease in net interest
income and the net
interest margin was due
to a contraction in the net interest spread caused primarily by a decrease in the yield on investment securities maturing at higher
historical rates and new replacement securities yielding lower current market rates.
Average interest-earning
assets increased $62.4 million, or 5.56%, to $1.19 billion for the three months ended September 30, 2016 compared to $1.12 billion
for the three months ended September 30, 2015, and average interest bearing liabilities increased $35.9 million, or 3.97%, to $941.7
million for the three months ended September 30, 2016 compared to $905.7 million for the three months ended September 30, 2015.
Average interest-earning
assets increased $47.6 million, or 4.26%, to $1.16 billion for the nine months ended September 30, 2016 compared to $1.12 billion
for the nine months ended September 30, 2015, and average interest bearing liabilities increased $27.9 million, or 3.09%, to $931.3
million for the nine months ended September 30, 2016 compared to $903.4 million for the nine months ended September 30, 2015.
Total interest
income
(expressed on a fully taxable equivalent basis) decreased to $11.7 million and $34.5 million for the three and nine
months ended September 30, 2016, respectively, compared to $12.0 million and $34.7 million for the three and nine months ended
September 30, 2015, respectively. The Company’s rates earned on interest earning assets were 3.93% and 3.95% for the three
and nine months ended September 30, 2016, respectively, compared to 4.23% and 4.15% for the three and nine months ended September
30, 2015, respectively.
Interest income
on loans
was $10.7 million and $31.1 million for the three and nine months ended September 30, 2016, respectively, compared
to $10.8 million and $31.0 million for the three and nine months ended September 30, 2015, respectively.
Average loans outstanding
increased $59.3 million, or 6.81%, to $930.8 million for the three months ended September 30, 2016 compared to $871.5 million for
the three months ended September 30, 2015. The average yield on loans receivable decreased to 4.57% for the three months ended
September 30, 2016 compared to 4.90% for the three months ended September 30, 2015.
For the nine months ended
September 30, 2016, average loans outstanding increased $34.7 million, or 4.02%, to $897.9 million compared to $863.3 million for
the nine months ended September 30, 2015. The average yield on loans receivable decreased to 4.61% for the nine months ended September
30, 2016 compared to 4.81% for the nine months ended September 30, 2015.
Total interest
expense
was $1.5 million and $4.2 million for the three and nine months ended September 30, 2016, respectively, compared
to $1.3 million and $3.7 million for the three and nine months ended September 30, 2015, respectively. The Company’s rates
paid on interest bearing liabilities were 0.62% and 0.60% for the three and nine months ended September 30, 2016 compared to 0.56%
and 0.55% for the three and nine months ended September 30, 2015, respectively. See the
Liquidity Management
section for
further discussion.
Interest expense
on deposits
increased to $789,000 and $2.3 million for the three and nine months ended September 30, 2016, respectively,
compared to $732,000 and $2.2 million for the three and nine months ended September 30, 2015, respectively.
Average time deposits
increased $18.0 million, or 2.33%, to $786.7 million for the three months ended September 30, 2016 compared to $768.7 million for
the three months ended September 30, 2015. The average cost of deposits increased to 0.40% for the three months ended September
30, 2016 compared to 0.38% for the three months ended September 30, 2015.
For the nine months ended
September 30, 2016, average time deposits decreased $2.4 million, or 0.31%, to $780.9 million for the nine months ended September
30, 2015 compared to $783.3 million for the nine months ended September 30, 2015. The average cost of deposits increased to 0.39%
for the nine months ended September 30, 2016 compared to 0.38% for the nine months ended September 30, 2015 primarily as a result
of higher market interest rates.
Interest expense
on borrowings
increased to $670,000 and $1.9 million for the three and nine months ended September 30, 2016, respectively,
compared to $539,000 and $1.5 million for the three and nine months ended September 30, 2015, respectively.
Average borrowings increased
$18.0 million, or 13.14%, to $155.0 million for the three months ended September 30, 2016 compared to $137.0 million for the three
months ended September 30, 2015. The average cost of borrowings increased to 1.72% for the three months ended September 30, 2016
compared to 1.56% for the three months ended September 30, 2015.
For the nine months ended
September 30, 2016, average borrowings increased $30.4 million, or 25.31%, to $150.4 million for the nine months ended September
30, 2015 compared to $120.0 million for the nine months ended September 30, 2015. The average cost of borrowings decreased to 1.66%
for the nine months ended September 30, 2016 compared to 1.67% for the nine months ended September 30, 2015. 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)
|
|
2016
|
|
|
2015
|
|
|
$
Change
|
|
|
%
Change
|
|
|
2016
|
|
|
2015
|
|
|
$
Change
|
|
|
%
Change
|
|
Non-interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
$
|
882
|
|
|
$
|
903
|
|
|
$
|
(21
|
)
|
|
|
(2.3
|
)%
|
|
$
|
2,544
|
|
|
$
|
2,597
|
|
|
$
|
(53
|
)
|
|
|
(2.0
|
)%
|
Bank card income and fees
|
|
|
593
|
|
|
|
632
|
|
|
|
(39
|
)
|
|
|
(6.2
|
)
|
|
|
1,875
|
|
|
|
1,849
|
|
|
|
26
|
|
|
|
1.4
|
|
Trust department income
|
|
|
216
|
|
|
|
235
|
|
|
|
(19
|
)
|
|
|
(8.1
|
)
|
|
|
699
|
|
|
|
714
|
|
|
|
(15
|
)
|
|
|
(2.1
|
)
|
Real estate servicing fees, net
|
|
|
(4
|
)
|
|
|
177
|
|
|
|
(181
|
)
|
|
|
(102.3
|
)
|
|
|
(36
|
)
|
|
|
357
|
|
|
|
(393
|
)
|
|
|
(110.1
|
)
|
Gain on sales of mortgage loans, net
|
|
|
266
|
|
|
|
322
|
|
|
|
(56
|
)
|
|
|
(17.4
|
)
|
|
|
653
|
|
|
|
1,103
|
|
|
|
(450
|
)
|
|
|
(40.8
|
)
|
Gain on sale of investment securities
|
|
|
111
|
|
|
|
0
|
|
|
|
111
|
|
|
|
NM
|
|
|
|
602
|
|
|
|
8
|
|
|
|
594
|
|
|
|
NM
|
|
Other
|
|
|
61
|
|
|
|
67
|
|
|
|
(6
|
)
|
|
|
(9.0
|
)
|
|
|
185
|
|
|
|
157
|
|
|
|
28
|
|
|
|
17.8
|
|
Total non-interest income
|
|
$
|
2,125
|
|
|
$
|
2,336
|
|
|
$
|
(211
|
)
|
|
|
(9.0
|
)%
|
|
$
|
6,522
|
|
|
$
|
6,785
|
|
|
$
|
(263
|
)
|
|
|
(3.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income as a % of total revenue *
|
|
|
17.3
|
%
|
|
|
18.1
|
%
|
|
|
|
|
|
|
|
|
|
|
17.9
|
%
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue per full time equivalent employee
|
|
$
|
37.8
|
|
|
$
|
37.9
|
|
|
|
|
|
|
|
|
|
|
$
|
112.3
|
|
|
$
|
109.7
|
|
|
|
|
|
|
|
|
|
* Total revenue is calculated as net interest income plus non-interest
income.
NM - not meaningful
Total non-interest
income
decreased $211,000, or 9.0%, to $2.1 million for the quarter ended September 30, 2016 compared to $2.3 million for
the quarter ended September 30, 2015, and decreased $263,000, or 3.9%, to $6.5 million for the nine months ended September 30,
2016 compared to $6.8 million for the nine months ended September 30, 2015.
Real estate servicing
fees, net
of the change in valuation of mortgage serving rights decreased $181,000, or 102.3%, to $(4,000) for the quarter
ended September 30, 2016 compared to $177,000 for the quarter ended September 30, 2015, and decreased $393,000, or 110.1%, to $(36,000)
for the nine months ended September 30, 2016 compared to $357,000 for the nine months ended September 30, 2015.
Mortgage loan servicing
fees earned on loans sold were $233,000 for the quarter ended September 30, 2016 compared to $206,000 for the quarter ended September
30, 2015. Total realized losses included in earnings attributable to the change in unrealized gains or losses related to assets
still held were $237,000 for the quarter ended September 30, 2016 compared to $29,000 for the quarter ended September 30, 2015.
Mortgage loan servicing
fees earned on loans sold were $654,000 for the nine months ended September 30, 2016 compared to $648,000 for the nine months ended
September 30, 2015. Total realized losses included in earnings attributable to the change in unrealized gains or losses related
to assets still held were $690,000 for the nine months ended September 30, 2016 compared to $291,000 for the nine months ended
September 30, 2015. The Company was servicing $299.7 million of mortgage loans at September 30, 2015 compared to $312.1 million
and $311.8 million at December 31, 2015 and September 30, 2015, respectively.
Gain on sales of
mortgage loans
decreased $56,000, or 17.4%, to $266,000 for the quarter ended September 30, 2016 compared to $322,000 for
the quarter ended September 30, 2015, and decreased $450,000, or 40.8%, to $653,000 for the nine months ended September 30, 2016
compared to $1.1 million for the nine months ended September 30, 2015. The Company sold loans of $11.2 million for both the quarters
ended September 30, 2016 and 2015, and $28.8 million for the nine months ended September 30, 2016 compared to $40.1 million for
the nine months ended September 30, 2015.
Gain on sale of
investment securities
During the nine months ended September 30, 2016 the Company received $60.7 million from proceeds
on sales of available-for-sale debt securities and recognized gains of $602,000. These transactions were the result of bond sales
and purchases to replace several smaller holdings with fewer, larger investments without materially changing the duration or yield
of the investment portfolio.
Non-interest expense for the periods indicated was as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Non-interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
3,833
|
|
|
$
|
3,939
|
|
|
$
|
(106
|
)
|
|
|
(2.7
|
)%
|
|
$
|
11,798
|
|
|
$
|
11,613
|
|
|
$
|
185
|
|
|
|
1.6
|
%
|
Employee benefits
|
|
|
1,230
|
|
|
|
1,381
|
|
|
|
(151
|
)
|
|
|
(10.9
|
)
|
|
|
3,920
|
|
|
|
4,185
|
|
|
|
(265
|
)
|
|
|
(6.3
|
)
|
Occupancy expense, net
|
|
|
730
|
|
|
|
685
|
|
|
|
45
|
|
|
|
6.6
|
|
|
|
2,037
|
|
|
|
2,064
|
|
|
|
(27
|
)
|
|
|
(1.3
|
)
|
Furniture and equipment expense
|
|
|
438
|
|
|
|
464
|
|
|
|
(26
|
)
|
|
|
(5.6
|
)
|
|
|
1,288
|
|
|
|
1,379
|
|
|
|
(91
|
)
|
|
|
(6.6
|
)
|
Processing expense, network and bank card expense
|
|
|
878
|
|
|
|
806
|
|
|
|
72
|
|
|
|
8.9
|
|
|
|
2,490
|
|
|
|
2,402
|
|
|
|
88
|
|
|
|
3.7
|
|
Legal, examination, and professional fees
|
|
|
277
|
|
|
|
332
|
|
|
|
(55
|
)
|
|
|
(16.6
|
)
|
|
|
939
|
|
|
|
943
|
|
|
|
(4
|
)
|
|
|
(0.4
|
)
|
FDIC insurance assessment
|
|
|
196
|
|
|
|
175
|
|
|
|
21
|
|
|
|
12.0
|
|
|
|
560
|
|
|
|
673
|
|
|
|
(113
|
)
|
|
|
(16.8
|
)
|
Advertising and promotion
|
|
|
283
|
|
|
|
273
|
|
|
|
10
|
|
|
|
3.7
|
|
|
|
734
|
|
|
|
780
|
|
|
|
(46
|
)
|
|
|
(5.9
|
)
|
Postage, printing, and supplies
|
|
|
244
|
|
|
|
250
|
|
|
|
(6
|
)
|
|
|
(2.4
|
)
|
|
|
771
|
|
|
|
794
|
|
|
|
(23
|
)
|
|
|
(2.9
|
)
|
Real estate foreclosure expense (gains), net
|
|
|
49
|
|
|
|
(329
|
)
|
|
|
378
|
|
|
|
114.9
|
|
|
|
232
|
|
|
|
(352
|
)
|
|
|
584
|
|
|
|
165.9
|
|
Other
|
|
|
927
|
|
|
|
1,001
|
|
|
|
(74
|
)
|
|
|
(7.4
|
)
|
|
|
2,753
|
|
|
|
2,472
|
|
|
|
281
|
|
|
|
11.4
|
|
Total non-interest expense
|
|
$
|
9,085
|
|
|
$
|
8,977
|
|
|
$
|
108
|
|
|
|
1.2
|
%
|
|
$
|
27,522
|
|
|
$
|
26,953
|
|
|
$
|
569
|
|
|
|
2.1
|
%
|
Efficiency ratio *
|
|
|
74.0
|
%
|
|
|
69.6
|
%
|
|
|
|
|
|
|
|
|
|
|
75.4
|
%
|
|
|
72.3
|
%
|
|
|
|
|
|
|
|
|
Salaries and benefits as a % of total non-interest expense
|
|
|
55.7
|
%
|
|
|
59.3
|
%
|
|
|
|
|
|
|
|
|
|
|
57.1
|
%
|
|
|
58.6
|
%
|
|
|
|
|
|
|
|
|
Number of full-time equivalent employees
|
|
|
325
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
325
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
* Efficiency ratio is calculated as non-interest expense as
a percent of total revenue. Total revenue includes net interest income and non-interest income.
Total non-interest
expense
increased $108,000, or 1.2%, to $9.1 million for the quarter ended September 30, 2016 compared to $9.0 million
for the quarter ended September 30, 2015, and increased $569,000, or 2.1%, to $27.5 million for the nine months ended September
30, 2016 compared to $27.0 million for the nine months ended September 30, 2015.
Salaries
decreased $106,000, or 2.7%, to $3.8 million for the quarter ended September 30, 2016 compared to $3.9 million for the quarter
ended September 30, 2015, and increased $185,000, or 1.6%, to $11.8 million for the nine months ended September 30, 2016 compared
to $11.6 million for the nine months ended September 30, 2015. The decrease quarter over quarter was primarily due to a decrease
in employees and the increase year over year was primarily due to annual salary increases granted at the beginning of each year.
Employee benefits
decreased
$151,000, or 10.9%, to $1.2 million for the quarter ended September 30, 2016 compared to $1.4 million for the quarter ended September
30, 2015, and decreased $265,000, or 6.3%, to $3.9 million for the nine months ended September 30, 2016 compared to $4.2 million
for the nine months ended September 30, 2015. The decreases in both quarter over quarter and year over year were primarily due
to decreases in the 401(k) profit-sharing plan expense, pension plan expense, and medical insurance premiums which was due to a
change in the Company’s health insurance plan effective July 1, 2016.
FDIC insurance assessment
increased
$21,000, or 12.0%, to $196,000 for the quarter ended September 30, 2016 compared to $175,000 for the quarter ended September 30,
2015, and decreased $113,000, or 16.8%, to $560,000 for the nine months ended September 30, 2016 compared to $673,000 for the nine
months ended September 30, 2015. The decrease year over year was primarily due to a decrease in the 2016 assessment. This decrease
was not reflected quarter over quarter primarily due to an adjustment for the second quarter 2015 estimate that was made in the
third quarter of 2015. As required by the Dodd-Frank Act, the FDIC finalized a rule in March 2016 to increase the deposit insurance
fund from 1.15 percent of insured deposits to 1.35 percent by 2020. Under a rule adopted in 2011, assessment rates for all banks
will decline by 2 or more basis points the quarter after the fund reaches 1.15 percent, which is anticipated for the second quarter
of 2016. Under the current rule, starting that same quarter, banks under $10 billion will accrue credits for the portion of their
assessments that contribute to growth of the fund above 1.15 percent.
Real estate foreclosure expense and
(gains), net
increased $378,000, or 114.9%, to $49,000 for the quarter ended September 30, 2016 compared to $(329,000)
for the quarter ended September 30, 2015, and increased $584,000, or 165.9%, to $232,000 for the nine months ended September 30,
2016 compared to $(352,000) for the nine months ended September 30, 2015. Net gains recognized on other real estate owned were
$17,000 for the quarter ended September 30, 2016 compared to $435,000 for the quarter ended September 30, 2015, and $64,000 for
the nine months ended September 30, 2016 compared to $690,000 for the nine months ended September 30, 2015. Expenses to maintain
foreclosed properties were $66,000 for the quarter ended September 30, 2016 compared to $107,000 for the quarter ended September
30, 2015, and $296,000 for the nine months ended September 30, 2016 compared to $338,000 for the nine months ended September 30,
2015.
Other non-interest expense
decreased $74,000, or 7.4%, to $927,000 for the quarter ended September 30, 2016 compared to $1.0 million for the quarter ended
September 30, 2015, and increased $281,000, or 11.4%, to $2.8 million for the nine months ended September 30, 2016 compared to
$2.5 million for the nine months ended September 30, 2015. The decrease quarter
over quarter was primarily related to an
impairment write-down on a building held for sale in 2015. The increase year over year was primarily due to an increase in debit
card charge offs due to fraudulent transactions, an increase in donations, and an increase in employee training, education, and
travel expenses, partially offset by the impairment write-down on a building held for sale in 2015.
Income taxes
Income taxes as a percentage of earnings
before income taxes as reported in the consolidated financial statements were 34.7% for the quarter ended September 30, 2016 compared
to 35.2% for the quarter ended September 30, 2015. Income taxes as a percentage of earnings before income taxes as reported in
the consolidated financial statements were 33.8% for the nine months ended September 30, 2016 compared to 34.6% for the nine months
ended September 30, 2015. The decrease in tax rates year over year is primarily due to an immaterial return to provision adjustment
recorded during the first quarter of 2016.
Lending and Credit Management
Interest earned on the
loan portfolio is a primary source of interest income for the Company. Net loans represented 73.4% of total assets as of September
30, 2016 compared to 71.3% as of December 31, 2015.
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)
|
|
2016
|
|
|
2015
|
|
Commercial, financial, and agricultural
|
|
$
|
172,274
|
|
|
$
|
149,091
|
|
Real estate construction - residential
|
|
|
17,066
|
|
|
|
16,895
|
|
Real estate construction - commercial
|
|
|
48,743
|
|
|
|
33,943
|
|
Real estate mortgage - residential
|
|
|
256,786
|
|
|
|
256,086
|
|
Real estate mortgage - commercial
|
|
|
423,779
|
|
|
|
385,869
|
|
Installment loans to individuals
|
|
|
29,123
|
|
|
|
23,196
|
|
Total loans
|
|
$
|
947,771
|
|
|
$
|
865,080
|
|
Percent of categories to total loans:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
18.2
|
%
|
|
|
17.2
|
%
|
Real estate construction - residential
|
|
|
1.8
|
|
|
|
2.0
|
|
Real estate construction - commercial
|
|
|
5.1
|
|
|
|
3.9
|
|
Real estate mortgage - residential
|
|
|
27.1
|
|
|
|
29.6
|
|
Real estate mortgage - commercial
|
|
|
44.7
|
|
|
|
44.6
|
|
Installment loans to individuals
|
|
|
3.1
|
|
|
|
2.7
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The Company extends credit
to its local community market through traditional real estate mortgage products. The Company does not participate in extending
credit to sub-prime residential real estate markets. The Company does not lend funds for the type of transactions defined as “highly
leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations
of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does
not have any interest-earning assets that would have been included in nonaccrual, past due, or restructured loans if such assets
were loans.
The 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. The Company sold loans of $11.2 million and $28.8 million to investors for
the three and nine months ended September 30, 2016, respectively, compared to $11.2 million and $40.1 million for the three and
nine months ended September 30, 2015, respectively. At September 30, 2016, the Company was servicing approximately $299.7 million
of loans sold to the secondary market compared to $312.1 million at December 31, 2015, and $311.8 million at September 30, 2015.
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)
|
|
2016
|
|
|
2015
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
1,157
|
|
|
$
|
308
|
|
Real estate construction - commercial
|
|
|
51
|
|
|
|
102
|
|
Real estate mortgage - residential
|
|
|
1,704
|
|
|
|
2,322
|
|
Real estate mortgage - commercial
|
|
|
559
|
|
|
|
1,542
|
|
Installment loans to individuals
|
|
|
116
|
|
|
|
144
|
|
Total
|
|
$
|
3,587
|
|
|
$
|
4,418
|
|
Loans contractually past due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
0
|
|
|
$
|
1
|
|
Real estate mortgage - residential
|
|
|
60
|
|
|
|
0
|
|
Installment loans to individuals
|
|
|
1
|
|
|
|
5
|
|
Total
|
|
$
|
61
|
|
|
$
|
6
|
|
Performing troubled debt restructurings
|
|
|
5,655
|
|
|
|
5,850
|
|
Total nonperforming loans
|
|
|
9,303
|
|
|
|
10,274
|
|
Other real estate owned and repossessed assets
|
|
|
14,438
|
|
|
|
15,992
|
|
Total nonperforming assets
|
|
$
|
23,741
|
|
|
$
|
26,266
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
947,771
|
|
|
$
|
865,080
|
|
Allowance for loan losses to loans
|
|
|
1.00
|
%
|
|
|
0.99
|
%
|
Nonperforming loans to loans
|
|
|
0.98
|
%
|
|
|
1.19
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
101.80
|
%
|
|
|
83.75
|
%
|
Allowance for loan losses to nonperforming loans, excluding TDR's - accruing
|
|
|
259.59
|
%
|
|
|
194.48
|
%
|
Nonperforming assets to loans, other real estate owned and foreclosed assets
|
|
|
2.47
|
%
|
|
|
2.98
|
%
|
Total nonperforming assets
totaled $23.7 million at September 30, 2016 compared to $26.3 million at December 31, 2015. Nonperforming loans, defined as loans
on nonaccrual status, loans 90 days or more past due and still accruing, and TDRs totaled $9.3 million, or 0.98% of total loans,
at September 30, 2016 compared to $10.3 million, or 1.19% of total loans, at December 31, 2015, and $14.6 million, or 1.66% of
total loans, at September 30, 2015. Non-accrual loans included $597,000 and $527,000 of loans classified as TDRs at September 30,
2016 and December 31, 2015, respectively.
As of September 30, 2016
and December 31, 2015, approximately $1.8 million and $5.7 million, respectively, of loans classified as substandard, not included
in the nonperforming asset table, were identified as potential problem loans having more than a 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, 2016 and December 31, 2015, respectively.
Total non-accrual loans
at September 30, 2016 decreased $831,000, or 19.0%, to $3.6 million compared to $4.4 million at December 31, 2015. This decrease
primarily consisted of decreases in real estate mortgage residential and commercial loans, partially offset by an increase in commercial,
financial, and agricultural loans. The decrease in non-accrual loans primarily resulted from the sale of a piece of collateral
and transfers of impaired loans to other real estate owned and repossessed assets.
Loans
past due 90 days and still accruing interest at September 30, 2016, were $61,000 compared to $6,000 at December 31, 2015. Other
real estate and repossessed assets at September 30, 2016 were $14.4 million compared to $16.0 million at December 31, 2015. During
the nine months ended September 30, 2016, $2.0 million of nonaccrual loans, net of charge-offs taken, moved to other real estate
owned and repossessed assets compared to $1.5 million during the nine months ended September 30, 2015.
The following
table summarizes the Company’s TDRs at the dates indicated:
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
(In thousands)
|
|
Number
of
Contracts
|
|
|
Recorded
Investment
|
|
|
Specific
Reserves
|
|
|
Number
of
Contracts
|
|
|
Recorded
Investment
|
|
|
Specific
Reserves
|
|
Performing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
8
|
|
|
$
|
654
|
|
|
$
|
7
|
|
|
|
8
|
|
|
$
|
697
|
|
|
$
|
67
|
|
Real estate mortgage - residential
|
|
|
7
|
|
|
|
3,492
|
|
|
|
170
|
|
|
|
7
|
|
|
|
3,615
|
|
|
|
630
|
|
Real estate mortgage - commercial
|
|
|
3
|
|
|
|
1,509
|
|
|
|
99
|
|
|
|
3
|
|
|
|
1,538
|
|
|
|
-
|
|
Total performing TDRs
|
|
|
18
|
|
|
$
|
5,655
|
|
|
$
|
276
|
|
|
|
18
|
|
|
$
|
5,850
|
|
|
$
|
697
|
|
Nonperforming TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
2
|
|
|
$
|
32
|
|
|
$
|
5
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Real estate mortgage - residential
|
|
|
5
|
|
|
|
374
|
|
|
|
61
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Real estate mortgage - commercial
|
|
|
2
|
|
|
|
191
|
|
|
|
103
|
|
|
|
4
|
|
|
|
527
|
|
|
|
213
|
|
Total nonperforming TDRs
|
|
|
9
|
|
|
$
|
597
|
|
|
$
|
169
|
|
|
|
4
|
|
|
$
|
527
|
|
|
$
|
213
|
|
Total TDRs
|
|
|
27
|
|
|
$
|
6,252
|
|
|
$
|
445
|
|
|
|
22
|
|
|
$
|
6,377
|
|
|
$
|
910
|
|
At September 30, 2016,
loans classified as TDRs totaled $6.3 million, with $445,000 of specific reserves, of which $597,000 were classified as nonperforming
TDRs and $5.7 million were classified as performing TDRs. This compared to $6.4 million of loans classified as TDRs, with $910,000
of specific reserves, of which $527,000 were classified as nonperforming TDRs and $5.9 million were classified as performing TDRs
at December 31, 2015. 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. The net decrease in total
TDRs from December 31, 2015 to September 30, 2016 was primarily due to approximately $531,000 of payments received, partially offset
by $406,000 of new loans designated as TDRs during the nine months ended September 30, 2016.
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)
|
|
2016
|
|
|
2015
|
|
Allocation of allowance
for loan losses at end of period:
|
|
|
|
|
|
|
|
|
Commercial,
financial, and agricultural
|
|
$
|
2,771
|
|
|
$
|
2,153
|
|
Real estate construction
- residential
|
|
|
59
|
|
|
|
59
|
|
Real estate construction
- commercial
|
|
|
293
|
|
|
|
644
|
|
Real estate mortgage
- residential
|
|
|
2,080
|
|
|
|
2,439
|
|
Real estate mortgage
- commercial
|
|
|
3,870
|
|
|
|
2,935
|
|
Installment loans
to individuals
|
|
|
295
|
|
|
|
273
|
|
Unallocated
|
|
|
102
|
|
|
|
101
|
|
Total
|
|
$
|
9,470
|
|
|
$
|
8,604
|
|
The allowance for loan losses (ALL) was
$9.5 million, or 1.00% of loans outstanding, at September 30, 2016 compared to $8.6 million, or 0.99% of loans outstanding, at
December 31, 2015, and $9.2 million, or 1.05% of loans outstanding, at September 30, 2015. The ratio of the allowance for loan
losses to nonperforming loans, excluding performing TDR’s, was 259.59% at September 30, 2016, compared to 194.48% at December
31, 2015.
The
following table is a summary of the general and specific allocations of the allowance for loan losses:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Allocation of allowance for loan losses:
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment - specific reserves
|
|
$
|
1,302
|
|
|
$
|
1,540
|
|
Collectively evaluated for impairment - general reserves
|
|
|
8,168
|
|
|
|
7,064
|
|
Total
|
|
$
|
9,470
|
|
|
$
|
8,604
|
|
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, less costs to sell, or by discounting the total
expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At September 30,
2016, $1.3 million of the Company’s ALL was allocated to impaired loans totaling approximately $9.2 million compared to $1.5
million of the Company’s ALL allocated to impaired loans totaling approximately $10.3 million at December 31, 2015. Management
determined that $2.1 million, or 23%, of total impaired loans required no reserve allocation at September 30, 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.
The
incurred loss component
of the
general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by 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. 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. These historical loss
rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan
loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing
financial difficulty and the recognition of a loss.
The Company’s methodology includes
qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available
and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally
reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and
developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans,
the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment
of trends in collateral values, assessment of changes in the quality of the Company’s internal loan review department, and
changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.
The specific and general reserve allocations
represent management’s best estimate of probable losses inherent in the loan portfolio at the evaluation date. Although the
allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit
losses.
Provision
The provision for loan
losses was $300,000 and $975,000 for the three and nine months ended September 30, 2016, respectively, compared to no provision
and $250,000 for the three and nine months ended September 30, 2015, respectively. The increase was primarily due to using a fifteen
quarter look-back period compared to twelve quarters, as discussed above, in addition to an increase in loans.
The
following table summarizes loan loss experience for the periods indicated:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Analysis of allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
9,392
|
|
|
$
|
9,986
|
|
|
$
|
8,604
|
|
|
$
|
9,099
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
157
|
|
|
|
591
|
|
|
|
295
|
|
|
|
741
|
|
Real estate construction - commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
5
|
|
Real estate mortgage - residential
|
|
|
92
|
|
|
|
87
|
|
|
|
474
|
|
|
|
298
|
|
Real estate mortgage - commercial
|
|
|
27
|
|
|
|
126
|
|
|
|
137
|
|
|
|
159
|
|
Installment loans to individuals
|
|
|
86
|
|
|
|
80
|
|
|
|
209
|
|
|
|
241
|
|
Total charge-offs
|
|
|
362
|
|
|
|
884
|
|
|
|
1,116
|
|
|
|
1,444
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
26
|
|
|
$
|
28
|
|
|
$
|
203
|
|
|
$
|
643
|
|
Real estate construction - residential
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
322
|
|
Real estate construction - commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
502
|
|
|
|
-
|
|
Real estate mortgage - residential
|
|
|
31
|
|
|
|
45
|
|
|
|
49
|
|
|
|
105
|
|
Real estate mortgage - commercial
|
|
|
36
|
|
|
|
5
|
|
|
|
128
|
|
|
|
157
|
|
Installment loans to individuals
|
|
|
47
|
|
|
|
38
|
|
|
|
125
|
|
|
|
114
|
|
Total recoveries
|
|
|
140
|
|
|
|
144
|
|
|
|
1,007
|
|
|
|
1,341
|
|
Net charge-offs
|
|
|
222
|
|
|
|
740
|
|
|
|
109
|
|
|
|
103
|
|
Provision for loan losses
|
|
|
300
|
|
|
|
-
|
|
|
|
975
|
|
|
|
250
|
|
Balance end of period
|
|
$
|
9,470
|
|
|
$
|
9,246
|
|
|
$
|
9,470
|
|
|
$
|
9,246
|
|
Net Loan Charge-offs
The Company’s net loan charge-offs
were $222,000, or 0.02% of average loans, for the three months ended September 30, 2016, compared to net loan charge-offs of $740,000,
or 0.08% of average loans, for the three months ended September 30, 2015. The decrease in charge-offs quarter over quarter primarily
related to one commercial loan relationship recorded during the third quarter of 2015.
The Company’s net loan charge-offs
were $109,000, or 0.01% of average loans, for the nine months ended September 30, 2016, compared to net loan charge-offs of $103,000,
or 0.01% of average loans, for the nine months ended September 30, 2015. Although loan charge-offs decreased year over year, loan
recoveries also decreased from the prior year. One commercial loan and one real estate residential construction loan recovery were
received during the first and second quarters of 2015 compared to a significant commercial real estate construction loan recovery
received from the sale of collateral during the second quarter of 2016.
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)
|
|
2016
|
|
|
2015
|
|
Federal funds sold and other overnight interest-bearing deposits
|
|
$
|
19,788
|
|
|
$
|
7,893
|
|
Available-for-sale investment securities
|
|
|
221,824
|
|
|
|
235,054
|
|
Total
|
|
$
|
241,612
|
|
|
$
|
242,947
|
|
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 $221.8 million at September 30, 2016 and included an unrealized net gain of $1.3 million. The portfolio
includes projected maturities and mortgage backed securities pay-downs of approximately $20.9 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, 2016 and December 31,
2015, the Company’s unpledged securities in the available for sale portfolio totaled approximately $38.6 million and $52.4
million, respectively.
Total investment securities pledged for
these purposes were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Investment securities pledged for the purpose of securing:
|
|
|
|
|
|
|
|
|
Federal Reserve Bank borrowings
|
|
$
|
9,721
|
|
|
$
|
3,481
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
43,424
|
|
|
|
66,911
|
|
Other deposits
|
|
|
130,063
|
|
|
|
112,282
|
|
Total pledged, at fair value
|
|
$
|
183,208
|
|
|
$
|
182,674
|
|
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, 2016, such deposits totaled $707.9 million and represented 69.5% 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 $310.1 million at September 30, 2016. These accounts are normally considered
more volatile and higher costing representing 30.5% of total deposits at September 30, 2016.
Core deposits at September 30, 2016 and
December 31, 2015 were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2016
|
|
|
2015
|
|
Core deposit base:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
229,987
|
|
|
$
|
208,035
|
|
Interest checking
|
|
|
187,744
|
|
|
|
176,124
|
|
Savings and money market
|
|
|
290,201
|
|
|
|
264,956
|
|
Total
|
|
$
|
707,932
|
|
|
$
|
649,115
|
|
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, 2016, under agreements with these unaffiliated banks, the Bank may borrow up to $40.0 million in federal
funds on an unsecured basis and $17.4 million on a secured basis. There were no federal funds purchased outstanding at September
30, 2016. 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, 2016, there was $28.5 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, 2016.
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,
2016, the Bank had $79.0 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, 2016 and December 31, 2015 were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In
thousands)
|
|
2016
|
|
|
2015
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Securities sold under agreements to repurchase
|
|
$
|
28,504
|
|
|
$
|
56,834
|
|
Federal Home Loan Bank advances
|
|
|
79,000
|
|
|
|
50,000
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
49,486
|
|
Total
|
|
$
|
156,990
|
|
|
$
|
156,320
|
|
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,
|
|
|
|
2016
|
|
|
2015
|
|
(In
thousands)
|
|
FHLB
|
|
|
Federal
Reserve
Bank
|
|
|
Federal
Funds
Purchased
Lines
|
|
|
Total
|
|
|
FHLB
|
|
|
Federal
Reserve
Bank
|
|
|
Federal
Funds
Purchased
Lines
|
|
|
Total
|
|
Advance equivalent
|
|
$
|
302,533
|
|
|
$
|
9,518
|
|
|
$
|
47,905
|
|
|
$
|
359,956
|
|
|
$
|
257,513
|
|
|
$
|
3,412
|
|
|
$
|
45,175
|
|
|
$
|
306,100
|
|
Advances outstanding
|
|
|
(79,000
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(79,000
|
)
|
|
|
(50,000
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(50,000
|
)
|
Total available
|
|
$
|
223,533
|
|
|
$
|
9,518
|
|
|
$
|
47,905
|
|
|
$
|
280,956
|
|
|
$
|
207,513
|
|
|
$
|
3,412
|
|
|
$
|
45,175
|
|
|
$
|
256,100
|
|
At September 30, 2016, loans with a market
value of $388.3 million were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit. At September
30, 2016, investments with a market value of $19.5 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 $38.9 million
at September 30, 2016 compared to $28.4 million at December 31, 2015. The $8.6 million increase 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, 2016. Cash flow provided from operating activities consists mainly
of net income adjusted for certain non-cash items. Operating activities provided cash flow of $9.1 million for the nine months
ended September 30, 2016.
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 $68.8
million. The cash outflow primarily consisted of $102.0 million purchases of investment securities, and $85.1 million net increase
in loans, partially offset by $60.7 million proceeds from sales of investment securities, and $56.0 from maturities, calls, and
pay-downs of investment securities.
Financing activities provided cash of $70.3
million, resulting primarily from a $36.9 million increase in interest bearing transaction accounts, $29.0 million increase in
net FHLB advances, and $22.0 million increase in time deposits, partially offset by a $28.3 million decrease in federal funds purchased
and securities sold under agreements to repurchase. Future short-term liquidity needs arising from daily operations are not expected
to vary significantly during 2016.
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 $237.9 million in unused loan commitments and
standby letters of credit as of September 30, 2016. 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 $815,000 and $785,000 for the nine months ended September 30, 2016 and 2015, respectively.
A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank did not declare or
pay dividends to the Company during the nine months ended September 30, 2016. At September 30, 2016 and December 31, 2015, the
Company had cash and cash equivalents totaling $2.1 million and $5.0 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.
In July 2013, the federal banking agencies
issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in
period for the Company began on January 1, 2015. The Federal Reserve System’s (FRB) capital adequacy guidelines require
that bank holding companies maintain a Common Equity Tier 1 risk-based capital ratio equal to at least 4.5% of its risk-weighted
assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital ratio
equal to at least 8% of its risk-weighted assets. In addition, bank holding companies generally are required to maintain a Tier
1 leverage ratio of at least 4%.
In addition, the final rules establish
a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. Institutions
that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage
of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior
executive management. The capital conservation buffer requirement will be phased in over four years beginning in 2016. The capital
conservation buffer requirement effectively raises the minimum required risk-based capital ratios to 7% Common Equity Tier 1 Capital,
8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.
Under the Basel III requirements, at September
30, 2016 and December 31, 2015, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of
the levels established for well-capitalized institutions, as shown in the following table as of periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well-Capitalized Under
|
|
|
|
|
|
|
|
|
|
Required for Capital
|
|
|
Prompt Corrective Action
|
|
|
|
Actual
|
|
|
Adequacy
Purposes
|
|
|
Provision
|
|
(in
thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
150,985
|
|
|
|
14.11
|
%
|
|
$
|
85,592
|
|
|
|
8.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A. %
|
|
Bank
|
|
|
145,352
|
|
|
|
13.64
|
|
|
|
85,275
|
|
|
|
8.00
|
|
|
|
106,594
|
|
|
|
10.00
|
|
Tier I Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
124,473
|
|
|
|
11.63
|
%
|
|
$
|
64,194
|
|
|
|
6.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A. %
|
|
Bank
|
|
|
135,722
|
|
|
|
12.73
|
|
|
|
63,956
|
|
|
|
6.00
|
|
|
|
85,275
|
|
|
|
8.00
|
|
Common Equity Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
93,355
|
|
|
|
8.73
|
%
|
|
$
|
48,145
|
|
|
|
4.50
|
%
|
|
$
|
N.A.
|
|
|
|
N.A. %
|
|
Bank
|
|
|
135,722
|
|
|
|
12.70
|
|
|
|
47,967
|
|
|
|
4.50
|
|
|
|
69,286
|
|
|
|
6.50
|
|
Tier I Capital (to adjusted average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
124,473
|
|
|
|
9.86
|
%
|
|
$
|
50,507
|
|
|
|
4.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A. %
|
|
Bank
|
|
|
135,722
|
|
|
|
10.81
|
|
|
|
50,231
|
|
|
|
4.00
|
|
|
|
62,789
|
|
|
|
5.00
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
146,068
|
|
|
|
14.78
|
%
|
|
$
|
79,066
|
|
|
|
8.00
|
%
|
|
|
N.A.
|
|
|
|
N.A. %
|
|
Bank
|
|
|
137,572
|
|
|
|
13.98
|
|
|
|
78,718
|
|
|
|
8.00
|
|
|
$
|
98,398
|
|
|
|
10.00
|
|
Tier I Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
118,875
|
|
|
|
12.03
|
%
|
|
$
|
59,299
|
|
|
|
6.00
|
%
|
|
|
N.A.
|
|
|
|
N.A. %
|
|
Bank
|
|
|
128,808
|
|
|
|
13.09
|
|
|
|
59,039
|
|
|
|
6.00
|
|
|
$
|
78,718
|
|
|
|
8.00
|
|
Common Equity Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
89,304
|
|
|
|
9.04
|
%
|
|
$
|
44,475
|
|
|
|
4.50
|
%
|
|
$
|
N.A.
|
|
|
|
N.A. %
|
|
Bank
|
|
|
128,808
|
|
|
|
13.09
|
|
|
|
44,279
|
|
|
|
4.50
|
|
|
|
63,959
|
|
|
|
6.50
|
|
Tier I capital (to adjusted average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
118,875
|
|
|
|
9.84
|
%
|
|
$
|
48,314
|
|
|
|
4.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A. %
|
|
Bank
|
|
|
128,808
|
|
|
|
10.73
|
|
|
|
48,025
|
|
|
|
4.00
|
|
|
|
60,031
|
|
|
|
5.00
|
|