Washington, D.C. 20549
Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check mark whether
the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
No
x
The aggregate market value of
the 4,103,296 shares of voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the
$20.95 closing price of such common equity on June 30, 2017, the last business day of the registrant's most recently completed
second fiscal quarter, was $85,964,049. Aggregate market value excludes an aggregate of 1,733,146 shares of common stock held by
officers and directors and by each person known by the registrant to own 5% or more of the outstanding common stock on such date.
Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct
or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled
by or under common control with the registrant. As of March 7, 2018, the registrant had 6,046,907 shares of common stock, par value
$1.00 per share, issued and 5,798,009 shares outstanding.
Portions of the following
documents are incorporated by reference into the indicated parts of this report: (1) 2017 Annual Report to Shareholders - Part
II and (2) definitive Proxy Statement for the 2018 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation
14A - Part III.
PART I
Item 1
.
Business
.
This report and the documents
incorporated by reference herein contain forward-looking statements, which are inherently subject to risks and uncertainties. See
"Forward Looking Statements" under Item 7 of this report.
General
The Company, Hawthorn Bancshares,
Inc., is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. Hawthorn Bancshares, Inc. was
incorporated under the laws of the State of Missouri on October 23, 1992 as Exchange National Bancshares, Inc. and changed its
name to Hawthorn Bancshares, Inc. in August 2007. The Company owns all of the issued and outstanding capital stock of Union State
Bancshares, Inc., which in turn owns all of the issued and outstanding capital stock of Hawthorn Bank. The Company and Union State
Bancshares each received approval from the Federal Reserve and elected to become a financial holding company on October 21, 2001.
The Company acquired Hawthorn
Bank and its constituent predecessor banks, as well as Union State Bancshares, in a series of transactions that are summarized
as follows:
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On April 7, 1993 the Company acquired all of the issued
and outstanding capital stock of The Exchange National Bank of Jefferson City, a national banking association, pursuant to a corporate
reorganization involving an exchange of shares;
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On November 3, 1997, the Company acquired Union State Bancshares,
Inc., and Union's wholly-owned subsidiary, Union State Bank and Trust of Clinton;
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On January 3, 2000, the Company acquired Osage Valley Bank;
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Following the May 4, 2000 acquisition of Citizens State
Bank of Calhoun by Union State Bank, Citizens State Bank merged into Union State Bank to form Citizens Union State Bank &
Trust;
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·
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On June 16, 2000, the Company acquired City National Savings
Bank, FSB, which was then merged into Exchange National Bank; and
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·
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On May 2, 2005, the Company acquired all of the issued
and outstanding capital stock of Bank 10, a Missouri state bank.
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On December 1, 2006, the
Company announced its development of a strategic plan in which, among other things, Exchange National Bank, Citizens Union State
Bank, Osage Valley Bank and Bank 10 would be consolidated into a single bank under a Missouri state trust charter. This consolidation
was completed in October 2007, and the subsidiary bank is now known as Hawthorn Bank.
Except as otherwise provided herein, references
herein to the "Company" or "Hawthorn" include Hawthorn Bancshares, Inc. and its consolidated subsidiaries,
and references herein to the "Bank" refers to Hawthorn Bank and its constituent predecessors.
Description of Business
Company.
The Company
is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company.
The Company's activities currently are limited to ownership, indirectly through its subsidiary (Union State Bancshares, Inc.),
of the outstanding capital stock of Hawthorn Bank. In addition to ownership of its subsidiaries, the Company may seek expansion
through acquisition and may engage in those activities (such as investments in banks or operations that are financial in nature)
in which it is permitted to engage under applicable law. It is not currently anticipated that the Company will engage in any business
other than that directly related to its ownership of its banking subsidiary or other financial institutions.
Union.
Union State
Bancshares, Inc. is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial
holding company. Union's activities currently are limited to ownership of the
outstanding capital stock
of Hawthorn Bank. It is not currently anticipated that Union will engage in any business other than that directly related to its
ownership of Hawthorn Bank.
Hawthorn Bank
. Hawthorn
Bank was founded in 1932 as a Missouri bank and converted to a Missouri trust company on August 16, 1989. However, its predecessors
trace their lineage back to the founding of Exchange National Bank in 1865. Hawthorn Bank has 24 banking offices, including its
principal office at 132 East High Street in Jefferson City's central business district. See "Item 2. Properties".
Hawthorn Bank is a full
service bank conducting a general banking and trust business, offering its customers checking and savings accounts, internet banking,
debit cards, certificates of deposit, trust services, brokerage services, safety deposit boxes and a wide range of lending services,
including commercial and industrial loans, single payment personal loans, installment loans and commercial and residential real
estate loans.
Hawthorn Bank's deposit
accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law. Hawthorn
Bank's operations are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of Hawthorn
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 the holders of Hawthorn Bank's common stock. See
"Regulation Applicable to Bank Holding Companies" and "Regulation Applicable to the Bank".
Hawthorn Real Estate
.
Hawthorn Real Estate, LLC, a non-bank subsidiary of the Company, was formed in December 2008 in order to purchase and hold various
nonperforming assets of Hawthorn Bank. The purpose for holding these nonperforming assets in Hawthorn Real Estate is to allow for
the orderly disposition of these assets and strengthen Hawthorn Bank's financial position.
Real Estate Holdings
of Missouri, LLC
. Real Estate Holdings of Missouri, LLC, a non-bank subsidiary of the Company, was formed in March 2010 in
order to purchase from Hawthorn Bank and hold parcels of foreclosed real property located in and around Kansas City, Missouri.
The purpose for acquiring this foreclosed real estate in Real Estate Holdings of Missouri, LLC is to allow for the orderly, and
potentially more expeditious, disposition of these assets and strengthen Hawthorn Bank's financial position.
Employees
As of December 31, 2017,
Hawthorn and its subsidiaries had approximately 315 full-time and 34 part-time employees. None of its employees is presently represented
by any union or collective bargaining group, and the Company considers its employee relations to be satisfactory.
Competition
Bank holding companies
and their subsidiaries and affiliates encounter intense competition from nonbanking as well as banking sources in all of their
activities. The Bank's competitors include other commercial banks, thrifts, savings banks, credit unions, and money market mutual
funds. Thrifts and credit unions now have the authority to offer checking accounts and to make corporate and agricultural loans
and were granted expanded investment authority by recent federal regulations. In addition, large national and multinational corporations
have in recent years become increasingly visible in offering a broad range of financial services to all types of commercial and
consumer customers. In the Bank's service areas, new competitors, as well as the expanding operations of existing competitors,
have had, and are expected to continue to have, an adverse impact on the Bank's market share of deposits and loans in such service
areas.
The Bank experiences substantial
competition for deposits and loans within both its primary service areas of Jefferson City, Columbia, Clinton, Lee's Summit, Warsaw,
Springfield, and Branson, Missouri and its secondary service area of the nearby communities in Cole, Boone, Henry, Cass, Benton,
and Greene counties of Missouri. Hawthorn Bank's principal competition for deposits and loans comes from other banks within its
primary service areas and, to an increasing extent, other banks in nearby communities. Based on publicly available information,
management believes that Hawthorn Bank is the third largest (in terms of deposits) of the twelve banks within Cole county, the
twelfth largest (in terms of deposits) of thirty-two banks within Boone county, the largest (in terms of deposits) of the seven
banks within Henry county, the third largest (in terms of deposits) of the eighteen banks within Cass county, and the second largest
(in terms
of deposits) of the five
banks within Benton county. The main competition for Hawthorn Bank's trust services is from other commercial banks, including those
of the Kansas City metropolitan area.
Regulation Applicable to Bank Holding Companies
General.
As a registered
bank holding company and a financial holding company under the Bank Holding Company Act (the "BHC Act") and the Gramm-Leach-Bliley
Act (the "GLB Act"), Hawthorn is subject to supervision and examination by the Board of Governors of the Federal Reserve
System (the "FRB"). The FRB has authority to issue cease and desist orders against bank holding companies if it determines
that their actions represent unsafe and unsound practices or violations of law. In addition, the FRB is empowered to impose civil
money penalties for violations of banking statutes and regulations. Regulation by the FRB is intended to protect depositors of
the Bank, not the shareholders of Hawthorn. Hawthorn also is subject to a number of restrictions and requirements imposed by the
Sarbanes-Oxley Act of 2002 relating to internal controls over financial reporting, disclosure controls and procedures, loans to
directors or executive officers of the Hawthorn and its subsidiaries, the preparation and certification of the Hawthorn's consolidated
financial statements, the duties of Hawthorn's audit committee, relations with and functions performed by Hawthorn's independent
auditors, and various accounting and corporate governance matters.
Limitation on Activities.
The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other
activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident
thereto. In addition, under the GLB Act, a bank holding company, all of whose controlled depository institutions are "well
capitalized" and "well managed" (as defined in federal banking regulations) with "satisfactory" Community
Reinvestment Act ratings, may declare itself to be a "financial holding company" and engage in a broader range of activities.
As noted above, Hawthorn is registered as a financial holding company.
A financial holding company
may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental
or complementary to activities that are financial in nature. "Financial in nature" activities include:
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securities underwriting, dealing and market making;
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sponsoring mutual funds and investment companies;
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insurance underwriting and insurance agency activities;
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activities that the FRB determines to be financial in nature
or incidental to a financial activity or which is complementary to a financial activity and does not pose a safety and soundness
risk.
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A financial holding company
that desires to engage in activities that are financial in nature or incidental to a financial activity but not previously authorized
by the FRB must obtain approval from the FRB before engaging in such activity. Also, a financial holding company may seek FRB approval
to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does
not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system.
A financial holding company
generally may acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are
financial in nature or incidental to activities that are financial in nature without prior approval from the FRB. Prior FRB approval
is required, however, before the financial holding company may acquire control of more than 5% of the voting shares or substantially
all of the assets of a bank holding company, bank or savings association. In addition, under the FRB's merchant banking regulations,
a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as
long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does
not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial
holding company's controlled depository institutions.
If any subsidiary bank
of a financial holding company ceases to be "well-capitalized" or "well-managed" and fails to correct its condition
within the time period that the FRB specifies, the FRB has authority to order the financial holding
company to divest its subsidiary
banks. Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to
those permissible for a bank holding company that is not a financial holding company. If any subsidiary bank of a financial holding
company receives a rating under the Community Reinvestment Act (the "CRA") of less than "satisfactory", then
the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies,
banks or savings associations until the rating is raised to "satisfactory" or better.
Limitation
on Acquisitions
.
The BHC Act requires a bank holding company to obtain prior approval of the FRB before:
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taking any action that causes a bank to become a controlled subsidiary of the bank holding company;
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acquiring direct or indirect ownership or control of voting shares of any bank or bank holding
company, if the acquisition results in the acquiring bank holding company having control of more than 5% of the outstanding shares
of any class of voting securities of such bank or bank holding company, and such bank or bank holding company is not majority-owned
by the acquiring bank holding company prior to the acquisition;
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acquiring substantially all of the assets of a bank; or
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merging or consolidating with another bank holding company.
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Regulatory Capital Requirements.
The FRB has issued risk-based and leverage capital guidelines applicable to United States banking organizations. If a bank holding
company's capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital,
and its ability to pay dividends and make acquisitions of new bank subsidiaries may be restricted or prohibited. The risk-based
capital guidelines that applied to us and our subsidiary bank prior to January 1, 2015 were based on the 1988 capital accord, referred
to as Basel I, of the International Basel Committee on Banking Supervision (which we refer to as the "Basel Committee"),
a committee of central banks and bank supervisors, as implemented by federal bank regulators. In 2008, the bank regulatory agencies
began to phase-in capital standards based on a second capital accord issued by the Basel Committee, referred to as Basel II, for
large or "core" international banks (generally defined for U.S. purposes as having total assets of $250 billion or more
or consolidated foreign exposures of $10 billion or more). Because we do not anticipate controlling any large or "core"
international bank in the foreseeable future, Basel II presently does not apply to us. On September 12, 2010, the Group of Governors
and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase-in arrangements
for a strengthened set of capital requirements, known as Basel III. In July 2013, the federal banking agencies announced new risk-based
capital and leverage ratios to conform to the Basel III framework and address provisions of the Dodd-Frank Act. With respect to
the Company and the Bank, these requirements become effective on January 1, 2015.
The FRB's risk-based guidelines
generally define a three-tier capital framework. Common Equity Tier 1 Capital generally includes common stock instruments and related
surplus (net of treasury stock), retained earnings, and, subject to certain adjustments, minority common equity interests in subsidiaries,
less goodwill and certain other adjustments. The rules require accumulated other comprehensive income to flow through to regulatory
capital unless a one-time, irrevocable opt-out election is made. We did not make the opt-out election. Banking organizations are
required to deduct goodwill and other intangible assets (other than certain mortgage servicing assets), net of associated deferred
tax liabilities, from Common Equity Tier 1 Capital. Deferred tax assets arising from temporary timing differences that
cannot be realized through net operating loss (NOL) carrybacks are also deducted. Deferred tax assets that can be realized
through NOL carrybacks are not deducted but are subject to 100% risk weighting. Defined benefit pension fund assets,
net of any associated deferred tax liability, are deducted from Common Equity Tier 1 Capital unless the banking organization
has unrestricted and unfettered access to such assets. Reciprocal cross-holdings of capital instruments in any other
financial institutions are deducted from capital, not just holdings in other depository institutions. For this purpose,
financial institutions are broadly defined to include securities and commodities firms, hedge and private equity funds and non-depository
lenders. Banking organizations are required to deduct non-significant investments (less than 10% of outstanding stock)
in the capital of other financial institutions (including investments in trust preferred securities) to the extent these exceed
10% of Common Equity Tier 1 Capital subject to a 15% of Common Equity Tier 1 Capital cap. Greater than 10% investments
must be deducted if they exceed 10% of Common Equity Tier 1 Capital. If the aggregate amount of certain items excluded
from capital deduction due to a 10% threshold exceeds 17.65% of Common Equity Tier 1 Capital, the excess must be deducted. The
federal banking agencies did not adopt a proposed rule as part of the new regulations that would have significantly changed the
risk-weighting for residential mortgages. Instead, the amended regulations
continue to follow the capital
rules that historically have applied to us, which assign a 50% risk-weighting to "qualifying mortgage loans" which generally
consist of residential first mortgages with an 80% loan-to-value ratio (or which carry mortgage insurance that reduces the bank's
exposure to 80%) that are not more than 90 days past due. All other mortgage loans have a 100% risk weight. The
revised regulations apply a 250% risk-weighting to mortgage servicing rights, deferred tax assets that cannot be realized through
NOL carrybacks and investments in the capital instruments of other financial institutions that are not deducted from capital. The
revised regulations also create a new 150% risk-weighting category for "high volatility commercial real estate loans"
which are credit facilities for the acquisition, construction or development of real property other than for certain community
development projects, agricultural land and one- to four-family residential properties or commercial real projects where: (i) the
loan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital
equal to not less than 15% of the real estate's "as completed" value before the loan is made.
Tier 1 Capital generally
includes Common Equity Tier 1 Capital plus Additional Tier 1 Capital elements, such as non-cumulative perpetual preferred stock
and similar instruments meeting specified criteria and minority interests in subsidiaries that do not satisfy the requirements
for Common Equity Tier 1 Capital treatment. Cumulative preferred stock (other than cumulative preferred stock issued to the U.S.
Treasury under the Capital Purchase Program or the Small Business Lending Fund) does not qualify as Additional Tier 1 Capital. Trust
preferred securities and other non-qualifying capital instruments issued prior to May 19, 2010 by bank and savings and loan
holding companies with less than $15 billion in assets as of December 31, 2009 or by mutual holding companies may continue to be
included in Tier 1 Capital but will be phased out over 10 years beginning in 2016 for all other banking organizations. These
non-qualifying capital instruments, however, may be included in Tier 2 Capital. Tier 2 Capital may also include certain qualifying
debt and the allowance for credit losses up to 1.25% of risk-weighted assets and other adjustments.
The sum of the three tiers
of capital less investments in unconsolidated subsidiaries represents the total capital. The risk-based capital ratios are calculated
by dividing Common Equity Tier 1, Tier 1 and total capital by risk-weighted assets (including certain off-balance sheet activities).
The FRB's 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%.
On December 31, 2017,
Hawthorn was in compliance with the FRB's capital adequacy guidelines. Hawthorn's capital ratios on December 31, 2017 and the minimum
requirements as of that date are shown below:
Tier I Leverage Ratio
(4% minimum
requirement)
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Common Equity Tier 1 Risk-
Based Capital Ratio (4.5%
minimum requirement)
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Tier 1 Risk-Based Capital
Ratio (6% minimum
requirement)
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Total Risk-Based
Capital Ratio (8%)
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9.33
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%
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8.04
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%
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10.72
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%
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12.93
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%
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In addition to higher capital
requirements, bank holding companies are required to maintain a common equity Tier 1 capital conservation buffer of at least 2.5%
of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain
the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that
can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The
capital conservation buffer requirement will be phased in over four years beginning in 2016. On January 1, 2016, the first
phase of the requirement went into effect at 0.625% of risk-weighted assets, and the requirement will increase each subsequent
year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk weighted assets on January 1, 2019. Once
fully phased in, the capital conservation buffer requirement effectively raises the minimum required risk-based capital ratios
to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.
Interstate Banking and
Branching.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"),
a bank holding company is permitted to acquire the stock or substantially all of the assets of banks located in any state regardless
of whether such transaction is prohibited under the laws of any state. The FRB will not approve an interstate acquisition if, as
a result of the acquisition, the bank holding company would control more than 10% of the total amount of insured deposits in the
United States or would control more than 30% of the insured deposits in the home state of the acquired bank. The 30% of insured
deposits state limit does not apply if the acquisition
is the initial entry into
a state by a bank holding company or if the home state waives such limit. The Riegle-Neal Act also authorizes banks to merge across
state lines, thereby creating interstate branches. The Bank and Savings Association Holding Company and Depository Institution
Regulatory Improvements Act of 2010, a subset of the Dodd-Frank Act discussed below, permits banks to acquire and establish de
novo branches in other states if a state bank in that other state would be permitted to establish the branch.
Under the Riegle-Neal Act,
individual states may restrict interstate acquisitions in two ways. A state may prohibit an out-of-state bank holding company from
acquiring a bank located in the state unless the target bank has been in existence for a specified minimum period of time (not
to exceed five years). A state may also establish limits on the total amount of insured deposits within the state which are controlled
by a single bank holding company, provided that such deposit limit does not discriminate against out-of-state bank holding companies.
Source of Strength.
Bank holding companies, such as the Company, are required by statute to serve as a source of financial strength for their subsidiary
depository institutions, by providing financial assistance to their insured depository institution subsidiaries in the event of
financial distress. Under the source of strength requirement, the Company could be required to provide financial assistance to
the Bank should it experience financial distress. Furthermore, the FRB has the right to order a bank holding company to terminate
any activity that the FRB believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank. The
regulators may require these and other actions in support of controlled banks even if such action is not in the best interests
of the bank holding company or its stockholders.
Liability of Commonly
Controlled Institutions.
Under cross-guaranty provisions of the Federal Deposit Insurance Act (the "FDIA"), bank
subsidiaries of a bank holding company are liable for any loss incurred by the Deposit Insurance Fund (the "DIF"), the
federal deposit insurance fund for banks, in connection with the failure of any other bank subsidiary of the bank holding company.
Bank Secrecy Act and
USA PATRIOT Act
. The Company and the Bank must comply with the requirements of the Bank Secrecy Act (the "BSA").
The BSA was enacted to prevent banks and other financial service providers from being used as intermediaries for, or to hide the
transfer or deposit of money derived from, drug trafficking, money laundering, and other crimes. Since its passage, the BSA has
been amended several times. These amendments include the Money Laundering Control Act of 1986, which made money laundering a criminal
act, as well as the Money Laundering Suppression Act of 1994, which required regulators to develop enhanced examination procedures
and increased examiner training to improve the identification of money laundering schemes in financial institutions. The USA PATRIOT
Act, established in 2001, substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant
new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction
of the United States. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures
and controls to detect, prevent, and report money laundering and terrorist financing. The regulations include significant penalties
for non-compliance.
Missouri Bank Holding
Company Regulation
. Missouri prohibits any bank holding company from acquiring ownership or control of any bank or Missouri
depository trust company that has Missouri deposits if, after such acquisition, the bank holding company would hold or control
more than 13% of total Missouri deposits. Because of this restriction, among others, a bank holding company, prior to acquiring
control of a bank or depository trust company that has deposits in Missouri, must receive the approval of the Missouri Division
of Finance.
Regulation Applicable to the Bank
General.
Hawthorn
Bank, a Missouri state non-member depository trust company, is subject to the regulation of the Missouri Division of Finance and
the FDIC. The FDIC is empowered to issue cease and desist orders against the Bank if it determines that any activities of the Bank
represent unsafe and unsound banking practices or violations of law. In addition, the FDIC has the power to impose civil money
penalties for violations of banking statutes and regulations. Regulation by these agencies is designed to protect the depositors
of the Bank; not shareholders of Hawthorn.
Bank Regulatory Capital
Requirements.
The FDIC has adopted minimum capital requirements applicable to state non-member banks, which are similar to
the capital adequacy guidelines established by the FRB for bank holding companies. Federal banking laws classified an insured financial
institution in one of the following five categories, depending upon the amount of its regulatory capital:
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"well-capitalized" if it has a total Tier 1 leverage ratio of 5% or greater, a Common
Equity Tier 1 risk-based capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8% or greater and a total risk-based
capital ratio of 10% or greater (and is not subject to any order or written directive requiring the bank to adhere to a higher
capital ratio);
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"adequately capitalized" if it has a total Tier 1 leverage ratio of 4% or greater, a
Common Equity Tier 1 risk-based capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a total
risk-based capital ratio of 8% or greater;
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"undercapitalized" if it has a total Tier 1 leverage ratio that is less than 4%, a Common
Equity Tier 1 risk-based capital ratio that is less than 4.5%, a Tier 1 risk-based capital ratio that is less than 6% or a total
risk-based capital ratio that is less than 8%;
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"significantly undercapitalized" if it has a total Tier 1 leverage ratio that is less
than 3%, a Common Equity Tier 1 risk-based capital ratio that is less than 3%, a Tier 1 risk-based capital ratio that is less than
4% or a total risk-based ratio that is less than 6%; and
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"critically undercapitalized" if it has a Tier
1 leverage ratio that is equal to or less than 2%.
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Federal regulatory agencies
are required to take prompt corrective action against undercapitalized financial institutions. On December 31, 2017, the Bank was
classified as "well-capitalized," which is required for Hawthorn to remain a financial holding company. The capital ratios
and classifications of the Bank as of December 31, 2017 and the minimum requirements as of such date are shown on the following
chart.
Tier 1 Leverage Ratio
(5% minimum
requirement)
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Common Equity Tier 1
Risk-Based Capital Ratio
(6.5% minimum
requirement)
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Tier 1 Risk-Based Capital
Ratio (8% minimum
requirement)
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Total Risk-Based Capital
Ratio (10%)
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10.38
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%
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11.92
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%
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11.92
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%
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12.83
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%
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Limitations on Interest
Rates and Loans to One Borrower.
The rate of interest a bank may charge on certain classes of loans is limited by state and
federal law. At certain times in the past, these limitations have resulted in reductions of net interest margins on certain classes
of loans. Federal and state laws impose additional restrictions on the lending activities of banks. The maximum amount that a Missouri
state-chartered bank may lend to any one person or entity is generally limited to 15% of the unimpaired capital of the bank located
in a city having a population of 100,000 or more, 20% of the unimpaired capital of the bank located in a city having a population
of less than 100,000 and over 7,000, and 25% of the unimpaired capital of the bank if located elsewhere in the state. In the case
of Missouri state-chartered banks with a composite rating of 1 or 2 under the Capital, Assets, Management, Earnings, Liquidity
and Sensitivity (CAMELS) rating system, the maximum amount is the greater of (i) the limits listed in the foregoing sentence or
(ii) 25% of the unimpaired capital of the bank.
Payment of Dividends.
The Company's primary source of funds is dividends from the Bank, and the Bank is subject to federal and state laws limiting the
payment of dividends. Under the FDIA, an FDIC-insured institution may not pay dividends while it is undercapitalized or if payment
would cause it to become undercapitalized. The National Bank Act and Missouri banking law also prohibit the declaration of a dividend
out of the capital and surplus of the bank.
Community Reinvestment
Act.
The Bank is subject to the CRA and implementing regulations. The CRA regulations establish the framework and criteria
by which the bank regulatory agencies assess an institution's record of helping to meet the credit needs of its community, including
low- and moderate-income neighborhoods. CRA ratings are taken into account by regulators in reviewing certain applications made
by Hawthorn and its banking subsidiary.
Limitations on Transactions
with Affiliates.
Hawthorn and its non-bank subsidiaries are "affiliates" within the meaning of the Federal Reserve
Act. The amount of loans or extensions of credit which the Bank may make to non-bank affiliates, or to third parties secured by
securities or obligations of the non-bank affiliates, are substantially limited by the Federal Reserve Act and the FDIA. Such acts
further restrict the range of permissible transactions between a bank and an affiliated company. A bank and its subsidiaries may
engage in certain transactions, including loans and purchases of assets,
with an affiliated company
only if the terms and conditions of the transaction, including credit standards, are substantially the same as, or at least as
favorable to the bank as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence
of comparable transactions, on terms and conditions that would be offered to non-affiliated companies.
Other Banking Activities.
The investments and activities of the Bank are also subject to regulation by federal and state banking agencies regarding,
among other things, investments in subsidiaries, investments for their own account (including limitations on investments in junk
bonds and equity securities), loans to officers, directors and their affiliates, security requirements, anti-tying limitations,
anti-money laundering, financial privacy and customer identity verification requirements, truth-in-lending, the types of interest
bearing deposit accounts which it can offer, trust department operations, brokered deposits, audit requirements, issuance of securities,
branching and mergers and acquisitions.
Changes in Laws and Monetary Policies
Recent Legislation.
Various pieces of legislation, including proposals to change substantially the financial institution regulatory system, are
from time to time introduced and considered by the Missouri state legislature and the United States Congress. In July 2010, President
Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which
enacted substantial changes to the legal framework of the entire financial services industry. The Dodd-Frank Act mandates the passage
of numerous rules and regulations by various regulatory agencies over the next few years. It also creates the Consumer Financial
Protection Bureau, which will overtake supervision of most providers of consumer financial products and services, and will be empowered
to declare acts or practices related to the delivery of a consumer financial product or service to be "unfair, deceptive or
abusive." This law will continue to change banking regulation and the operating environment of Hawthorn in substantial and
unpredictable ways. These changes could increase or decrease the cost of doing business, limit or expand permissible activities
or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. Hawthorn cannot
predict the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its business.
Fiscal Monetary Policies.
Hawthorn's business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its
agencies. Hawthorn is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United
States. Among the instruments of monetary policy available to the FRB are:
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conducting open market operations in United States government securities;
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changing the discount rates of borrowings of depository institutions;
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imposing or changing reserve requirements against depository institutions' deposits; and
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imposing or changing reserve requirements against certain borrowings by bank and their affiliates.
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These methods are used
in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates
charged on loans and paid on deposits. The policies of the FRB have a material effect on Hawthorn's business, results of operations
and financial condition.
The references in the foregoing
discussion to various aspects of statutes and regulation are merely summaries, which do not purport to be complete and which are
qualified in their entirety by reference to the actual statutes and regulations.
Available Information
The address of the Company's
principal executive offices is 132 East High Street, Jefferson City, Missouri 65102 and the telephone number at this location is
(573)761-6100. The Company's common stock trades on the Nasdaq Global Select Market under the symbol "HWBK".
We electronically file
certain documents with the Securities and Exchange Commission (SEC). We file annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K (as appropriate), along with any related amendments and supplements. From time-to-time,
we also may file registration and related statements pertaining to equity or debt offerings. You may read and download the Company's
SEC filings over the internet from several
commercial document retrieval
services as well as at the SEC's internet website (www.sec.gov). You may also read and copy the Company's SEC filings at the SEC's
public reference room located at 100 F Street, NE., Washington, DC 20549. Please call the SEC 1-800-SEC-0330 for further information
concerning the public reference room and any applicable copy charges.
The Company's internet
website address is www.hawthornbancshares.com. Under the "Documents" menu tab of the Company's website (www.hawthornbancshares.com),
we make available, without charge, the Company's public filings with the SEC, including the Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K, or any amendments to those reports filed or furnished to the SEC pursuant to
Section 13(a) of the Securities Exchange Act of 1934. Please note that any internet addresses provided in this report are for information
purposes only and are not intended to be hyperlinks. Accordingly, no information found and/or provided at such internet addresses
is intended or deemed to be incorporated by reference herein.
Item 1A
.
Risk Factors
.
Risk Factors
We are identifying important
risks and uncertainties that could affect the Company's results of operations, financial condition or business and that could cause
them to differ materially from the Company's historical results of operations, financial condition or business, or those contemplated
by forward-looking statements made herein or elsewhere, by, or on behalf of, the Company. Factors that could cause or contribute
to such differences include, but are not limited to, those factors described below. The risk factors highlighted below are not
necessarily the only ones that the Company faces.
Because We Primarily
Serve Central And West Central Missouri, A Decline In The Local Economic Conditions Could Lower The Company's Profitability
.
The profitability of Hawthorn is dependent on the profitability of its banking subsidiary, which operates out of central and west
central Missouri. The financial condition of this bank is affected by fluctuations in the economic conditions prevailing in the
portion of Missouri in which its operations are located. Accordingly, the financial conditions of both Hawthorn and its banking
subsidiary would be adversely affected by deterioration in the general economic and real estate climate in Missouri.
An increase in unemployment,
a decrease in profitability of regional businesses or real estate values or an increase in interest rates are among the factors
that could weaken the local economy. With a weaker local economy:
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customers may not want or need the products and services of the Bank,
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borrowers may be unable to repay their loans,
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the value of the collateral security of the Bank's loans to borrowers may decline,
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the number of loan delinquencies and foreclosures may increase, and
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the overall quality of the Bank's loan portfolio may decline.
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Originating mortgage loans
and consumer loans is a significant source of profits for Hawthorn's banking subsidiary. If individual customers in the local area
do not want or need these loans, profits may decrease. Although the Bank could make other investments, the Bank may earn less revenue
on these investments than on loans. Also, the Bank's losses on loans may increase if borrowers are unable to make payments on their
loans.
Interest Rate Changes
May Reduce The Profitability Of The Company And Of The Bank
. The primary source of earnings for Hawthorn's banking subsidiary
is net interest income. To be profitable, the Bank has to earn more money in interest and fees on loans and other interest-earning
assets than it pays as interest on deposits and other interest-bearing liabilities and as other expenses. If prevailing interest
rates decrease, the amount of interest the Bank earn on loans and investment securities may decrease more rapidly than the amount
of interest the Bank has to pay on deposits and other interest-bearing liabilities. This would result in a decrease in the profitability
of Hawthorn and its banking subsidiary.
Changes in the level or
structure of interest rates also affect:
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the Bank's ability to originate loans,
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the value of the Bank's loan and securities portfolios,
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the Bank's ability to realize gains from the sale of loans and securities,
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the average life of the Bank's deposits, and
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the Bank's ability to obtain deposits.
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Fluctuations in interest
rates will ultimately affect both the level of income and expense recorded on a large portion of the Bank's assets and liabilities,
and the fair value of all interest-earning assets, other than interest-earning assets that mature in the short term. The Bank's
interest rate management strategy is designed to stabilize net interest income and preserve capital over a broad range of interest
rate movements by matching the interest rate sensitivity of assets and liabilities. Although Hawthorn believes that its Bank's
current mix of loans, mortgage-backed securities, investment securities and deposits is reasonable, significant fluctuations in
interest rates may have a negative effect on the profitability of the Bank.
Our Business Depends
On Our Ability To Successfully Manage Credit Risk
. The operation of our business requires us to manage credit risk. As a lender,
our banking subsidiary is exposed to the risk that borrowers will be unable to repay their loans according to their terms, and
that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are
risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks
relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing
with individual borrowers. In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent
underwriting standards and ensure that our loan officers follow those standards. The weakening of these standards for any reason,
such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring
loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions
affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs
and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net
income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial
condition or results of operations.
The Company's Profitability
Depends On The Bank's Asset Quality And Lending Risks
. Success in the banking industry largely depends on the quality of loans
and other assets. The loan officers of Hawthorn's banking subsidiary are actively encouraged to identify deteriorating loans. Loans
are also monitored and categorized through an analysis of their payment status. The Bank's failure to timely and accurately monitor
the quality of its loans and other assets could have a materially adverse effect on the operations and financial condition of Hawthorn
and its banking subsidiary. There is a degree of credit risk associated with any lending activity. The Bank attempts to minimize
its credit risk through loan diversification. Although the Bank's loan portfolio is varied, with no undue concentration in any
one industry, substantially all of the loans in the portfolio have been made to borrowers in central, west central, and southwest
Missouri. Therefore, the loan portfolio is susceptible to factors affecting the central, west central, and southwest Missouri area
and the level of non-performing assets is heavily dependent upon local conditions. There can be no assurance that the level of
the Bank's non-performing assets will not increase above current levels. High levels of non-performing assets could have a materially
adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.
The Provision For Probable
Loan Losses May Need To Be Increased
. Hawthorn's banking subsidiary makes a provision for loan losses based upon management's
estimate of probable losses in the loan portfolio and its consideration of prevailing economic and environmental conditions. The
amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest
rates, which may be beyond the Company's control, and these losses may exceed current estimates. We cannot fully predict the amount
or timing of losses or whether the loss allowance will be adequate in the future. The Bank may need to increase the provision for
loan losses through additional provisions in the future if, among other things, the financial condition of any of its borrowers
deteriorates, if its borrower fails to perform its obligations to it, or if real estate values decline. Furthermore, various regulatory
agencies, as an integral part of their examination process, periodically review the Bank's loan portfolio, provision for loan losses,
and real estate acquired by foreclosure. Such agencies may require the Bank to recognize additions to the provision for loan losses
based on their judgments of information available to them at the time of the examination. Any additional provision for probable
loan losses, whether required as a result of regulatory review or initiated by Hawthorn itself, may materially alter the financial
outlook of Hawthorn and its banking subsidiary and may have a material adverse effect on the Company's financial condition and
results of operations.
Adverse Market Conditions
In The U.S. Economy And The Markets In Which We Operate Could Adversely Impact The Company's Business.
General downward economic
trends, reduced availability of commercial credit, and increasing unemployment have negatively impacted the credit performance
of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and
the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil
and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market
volatility and widespread reduction in general business activity. Competition among depository institutions for deposits has increased
significantly. Financial institutions have experienced decreased access to deposits or borrowings.
Although there has been
a modest recovery in the domestic economy, there can be no assurance that the economy will not enter into another recession, whether
in the near or long term future. Furthermore, real estate values and the demand for commercial real estate loans have not fully
recovered, and reduced availability of commercial credit and continuing unemployment have negatively impacted the credit performance
of commercial and consumer credit. Additional market developments such as a relapse or worsening of economic conditions in other
parts of the world would likely exacerbate the lingering effects of the difficult market conditions experienced by us and others
in the financial services industry and could further slow, stall or reverse the slow recovery in the U.S. A further deterioration
of overall market conditions, a continuation of the economic downturn or prolonged economic stagnation in the Company's markets
may have a negative impact on its business, financial condition, results of operations and the trading price of its common stock.
If the strength of the U.S. economy in general and the strength of the economy in areas where we lend were to stagnate or decline,
this could result in, among other things, a deterioration in credit quality or a reduced demand for credit, including a resultant
adverse effect on the Company's loan portfolio and provision for losses on loans. This may exacerbate the Company's exposure to
credit risk, impair the Company's ability to assess the creditworthiness of its customers or to estimate the values of its assets
and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us. Negative conditions
in the real estate markets where we operate could adversely affect borrowers' ability to repay their loans and the value of the
underlying collateral. Real estate values are affected by various factors, including general economic conditions, governmental
rules or policies and natural disasters. These factors may adversely impact borrowers' ability to make required payments, which
in turn, may negatively impact the Company's financial results. As a result of the difficult market and economic conditions referred
to above, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity
standards, and for bank regulatory agencies to be very aggressive in responding to concerns and trends identified in examinations.
This increased government action may increase costs and limit the Company's ability to pursue certain business opportunities.
We cannot predict whether the difficult market
and economic conditions will improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects
of these difficult conditions on the Company, its customers and the other financial institutions in its market. As a result, we
may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds,
and the Company's business, financial condition, results of operations and stock price may be adversely affected.
The Soundness Of Other
Financial Institutions Could Adversely Affect Us.
The Company's ability to engage in routine funding transactions could be
adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are
interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries
and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and
dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by,
or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have
led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions
expose us to credit risk in the event of default of a counterparty or client. In addition, the Company's credit risk may be exacerbated
when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of
the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affect the
Company's results of operations.
Deterioration In The
Housing Market Could Cause Further Increases In Delinquencies And Non-Performing Assets, Including Loan Charge-Offs, And Depress
The Company's Income And Growth.
The volume of one-to-four family residential mortgages and home equity lines of credit may
decrease during economic downturns as a result of, among other things, a decrease in real estate values, an increase in unemployment,
a slowdown in housing price
appreciation or increases
in interest rates. These factors could reduce earnings and consequently the Company's financial condition because:
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borrowers may not be able to repay their loans;
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the value of the collateral securing loans may decline further;
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the quality of the Company's loan portfolio may decline further; and
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customers may not want or need the Company's products and services.
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Any of these scenarios could
cause an increase in delinquencies and non-performing assets, require us to charge-off a higher percentage of loans, increase substantially
the provision for losses on loans, or make fewer loans, which would reduce income.
The FDIC's Changes in
the Calculation of Deposit Insurance Premiums and Ability to Levy Special Assessments Could Increase The Company's Non-Interest
Expense And May Reduce Its Profitability.
The range of base assessment rates historically varies from 12 to 45 basis points
depending on an institution's risk category, with newly added financial measures resulting in increased assessment rates for institutions
heavily relying on brokered deposits to support rapid asset growth. However, the Dodd-Frank Act requires the FDIC to amend its
regulations to redefine the assessment base used for calculating deposit insurance assessments. On February 9, 2011, the FDIC adopted
a final rule that defines the assessment base as the average consolidated total assets during the assessment period minus the average
tangible equity of the insured depository institution during the assessment period. The FDIC also imposed a new assessment rate
scale (which was revised further in 2016). Under the new system, banks will pay assessments at a rate between 3 and 30 basis points
per assets minus tangible equity, depending upon an institution's risk category (the final rule also includes progressively lower
assessment rate schedules when the FDIC's reserve ratio reaches certain levels). The rulemaking changes the current assessment
rate schedule so the schedule will result in the collection of assessment revenue that is approximately the same as generated under
the current rate schedule and current assessment base. Nearly all banks with assets less than $10 billion will pay smaller deposit
insurance assessments as a result of the new rule. The majority of the changes in the FDIC's final rule became effective on April
1, 2011. The FDIC has the statutory authority to impose special assessments on insured depository institutions in an amount, and
for such purposes, as the FDIC may deem necessary. The change in the calculation methodology for deposit insurance premiums and
the possible emergency special assessments could increase non-interest expense and may adversely affect the Company's profitability.
We May Elect Or Be Compelled To Seek Additional
Capital In The Future, But That Capital May Not Be Available When It Is Needed.
We are required by regulatory authorities to
maintain adequate levels of capital to support operations. In addition, we may elect to raise additional capital to support the
growth of the Company's business or to finance acquisitions, if any, or we may elect to raise additional capital for other reasons.
In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration
in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic
conditions, declines in real estate values and other factors. Should we elect or be required by regulatory authorities to raise
additional capital, we may seek to do so through the issuance of, among other things, common stock or securities convertible into
common stock, which could dilute your ownership interest in the Company. Although we remain "well-capitalized" and have
not had a deterioration in liquidity, the future cost and availability of capital may be adversely affected by illiquid credit
markets, economic conditions and a number of other factors, many of which are outside of the Company's control. Accordingly, we
cannot assure you of the ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional
capital when needed or on terms acceptable to us, it may have a material adverse effect on the Company's financial condition and
results of operations.
If We Are Unable To
Successfully Compete For Customers In The Company's Market Area, The Company's Financial Condition And Results Of Operations Could
Be Adversely Affected
. Hawthorn's banking subsidiary faces substantial competition in making loans, attracting deposits and
providing other financial products and services. The Bank has numerous competitors for customers in its market area.
Such competition for loans
comes principally from:
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other commercial banks
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mortgage banking companies
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savings banks
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finance companies
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savings and loan associations
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credit unions
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Competition for deposits comes principally
from:
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other commercial banks
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brokerage firms
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savings banks
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insurance companies
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savings and loan associations
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money market mutual funds
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credit unions
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mutual funds (such as corporate and government securities funds)
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Many of these competitors
have greater financial resources and name recognition, more locations, more advanced technology and more financial products to
offer than the Bank. Competition from larger institutions may increase due to an acceleration of bank mergers and consolidations
in Missouri and the rest of the nation. In addition, the Gramm-Leach-Bliley Act removes many of the remaining restrictions in federal
banking law against cross-ownership between banks and other financial institutions, such as insurance companies and securities
firms. The law will likely increase the number and financial strength of companies that compete directly with the Bank. The profitability
of the Bank depends of its continued ability to attract new customers and compete in Missouri. New competitors, as well as the
expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on the Bank's market
share of deposits and loans in the Bank's service areas. If the Bank is unable to successfully compete, its financial condition
and results of operations will be adversely affected.
We May Experience Difficulties
In Managing Growth And In Effectively Integrating Newly Acquired Companies
. As part of the Company's general strategy, it may
continue to acquire banks and businesses that it believes provide a strategic fit with its business. To the extent that the Company
does grow, there can be no assurances that we will be able to adequately and profitably manage such growth. Acquiring other banks
and businesses will involve risks commonly associated with acquisitions, including:
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potential exposure to liabilities of the banks and businesses acquired;
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difficulty and expense of integrating the operations and personnel of the banks and businesses
acquired;
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difficulty and expense of instituting the necessary systems and procedures, including accounting
and financial reporting systems, to manage the combined enterprises on a profitable basis;
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potential disruption to existing business and operations;
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potential diversion of the time and attention of management; and
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impairment of relationships with and the possible loss of key employees and customers of the banks
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The success of the Company's
internal growth strategy will depend primarily on the ability of the Bank 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.
There is no assurance that we will be successful in implementing the Company's internal growth strategy.
We May Be Adversely
Affected By Changes In Laws And Regulations Affecting The Financial Services Industry
. Banks and bank holding companies such
as Hawthorn are subject to regulation by both federal and state bank regulatory agencies. The regulations, which are designed to
protect borrowers and promote certain social policies, include limitations on the operations of banks and bank holding companies,
such as minimum capital requirements and restrictions on dividend payments. The regulatory authorities have extensive discretion
in connection with their supervision and enforcement activities and their examination policies, including the imposition of restrictions
on the operation of a bank, the classification of assets by an institution and requiring an increase in a bank's allowance for
loan losses. These regulations are not necessarily designed to maximize the profitability of banking institutions.
In July 2010, President
Barack Obama signed into law the Dodd-Frank Act, which enacted substantial changes to the legal framework of the entire financial
services industry. The Dodd-Frank Act mandates the passage of numerous rules and regulations by various regulatory agencies over
the next few years. This legislation will change banking regulation and the operating environment of Hawthorn in substantial and
unpredictable ways. It could increase or decrease the cost of doing business, limit or expand permissible activities or affect
the competitive balance among banks, savings associations, credit unions and other financial institutions. Hawthorn cannot predict
the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its business.
These, and other future
changes in the banking laws and regulations and tax and accounting rules applicable to financial institutions, could have a material
adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.
The Short-Term And Long-Term
Impact Of The Changing Regulatory Capital Requirements And New Capital Rules Is Uncertain.
The federal banking agencies have
substantially amended the regulatory capital rules applicable to us and the Bank. The amendments implement the "Basel III"
regulatory capital reforms and changes required by the Dodd-Frank Act. The amended rules include new minimum risk-based
capital and leverage ratios, which became effective in January 2015, with certain requirements to be phased in beginning in 2016,
and refined the definition of what constitutes "capital" for purposes of calculating those ratios.
The application of more
stringent capital requirements to us and the Bank could, among other things, result in lower returns on invested capital, require
the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements. Implementation
of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital
and/or additional capital conservation buffers could result in management modifying its business strategy and could further limit
the Company's ability to make distributions, including paying out dividends or buying back shares.
The Bank Is A Community
Bank And Our Ability To Maintain The Bank's Reputation Is Critical To The Success Of Our Business And The Failure To Do So Could
Materially Adversely Affect Our Performance.
The Bank is a community bank, and its reputation is one of the most valuable components
of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by
recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering
superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the
actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.
The Company's Success
Largely Depends On The Efforts Of Its Executive Officers
. The success of Hawthorn and its banking subsidiary has been largely
dependent on the efforts of David Turner, Chairman, CEO, and President and the other executive officers. These individuals are
expected to continue to perform their services. However, the loss of the services of Mr. Turner, or any of the other key executive
officers could have a materially adverse effect on Hawthorn and its subsidiary bank.
If We Fail To Maintain
An Effective System Of Internal Control Over Financial Reporting, We May Not Be Able To Accurately Report Our Financial Results
Or Prevent Fraud, And, As A Result, Investors And Depositors Could Lose Confidence In Our Financial Reporting, Which Could Adversely
Affect Our Business, The Trading Price Of Our Stock, And Our Ability To Attract Additional Deposits
. We are required to include
in our annual reports filed with the SEC a report from our management regarding internal control over financial reporting. As a
result, we documented and evaluated our internal control over financial reporting in order to satisfy the requirements of Section
404 of the Sarbanes-Oxley Act and SEC rules and regulations, which require an annual management report on our internal control
over financial reporting, including, among other matters, management's assessment of the effectiveness of internal control over
financial reporting. Failure or circumvention of our system of internal control could have an adverse effect on our business, profitability,
and financial condition, and could result in regulatory actions and loss of investor confidence. Additionally, if we fail to identify
and correct any significant deficiencies or material weaknesses in the design or operating effectiveness of our internal control
over financial reporting or fail to prevent fraud, current and potential stockholders and depositors could lose confidence in our
financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price
of our stock and our ability to attract additional deposits.
We Are Subject To Security
And Operational Risks Relating To Our Use Of Technology That Could Damage Our Reputation And Our Business
. We rely heavily
on communications and information systems to conduct our business. Furthermore, we have access to large amounts of confidential
financial information and control substantial financial assets, including those belonging to our customers, to whom we offer remote
access, and we regularly transfer substantial financial assets by electronic means. Our operations are dependent upon our ability
to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar
catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems
caused by hackers. Any failure, interruption or breach in security of our systems could damage our reputation, result in a loss
of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial
liability, any of which could
have a material adverse effect on our financial condition and results of operations. Although we intend to continue to implement
security technology and establish operational procedures to prevent such damage, our security measures may not be successful.
In addition, advances in
computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach
of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such
security measures could have a material adverse effect on our financial condition and results of operations. We also face the risk
of operational disruption, failure, termination or capacity constraints caused by third parties that facilitate our business activities
by providing technology such as software applications, as well as financial intermediaries. Such parties could also be the source
of an attack on, or breach of, our operational systems, data or infrastructure.
We also face the potential
risk of loss due to fraud, including commercial checking account fraud, automated teller machine ("ATM") skimming and
trapping, write-offs necessitated by debit card fraud, and other forms of online banking fraud, which are becoming more sophisticated
and present new challenges as mobile banking increases, as well as employee fraud. Employee errors could also subject us to financial
claims for negligence. We maintain a system of internal controls and insurance coverage to mitigate against operational risks,
including data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent
or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have
a material adverse effect on our business, financial condition and results of operations.
The Operation Of Our
Business, Including Our Interaction With Customers, Are Increasingly Done Via Electronic Means, And This Has Increased Our Risks
Related To Cybersecurity
. We are exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents
can result from deliberate attacks or unintentional events. We have observed an increased level of attention in the industry focused
on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating
assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a
manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites. Cyber-attacks
may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically
circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining
information necessary to gain access. The objectives of cyber-attacks vary widely and can include theft of financial assets, intellectual
property, or other sensitive information, including the information belonging to our banking customers. Cyber-attacks may also
be directed at disrupting our operations.
We may incur substantial
costs and suffer other negative consequences if we fall victim to successful cyber-attacks. Such negative consequences could include
remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused;
increased cybersecurity protection costs that may include organizational changes, deploying additional personnel and protection
technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use
of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage
adversely affecting customer or investor confidence.
We Continually Encounter
Technological Change, And We Cannot Predict How Changes In Technology Will Affect Our Business.
The financial services industry
is continually undergoing rapid technological change with frequent introductions of new technology driven by products and services,
which include developments in:
|
•
|
telecommunications
|
|
•
|
internet-based banking
|
|
•
|
data processing
|
|
•
|
telebanking
|
|
•
|
automation
|
|
•
|
debit cards and so-called "smart cards"
|
The effective use of technology
increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends,
in part, upon our ability to address the needs of our customers by using technology to provide products and services that will
satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially
greater resources to invest in technological improvements. We may not be able to effectively implement new technology driven products
and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with
technological change affecting the
financial services industry
could have a material adverse impact on our business and, in turn, our financial condition and results of operations.
We Rely On Others To
Provide Key Components Of Our Business Infrastructure
. Third party vendors provide key components of our business infrastructure
such as internet connections, network access and core application processing. While we have selected these third party vendors
carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing
us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products
and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third party vendors
could also entail significant delay and expense.
The Price Of Our Common
Stock Could Fluctuate Significantly, And This Could Make It Difficult For You To Resell Shares Of Our Common Stock At Times Or
At Prices You Find Attractive
. The stock market and, in particular, the market for financial institution stocks, has experienced
significant volatility during the recent economic downturn. In some cases, the markets have produced downward pressure on stock
prices for certain issuers without regard to those issuers' underlying financial strength. As a result, the trading volume in our
common stock could fluctuate more than usual and cause significant price variations to occur. This could make it difficult for
you to resell shares of our common stock at times or at prices you find attractive.
The trading price of the
shares of our common stock will depend on many factors that could change from time to time and could be beyond our control. Among
the factors that could affect our stock price are those identified under the heading "Forward-Looking Statements" in
Item 7 of this report and as follows:
|
·
|
actual or anticipated quarterly fluctuations in our operating results and financial condition;
|
|
·
|
changes in financial estimates or publication of research reports and recommendations by financial
analysts or actions taken by rating agencies with respect to our common stock or those of other financial institutions;
|
|
·
|
failure to meet analysts' revenue or earnings estimates;
|
|
·
|
speculation in the press or investment community generally or relating to our reputation, our market
area, our competitors or the financial services industry in general;
|
|
·
|
strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions
or financings;
|
|
·
|
actions by our current stockholders, including sales of common stock by existing stockholders and/or
directors and executive officers;
|
|
·
|
fluctuations in the stock price and operating results of our competitors;
|
|
·
|
future sales of our equity, equity-related or debt securities;
|
|
·
|
changes in the frequency or amount of dividends or share
repurchases;
|
|
·
|
proposed or adopted regulatory changes or developments;
|
|
·
|
investigations, proceedings or litigation that involve
or affect us;
|
|
·
|
trading activities in our common stock, including short-selling;
|
|
·
|
domestic and local economic factors unrelated to our performance;
and
|
|
·
|
general market conditions and, in particular, developments
related to market conditions for the financial services industry.
|
A significant decline in
our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities
litigation.
The Trading Volume In
Our Common Stock Has Been Low, And The Sale Of A Substantial Number Of Shares Of Our Common Stock In The Public Market Could Depress
The Price Of Our Common Stock And Make It Difficult For You To Sell Your Shares
. Our common stock is listed to trade on the
NASDAQ Global Select Market, but is thinly traded. As a result, you may not be able to sell your shares of common stock on short
notice. Additionally,
thinly traded stock can be
more volatile than stock trading in an active public market. The sale of a substantial number of shares of our common stock at
one time could temporarily depress the market price of our common stock, making it difficult for you to sell your shares and impairing
our ability to raise capital.
Our Common Stock Is
Not Insured By Any Governmental Entity
. Our common stock is not a deposit account or other obligation of any bank and is not
insured by the FDIC or any other governmental entity.
Additional Factors
.
Additional risks and uncertainties that may affect the future results of operations, financial condition or business of the Company
and its banking subsidiary include, but are not limited to: (i) adverse publicity, news coverage by the media, or negative reports
by brokerage firms, industry and financial analysts regarding the Bank or the Company; and (ii) changes in accounting policies
and practices.
Item 1B
.
Unresolved Staff Comments
.
None.
Item 2
.
Properties
.
Neither the Company nor
Union State Bancshares owns or leases any property. The Company's principal offices are located at 132 East High Street, Jefferson
City, Missouri 65102. The table below provides a list of the Bank's facilities.
|
|
|
|
|
|
|
|
Net Book
|
|
|
|
|
|
|
|
|
|
Value at
|
|
|
|
Approximate
|
|
|
Owned or
|
|
|
12/31/2017
|
|
Location
|
|
Square
Footage
|
|
|
Leased
|
|
|
(in
thousands)
|
|
8127 East 171
st
Street, Belton, MO
|
|
|
13,000
|
|
|
Owned
|
|
|
$
|
1,725
|
|
4675 Gretna Road, Branson, MO
|
|
|
11,000
|
(1)
|
|
Owned
|
|
|
$
|
1,296
|
|
1000 West Buchanan Street, California, MO
|
|
|
2,270
|
|
|
Owned
|
|
|
$
|
338
|
|
102 North Second Street, Clinton, MO
|
|
|
11,524
|
|
|
Owned
|
|
|
$
|
1,328
|
|
1400 East Ohio Street, Clinton, MO
|
|
|
13,551
|
|
|
Owned
|
|
|
$
|
2,737
|
|
1712 East Ohio Street, Clinton, MO
|
|
|
|
|
|
|
|
|
|
|
|
(inside a Wal-Mart store)
|
|
|
540
|
|
|
Leased
|
(2)
|
|
$
|
44
|
|
1110 Club Village Drive, Columbia, MO
|
|
|
5,000
|
|
|
Owned
|
|
|
$
|
1,379
|
|
18 S. Ninth St., Suites 208-209, Columbia, MO
|
|
|
1,500
|
|
|
Leased
|
(3)
|
|
|
N/A
|
|
115 South 2
nd
Street, Drexel, MO
|
|
|
4,000
|
|
|
Owned
|
|
|
$
|
151
|
|
100 Plaza Drive, Harrisonville, MO
|
|
|
4,000
|
|
|
Owned
|
|
|
$
|
478
|
|
17430 East 39
th
Street, Independence, MO
|
|
|
4,070
|
|
|
Owned
|
|
|
$
|
578
|
|
220 West White Oak, Independence, MO
|
|
|
1,800
|
|
|
Owned
|
|
|
$
|
49
|
|
132 East High Street, Jefferson City, MO
|
|
|
34,800
|
|
|
Owned
|
|
|
$
|
2,816
|
|
3701 West Truman Blvd, Jefferson City, MO
|
|
|
21,000
|
|
|
Owned
|
|
|
$
|
395
|
|
211 West Dunklin Street, Jefferson City, MO
|
|
|
2,500
|
|
|
Owned
|
|
|
$
|
1,558
|
|
800 Eastland Drive, Jefferson City, MO
|
|
|
4,100
|
|
|
Owned
|
|
|
$
|
688
|
|
3600 Amazonas Drive, Jefferson City, MO
|
|
|
26,000
|
|
|
Owned
|
|
|
$
|
2,367
|
|
300 S.W. Longview Blvd, Lee's Summit, MO
|
|
|
11,700
|
|
|
Owned
|
|
|
$
|
1,959
|
|
5 Victory lane, Suite 203, Liberty, MO
|
|
|
1667
|
|
|
Leased
|
(4)
|
|
|
N/A
|
|
335 Chestnut, Osceola, MO
|
|
|
1,580
|
|
|
Owned
|
|
|
$
|
88
|
|
595 VFW Memorial Drive, St. Robert, MO
|
|
|
2,236
|
|
|
Owned
|
|
|
$
|
60
|
|
321 West Battlefield, Springfield, MO
|
|
|
12,500
|
(5)
|
|
Owned
|
|
|
$
|
525
|
|
200 West Main Street, Warsaw, MO
|
|
|
8,900
|
|
|
Owned
|
|
|
$
|
99
|
|
1891 Commercial Drive, Warsaw, MO
|
|
|
11,000
|
|
|
Owned
|
|
|
$
|
1,513
|
|
125 South Main, Windsor, MO
|
|
|
3,600
|
|
|
Owned
|
|
|
$
|
182
|
|
|
(1)
|
Of the 11,000 square feet of space, 2,384 square feet of space is leased to a non-affiliate.
|
|
(2)
|
The term of this lease began in February 2014 and ends in January 2019.
|
|
(3)
|
The term of this lease began in April 2015 and ends in March 2018.
|
|
(4)
|
The term of this lease began in May 2016 and ends in April 2019.
|
|
(5)
|
Of the 12,500 square feet of space, 5,873 square feet of space is available to be leased to a non-affiliate.
|
Management believes that
the condition of each of the Bank's facilities presently is adequate for its business and that such facilities are adequately covered
by insurance.
Item 3
.
Legal Proceedings
.
The information required
by this Item is set forth in Note 18,
Commitments and Contingencies,
in the Company's consolidated financial statements.
Item 4
.
Mine Safety Disclosures
.
Not applicable
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive officers of the
Company are appointed by the board of directors and serve at the discretion of the board. The following table sets forth certain
information with respect to all executive officers of the Company.
Name
|
|
Age
|
|
Position
|
David T. Turner
|
|
61
|
|
Chairman, Chief Executive Officer, President and Director
|
W. Bruce Phelps
|
|
67
|
|
Senior Vice President
and Chief Financial Officer
|
Kathleen L. Bruegenhemke
|
|
52
|
|
Senior Vice President, Secretary and Director
|
The business experience
of the executive officers of the Company for the last five years is as follows:
David T. Turner
has served as a director of the Company and of Hawthorn Bank (or of its constituent predecessors) since January 1997. He has served
as president of the Company since March 2002 and as chairman and chief executive officer of the Company since January 2011. He
also currently serves as chairman, chief executive officer and president of Hawthorn Bank. Mr. Turner has served as vice chairman
of the Company from June 1998 through March 2002 and as senior vice president of the Company from 1993 until June 1998. He served
as president of a predecessor to Hawthorn Bank from January 1997 through March 2002 when he assumed the position of chairman, chief
executive officer and president. He served as senior vice president of that same predecessor from June 1992 through December 1996
and as its vice president from 1985 until June 1992.
W. Bruce Phelps
has
served as Senior Vice President and Chief Financial Officer of the Company since January 2012 and Senior Vice President and Chief
Financial Officer of Hawthorn Bank since January 2012. Prior to joining the Company, he served as Controller of Pulaski Bank from
2009 until January 2012. Previously Mr. Phelps served as Principal of WBP Consulting in providing financial consulting and support
services for clients in the St. Louis area, and as Chief Financial Officer for Champion Bank, St. Louis, Missouri.
Kathleen L. Bruegenhemke
has served as a director of our Company and of Hawthorn Bank since March 2017 and as Chief Operating Officer of Hawthorn Bank
since January 2017. She has served as Senior Vice President and Secretary of the Company since November 1997 and as Chief
Risk Officer of the Company since June 2006. From January 1992 until November 1997, she served as Internal Auditor of Hawthorn
Bank (or of one of its constituent predecessors). From October 2014 until December 2016 she served as Columbia Market President
of Hawthorn Bank. Prior to joining the Bank, Ms. Bruegenhemke served as a Commissioned Bank Examiner for the Federal
Deposit Insurance Corporation. Ms. Bruegenhemke is a certified public accountant and possesses considerable expertise in
overseeing various finance, regulatory compliance and risk management aspects of community banking, which she attained through
over 30 years of service, first as a bank regulator and then as a dedicated employee of Hawthorn Bank. Her
expertise, and the customer
relationships and community connections she has developed, particularly in the Columbia, Missouri market, will benefit Board discussions
and decisions and support the conclusion that Ms. Bruegenhemke should serve on our board.
There is no arrangement
or understanding between any executive officer and any other person pursuant to which such executive officer was selected as an
officer.
PART II
Item 5
.
Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
.
Pursuant to General Instruction
G(2) to Form 10-K, the information required by this Item, other than that referred to below, is incorporated herein by reference
to the information under the caption "Market Price of and Dividends on Equity Securities and Related Matters" in the
Company's 2017 Annual Report to Shareholders.
We refer you to Item 12
of this report under the caption "Securities Authorized For Issuance Under Equity Compensation Plans" for certain equity
plan information.
The Company's Purchases
of Equity Securities
The following table summarizes
the purchases made by or on behalf of the Company or certain affiliated purchasers of shares of the Company's common stock during
the fourth quarter of the year ended December 31, 2017:
Period
|
|
(a) Total Number of
Shares (or Units)
Purchased
|
|
|
(b) Average Price
Paid per Share (or
Unit)
|
|
|
(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced Plans
or Programs
|
|
|
(d) Maximum Number (or
Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs *
|
|
October 1-31, 2017
|
|
|
6,854
|
|
|
$
|
20.58
|
|
|
|
6,854
|
|
|
$
|
2,097,350
|
|
November 1-30, 2017
|
|
|
5,579
|
|
|
$
|
20.40
|
|
|
|
5,579
|
|
|
$
|
1,965,562
|
|
December 1-31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
1,965,562
|
|
Total
|
|
|
12,433
|
|
|
$
|
20.50
|
|
|
|
12,433
|
|
|
$
|
1,965,562
|
|
|
*
|
On August 6, 2015, the Company announced that its Board
of Directors authorized the purchase, through open market transactions, of up to $2.0 million market value of the Company's common
stock. On August 8, 2017, the Board authorized the repurchase of an additional $1.5 million market value of the Company’s
common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as, the
timing of any such purchases.
|
Recent Issuance of Securities
None.
Item 6
.
Selected Financial Data
.
Pursuant to General Instruction
G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption
"Selected Consolidated Financial Data" in the Company's 2017 Annual Report to Shareholders.
Item 7
.
Management's Discussion
and Analysis of Financial Condition and Results of Operation
.
Pursuant to General Instruction
G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2017 Annual
Report to Shareholders.
Forward-Looking Statements
This report, including
information included or incorporated by reference in this report, contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives, strategy, future performance and business of the Company 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 the Company's loans and other assets,
|
|
·
|
increases in non-performing assets in the Company's loan portfolios and adverse economic conditions
may necessitate increases to the provisions for loan losses,
|
|
·
|
costs or difficulties related to the integration of the business of Hawthorn and its acquisition
targets may be greater than expected,
|
|
·
|
legislative, regulatory, or tax law changes may adversely affect the business in which
Hawthorn and
its
subsidiaries are engaged, and
|
|
·
|
changes may occur in the securities markets.
|
We have described additional factors that could
cause actual results to be materially different from those described in the forward-looking statements, which factors are identified
in Item 1A of this report under the heading "Risk Factors." Other factors that we have not 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 such statement is made. Except as otherwise required by law, we undertake no obligation to publicly update or revise
any forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
Item 7A
.
Quantitative and Qualitative
Disclosures About Market Risk
.
The Company's exposure
to market risk is reviewed on a regular basis by our Bank's asset/liability committee and board of directors. Interest rate risk
is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future
net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income
and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain
risks are inherent and that the goal is to identify and minimize those risks. Tools used by the Bank's management include the standard
GAP report subject to different rate shock scenarios. At December 31, 2017, the Company’s rate shock scenario models indicated
that annual net interest income could change by as much as -1.54% or -24.25% should interest rates rise or fall, respectively,
400 basis points from their current level over a one year period. These levels of interest rate risk are within limits set by the
board in the Company’s
Funds Management, Investment Asset Liability Policy
and Management believes this is an acceptable
level of interest rate risk. However there are no assurances that the change will not be more or less than this estimate.
Pursuant to General Instruction
G(3) to Form 10-K, the information required by this Item, other than that provided above, is incorporated herein by reference to:
|
(i)
|
the information under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations — Interest Sensitivity and Liquidity" in the Company's 2017 Annual Report to Shareholders;
and
|
|
(ii)
|
the information under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk" in the Company's 2017 Annual
Report to Shareholders.
|
Item 8
.
Financial Statements and
Supplementary Data
.
Pursuant to General Instruction
G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the report of the independent auditors
and the information under the caption "Consolidated Financial Statements" in the Company's 2017 Annual Report to Shareholders.
Item
9
.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
.
None.
Item 9A
.
Controls and Procedures
.
Evaluation of Disclosure
Controls and Procedures
.
An evaluation was performed
under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)
promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2017. Based on that evaluation, the Company’s
management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2017, the Company’s
disclosure controls and procedures were effective.
Internal Controls Over
Financial Reporting
.
Management's
Report on Internal Control Over Financial Reporting
.
The Company's
management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is
defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company's management,
including the Company's principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness
of the Company's internal control over financial reporting, as of December 31, 2017, based on the framework set forth by the Committee
of Sponsoring Organizations of the Treadway Commission in
Internal Control-Integrated Framework (2013)
. Based upon its assessment,
management has concluded that, as of December 31, 2017, the Company's internal control over financial reporting, is effective based
on the criteria established in
Internal Control-Integrated Framework (2013)
.
Management's
assessment of the effectiveness of internal control over financial reporting, as of December 31, 2017, has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in
Internal Controls
.
There has been
no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31,
2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Report of Independent
Registered Public Accounting Firm
.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Hawthorn Bancshares, Inc.:
Opinion on Internal Control Over
Financial Reporting
We have audited
Hawthorn Bancshares, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31,
2017, based on criteria established in
Internal Control – Integrated Framework (2013)
issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control –
Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance
sheets of the Company as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the
related notes, collectively the consolidated financial statements, and our report dated March 16, 2018 expressed an unqualified
opinion on those consolidated financial statements.
Basis for
Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s
Report on Internal Control Over Financial Reporting
. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained
in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition
and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s /
KPMG
LLP
St. Louis, Missouri
March 16, 2018
Item 9B
.
Other Information
.
None.
See financial statement schedules identified
above under Item 15(a)2, if any.