Notes to the Consolidated Financial Statements
(Unaudited)
|
(1)
|
Summary of Significant Accounting Policies
|
Hawthorn Bancshares,
Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and
corporate customers located within the communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson,
and the greater Kansas City metropolitan area. The Company is subject to competition from other financial and nonfinancial institutions
providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory
agencies and undergo periodic examinations by those regulatory agencies.
The accompanying
unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting
principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X.
Accordingly, the unaudited consolidated financial statements do not include all of the information and disclosures required by
U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and related
notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The preparation
of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to
make those statements not misleading. Management is required to make estimates and assumptions, including the determination of
the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values
of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not
identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.
Stock Dividend
On July 1, 2017, the Company paid a special stock dividend of four percent to shareholders of record at the close of business
on June 15, 2017. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted
retroactively to reflect this change.
The following represents significant
new accounting principles adopted in 2017:
Stock Compensation
The
FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
, in March 2016, in order to reduce complexity
in this area and improve the usefulness of information provided to users. Amendments which will affect public companies include
the recognition of excess tax benefits and deficiencies in income tax expense or benefit in the income statement, guidance as to
the classification of excess tax benefits on the statement of cash flows, an election to account for award forfeitures as they
occur, and the ability to withhold taxes up to the maximum statutory rate in the applicable jurisdictions without triggering liability
classification of the award. The Company adopted the ASU on January 1, 2017 and elected to recognize forfeitures as they occur.
As allowed by the ASU, the Company’s adoption was prospective, therefore prior periods have not been adjusted. The adoption
of the ASU could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies
for employee share-based transactions, however, the actual amounts recognized in income tax expense will be dependent on the amount
of employee share-based transactions and the stock price at the time of vesting or exercise. The adoption of the ASU did not have
a significant effect on the Company’s consolidated financial statements.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(2)
|
Loans and Allowance for Loan Losses
|
Loans
A summary of loans, by major class
within the Company’s loan portfolio, at September 30, 2017 and December 31, 2016 is as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Commercial, financial, and agricultural
|
|
$
|
184,868
|
|
|
$
|
182,881
|
|
Real estate construction - residential
|
|
|
22,723
|
|
|
|
18,907
|
|
Real estate construction - commercial
|
|
|
91,102
|
|
|
|
55,653
|
|
Real estate mortgage - residential
|
|
|
250,736
|
|
|
|
259,900
|
|
Real estate mortgage - commercial
|
|
|
461,988
|
|
|
|
426,470
|
|
Installment and other consumer
|
|
|
33,630
|
|
|
|
30,218
|
|
Total loans
|
|
$
|
1,045,047
|
|
|
$
|
974,029
|
|
The Bank grants real estate, commercial,
installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton,
Warsaw, Springfield, Branson and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes in the
economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment
and other consumer loans consist primarily of the financing of automotive vehicles. At September 30, 2017, $490.8 million of loans
were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.
Allowance for Loan Losses
The following is a summary of the
allowance for loan losses during the periods indicated.
|
|
Three
Months Ended September 30, 2017
|
|
|
|
Commercial,
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
Financial, &
|
|
|
Construction -
|
|
|
Construction -
|
|
|
Mortgage -
|
|
|
Mortgage -
|
|
|
and Other
|
|
|
Un-
|
|
|
|
|
(in thousands)
|
|
Agricultural
|
|
|
Residential
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
Consumer
|
|
|
allocated
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
2,578
|
|
|
$
|
70
|
|
|
$
|
615
|
|
|
$
|
1,854
|
|
|
$
|
4,882
|
|
|
$
|
376
|
|
|
$
|
170
|
|
|
$
|
10,545
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
853
|
|
|
|
64
|
|
|
|
91
|
|
|
|
100
|
|
|
|
(426
|
)
|
|
|
32
|
|
|
|
(159
|
)
|
|
|
555
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
37
|
|
|
|
0
|
|
|
|
0
|
|
|
|
68
|
|
|
|
4
|
|
|
|
56
|
|
|
|
0
|
|
|
|
165
|
|
Less recoveries on loans
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
0
|
|
|
|
(11
|
)
|
|
|
(5
|
)
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
(65
|
)
|
Net loan charge-offs (recoveries)
|
|
|
25
|
|
|
|
(12
|
)
|
|
|
0
|
|
|
|
57
|
|
|
|
(1
|
)
|
|
|
31
|
|
|
|
0
|
|
|
|
100
|
|
Balance at end of period
|
|
$
|
3,406
|
|
|
$
|
146
|
|
|
$
|
706
|
|
|
$
|
1,897
|
|
|
$
|
4,457
|
|
|
$
|
377
|
|
|
$
|
11
|
|
|
$
|
11,000
|
|
|
|
Nine
Months Ended September 30, 2017
|
|
|
|
Commercial,
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
Financial, &
|
|
|
Construction -
|
|
|
Construction -
|
|
|
Mortgage -
|
|
|
Mortgage -
|
|
|
and Other
|
|
|
Un-
|
|
|
|
|
(in thousands)
|
|
Agricultural
|
|
|
Residential
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
Consumer
|
|
|
allocated
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
2,753
|
|
|
$
|
108
|
|
|
$
|
413
|
|
|
$
|
2,385
|
|
|
$
|
3,793
|
|
|
|
274
|
|
|
$
|
160
|
|
|
$
|
9,886
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
695
|
|
|
|
(49
|
)
|
|
|
293
|
|
|
|
(407
|
)
|
|
|
658
|
|
|
|
194
|
|
|
|
(149
|
)
|
|
|
1,235
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
97
|
|
|
|
0
|
|
|
|
0
|
|
|
|
149
|
|
|
|
20
|
|
|
|
167
|
|
|
|
0
|
|
|
|
433
|
|
Less recoveries on loans
|
|
|
(55
|
)
|
|
|
(87
|
)
|
|
|
0
|
|
|
|
(68
|
)
|
|
|
(26
|
)
|
|
|
(76
|
)
|
|
|
0
|
|
|
|
(312
|
)
|
Net loan charge-offs (recoveries)
|
|
|
42
|
|
|
|
(87
|
)
|
|
|
0
|
|
|
|
81
|
|
|
|
(6
|
)
|
|
|
91
|
|
|
|
0
|
|
|
|
121
|
|
Balance at end of period
|
|
$
|
3,406
|
|
|
$
|
146
|
|
|
$
|
706
|
|
|
$
|
1,897
|
|
|
$
|
4,457
|
|
|
$
|
377
|
|
|
$
|
11
|
|
|
$
|
11,000
|
|
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three
Months Ended September 30, 2016
|
|
|
|
Commercial,
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
Financial, &
|
|
|
Construction -
|
|
|
Construction -
|
|
|
Mortgage -
|
|
|
Mortgage -
|
|
|
Loans to
|
|
|
Un-
|
|
|
|
|
(in thousands)
|
|
Agricultural
|
|
|
Residential
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
Individuals
|
|
|
allocated
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
2,996
|
|
|
$
|
63
|
|
|
$
|
249
|
|
|
$
|
2,293
|
|
|
$
|
3,411
|
|
|
$
|
284
|
|
|
$
|
96
|
|
|
$
|
9,392
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
(94
|
)
|
|
|
(4
|
)
|
|
|
44
|
|
|
|
(152
|
)
|
|
|
450
|
|
|
|
50
|
|
|
|
6
|
|
|
|
300
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
157
|
|
|
|
0
|
|
|
|
0
|
|
|
|
92
|
|
|
|
27
|
|
|
|
86
|
|
|
|
0
|
|
|
|
362
|
|
Less recoveries on loans
|
|
|
(26
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(31
|
)
|
|
|
(36
|
)
|
|
|
(47
|
)
|
|
|
0
|
|
|
|
(140
|
)
|
Net loans charged off
|
|
|
131
|
|
|
|
0
|
|
|
|
0
|
|
|
|
61
|
|
|
|
(9
|
)
|
|
|
39
|
|
|
|
0
|
|
|
|
222
|
|
Balance at end of period
|
|
$
|
2,771
|
|
|
$
|
59
|
|
|
$
|
293
|
|
|
$
|
2,080
|
|
|
$
|
3,870
|
|
|
$
|
295
|
|
|
$
|
102
|
|
|
$
|
9,470
|
|
|
|
Nine
Months Ended September 30, 2016
|
|
|
|
Commercial,
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
Financial, &
|
|
|
Construction -
|
|
|
Construction -
|
|
|
Mortgage -
|
|
|
Mortgage -
|
|
|
Loans to
|
|
|
Un-
|
|
|
|
|
(in thousands)
|
|
Agricultural
|
|
|
Residential
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
Individuals
|
|
|
allocated
|
|
|
Total
|
|
Balance at beginning of period
|
|
$
|
2,153
|
|
|
$
|
59
|
|
|
$
|
644
|
|
|
$
|
2,439
|
|
|
$
|
2,935
|
|
|
$
|
273
|
|
|
$
|
101
|
|
|
$
|
8,604
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
710
|
|
|
|
0
|
|
|
|
(852
|
)
|
|
|
66
|
|
|
|
944
|
|
|
|
106
|
|
|
|
1
|
|
|
|
975
|
|
Deductions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off
|
|
|
295
|
|
|
|
0
|
|
|
|
1
|
|
|
|
474
|
|
|
|
137
|
|
|
|
209
|
|
|
|
0
|
|
|
|
1,116
|
|
Less recoveries on loans
|
|
|
(203
|
)
|
|
|
0
|
|
|
|
(502
|
)
|
|
|
(49
|
)
|
|
|
(128
|
)
|
|
|
(125
|
)
|
|
|
0
|
|
|
|
(1,007
|
)
|
Net loans charged off
|
|
|
92
|
|
|
|
0
|
|
|
|
(501
|
)
|
|
|
425
|
|
|
|
9
|
|
|
|
84
|
|
|
|
0
|
|
|
|
109
|
|
Balance at end of period
|
|
$
|
2,771
|
|
|
$
|
59
|
|
|
$
|
293
|
|
|
$
|
2,080
|
|
|
$
|
3,870
|
|
|
$
|
295
|
|
|
$
|
102
|
|
|
$
|
9,470
|
|
Loans, or portions of loans, are
charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and
recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all
amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired.
These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience,
specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics
and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies,
current economic conditions, loan risk ratings and industry concentration.
Beginning in the first quarter of
2016, the Company began to lengthen its look-back period with the intent to increase such period from three to five years over
the next two years. The Company believes that the five-year look-back period, which is consistent with the Company’s practices
prior to the start of the economic recession in 2008, provides a representative historical loss period in the current economic
environment.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table provides the
balance in the allowance for loan losses at September 30, 2017 and December 31, 2016, and the related loan balance by impairment
methodology.
|
|
Commercial,
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Real Estate
|
|
|
Installment
|
|
|
|
|
|
|
|
|
|
Financial, and
|
|
|
Construction -
|
|
|
Construction -
|
|
|
Mortgage -
|
|
|
Mortgage -
|
|
|
and Other
|
|
|
Un-
|
|
|
|
|
(in thousands)
|
|
Agricultural
|
|
|
Residential
|
|
|
Commercial
|
|
|
Residential
|
|
|
Commercial
|
|
|
Consumer
|
|
|
allocated
|
|
|
Total
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
929
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
528
|
|
|
$
|
258
|
|
|
$
|
23
|
|
|
$
|
0
|
|
|
$
|
1,738
|
|
Collectively
evaluated for impairment
|
|
|
2,477
|
|
|
|
146
|
|
|
|
706
|
|
|
|
1,369
|
|
|
|
4,199
|
|
|
|
354
|
|
|
|
11
|
|
|
|
9,262
|
|
Total
|
|
$
|
3,406
|
|
|
$
|
146
|
|
|
$
|
706
|
|
|
$
|
1,897
|
|
|
$
|
4,457
|
|
|
$
|
377
|
|
|
$
|
11
|
|
|
$
|
11,000
|
|
Loans
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
3,522
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,173
|
|
|
$
|
2,023
|
|
|
$
|
168
|
|
|
$
|
0
|
|
|
$
|
10,886
|
|
Collectively
evaluated for impairment
|
|
|
181,346
|
|
|
|
22,723
|
|
|
|
91,102
|
|
|
|
245,563
|
|
|
|
459,965
|
|
|
|
33,462
|
|
|
|
0
|
|
|
|
1,034,161
|
|
Total
|
|
$
|
184,868
|
|
|
$
|
22,723
|
|
|
$
|
91,102
|
|
|
$
|
250,736
|
|
|
$
|
461,988
|
|
|
$
|
33,630
|
|
|
$
|
0
|
|
|
$
|
1,045,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
469
|
|
|
$
|
0
|
|
|
$
|
7
|
|
|
$
|
319
|
|
|
$
|
277
|
|
|
$
|
8
|
|
|
$
|
0
|
|
|
$
|
1,080
|
|
Collectively
evaluated for impairment
|
|
|
2,284
|
|
|
|
108
|
|
|
|
406
|
|
|
|
2,066
|
|
|
|
3,516
|
|
|
|
266
|
|
|
|
160
|
|
|
|
8,806
|
|
Total
|
|
$
|
2,753
|
|
|
$
|
108
|
|
|
$
|
413
|
|
|
$
|
2,385
|
|
|
$
|
3,793
|
|
|
$
|
274
|
|
|
$
|
160
|
|
|
$
|
9,886
|
|
Loans
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
for impairment
|
|
$
|
1,617
|
|
|
$
|
0
|
|
|
$
|
49
|
|
|
$
|
5,471
|
|
|
$
|
1,918
|
|
|
$
|
89
|
|
|
$
|
0
|
|
|
$
|
9,144
|
|
Collectively
evaluated for impairment
|
|
|
181,264
|
|
|
|
18,907
|
|
|
|
55,604
|
|
|
|
254,429
|
|
|
|
424,552
|
|
|
|
30,129
|
|
|
|
0
|
|
|
|
964,885
|
|
Total
|
|
$
|
182,881
|
|
|
$
|
18,907
|
|
|
$
|
55,653
|
|
|
$
|
259,900
|
|
|
$
|
426,470
|
|
|
$
|
30,218
|
|
|
$
|
0
|
|
|
$
|
974,029
|
|
Impaired Loans
Loans evaluated under ASC 310-10-35
include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under
ASC 450-20. Impaired loans individually evaluated for impairment totaled $10.9 million and $9.1 million at September 30, 2017 and
December 31, 2016, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled
debt restructurings (TDRs).
The net carrying value of impaired
loans is based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting
the total expected future cash flows. At September 30, 2017 and December 31, 2016, $7.1 million and $4.5 million, respectively,
of impaired loans were evaluated based on the fair value less estimated selling costs of the loan’s collateral. Once the
impairment amount is calculated, a specific reserve allocation is recorded. At September 30, 2017, $1.7 million of the Company’s
allowance for loan losses was allocated to impaired loans totaling $10.9 million compared to $1.1 million of the Company's allowance
for loan losses allocated to impaired loans totaling approximately $9.1 million at December 31, 2016. Management determined that
$2.8 million, or 26%, of total impaired loans required no reserve allocation at September 30, 2017 compared to $2.1 million, or
23%, at December 31, 2016 primarily due to adequate collateral values
,
acceptable payment history
and adequate cash flow ability.
The categories of impaired loans at
September 30, 2017 and December 31, 2016 are as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Non-accrual loans
|
|
$
|
6,210
|
|
|
$
|
3,429
|
|
Performing TDRs
|
|
|
4,676
|
|
|
|
5,715
|
|
Total impaired loans
|
|
$
|
10,886
|
|
|
$
|
9,144
|
|
The following tables provide additional
information about impaired loans at September 30, 2017 and December 31, 2016, respectively, segregated between loans for which
an allowance has been provided and loans for which no allowance has been provided.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
(in thousands)
|
|
Investment
|
|
|
Balance
|
|
|
Reserves
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,442
|
|
|
$
|
1,473
|
|
|
$
|
0
|
|
Real estate - residential
|
|
|
1,024
|
|
|
|
1,049
|
|
|
|
0
|
|
Real estate - commercial
|
|
|
366
|
|
|
|
529
|
|
|
|
0
|
|
Total
|
|
$
|
2,832
|
|
|
$
|
3,051
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
2,080
|
|
|
$
|
2,288
|
|
|
$
|
929
|
|
Real estate - residential
|
|
|
4,149
|
|
|
|
4,220
|
|
|
|
528
|
|
Real estate - commercial
|
|
|
1,657
|
|
|
|
1,887
|
|
|
|
258
|
|
Installment and other consumer
|
|
|
168
|
|
|
|
185
|
|
|
|
23
|
|
Total
|
|
$
|
8,054
|
|
|
$
|
8,580
|
|
|
$
|
1,738
|
|
Total impaired loans
|
|
$
|
10,886
|
|
|
$
|
11,631
|
|
|
$
|
1,738
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
|
Principal
|
|
|
Specific
|
|
(in thousands)
|
|
Investment
|
|
|
Balance
|
|
|
Reserves
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
564
|
|
|
$
|
706
|
|
|
$
|
0
|
|
Real estate - residential
|
|
|
1,550
|
|
|
|
1,557
|
|
|
|
0
|
|
Total
|
|
$
|
2,114
|
|
|
$
|
2,263
|
|
|
$
|
0
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
1,053
|
|
|
$
|
1,078
|
|
|
$
|
469
|
|
Real estate - construction commercial
|
|
|
49
|
|
|
|
56
|
|
|
|
7
|
|
Real estate - residential
|
|
|
3,921
|
|
|
|
3,990
|
|
|
|
319
|
|
Real estate - commercial
|
|
|
1,918
|
|
|
|
1,988
|
|
|
|
277
|
|
Installment and other consumer
|
|
|
89
|
|
|
|
116
|
|
|
|
8
|
|
Total
|
|
$
|
7,030
|
|
|
$
|
7,228
|
|
|
$
|
1,080
|
|
Total impaired loans
|
|
$
|
9,144
|
|
|
$
|
9,491
|
|
|
$
|
1,080
|
|
The following table presents by
class, information related to the average recorded investment and interest income recognized on impaired loans during the periods
indicated.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Interest
|
|
|
|
Average
|
|
|
Recognized
|
|
|
Average
|
|
|
Recognized
|
|
|
Average
|
|
|
Recognized
|
|
|
Average
|
|
|
Recognized
|
|
|
|
Recorded
|
|
|
For the
|
|
|
Recorded
|
|
|
For the
|
|
|
Recorded
|
|
|
For the
|
|
|
Recorded
|
|
|
For the
|
|
(in thousands)
|
|
Investment
|
|
|
Period
Ended
|
|
|
Investment
|
|
|
Period
Ended
|
|
|
Investment
|
|
|
Period
Ended
|
|
|
Investment
|
|
|
Period
Ended
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
481
|
|
|
$
|
0
|
|
|
$
|
460
|
|
|
$
|
-9
|
|
|
$
|
478
|
|
|
$
|
0
|
|
|
$
|
491
|
|
|
$
|
18
|
|
Real estate - residential
|
|
|
341
|
|
|
|
0
|
|
|
|
2,050
|
|
|
|
27
|
|
|
|
1,412
|
|
|
|
0
|
|
|
|
1,640
|
|
|
|
63
|
|
Real estate - commercial
|
|
|
77
|
|
|
|
3
|
|
|
|
1,167
|
|
|
|
17
|
|
|
|
221
|
|
|
|
9
|
|
|
|
1,769
|
|
|
|
17
|
|
Installment and other consumer
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
22
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
$
|
899
|
|
|
$
|
3
|
|
|
$
|
3,677
|
|
|
$
|
35
|
|
|
$
|
2,133
|
|
|
$
|
9
|
|
|
$
|
3,900
|
|
|
$
|
98
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
$
|
694
|
|
|
$
|
8
|
|
|
$
|
1,398
|
|
|
$
|
-13
|
|
|
$
|
1,667
|
|
|
$
|
24
|
|
|
$
|
924
|
|
|
$
|
9
|
|
Real estate - construction commercial
|
|
|
0
|
|
|
|
0
|
|
|
|
51
|
|
|
|
0
|
|
|
|
37
|
|
|
|
0
|
|
|
|
64
|
|
|
|
0
|
|
Real estate - residential
|
|
|
1,383
|
|
|
|
33
|
|
|
|
2,992
|
|
|
|
20
|
|
|
|
4,090
|
|
|
|
121
|
|
|
|
3,741
|
|
|
|
78
|
|
Real estate - commercial
|
|
|
597
|
|
|
|
17
|
|
|
|
811
|
|
|
|
14
|
|
|
|
1,772
|
|
|
|
46
|
|
|
|
717
|
|
|
|
61
|
|
Installment and other consumer
|
|
|
56
|
|
|
|
0
|
|
|
|
118
|
|
|
|
-1
|
|
|
|
70
|
|
|
|
0
|
|
|
|
123
|
|
|
|
0
|
|
Total
|
|
$
|
2,730
|
|
|
$
|
58
|
|
|
$
|
5,370
|
|
|
$
|
20
|
|
|
$
|
7,636
|
|
|
$
|
191
|
|
|
$
|
5,569
|
|
|
$
|
148
|
|
Total
impaired loans
|
|
$
|
3,629
|
|
|
$
|
61
|
|
|
$
|
9,047
|
|
|
$
|
55
|
|
|
$
|
9,769
|
|
|
$
|
200
|
|
|
$
|
9,469
|
|
|
$
|
246
|
|
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The recorded investment varies from
the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount
recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings,
was $61,000 and $200,000, for the three months and nine months ended September 30, 2017, respectively, compared to $55,000 and
$246,000 for the three and nine months ended September 30, 2016, respectively. The average recorded investment in impaired loans
is calculated on a monthly basis during the periods reported.
Delinquent and Non-Accrual Loans
The delinquency status of loans
is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become
30 days or more past due. The Company’s policy is to discontinue the accrual of interest income on any loan when, in the
opinion of management, the ultimate collectability of interest or principal is no longer probable. In general, loans are placed
on non-accrual when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual,
including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management’s
collection efforts and the value of the underlying collateral. Non-accrual loans are returned to accrual status when, in the opinion
of management, the financial condition of the borrower indicates that the timely collectability of interest and principal is probable
and the borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance,
which is generally nine months.
The following table provides aging
information for the Company’s past due and non-accrual loans at September 30, 2017 and December 31, 2016.
|
|
Current or
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
|
|
|
|
30 Days
|
|
|
30 - 89 Days
|
|
|
And Still
|
|
|
|
|
|
|
|
(in thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
Accruing
|
|
|
Non-Accrual
|
|
|
Total
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
181,781
|
|
|
$
|
82
|
|
|
$
|
0
|
|
|
$
|
3,005
|
|
|
$
|
184,868
|
|
Real Estate Construction - Residential
|
|
|
22,723
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
22,723
|
|
Real Estate Construction - Commercial
|
|
|
91,005
|
|
|
|
97
|
|
|
|
0
|
|
|
|
0
|
|
|
|
91,102
|
|
Real Estate Mortgage - Residential
|
|
|
247,462
|
|
|
|
1,063
|
|
|
|
117
|
|
|
|
2,094
|
|
|
|
250,736
|
|
Real Estate Mortgage - Commercial
|
|
|
460,339
|
|
|
|
706
|
|
|
|
0
|
|
|
|
943
|
|
|
|
461,988
|
|
Installment and Other Consumer
|
|
|
33,224
|
|
|
|
177
|
|
|
|
61
|
|
|
|
168
|
|
|
|
33,630
|
|
Total
|
|
$
|
1,036,534
|
|
|
$
|
2,125
|
|
|
$
|
178
|
|
|
$
|
6,210
|
|
|
$
|
1,045,047
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, Financial, and Agricultural
|
|
$
|
181,609
|
|
|
$
|
290
|
|
|
$
|
0
|
|
|
$
|
982
|
|
|
$
|
182,881
|
|
Real Estate Construction - Residential
|
|
|
18,681
|
|
|
|
226
|
|
|
|
0
|
|
|
|
0
|
|
|
|
18,907
|
|
Real Estate Construction - Commercial
|
|
|
55,603
|
|
|
|
0
|
|
|
|
0
|
|
|
|
50
|
|
|
|
55,653
|
|
Real Estate Mortgage - Residential
|
|
|
254,758
|
|
|
|
3,200
|
|
|
|
54
|
|
|
|
1,888
|
|
|
|
259,900
|
|
Real Estate Mortgage - Commercial
|
|
|
425,260
|
|
|
|
790
|
|
|
|
0
|
|
|
|
420
|
|
|
|
426,470
|
|
Installment and Other Consumer
|
|
|
29,920
|
|
|
|
198
|
|
|
|
11
|
|
|
|
89
|
|
|
|
30,218
|
|
Total
|
|
$
|
965,831
|
|
|
$
|
4,704
|
|
|
$
|
65
|
|
|
$
|
3,429
|
|
|
$
|
974,029
|
|
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Credit Quality
The Company categorizes loans into
risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on
watch
status when one or more weaknesses that may result in the deterioration of the repayment exits or the Company’s credit
position at some future date. Loans classified as
substandard
are inadequately protected by the current sound worth and
paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses
that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain
some loss if the deficiencies are not corrected. A loan is classified as a
troubled debt restructuring
(
TDR)
when
a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions
to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs which are accruing interest
are classified as performing TDRs. Loans classified as TDRs which are not accruing interest are classified as nonperforming TDRs
and are included with all other nonaccrual loans for presentation purposes. It is the Company’s policy to discontinue the
accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are
placed on
non-accrual
status when (1) deterioration in the financial condition of the borrower exists for which payment
of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90
days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on
such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are
recorded as interest income on a cash basis.
The following table presents the
risk categories by class at September 30, 2017 and December 31, 2016.
(in thousands)
|
|
Commercial,
Financial, &
Agricultural
|
|
|
Real
Estate
Construction -
Residential
|
|
|
Real
Estate
Construction -
Commercial
|
|
|
Real
Estate
Mortgage -
Residential
|
|
|
Real
Estate
Mortgage -
Commercial
|
|
|
Installment
and Other
Consumer
|
|
|
Total
|
|
At September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
9,830
|
|
|
$
|
1,236
|
|
|
$
|
1,281
|
|
|
$
|
10,330
|
|
|
$
|
48,773
|
|
|
$
|
0
|
|
|
$
|
71,450
|
|
Substandard
|
|
|
900
|
|
|
|
462
|
|
|
|
97
|
|
|
|
2,296
|
|
|
|
728
|
|
|
|
20
|
|
|
|
4,503
|
|
Performing TDRs
|
|
|
517
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,080
|
|
|
|
1,079
|
|
|
|
0
|
|
|
|
4,676
|
|
Non-accrual
|
|
|
3,005
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,094
|
|
|
|
943
|
|
|
|
168
|
|
|
|
6,210
|
|
Total
|
|
$
|
14,252
|
|
|
$
|
1,698
|
|
|
$
|
1,378
|
|
|
$
|
17,800
|
|
|
$
|
51,523
|
|
|
$
|
188
|
|
|
$
|
86,839
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Watch
|
|
$
|
10,295
|
|
|
$
|
665
|
|
|
$
|
1,113
|
|
|
$
|
16,577
|
|
|
$
|
44,611
|
|
|
$
|
0
|
|
|
$
|
73,261
|
|
Substandard
|
|
|
798
|
|
|
|
640
|
|
|
|
0
|
|
|
|
2,159
|
|
|
|
426
|
|
|
|
24
|
|
|
|
4,047
|
|
Performing TDRs
|
|
|
635
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,582
|
|
|
|
1,498
|
|
|
|
0
|
|
|
|
5,715
|
|
Non-accrual
|
|
|
982
|
|
|
|
0
|
|
|
|
50
|
|
|
|
1,888
|
|
|
|
420
|
|
|
|
89
|
|
|
|
3,429
|
|
Total
|
|
$
|
12,710
|
|
|
$
|
1,305
|
|
|
$
|
1,163
|
|
|
$
|
24,206
|
|
|
$
|
46,955
|
|
|
$
|
113
|
|
|
$
|
86,452
|
|
Troubled Debt Restructurings
At September 30, 2017, loans classified as TDRs totaled
$5.7 million, of which $1.0 million were classified as nonperforming TDRs and included in non-accrual loans and $4.7 million were
classified as performing TDRs. At December 31, 2016, loans classified as TDRs totaled $6.3 million, of which $619,000 were classified
as nonperforming TDRs and included in non-accrual loans and $5.7 million were classified as performing TDRs. Both performing and
nonperforming TDRs are considered impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is
based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value
of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $531,000 and $410,000 related to
TDRs were allocated to the allowance for loan losses at September 30, 2017 and December 31, 2016, respectively.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The following table summarizes loans that were modified
as TDRs during the periods indicated.
|
|
Three Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Recorded Investment (1)
|
|
|
Recorded Investment (1)
|
|
(in thousands)
|
|
Number of
Contracts
|
|
|
Pre-
Modification
|
|
|
Post-
Modification
|
|
|
Number of
Contracts
|
|
|
Pre-
Modification
|
|
|
Post-
Modification
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
2
|
|
|
$
|
32
|
|
|
$
|
32
|
|
Real estate mortgage - residential
|
|
|
1
|
|
|
|
14
|
|
|
|
14
|
|
|
|
4
|
|
|
|
298
|
|
|
|
296
|
|
Total
|
|
|
1
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
6
|
|
|
$
|
330
|
|
|
$
|
328
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Recorded Investment (1)
|
|
|
Recorded Investment (1)
|
|
(in thousands)
|
|
Number of
Contracts
|
|
|
Pre-
Modification
|
|
|
Post-
Modification
|
|
|
Number of
Contracts
|
|
|
Pre-
Modification
|
|
|
Post-
Modification
|
|
Troubled Debt Restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
1
|
|
|
$
|
131
|
|
|
$
|
130
|
|
|
|
2
|
|
|
$
|
32
|
|
|
$
|
32
|
|
Real estate mortgage - residential
|
|
|
1
|
|
|
|
14
|
|
|
|
14
|
|
|
|
5
|
|
|
|
376
|
|
|
|
374
|
|
Real estate mortgage - commercial
|
|
|
1
|
|
|
|
56
|
|
|
|
52
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
3
|
|
|
$
|
201
|
|
|
$
|
196
|
|
|
|
7
|
|
|
$
|
408
|
|
|
$
|
406
|
|
(1) The amounts reported post-modification
are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were
fully paid down, charged-off or foreclosed upon during the period ended are not reported.
The Company’s portfolio of
loans classified as TDRs include concessions for the borrower given financial condition such as interest rates below the current
market rate, deferring principal payments, and extending maturity dates. There was one loan and three loans meeting the TDR criteria
during the three and nine months ended September 30, 2017, respectively, compared to six loans and seven loans during the three
and nine months ended September 30, 2016, respectively.
The Company considers a TDR to be
in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or it is the process of foreclosure.
There were no loans modified as a TDR that defaulted during the three months ended September 30, 2017 and 2016, respectively, and
within twelve months of their modification date. See
Lending and Credit Management
section for further information.
|
(3)
|
Other Real Estate and Repossessed Assets
|
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Commercial
|
|
$
|
727
|
|
|
$
|
809
|
|
Real estate construction - commercial
|
|
|
12,380
|
|
|
|
12,380
|
|
Real estate mortgage - residential
|
|
|
363
|
|
|
|
647
|
|
Real estate mortgage - commercial
|
|
|
2,909
|
|
|
|
3,439
|
|
Repossessed assets
|
|
|
0
|
|
|
|
16
|
|
Total
|
|
$
|
16,379
|
|
|
$
|
17,291
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,202
|
)
|
|
|
(3,129
|
)
|
Total other real estate and repossessed assets
|
|
$
|
13,177
|
|
|
$
|
14,162
|
|
Changes in the net carrying amount of other real estate
and repossessed assets were as follows for the periods indicated:
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
16,530
|
|
|
$
|
18,462
|
|
|
$
|
17,291
|
|
|
$
|
19,225
|
|
Additions
|
|
|
62
|
|
|
|
386
|
|
|
|
217
|
|
|
|
2,020
|
|
Proceeds from sales
|
|
|
(217
|
)
|
|
|
(1,214
|
)
|
|
|
(1,001
|
)
|
|
|
(3,613
|
)
|
Charge-offs against the valuation allowance for other real estate owned, net
|
|
|
0
|
|
|
|
(48
|
)
|
|
|
(170
|
)
|
|
|
(149
|
)
|
Net gain on sales
|
|
|
4
|
|
|
|
112
|
|
|
|
42
|
|
|
|
215
|
|
Total other real estate and repossessed assets
|
|
$
|
16,379
|
|
|
$
|
17,698
|
|
|
$
|
16,379
|
|
|
$
|
17,698
|
|
Less valuation allowance for other real estate owned
|
|
|
(3,202
|
)
|
|
|
(3,260
|
)
|
|
|
(3,202
|
)
|
|
|
(3,260
|
)
|
Balance at end of period
|
|
$
|
13,177
|
|
|
$
|
14,438
|
|
|
$
|
13,177
|
|
|
$
|
14,438
|
|
At September 30, 2017 $101,000 of
consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to $162,000 at
December 31, 2016.
Activity in the valuation allowance for other real estate
owned was as follows for the periods indicated:
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance, beginning of period
|
|
$
|
3,174
|
|
|
$
|
3,208
|
|
|
$
|
3,129
|
|
|
$
|
3,233
|
|
Provision for other real estate owned
|
|
|
28
|
|
|
|
100
|
|
|
|
243
|
|
|
|
176
|
|
Charge-offs
|
|
|
0
|
|
|
|
(48
|
)
|
|
|
(170
|
)
|
|
|
(149
|
)
|
Balance, end of period
|
|
$
|
3,202
|
|
|
$
|
3,260
|
|
|
$
|
3,202
|
|
|
$
|
3,260
|
|
|
(4)
|
Investment Securities
|
The amortized cost and fair value
of debt securities classified as available-for-sale at September 30, 2017 and December 31, 2016 were as follows:
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Gross Unrealized
|
|
|
Fair
|
|
(
in
thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
12,653
|
|
|
$
|
0
|
|
|
$
|
(180
|
)
|
|
$
|
12,473
|
|
Government sponsored enterprises
|
|
|
32,854
|
|
|
|
0
|
|
|
|
(235
|
)
|
|
|
32,619
|
|
Obligations of states and political subdivisions
|
|
|
47,730
|
|
|
|
246
|
|
|
|
(250
|
)
|
|
|
47,726
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
119,961
|
|
|
|
140
|
|
|
|
(1,265
|
)
|
|
|
118,836
|
|
Commercial - government agencies
|
|
|
987
|
|
|
|
9
|
|
|
|
0
|
|
|
|
996
|
|
Total mortgage-backed securities
|
|
|
120,948
|
|
|
|
149
|
|
|
|
(1,265
|
)
|
|
|
119,832
|
|
Total available-for-sale securities
|
|
$
|
214,185
|
|
|
$
|
395
|
|
|
$
|
(1,930
|
)
|
|
$
|
212,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,667
|
|
|
$
|
0
|
|
|
$
|
(303
|
)
|
|
$
|
13,364
|
|
Government sponsored enterprises
|
|
|
32,786
|
|
|
|
2
|
|
|
|
(329
|
)
|
|
|
32,459
|
|
Obligations of states and political subdivisions
|
|
|
42,666
|
|
|
|
123
|
|
|
|
(757
|
)
|
|
|
42,032
|
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
127,527
|
|
|
|
124
|
|
|
|
(1,995
|
)
|
|
|
125,656
|
|
Commercial - government agencies
|
|
|
989
|
|
|
|
12
|
|
|
|
0
|
|
|
|
1,001
|
|
Total mortgage-backed securities
|
|
|
128,516
|
|
|
|
136
|
|
|
|
(1,995
|
)
|
|
|
126,657
|
|
Total available-for-sale securities
|
|
$
|
217,635
|
|
|
$
|
261
|
|
|
$
|
(3,384
|
)
|
|
$
|
214,512
|
|
All of the Company’s investment
securities are classified as available for sale. Agency bonds and notes, small business administration guaranteed loan certificates
(SBA), residential and commercial agency mortgage-backed securities, and agency collateralized mortgage obligations (CMO) include
securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage
Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal Home Loan Bank (FHLB), which are U.S. government-sponsored
enterprises.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Other Investments and securities
primarily consist of Federal Home Loan Bank stock, subordinated debt equity securities, and the Company’s interest in statutory
trusts. These securities are reported at cost in other assets in the amount of $9.8 million as of both September 30, 2017 and December
31, 2016, respectively.
Debt securities with carrying values
aggregating approximately $173.1 million and $167.6 million at September 30, 2017 and December 31, 2016, respectively, were pledged
to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.
The amortized cost and fair value
of debt securities classified as available-for-sale at September 30, 2017, by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment
penalties.
|
|
Amortized
|
|
|
Fair
|
|
(
in
thousands)
|
|
Cost
|
|
|
Value
|
|
Due in one year or less
|
|
$
|
6,864
|
|
|
$
|
6,858
|
|
Due after one year through five years
|
|
|
56,996
|
|
|
|
56,846
|
|
Due after five years through ten years
|
|
|
25,307
|
|
|
|
25,081
|
|
Due after ten years
|
|
|
4,070
|
|
|
|
4,033
|
|
Total
|
|
|
93,237
|
|
|
|
92,818
|
|
Mortgage-backed securities
|
|
|
120,948
|
|
|
|
119,832
|
|
Total available-for-sale securities
|
|
$
|
214,185
|
|
|
$
|
212,650
|
|
Gross unrealized losses on debt
securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, at September 30, 2017 and December 31, 2016 were as follows:
|
|
Less than 12 months
|
|
|
12 months or more
|
|
|
Total
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
(in thousands)
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
At September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
486
|
|
|
$
|
0
|
|
|
$
|
11,987
|
|
|
$
|
(180
|
)
|
|
$
|
12,473
|
|
|
$
|
(180
|
)
|
Government sponsored enterprises
|
|
|
16,278
|
|
|
|
(69
|
)
|
|
|
16,041
|
|
|
|
(166
|
)
|
|
|
32,319
|
|
|
|
(235
|
)
|
Obligations of states and political subdivisions
|
|
|
10,820
|
|
|
|
(35
|
)
|
|
|
12,535
|
|
|
|
(215
|
)
|
|
|
23,355
|
|
|
|
(250
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
48,651
|
|
|
|
(341
|
)
|
|
|
51,735
|
|
|
|
(924
|
)
|
|
|
100,386
|
|
|
|
(1,265
|
)
|
Total
|
|
$
|
76,235
|
|
|
$
|
(445
|
)
|
|
$
|
92,298
|
|
|
$
|
(1,485
|
)
|
|
$
|
168,533
|
|
|
$
|
(1,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,365
|
|
|
$
|
(303
|
)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13,365
|
|
|
$
|
(303
|
)
|
Government sponsored enterprises
|
|
|
29,432
|
|
|
|
(329
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
29,432
|
|
|
|
(329
|
)
|
Obligations of states and political subdivisions
|
|
|
32,318
|
|
|
|
(757
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
32,318
|
|
|
|
(757
|
)
|
Mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential - government agencies
|
|
|
109,772
|
|
|
|
(1,848
|
)
|
|
|
3,742
|
|
|
|
(147
|
)
|
|
|
113,514
|
|
|
|
(1,995
|
)
|
Total
|
|
$
|
184,887
|
|
|
$
|
(3,237
|
)
|
|
$
|
3,742
|
|
|
$
|
(147
|
)
|
|
$
|
188,629
|
|
|
$
|
(3,384
|
)
|
The
total available for sale portfolio consisted of approximately 329 securities at September 30, 2017. The portfolio included 204
securities having an aggregate fair value of $168.5 million that were in a loss position at September 30, 2017. Securities identified
as temporarily impaired which had been in a loss position for 12 months or longer totaled $92.3 million at fair value. The $1.9
million aggregate unrealized loss included in accumulated other comprehensive income at September 30, 2017 was caused by interest
rate fluctuations
.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The total available for sale portfolio
consisted of approximately 298 securities at December 31, 2016. The portfolio included 216 securities having an aggregate fair
value of $188.6 million that were in a loss position at December 31, 2016. Securities identified as temporarily impaired which
had been in a loss position for 12 months or longer had a fair value of $3.7 million at December 31, 2016. The $3.4 million aggregate
unrealized loss included in accumulated other comprehensive income at December 31, 2016 was caused by interest rate fluctuations.
Because the decline in fair value
is attributable to changes in interest rates and not credit quality, these investments were not considered other-than-temporarily
impaired at September 30, 2017 and December 31, 2016, respectively. In the absence of changes in credit quality of these investments,
the fair value is expected to recover on all debt securities as they approach their maturity date or re-pricing date, or if market
yields for such investments decline. In addition, the Company does not have the intent to sell these investments over the period
of recovery, and it is not more likely than not that the Company will be required to sell such investment securities.
The table presents the components
of investment securities gains and losses, which have been recognized in earnings:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Gains realized on sales
|
|
$
|
12
|
|
|
$
|
132
|
|
|
$
|
12
|
|
|
$
|
623
|
|
Losses realized on sales
|
|
|
(12
|
)
|
|
|
(21
|
)
|
|
|
(12
|
)
|
|
|
(21
|
)
|
Other-than-temporary impairment recognized
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Investment securities gains
|
|
$
|
0
|
|
|
$
|
111
|
|
|
$
|
0
|
|
|
$
|
602
|
|
Mortgage Servicing Rights
At September 30, 2017, the Company
was servicing approximately $288.7 million of loans sold to the secondary market compared to $294.4 million at December 31, 2016,
and $299.7 million at September 30, 2016. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were
$209,000 and $629,000 for the three and nine months ended September 30, 2017, respectively, compared to $233,000 and $654,000 for
the three and nine months ended September 30, 2016, respectively.
The table below presents changes
in mortgage servicing rights (MSRs) for the periods indicated.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
2,766
|
|
|
$
|
2,511
|
|
|
$
|
2,584
|
|
|
$
|
2,847
|
|
Originated mortgage servicing rights
|
|
|
61
|
|
|
|
96
|
|
|
|
176
|
|
|
|
213
|
|
Changes in fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to change in model inputs and assumptions (1)
|
|
|
(30
|
)
|
|
|
(52
|
)
|
|
|
289
|
|
|
|
(197
|
)
|
Other changes in fair value (2)
|
|
|
(109
|
)
|
|
|
(185
|
)
|
|
|
(361
|
)
|
|
|
(493
|
)
|
Balance at end of period
|
|
$
|
2,688
|
|
|
$
|
2,370
|
|
|
$
|
2,688
|
|
|
$
|
2,370
|
|
|
(1)
|
The change in fair value resulting from changes in valuation
inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily
due to changes in interest rates.
|
|
(2)
|
Other changes in fair value reflect changes due to customer
payments and passage of time.
|
The following key data and assumptions
were used in estimating the fair value of the Company’s MSRs as of the nine months ended September 30, 2017 and 2016:
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average constant prepayment rate
|
|
|
10.11
|
%
|
|
|
13.20
|
%
|
Weighted average note rate
|
|
|
3.86
|
%
|
|
|
3.88
|
%
|
Weighted average discount rate
|
|
|
9.78
|
%
|
|
|
9.20
|
%
|
Weighted average expected life (in years)
|
|
|
5.80
|
|
|
|
4.80
|
|
|
(6)
|
Federal funds purchased and securities sold under agreements
to repurchase
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Federal funds purchased
|
|
$
|
0
|
|
|
$
|
992
|
|
Repurchase agreements
|
|
|
32,555
|
|
|
|
30,023
|
|
Total
|
|
$
|
32,555
|
|
|
$
|
31,015
|
|
The Company offers a sweep account
program whereby amounts in excess of an established limit are “swept” from the customer’s demand deposit account
on a daily basis into retail repurchase agreements pursuant to individual repurchase agreements between the Company and its customers
.
Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities.
They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities
collateral pledged for the repurchase agreements with customers is maintained by a designated third party custodian
.
The
collateral amounts pledged to repurchase agreements by remaining maturity in the table below are limited to the outstanding balances
of the related asset or liability; thus amounts of excess collateral are not shown.
Repurchase Agreements
|
|
Remaining Contractual Maturity
of the Agreements
|
|
|
|
Overnight
|
|
|
Less
|
|
|
Greater
|
|
|
|
|
|
|
and
|
|
|
than
|
|
|
than
|
|
|
|
|
(in thousands)
|
|
continuous
|
|
|
90 days
|
|
|
90 days
|
|
|
Total
|
|
At September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
3,225
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,225
|
|
Government sponsored enterprises
|
|
|
9,134
|
|
|
|
0
|
|
|
|
0
|
|
|
|
9,134
|
|
Asset-backed securities
|
|
|
20,196
|
|
|
|
0
|
|
|
|
0
|
|
|
|
20,196
|
|
Total
|
|
$
|
32,555
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
32,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
3,489
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
3,489
|
|
Government sponsored enterprises
|
|
|
7,324
|
|
|
|
0
|
|
|
|
0
|
|
|
|
7,324
|
|
Asset-backed securities
|
|
|
19,210
|
|
|
|
0
|
|
|
|
0
|
|
|
|
19,210
|
|
Total
|
|
$
|
30,023
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
30,023
|
|
Income taxes as a percentage of
earnings before income taxes as reported in the consolidated financial statements were 32.4% for the three months ended September
30, 2017 compared to 34.7% for the three months ended September 30, 2016. Income taxes as a percentage of earnings before income
taxes as reported in the consolidated financial statements were 33.6% for the nine months ended September 30, 2017 compared to
33.8% for the nine months ended September 30, 2016. The decrease in the tax rate for the quarter ended September 30, 2017 in comparison
to the quarter ended September 30, 2016, is primarily due to an immaterial 2016 return to provision adjustment made in the third
quarter of 2017, as opposed to an immaterial 2015 return to provision adjustment made in the first quarter of 2016. The tax rate
was consistent for both the nine months ended September 30, 2017 and 2016.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income of the appropriate character during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, taxable income available in carryback years, and tax planning strategies in making this assessment. With the exception
of certain capital losses generated during 2013 and 2014, it is management’s opinion that the Company will more likely than
not realize the benefits of these temporary differences as of September 30, 2017 and, therefore, only established a valuation reserve
against the Company’s capital loss carry forward. Management arrived at this conclusion based upon the level of historical
taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible. As indicated
above, the Company generated approximately $219,000 of capital losses during 2013 and 2014 as a result of disposing of certain
limited partnership interests. The capital losses will expire between 2018 and 2019, and it is management’s opinion that
the Company will not more likely than not generate the capital gain income necessary to utilize the capital loss carry forwards
before the capital losses expire. As such, the Company has established an $83,000 valuation reserve against its capital loss carry
forward deferred tax asset.
Accumulated Other Comprehensive
Loss
The following details the change
in the components of the Company’s accumulated other comprehensive loss for the nine months ended September 30, 2017 and
2016:
|
|
Nine months ended September 30, 2017
|
|
|
|
|
|
|
Unrecognized Net
|
|
|
Accumulated
|
|
|
|
Unrealized
|
|
|
Pension and
|
|
|
Other
|
|
|
|
Gain (Loss)
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
(in thousands)
|
|
on Securities (1)
|
|
|
Costs (2)
|
|
|
Loss
|
|
Balance at beginning of period
|
|
$
|
(1,936
|
)
|
|
$
|
(1,865
|
)
|
|
$
|
(3,801
|
)
|
Other comprehensive income, before reclassifications
|
|
|
1,588
|
|
|
|
67
|
|
|
|
1,655
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Current period other comprehensive income, before tax
|
|
|
1,588
|
|
|
|
67
|
|
|
|
1,655
|
|
Income tax expense
|
|
|
(604
|
)
|
|
|
(25
|
)
|
|
|
(629
|
)
|
Current period other comprehensive income, net of tax
|
|
|
984
|
|
|
|
42
|
|
|
|
1,026
|
|
Balance at end of period
|
|
$
|
(952
|
)
|
|
$
|
(1,823
|
)
|
|
$
|
(2,775
|
)
|
|
|
Nine months ended September 30, 2016
|
|
|
|
|
|
|
Unrecognized Net
|
|
|
Accumulated
|
|
|
|
Unrealized
|
|
|
Pension and
|
|
|
Other
|
|
|
|
Gain (Loss)
|
|
|
Postretirement
|
|
|
Comprehensive
|
|
(in thousands)
|
|
on Securities (1)
|
|
|
Costs (2)
|
|
|
Loss
|
|
Balance at beginning of period
|
|
$
|
(591
|
)
|
|
$
|
(1,427
|
)
|
|
$
|
(2,018
|
)
|
Other comprehensive income, before reclassifications
|
|
|
2,884
|
|
|
|
59
|
|
|
|
2,943
|
|
Amounts reclassified from accumulated other
comprehensive income (loss)
|
|
|
(602
|
)
|
|
|
0
|
|
|
|
(602
|
)
|
Current period other comprehensive income, before tax
|
|
|
2,282
|
|
|
|
59
|
|
|
|
2,341
|
|
Income tax expense
|
|
|
(867
|
)
|
|
|
(23
|
)
|
|
|
(890
|
)
|
Current period other comprehensive income, net of tax
|
|
|
1,415
|
|
|
|
36
|
|
|
|
1,451
|
|
Balance at end of period
|
|
$
|
824
|
|
|
$
|
(1,391
|
)
|
|
$
|
(567
|
)
|
|
(1)
|
The pre-tax amounts reclassified from accumulated other
comprehensive loss are included in
gain on sale of investment securities
in the consolidated statements of income.
|
|
(2)
|
The pre-tax amounts
reclassified from accumulated other comprehensive loss are included in the computation of net periodic pension cost.
|
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
(9)
|
Employee Benefit Plans
|
Employee Benefits
Employee benefits charged to operating
expenses are summarized in the table below for the periods indicated.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Payroll taxes
|
|
$
|
267
|
|
|
$
|
251
|
|
|
$
|
911
|
|
|
$
|
883
|
|
Medical plans
|
|
|
595
|
|
|
|
415
|
|
|
|
1,489
|
|
|
|
1,414
|
|
401k match and profit sharing
|
|
|
218
|
|
|
|
201
|
|
|
|
694
|
|
|
|
585
|
|
Pension plan
|
|
|
349
|
|
|
|
307
|
|
|
|
1,052
|
|
|
|
920
|
|
Other
|
|
|
17
|
|
|
|
56
|
|
|
|
42
|
|
|
|
118
|
|
Total employee benefits
|
|
$
|
1,446
|
|
|
$
|
1,230
|
|
|
$
|
4,188
|
|
|
$
|
3,920
|
|
The Company’s profit-sharing
plan includes a matching 401k portion, in which the Company matches the first 3% of eligible employee contributions. The Company
made annual contributions in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and
pension plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the periods
shown. In addition, employees were able to make additional tax-deferred contributions.
Pension
The Company provides a noncontributory
defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension
plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities
over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might
not be made in a particular year. The Company made a pension contribution in the amount of $1.2 million on September 11, 2017.
The minimum required contribution for 2017 is $842,000. Effective July 1, 2017, the Company amended the pension plan to effectuate
a “soft freeze” such that no individual hired (or rehired in the case of a former employee) by the Company after September
30, 2017, whether or not such individual is or was a vested member in the plan, will be eligible to be an active member and be
entitled to accrue any benefits under the plan. Certain individuals hired by the Company before July 1, 2017 are also not eligible
to participate in the plan. Beginning in 2019, the Company anticipates that there may be a small reduction in the overall liability
and service cost resulting from the closure of the plan to new entrants.
Components of Net Pension Cost
and Other Amounts Recognized in Accumulated Other Comprehensive Income
The following items are components
of net pension cost for the periods indicated:
|
|
Estimated
|
|
|
Actual
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Service cost - benefits earned during the year
|
|
$
|
1,343
|
|
|
$
|
1,179
|
|
Interest costs on projected benefit obligations
|
|
|
1,008
|
|
|
|
956
|
|
Expected return on plan assets
|
|
|
(1,126
|
)
|
|
|
(1,057
|
)
|
Expected administrative expenses
|
|
|
88
|
|
|
|
70
|
|
Amortization of prior service cost
|
|
|
79
|
|
|
|
79
|
|
Amortization of unrecognized net loss
|
|
|
11
|
|
|
|
0
|
|
Net periodic pension expense
|
|
$
|
1,403
|
|
|
$
|
1,227
|
|
|
|
|
|
|
|
|
|
|
Pension expense - three months ended September 30, (actual)
|
|
$
|
349
|
|
|
$
|
307
|
|
Pension expense - nine months ended September 30, (actual)
|
|
$
|
1,052
|
|
|
$
|
920
|
|
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
The Company’s stock option
plan provides for the grant of options to purchase up to 601,627 shares of the Company’s common stock to officers and other
key employees of the Company and its subsidiaries. All options have been granted at exercise prices equal to fair value and vest
over periods ranging from four to five years.
The following table summarizes the
Company’s stock option activity:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number
|
|
|
Average
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
of
|
|
|
Exercise
|
|
|
Term
|
|
|
Value
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in years)
|
|
|
($000)
|
|
Outstanding, December 31, 2016
|
|
|
46,244
|
|
|
$
|
19.33
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(26,141
|
)
|
|
|
22.84
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2017
|
|
|
20,103
|
|
|
$
|
14.77
|
|
|
|
0.98
|
|
|
$
|
119,226
|
|
Exercisable, September 30, 2017
|
|
|
20,103
|
|
|
$
|
14.77
|
|
|
|
0.98
|
|
|
$
|
119,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2017.
|
|
Total stock-based compensation expense
was $1,000 and $3,000 for the three and nine months ended September 30, 2017, respectively, compared to $5,000 and $16,000 for
the three and nine months ended September 30, 2016, respectively. As of September 30, 2017, there was no remaining unrecognized
compensation expense related to non-vested stock awards.
Stock Dividend
On
July 1, 2017, the Company paid a special stock dividend of 4% to common shareholders of record at the close of business on June
15, 2017. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively
to reflect this change.
Basic earnings per share is computed
by dividing income available to shareholders by the weighted average number of shares outstanding during the year. Diluted earnings
per share gives effect to all dilutive potential shares that were outstanding during the year. The calculations of basic and diluted
earnings per share are as follows for the periods indicated:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(dollars in thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
1,766
|
|
|
$
|
1,884
|
|
|
$
|
5,786
|
|
|
$
|
5,294
|
|
Basic earnings per share
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.99
|
|
|
$
|
0.90
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to shareholders
|
|
$
|
1,766
|
|
|
$
|
1,884
|
|
|
$
|
5,786
|
|
|
$
|
5,294
|
|
Average shares outstanding
|
|
|
5,825,825
|
|
|
|
5,859,415
|
|
|
|
5,834,679
|
|
|
|
5,869,569
|
|
Effect of dilutive stock options
|
|
|
5,561
|
|
|
|
0
|
|
|
|
5,198
|
|
|
|
0
|
|
Average shares outstanding including dilutive stock options
|
|
|
5,831,386
|
|
|
|
5,859,415
|
|
|
|
5,839,877
|
|
|
|
5,869,569
|
|
Diluted earnings per share
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.99
|
|
|
$
|
0.90
|
|
Under
the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock,
when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when
the Company has a loss from continuing operations available to shareholders. In addition, proceeds from the assumed exercise of
dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price
of such stock during the period.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Options
to purchase 46,244 shares during the three and nine months ended September 30, 2016, respectively, were not included in the respective
computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized
compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive. There were
no anti-dilutive shares for the three and nine months ended September 30, 2017.
Repurchase Program
On
August 6, 2015, the Board of Directors authorized a share repurchase plan to purchase through open market transactions $2.0 million
market value of the Company’s common stock. On August 8, 2017 the Board authorized the repurchase of an additional $1.5
million market value of the Company’s common stock. As of September 30, 2017, the Company had repurchased a total of 74,608
shares of common stock pursuant to the plan at an average price of $17.15 per share, including 30,715 shares of common stock repurchased
pursuant to the plan during the nine months ended September 30, 2017 at an average price of $20.30 per share. At September 30,
2017, approximately $2.2 million remained available for the purchase of shares under the plan.
|
(12)
|
Fair Value Measurements
|
The Company uses fair value measurements
to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820,
Fair
Value Measurements and Disclosures,
defines fair value, establishes a framework for the measurement of fair value, and enhances
disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities
to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified
the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.
In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop
those assumptions. As of September 30, 2017 and December 31, 2016, respectively, there were no transfers into or out of Levels
1-3.
The fair value hierarchy is as follows:
Level 1 – Inputs are unadjusted
quoted prices for identical assets or liabilities in active markets.
Level 2 – Inputs other than
quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable
at commonly quoted intervals.
Level 3 – Inputs are unobservable
inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s
best information and assumptions that a market participant would consider.
ASC Topic 820 also provides guidance
on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on
identifying circumstances when a transaction may not be considered orderly.
The Company
is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair
value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed
real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate
that impairment may have occurred.
Valuation
Methods for Instruments Measured at Fair Value on a Recurring Basis
Following is a description of the
Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:
Available-for-Sale Securities
The fair value measurements of the Company’s investment
securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market
spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds,
credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to independent
verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale
are reported at fair value utilizing Level 2 inputs.
Hawthorn
Bancshares, Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Mortgage Servicing Rights
The fair value of mortgage servicing
rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant
prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model
that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants
use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service,
float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated
future net servicing income. The Company classifies its servicing rights as Level 3.
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in thousands)
|
|
Fair Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
12,473
|
|
|
$
|
0
|
|
|
$
|
12,473
|
|
|
$
|
0
|
|
Government sponsored enterprises
|
|
|
32,619
|
|
|
|
0
|
|
|
|
32,619
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
47,726
|
|
|
|
0
|
|
|
|
47,726
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
119,832
|
|
|
|
0
|
|
|
|
119,832
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,688
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,688
|
|
Total
|
|
$
|
215,338
|
|
|
$
|
0
|
|
|
$
|
212,650
|
|
|
$
|
2,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
13,364
|
|
|
$
|
0
|
|
|
$
|
13,364
|
|
|
$
|
0
|
|
Government sponsored enterprises
|
|
|
32,459
|
|
|
|
0
|
|
|
|
32,459
|
|
|
|
0
|
|
Obligations of states and political subdivisions
|
|
|
42,032
|
|
|
|
0
|
|
|
|
42,032
|
|
|
|
0
|
|
Mortgage-backed securities
|
|
|
126,657
|
|
|
|
0
|
|
|
|
126,657
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,584
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,584
|
|
Total
|
|
$
|
217,096
|
|
|
$
|
0
|
|
|
$
|
214,512
|
|
|
$
|
2,584
|
|
The changes in Level 3 assets and
liabilities measured at fair value on a recurring basis are summarized as follows:
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Fair Value Measurements Using
|
|
|
Fair Value Measurements Using
|
|
|
|
Significant Unobservable Inputs
|
|
|
Significant Unobservable Inputs
|
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
|
Mortgage Servicing Rights
|
|
|
Mortgage Servicing Rights
|
|
(in thousands)
|
|
Three Months Ended September
30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
2,766
|
|
|
$
|
2,511
|
|
|
$
|
2,584
|
|
|
$
|
2,847
|
|
Total gains or losses (realized/unrealized):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
(139
|
)
|
|
|
(237
|
)
|
|
|
(72
|
)
|
|
|
(690
|
)
|
Included in other comprehensive income
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Purchases
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Sales
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Issues
|
|
|
61
|
|
|
|
96
|
|
|
|
176
|
|
|
|
213
|
|
Settlements
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Balance at end of period
|
|
$
|
2,688
|
|
|
$
|
2,370
|
|
|
$
|
2,688
|
|
|
$
|
2,370
|
|
The change in valuation of mortgage
servicing rights arising from inputs and assumptions decreased $30,000 and increased $289,000 for the three and nine months ended
September 30, 2017, respectively, compared to decreases of $52,000 and $197,000 for the three and nine months ended September 30,
2016, respectively.
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
|
Valuation Technique
|
|
Unobservable Inputs
|
|
Input Value
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
Mortgage servicing rights
|
|
Discounted cash flows
|
|
Weighted average constant prepayment rate
|
|
|
10.11
|
%
|
|
|
13.20
|
%
|
|
|
|
|
Weighted average note rate
|
|
|
3.86
|
%
|
|
|
3.88
|
%
|
|
|
|
|
Weighted average discount rate
|
|
|
9.78
|
%
|
|
|
9.20
|
%
|
|
|
|
|
Weighted average expected life (in years)
|
|
|
5.80
|
|
|
|
4.80
|
|
Valuation methods for instruments
measured at fair value on a nonrecurring basis
Following is a description of the
Company’s valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:
Impaired Loans
The Company does not record loans
at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally
based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting
the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated,
a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level
3. As of September 30, 2017, the Company identified $8.0 million in impaired loans that had specific allowances for losses aggregating
$1.7 million. Related to these loans, there was $64,000 and $147,000 in charge-offs recorded during the three and nine months ended
September 30, 2017, respectively. As of September 30, 2016, the Company identified $7.1 million in impaired loans that had specific
allowances for losses aggregating $1.3 million. Related to these loans, there was $153,000 and $920,000 in charge-offs recorded
during the three and nine months ended September 30, 2016, respectively.
Other Real Estate and Foreclosed
Assets
Other real estate and foreclosed
assets consisted of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and
residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other
real estate assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less
estimated selling costs. The Company relies on external appraisals and assessment of property values by internal staff. In the
case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment
based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and
the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are
classified as Level 3.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Fair Value
Measurements Using
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
Three
|
|
|
Nine
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
|
|
|
Months
|
|
|
Months
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
Total
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
Total Gains
|
|
|
Total Gains
|
|
(in thousands)
|
|
Fair
Value
|
|
|
(Level
1)
|
|
|
(Level
2)
|
|
|
(Level
3)
|
|
|
(Losses)*
|
|
|
(Losses)*
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
1,151
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
1,151
|
|
|
$
|
0
|
|
|
$
|
(1
|
)
|
Real estate mortgage - residential
|
|
|
3,621
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,621
|
|
|
|
(57
|
)
|
|
|
(122
|
)
|
Real estate mortgage - commercial
|
|
|
1,399
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,399
|
|
|
|
0
|
|
|
|
(4
|
)
|
Consumer
|
|
|
145
|
|
|
|
0
|
|
|
|
0
|
|
|
|
145
|
|
|
|
(7
|
)
|
|
|
(20
|
)
|
Total
|
|
$
|
6,316
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
6,316
|
|
|
$
|
(64
|
)
|
|
$
|
(147
|
)
|
Other real estate and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreclosed assets
|
|
$
|
13,177
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
13,177
|
|
|
$
|
(26
|
)
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, & agricultural
|
|
$
|
392
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
392
|
|
|
$
|
0
|
|
|
$
|
(359
|
)
|
Real estate construction - commercial
|
|
|
43
|
|
|
|
0
|
|
|
|
0
|
|
|
|
43
|
|
|
|
0
|
|
|
|
0
|
|
Real estate mortgage - residential
|
|
|
3,464
|
|
|
|
0
|
|
|
|
0
|
|
|
|
3,464
|
|
|
|
(80
|
)
|
|
|
(295
|
)
|
Real estate mortgage - commercial
|
|
|
1,806
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,806
|
|
|
|
(71
|
)
|
|
|
(248
|
)
|
Consumer
|
|
|
103
|
|
|
|
0
|
|
|
|
0
|
|
|
|
103
|
|
|
|
(2
|
)
|
|
|
(18
|
)
|
Total
|
|
$
|
5,808
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
5,808
|
|
|
$
|
(153
|
)
|
|
$
|
(920
|
)
|
Other real estate and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreclosed
assets
|
|
$
|
14,438
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
14,438
|
|
|
$
|
21
|
|
|
$
|
70
|
|
* Total gains (losses) reported
for other real estate and foreclosed assets includes charge-offs, valuation write downs, and net losses taken during the periods
reported.
|
(13)
|
Fair Value of Financial Instruments
|
The following methods and assumptions
were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:
Loans
The
fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans
could be made to borrowers with similar credit ratings and for the same remaining maturities
. The net carrying amount
of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations,
or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price
concept of fair value prescribed by ASC Topic 820.
Investment Securities
A detailed description of the fair
value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided in
the
Fair Value Measurement
section above. A schedule of investment securities by category and maturity is provided in the
notes on
Investment Securities
.
Federal Home Loan Bank (FHLB)
Stock
Ownership of equity securities of
FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
Federal Funds Sold, Cash,
and Due from Banks
The
carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits
with banks, and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to
resell classified as short-term generally mature in 90 days or less.
Mortgage Servicing Rights
The fair value of mortgage servicing
rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant
prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model
that calculates the present value of estimated future net servicing income.
The
model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment
speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.
Cash
Surrender Value - Life Insurance
The fair value
of Bank owned life insurance (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company would
receive the cash surrender value which equals the carrying amount.
Accrued
Interest Receivable and Payable
For accrued
interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these
financial instruments.
Deposits
The fair value
of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is equal
to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The
discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.
Securities
Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury
For securities
sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable
estimate of fair value, as such instruments reprice in a short time period.
Subordinated Notes and Other
Borrowings
The fair value of subordinated notes
and other borrowings is based on the discounted value of contractual cashflows. The discount rate is estimated using the rates
currently offered for other borrowed money of similar remaining maturities.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
A summary of the carrying amounts
and fair values of the Company’s financial instruments at September 30, 2017 and December 31, 2016 is as follows:
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
September 30, 2017
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in thousands)
|
|
Amount
|
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
19,200
|
|
|
$
|
19,200
|
|
|
$
|
19,200
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing deposits
|
|
|
41,227
|
|
|
|
41,227
|
|
|
|
41,227
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
212,650
|
|
|
|
212,650
|
|
|
|
0
|
|
|
|
212,650
|
|
|
|
0
|
|
Loans, net
|
|
|
1,034,047
|
|
|
|
1,020,755
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,020,755
|
|
Investment in FHLB stock
|
|
|
5,113
|
|
|
|
5,113
|
|
|
|
0
|
|
|
|
5,113
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,688
|
|
|
|
2,688
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,688
|
|
Cash surrender value - life insurance
|
|
|
2,464
|
|
|
|
2,464
|
|
|
|
0
|
|
|
|
2,464
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
4,879
|
|
|
|
4,879
|
|
|
|
4,879
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,322,268
|
|
|
$
|
1,308,976
|
|
|
$
|
65,306
|
|
|
$
|
220,227
|
|
|
$
|
1,023,443
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
259,457
|
|
|
$
|
259,457
|
|
|
$
|
259,457
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
539,575
|
|
|
|
539,575
|
|
|
|
539,575
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
308,928
|
|
|
|
308,696
|
|
|
|
0
|
|
|
|
0
|
|
|
|
308,696
|
|
Federal funds purchased and securities sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under agreements to repurchase
|
|
|
32,555
|
|
|
|
32,555
|
|
|
|
32,555
|
|
|
|
0
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
36,228
|
|
|
|
0
|
|
|
|
36,228
|
|
|
|
0
|
|
Federal Home Loan Bank advances
|
|
|
89,408
|
|
|
|
89,827
|
|
|
|
0
|
|
|
|
89,827
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
486
|
|
|
|
486
|
|
|
|
486
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,279,895
|
|
|
$
|
1,266,824
|
|
|
$
|
832,073
|
|
|
$
|
126,055
|
|
|
$
|
308,696
|
|
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
December 31, 2016
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
(in thousands)
|
|
amount
|
|
|
value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
25,589
|
|
|
$
|
25,589
|
|
|
$
|
25,589
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Federal funds sold and overnight
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-bearing deposits
|
|
|
1,406
|
|
|
|
1,406
|
|
|
|
1,406
|
|
|
|
0
|
|
|
|
0
|
|
Investment in available-for-sale securities
|
|
|
214,512
|
|
|
|
214,512
|
|
|
|
0
|
|
|
|
214,512
|
|
|
|
0
|
|
Loans, net
|
|
|
964,143
|
|
|
|
959,929
|
|
|
|
0
|
|
|
|
0
|
|
|
|
959,929
|
|
Investment in FHLB stock
|
|
|
5,149
|
|
|
|
5,149
|
|
|
|
0
|
|
|
|
5,149
|
|
|
|
0
|
|
Mortgage servicing rights
|
|
|
2,584
|
|
|
|
2,584
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,584
|
|
Cash surrender value - life insurance
|
|
|
2,409
|
|
|
|
2,409
|
|
|
|
0
|
|
|
|
2,409
|
|
|
|
0
|
|
Accrued interest receivable
|
|
|
5,183
|
|
|
|
5,183
|
|
|
|
5,183
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,220,975
|
|
|
$
|
1,216,761
|
|
|
$
|
32,178
|
|
|
$
|
222,070
|
|
|
$
|
962,513
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
235,975
|
|
|
$
|
235,975
|
|
|
$
|
235,975
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Savings, interest checking and money market
|
|
|
468,731
|
|
|
|
468,731
|
|
|
|
468,731
|
|
|
|
0
|
|
|
|
0
|
|
Time deposits
|
|
|
305,960
|
|
|
|
304,334
|
|
|
|
0
|
|
|
|
0
|
|
|
|
304,334
|
|
Federal funds purchased and securities sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under agreements to repurchase
|
|
|
31,015
|
|
|
|
31,015
|
|
|
|
31,015
|
|
|
|
0
|
|
|
|
0
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
33,712
|
|
|
|
0
|
|
|
|
33,712
|
|
|
|
0
|
|
Other borrowings
|
|
|
93,392
|
|
|
|
93,209
|
|
|
|
0
|
|
|
|
93,209
|
|
|
|
0
|
|
Accrued interest payable
|
|
|
498
|
|
|
|
498
|
|
|
|
498
|
|
|
|
0
|
|
|
|
0
|
|
|
|
$
|
1,185,057
|
|
|
$
|
1,167,474
|
|
|
$
|
736,219
|
|
|
$
|
126,921
|
|
|
$
|
304,334
|
|
Off-Balance Sheet Financial
Instruments
The fair value
of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial
instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms
that are competitive in the markets in which it operates.
Limitations
The fair value
estimates provided are made at a point in time based on market information and information about the financial instruments. Because
no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.
|
(14)
|
Repurchase Reserve Liability
|
The Company’s repurchase reserve
liability for estimated losses incurred on sold loans was $160,000 at both September 30, 2017 and December 31, 2016. This liability
represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans originated
for sale that may arise from representation and warranty claims that could relate to a variety of issues, including but not limited
to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines. At September
30, 2017, the Company was servicing 2,777 loans sold to the secondary market with a balance of approximately $288.7 million compared
to 2,877 loans sold with a balance of approximately $294.4 million at December 31, 2016.
Hawthorn Bancshares,
Inc.
and subsidiaries
Notes to the Consolidated Financial Statements
(Unaudited)
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of year
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
Provision for repurchase liability
|
|
|
0
|
|
|
|
2
|
|
|
|
0
|
|
|
|
2
|
|
Reimbursement of expenses
|
|
|
0
|
|
|
|
(2
|
)
|
|
|
0
|
|
|
|
(2
|
)
|
Balance at end of year
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
|
$
|
160
|
|
|
(15)
|
Commitments and Contingencies
|
The Company issues financial instruments
with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The Company’s extent of involvement
and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company
uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on
its consolidated balance sheets. At September 30, 2017, no amounts have been accrued for any estimated losses for these financial
instruments.
The contractual amount of off-balance-sheet
financial instruments were as follows as of the dates indicated:
|
|
September 30,
|
|
|
December 31,
|
|
(in thousands)
|
|
2017
|
|
|
2016
|
|
Commitments to extend credit
|
|
$
|
212,420
|
|
|
$
|
253,375
|
|
Commitments to originate residential first and second mortgage loans
|
|
|
2,597
|
|
|
|
2,626
|
|
Standby letters of credit
|
|
|
29,123
|
|
|
|
2,745
|
|
Total
|
|
$
|
244,140
|
|
|
$
|
258,746
|
|
Commitments
Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and
letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the
customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.
Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit
are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby
letters of credit range from one month to five years at September 30, 2017.
Pending Litigation
The Company and its subsidiaries
are defendants in various legal actions incidental to the Company’s past and current business activities. Based on the Company’s
analysis, and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably
possible that these legal actions will materially adversely affect the Company’s consolidated financial condition or results
of operations in the near term. The Company records a loss accrual for all legal matters for which it deems a loss is probable
and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to
the point where a loss is deemed probable or an amount can be estimated.
Item 2
- Management’s
Discussion and Analysis of Financial Condition
And Results of Operations
Forward-Looking Statements
This report contains certain forward-looking
statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of
the Company, Hawthorn Bancshares, Inc., and its subsidiaries, including, without limitation:
|
·
|
statements that are not historical in
nature, and
|
|
·
|
statements preceded by, followed by or
that include the words
believes
,
expects, may, will, should, could, anticipates, estimates, intends
or similar expressions.
|
Forward-looking statements are not
guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially
from those contemplated by the forward-looking statements due to, among others, the following factors:
|
·
|
competitive pressures among financial
services companies may increase significantly,
|
|
·
|
changes in the interest rate environment
may reduce interest margins,
|
|
·
|
general economic conditions, either nationally
or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,
|
|
·
|
increases in non-performing assets in
the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,
|
|
·
|
costs or difficulties related to the integration
of the business of the Company and its acquisition targets may be greater than expected,
|
|
·
|
legislative or regulatory changes may
adversely affect the business in which the Company and its subsidiaries are engaged, and
|
|
·
|
changes may occur in the securities markets.
|
We have described under the caption
Risk Factors
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and in other reports
filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those
described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect.
You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.
Overview
Crucial to the
Company’s community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking
services. Through the branch network of its subsidiary bank, the Company, with $1.4 billion in assets at September 30, 2017, provides
a broad range of commercial and personal banking services. The Bank’s specialties include commercial banking for small and
mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration (SBA) loans, and personal
banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement
and other time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial services that
the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive
suite of cash management services. The geographic areas in which the Company provides products and services include the Missouri
communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson, and the greater Kansas City metropolitan
area.
The Company's
primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company's
business is commercial, commercial real estate development, and residential mortgage lending. The Company's income from mortgage
brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity.
The success of
the Company's growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans
and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative
to revenues generated. The Company's financial performance also depends, in part, on its ability to manage various portfolios and
to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing
improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends on
its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable
and despite economic conditions being beyond its control.
The Company’s
subsidiary bank is a full-service bank conducting a general banking business, offering its customers checking and savings accounts,
debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial
loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the
Bank provides trust services.
The deposit accounts
of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the
Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted
by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally
for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination
by the Board of Governors of the Federal Reserve System.
CRITICAL ACCOUNTING
POLICIES
The following
accounting policies are considered most critical to the understanding of the Company’s financial condition and results of
operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about
matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change
over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or
results of operations could reasonably be expected. The impact and any associated risks related to the critical accounting policies
on the business operations are discussed throughout
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
, where such policies affect the reported and expected financial results.
Allowance
for Loan Losses
Management has
identified the accounting policy related to the allowance for loan losses as critical to the understanding of the Company's results
of operations, since the application of this policy requires significant management assumptions and estimates that could result
in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of
the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the Company’s
business operations is provided in note 1 to the Company’s unaudited consolidated financial statements and is also discussed
in the
Lending and Credit Management
section below. Many of the loans are deemed collateral dependent for purposes of the
measurement of the impairment loss, thus the fair value of the underlying collateral and sensitivity of such fair values due to
changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time.
Such volatility can have an impact on the financial performance of the Company.
Other Real
Estate and Foreclosed Assets
Other real estate and foreclosed
assets consist of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and
residential real estate and other non-real estate property, including vehicles, manufactured homes, and construction equipment.
Other real estate assets are initially recorded as held for sale at the fair value of the collateral less estimated selling costs.
Any adjustment is recorded as a charge-off against the allowance for loan losses. The Company relies on external appraisals and
assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of
sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent
to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The write-downs
are recorded as other real estate expense, net. The Company establishes a valuation allowance related to other real estate owned
on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell
is lower than the cost of the property.
SELECTED CONSOLIDATED FINANCIAL
DATA
The following
table presents selected consolidated financial information for the Company as of and for each of the three and nine months ended
September 30, 2017 and 2016, respectively. The selected consolidated financial data should be read in conjunction with the unaudited
consolidated financial statements of the Company, including the related notes, presented elsewhere herein.
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands, except per share data)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.30
|
|
|
$
|
0.32
|
|
|
$
|
0.99
|
|
|
$
|
0.90
|
|
Diluted earnings per share
|
|
|
0.30
|
|
|
|
0.32
|
|
|
|
0.99
|
|
|
|
0.90
|
|
Dividends paid on common stock
|
|
|
393
|
|
|
|
273
|
|
|
|
1,067
|
|
|
|
815
|
|
Book value per share
|
|
|
|
|
|
|
|
|
|
|
16.47
|
|
|
|
15.81
|
|
Market price per share
|
|
|
|
|
|
|
|
|
|
|
20.70
|
|
|
|
14.66
|
|
Selected Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based on average balance sheets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on total assets
|
|
|
0.51
|
%
|
|
|
0.59
|
%
|
|
|
0.58
|
%
|
|
|
0.57
|
%
|
Return on stockholders' equity
|
|
|
7.28
|
%
|
|
|
8.09
|
%
|
|
|
8.18
|
%
|
|
|
7.78
|
%
|
Stockholders' equity to total assets
|
|
|
7.04
|
%
|
|
|
7.33
|
%
|
|
|
7.06
|
%
|
|
|
7.31
|
%
|
Efficiency ratio (1)
|
|
|
75.51
|
%
|
|
|
74.03
|
%
|
|
|
74.34
|
%
|
|
|
75.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Based on end-of-period data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity to assets
|
|
|
|
|
|
|
|
|
|
|
6.93
|
%
|
|
|
7.26
|
%
|
Total risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
13.42
|
%
|
|
|
14.11
|
%
|
Tier 1 risk-based capital ratio
|
|
|
|
|
|
|
|
|
|
|
11.17
|
%
|
|
|
11.63
|
%
|
Common equity Tier 1 capital
|
|
|
|
|
|
|
|
|
|
|
8.39
|
%
|
|
|
8.73
|
%
|
Tier 1 leverage ratio (2)
|
|
|
|
|
|
|
|
|
|
|
9.62
|
%
|
|
|
9.86
|
%
|
|
(1)
|
Efficiency ratio is calculated as non-interest expense
as a percentage of total revenue (net interest income and non-interest income).
|
|
(2)
|
Tier I leverage ratio is calculated by dividing Tier
1 capital by average total consolidated assets.
|
RESULTS OF OPERATIONS ANALYSIS
The
Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S.
GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting
period. There can be no assurances that actual results will not differ from those estimates.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Net interest income
|
|
$
|
10,753
|
|
|
$
|
10,147
|
|
|
$
|
606
|
|
|
|
6.0
|
%
|
|
$
|
32,060
|
|
|
$
|
29,966
|
|
|
$
|
2,094
|
|
|
|
7.0
|
%
|
Provision for loan losses
|
|
|
555
|
|
|
|
300
|
|
|
|
255
|
|
|
|
85.0
|
|
|
|
1,235
|
|
|
|
975
|
|
|
|
260
|
|
|
|
26.7
|
|
Noninterest income
|
|
|
2,181
|
|
|
|
2,125
|
|
|
|
56
|
|
|
|
2.6
|
|
|
|
6,687
|
|
|
|
6,522
|
|
|
|
165
|
|
|
|
2.5
|
|
Noninterest expense
|
|
|
9,766
|
|
|
|
9,085
|
|
|
|
681
|
|
|
|
7.5
|
|
|
|
28,803
|
|
|
|
27,522
|
|
|
|
1,281
|
|
|
|
4.7
|
|
Income before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income taxes
|
|
|
2,613
|
|
|
|
2,887
|
|
|
|
(274
|
)
|
|
|
(9.5
|
)
|
|
|
8,709
|
|
|
|
7,991
|
|
|
|
718
|
|
|
|
9.0
|
|
Income tax expense
|
|
|
847
|
|
|
|
1,003
|
|
|
|
(156
|
)
|
|
|
(15.6
|
)
|
|
|
2,923
|
|
|
|
2,697
|
|
|
|
226
|
|
|
|
8.4
|
|
Net income
|
|
$
|
1,766
|
|
|
$
|
1,884
|
|
|
$
|
(118
|
)
|
|
|
(6.3
|
)%
|
|
$
|
5,786
|
|
|
$
|
5,294
|
|
|
$
|
492
|
|
|
|
9.3
|
%
|
Consolidated
net income
of $1.8 million, or $0.30 per diluted share, for the three months ended September 30, 2017 decreased $118,000
compared to $1.9 million, or $0.32 per diluted share, for the three months ended September 30, 2016. For the three months ended
September 30, 2017, the return on average assets was 0.51%, the return on average stockholders’ equity was 7.28%, and the
efficiency ratio was 75.51%.
Consolidated net
income increased $492,000 to $5.8 million, or $0.99 per diluted share, for the nine months ended September 30, 2017 compared to
$5.3 million, or $0.90 per diluted share, for the nine months ended September 30, 2016. For the nine months ended September 30,
2017, the return on average assets was 0.58%, the return on average stockholders’ equity was 8.18%, and the efficiency ratio
was 74.34%.
Net interest
income
was $10.8 million and $32.0 million for the three and nine months ended September 30, 2017, respectively, compared
to $10.1 million and $30.0 million for the three and nine months ended September 30, 2016. The net interest margin (expressed on
a fully taxable equivalent basis) decreased to 3.35% for the three months ended September 30, 2017, compared to 3.44% for the three
months ended September 30, 2016, and decreased to 3.44% for the nine months ended September 30, 2017 compared to 3.48% for the
nine months ended September 30, 2016. These changes are discussed in greater detail under the
Average Balance Sheets and Rate
and Volume Analysis
section below.
A $555,000 and
$1.2 million
provision for loan losses
was recorded for the three and nine months ended September 30, 2017, respectively,
compared to a $300,000 and $975,000 provision for the three and nine months ended September 30, 2016, respectively.
The Company’s
net charge-offs were $100,000, or 0.01% of average loans, for the three months ended September 30, 2017 compared to net charge-offs
of $222,000, or 0.02% of average loans, for the three months ended September 30, 2016. For the nine months ended September 30,
2017, the Company’s net charge-offs were $121,000, or 0.01% of average loans, compared to net charge-offs of $109,000, or
0.01% of average loans, for the nine months ended September 30, 2016.
Non-performing
loans totaled $11.1 million, or 1.06% of total loans, at September 30, 2017 compared to $9.2 million, or 0.95% of total loans,
at December 31, 2016, and $9.3 million, or 0.98% of total loans, at September 30, 2016. These changes are discussed in greater
detail under the
Lending and Credit Management
section below.
Non-interest income
increased $56,000, or 2.6%, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016,
and increased $165,000, or 2.5%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.
These changes are discussed in greater detail below under Non-interest Income.
Non-interest expense
increased $681,000, or 7.5%, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016,
and increased $1.3 million, or 4.7%, for the nine months ended September 30, 2017 compared to the nine months ended September 30,
2016. These changes are discussed in greater detail below under Non-interest Expense.
Average
Balance Sheets
Net interest income
is the largest source of revenue resulting from the Company’s lending, investing, borrowing,
and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and
mix of interest earning assets and interest bearing liabilities. The following table presents average balance sheets, net interest
income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin
on a fully taxable equivalent basis for each of the periods ended September 30, 2017 and 2016, respectively.
|
|
Three Months Ended September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
Interest
|
|
|
Rate
|
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
|
|
Balance
|
|
|
Expense(1)
|
|
|
Paid(1)
|
|
|
Balance
|
|
|
Expense(1)
|
|
|
Paid(1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (2) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
186,001
|
|
|
$
|
2,166
|
|
|
|
4.62
|
%
|
|
$
|
164,558
|
|
|
$
|
1,924
|
|
|
|
4.65
|
%
|
Real estate construction - residential
|
|
|
21,532
|
|
|
|
253
|
|
|
|
4.66
|
|
|
|
16,550
|
|
|
|
189
|
|
|
|
4.54
|
|
Real estate construction - commercial
|
|
|
83,398
|
|
|
|
952
|
|
|
|
4.53
|
|
|
|
46,104
|
|
|
|
511
|
|
|
|
4.41
|
|
Real estate mortgage - residential
|
|
|
252,329
|
|
|
|
2,938
|
|
|
|
4.62
|
|
|
|
251,085
|
|
|
|
2,836
|
|
|
|
4.49
|
|
Real estate mortgage - commercial
|
|
|
458,684
|
|
|
|
5,289
|
|
|
|
4.57
|
|
|
|
425,533
|
|
|
|
4,932
|
|
|
|
4.61
|
|
Consumer
|
|
|
33,852
|
|
|
|
322
|
|
|
|
3.77
|
|
|
|
26,937
|
|
|
|
292
|
|
|
|
4.31
|
|
Total loans
|
|
$
|
1,035,796
|
|
|
$
|
11,920
|
|
|
|
4.57
|
%
|
|
$
|
930,767
|
|
|
$
|
10,684
|
|
|
|
4.57
|
%
|
Investment securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
$
|
49,762
|
|
|
$
|
175
|
|
|
|
1.40
|
%
|
|
$
|
42,340
|
|
|
$
|
123
|
|
|
|
1.16
|
%
|
Obligations of states and political subdivisions
|
|
|
48,359
|
|
|
|
268
|
|
|
|
2.20
|
|
|
|
31,831
|
|
|
|
193
|
|
|
|
2.41
|
|
Mortgage-backed securities
|
|
|
119,160
|
|
|
|
533
|
|
|
|
1.77
|
|
|
|
156,720
|
|
|
|
615
|
|
|
|
1.56
|
|
Total investment securities
|
|
$
|
217,281
|
|
|
$
|
976
|
|
|
|
1.78
|
%
|
|
$
|
230,891
|
|
|
$
|
931
|
|
|
|
1.60
|
%
|
Other investments and securities, at cost
|
|
|
10,199
|
|
|
|
101
|
|
|
|
3.93
|
|
|
|
9,044
|
|
|
|
80
|
|
|
|
3.52
|
|
Federal funds sold and interest bearing deposits in other financial
institutions
|
|
|
27,144
|
|
|
|
84
|
|
|
|
1.23
|
|
|
|
14,504
|
|
|
|
19
|
|
|
|
0.52
|
|
Total interest earning assets
|
|
$
|
1,290,420
|
|
|
$
|
13,081
|
|
|
|
4.02
|
%
|
|
$
|
1,185,206
|
|
|
$
|
11,714
|
|
|
|
3.93
|
%
|
All other assets
|
|
|
88,347
|
|
|
|
|
|
|
|
|
|
|
|
87,697
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(10,603
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,377
|
)
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,368,164
|
|
|
|
|
|
|
|
|
|
|
$
|
1,263,526
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
209,704
|
|
|
$
|
302
|
|
|
|
0.57
|
%
|
|
$
|
189,219
|
|
|
$
|
147
|
|
|
|
0.31
|
%
|
Savings
|
|
|
97,285
|
|
|
|
12
|
|
|
|
0.05
|
|
|
|
96,938
|
|
|
|
12
|
|
|
|
0.05
|
|
Commercial
|
|
|
1,450
|
|
|
|
3
|
|
|
|
0.82
|
|
|
|
646
|
|
|
|
1
|
|
|
|
0.62
|
|
Money market
|
|
|
239,742
|
|
|
|
365
|
|
|
|
0.60
|
|
|
|
190,137
|
|
|
|
131
|
|
|
|
0.27
|
|
Time deposits of $250,000 and over
|
|
|
58,765
|
|
|
|
119
|
|
|
|
0.80
|
|
|
|
71,886
|
|
|
|
107
|
|
|
|
0.59
|
|
Other time deposits
|
|
|
232,002
|
|
|
|
463
|
|
|
|
0.79
|
|
|
|
237,868
|
|
|
|
391
|
|
|
|
0.65
|
|
Total interest bearing deposits
|
|
$
|
838,948
|
|
|
$
|
1,264
|
|
|
|
0.60
|
%
|
|
$
|
786,694
|
|
|
$
|
789
|
|
|
|
0.40
|
%
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
29,107
|
|
|
|
29
|
|
|
|
0.40
|
|
|
|
31,393
|
|
|
|
13
|
|
|
|
0.16
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
450
|
|
|
|
3.61
|
|
|
|
49,486
|
|
|
|
375
|
|
|
|
3.01
|
|
Federal Home Loan Bank Advances
|
|
|
100,390
|
|
|
|
440
|
|
|
|
1.74
|
|
|
|
74,109
|
|
|
|
282
|
|
|
|
1.51
|
|
Total borrowings
|
|
$
|
178,983
|
|
|
$
|
919
|
|
|
|
2.04
|
%
|
|
$
|
154,988
|
|
|
$
|
670
|
|
|
|
1.72
|
%
|
Total interest bearing liabilities
|
|
$
|
1,017,931
|
|
|
$
|
2,183
|
|
|
|
0.85
|
%
|
|
$
|
941,682
|
|
|
$
|
1,459
|
|
|
|
0.62
|
%
|
Demand deposits
|
|
|
242,262
|
|
|
|
|
|
|
|
|
|
|
|
220,036
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
11,627
|
|
|
|
|
|
|
|
|
|
|
|
9,203
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,271,820
|
|
|
|
|
|
|
|
|
|
|
|
1,170,921
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
96,344
|
|
|
|
|
|
|
|
|
|
|
|
92,605
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,368,164
|
|
|
|
|
|
|
|
|
|
|
$
|
1,263,526
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
10,898
|
|
|
|
|
|
|
|
|
|
|
|
10,255
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.17
|
%
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
3.44
|
%
|
|
(1)
|
Interest income and yields are presented on a fully taxable
equivalent basis using the federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled
$145,000 and $108,000 for the three months ended September 30, 2017 and 2016, respectively.
|
|
(2)
|
Non-accruing loans are included in the average amounts
outstanding.
|
|
(3)
|
Average balances based on amortized cost.
|
|
(4)
|
Fees and costs on loans are included in interest income.
|
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Interest
|
|
|
Rate
|
|
|
|
|
|
Interest
|
|
|
Rate
|
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
|
Average
|
|
|
Income/
|
|
|
Earned/
|
|
|
|
Balance
|
|
|
Expense(1)
|
|
|
Paid(1)
|
|
|
Balance
|
|
|
Expense(1)
|
|
|
Paid(1)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (2) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
186,492
|
|
|
$
|
6,456
|
|
|
|
4.63
|
%
|
|
$
|
155,384
|
|
|
$
|
5,535
|
|
|
|
4.76
|
%
|
Real estate construction - residential
|
|
|
20,474
|
|
|
|
704
|
|
|
|
4.60
|
|
|
|
17,624
|
|
|
|
602
|
|
|
|
4.56
|
|
Real estate construction - commercial
|
|
|
73,821
|
|
|
|
2,470
|
|
|
|
4.47
|
|
|
|
41,489
|
|
|
|
1,460
|
|
|
|
4.70
|
|
Real estate mortgage - residential
|
|
|
257,249
|
|
|
|
8,819
|
|
|
|
4.58
|
|
|
|
251,819
|
|
|
|
8,590
|
|
|
|
4.56
|
|
Real estate mortgage - commercial
|
|
|
447,767
|
|
|
|
15,387
|
|
|
|
4.59
|
|
|
|
406,104
|
|
|
|
14,040
|
|
|
|
4.62
|
|
Consumer
|
|
|
31,975
|
|
|
|
931
|
|
|
|
3.89
|
|
|
|
25,513
|
|
|
|
854
|
|
|
|
4.47
|
|
Total loans
|
|
$
|
1,017,778
|
|
|
$
|
34,767
|
|
|
|
4.57
|
%
|
|
$
|
897,933
|
|
|
$
|
31,081
|
|
|
|
4.62
|
%
|
Investment securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency
obligations
|
|
$
|
48,037
|
|
|
$
|
507
|
|
|
|
1.41
|
%
|
|
$
|
49,216
|
|
|
$
|
427
|
|
|
|
1.16
|
%
|
Obligations of states and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
political subdivisions
|
|
|
46,621
|
|
|
|
784
|
|
|
|
2.25
|
|
|
|
30,549
|
|
|
|
612
|
|
|
|
2.68
|
|
Mortgage-backed securities
|
|
|
121,145
|
|
|
|
1,659
|
|
|
|
1.83
|
|
|
|
159,693
|
|
|
|
2,053
|
|
|
|
1.72
|
|
Total investment securities
|
|
$
|
215,803
|
|
|
$
|
2,950
|
|
|
|
1.83
|
%
|
|
$
|
239,458
|
|
|
$
|
3,092
|
|
|
|
1.72
|
%
|
Other investments and securities, at cost
|
|
|
10,192
|
|
|
|
285
|
|
|
|
3.74
|
|
|
|
8,544
|
|
|
|
231
|
|
|
|
3.61
|
|
Federal funds sold and interest bearing deposits in other financial institutions
|
|
|
17,885
|
|
|
|
144
|
|
|
|
1.08
|
|
|
|
17,640
|
|
|
|
69
|
|
|
|
0.52
|
|
Total interest earning assets
|
|
$
|
1,261,658
|
|
|
$
|
38,146
|
|
|
|
4.04
|
%
|
|
$
|
1,163,575
|
|
|
$
|
34,473
|
|
|
|
3.96
|
%
|
All other assets
|
|
|
88,984
|
|
|
|
|
|
|
|
|
|
|
|
88,942
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(10,332
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,959
|
)
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,340,310
|
|
|
|
|
|
|
|
|
|
|
$
|
1,243,558
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
212,645
|
|
|
$
|
806
|
|
|
|
0.51
|
%
|
|
$
|
201,508
|
|
|
$
|
471
|
|
|
|
0.31
|
%
|
Savings
|
|
|
99,356
|
|
|
|
37
|
|
|
|
0.05
|
|
|
|
95,403
|
|
|
|
37
|
|
|
|
0.05
|
|
Commercial
|
|
|
1,542
|
|
|
|
8
|
|
|
|
0.69
|
|
|
|
217
|
|
|
|
1
|
|
|
|
0.62
|
|
Money market
|
|
|
214,526
|
|
|
|
695
|
|
|
|
0.43
|
|
|
|
183,491
|
|
|
|
365
|
|
|
|
0.27
|
|
Time deposits of $250,000 and over
|
|
|
59,997
|
|
|
|
309
|
|
|
|
0.69
|
|
|
|
63,179
|
|
|
|
235
|
|
|
|
0.50
|
|
Other time deposits
|
|
|
231,178
|
|
|
|
1,252
|
|
|
|
0.72
|
|
|
|
237,087
|
|
|
|
1,180
|
|
|
|
0.66
|
|
Total interest bearing deposits
|
|
$
|
819,244
|
|
|
$
|
3,107
|
|
|
|
0.51
|
%
|
|
$
|
780,885
|
|
|
$
|
2,289
|
|
|
|
0.39
|
%
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
29,141
|
|
|
|
78
|
|
|
|
0.36
|
|
|
|
38,979
|
|
|
|
51
|
|
|
|
0.17
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
1,290
|
|
|
|
3.49
|
|
|
|
49,486
|
|
|
|
1,095
|
|
|
|
2.96
|
|
Federal Home Loan Bank Advances
|
|
|
101,059
|
|
|
|
1,182
|
|
|
|
1.56
|
|
|
|
61,949
|
|
|
|
732
|
|
|
|
1.58
|
|
Total borrowings
|
|
$
|
179,686
|
|
|
$
|
2,550
|
|
|
|
1.90
|
%
|
|
$
|
150,414
|
|
|
$
|
1,878
|
|
|
|
1.67
|
%
|
Total interest bearing liabilities
|
|
$
|
998,930
|
|
|
$
|
5,657
|
|
|
|
0.76
|
%
|
|
$
|
931,299
|
|
|
$
|
4,167
|
|
|
|
0.60
|
%
|
Demand deposits
|
|
|
235,469
|
|
|
|
|
|
|
|
|
|
|
|
211,930
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
11,343
|
|
|
|
|
|
|
|
|
|
|
|
9,476
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,245,742
|
|
|
|
|
|
|
|
|
|
|
|
1,152,705
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
94,568
|
|
|
|
|
|
|
|
|
|
|
|
90,853
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,340,310
|
|
|
|
|
|
|
|
|
|
|
$
|
1,243,558
|
|
|
|
|
|
|
|
|
|
Net interest income (FTE)
|
|
|
|
|
|
|
32,489
|
|
|
|
|
|
|
|
|
|
|
|
30,306
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.28
|
%
|
|
|
|
|
|
|
|
|
|
|
3.36
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
|
|
|
3.48
|
%
|
|
(1)
|
Interest income and yields are presented on a fully taxable
equivalent basis using the federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled
$429,000 and $340,000 for the nine months ended September 30, 2017 and 2016, respectively.
|
|
(2)
|
Non-accruing loans are included in the average amounts
outstanding.
|
|
(3)
|
Average balances based on amortized cost.
|
|
(4)
|
Fees and costs on loans are included in interest income.
|
Rate and
Volume Analysis
The following
table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning
assets and interest bearing liabilities, identifying changes related to volumes and rates for the three and nine months ended September
30, 2017 compared to the three and nine months ended September 30, 2016. The change in interest due to the combined rate/volume
variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017 vs. 2016
|
|
|
2017 vs. 2016
|
|
|
|
|
|
|
Change due to
|
|
|
|
|
|
Change due to
|
|
|
|
Total
|
|
|
Average
|
|
|
Average
|
|
|
Total
|
|
|
Average
|
|
|
Average
|
|
(In thousands)
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
|
Change
|
|
|
Volume
|
|
|
Rate
|
|
Interest income on a fully taxable equivalent basis: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans: (2) (4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
242
|
|
|
$
|
250
|
|
|
$
|
(8
|
)
|
|
$
|
921
|
|
|
$
|
1,081
|
|
|
$
|
(160
|
)
|
Real estate construction - residential
|
|
|
64
|
|
|
|
59
|
|
|
|
5
|
|
|
|
102
|
|
|
|
98
|
|
|
|
4
|
|
Real estate construction - commercial
|
|
|
441
|
|
|
|
425
|
|
|
|
16
|
|
|
|
1,010
|
|
|
|
1,085
|
|
|
|
(75
|
)
|
Real estate mortgage - residential
|
|
|
102
|
|
|
|
14
|
|
|
|
88
|
|
|
|
229
|
|
|
|
186
|
|
|
|
43
|
|
Real estate mortgage - commercial
|
|
|
357
|
|
|
|
382
|
|
|
|
(25
|
)
|
|
|
1,347
|
|
|
|
1,432
|
|
|
|
(85
|
)
|
Consumer
|
|
|
30
|
|
|
|
69
|
|
|
|
(39
|
)
|
|
|
77
|
|
|
|
197
|
|
|
|
(120
|
)
|
Investment securities: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency obligations
|
|
|
52
|
|
|
|
24
|
|
|
|
28
|
|
|
|
80
|
|
|
|
(10
|
)
|
|
|
90
|
|
Obligations of states and political subdivisions
|
|
|
75
|
|
|
|
93
|
|
|
|
(18
|
)
|
|
|
172
|
|
|
|
282
|
|
|
|
(110
|
)
|
Mortgage-backed securities
|
|
|
(82
|
)
|
|
|
(160
|
)
|
|
|
78
|
|
|
|
(394
|
)
|
|
|
(521
|
)
|
|
|
127
|
|
Other investments and securities, at cost
|
|
|
21
|
|
|
|
11
|
|
|
|
10
|
|
|
|
54
|
|
|
|
46
|
|
|
|
8
|
|
Federal funds sold and interest bearing deposits in other financial institutions
|
|
|
65
|
|
|
|
26
|
|
|
|
39
|
|
|
|
75
|
|
|
|
1
|
|
|
|
74
|
|
Total interest income
|
|
|
1,367
|
|
|
|
1,193
|
|
|
|
174
|
|
|
|
3,673
|
|
|
|
3,877
|
|
|
|
(204
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
155
|
|
|
|
18
|
|
|
|
137
|
|
|
|
335
|
|
|
|
27
|
|
|
|
308
|
|
Savings
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2
|
|
|
|
(2
|
)
|
Commercial
|
|
|
2
|
|
|
|
0
|
|
|
|
2
|
|
|
|
7
|
|
|
|
7
|
|
|
|
0
|
|
Money market
|
|
|
234
|
|
|
|
41
|
|
|
|
193
|
|
|
|
330
|
|
|
|
70
|
|
|
|
260
|
|
Time deposits of $250,000 and over
|
|
|
12
|
|
|
|
(22
|
)
|
|
|
34
|
|
|
|
74
|
|
|
|
(13
|
)
|
|
|
87
|
|
Other time deposits
|
|
|
72
|
|
|
|
(10
|
)
|
|
|
82
|
|
|
|
72
|
|
|
|
(30
|
)
|
|
|
102
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
16
|
|
|
|
(1
|
)
|
|
|
17
|
|
|
|
27
|
|
|
|
(16
|
)
|
|
|
43
|
|
Subordinated notes
|
|
|
75
|
|
|
|
0
|
|
|
|
75
|
|
|
|
195
|
|
|
|
0
|
|
|
|
195
|
|
Federal Home Loan Bank advances
|
|
|
158
|
|
|
|
111
|
|
|
|
47
|
|
|
|
450
|
|
|
|
457
|
|
|
|
(7
|
)
|
Total interest expense
|
|
|
724
|
|
|
|
137
|
|
|
|
587
|
|
|
|
1,490
|
|
|
|
504
|
|
|
|
986
|
|
Net interest income on a fully taxable equivalent basis
|
|
$
|
643
|
|
|
$
|
1,056
|
|
|
$
|
(413
|
)
|
|
$
|
2,183
|
|
|
$
|
3,373
|
|
|
$
|
(1,190
|
)
|
|
(1)
|
Interest income and yields are presented on a fully taxable
equivalent basis using the Federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled
$145,000 and $429,000 for the three and nine months September 30, 2017, respectively, compared to $108,000 and
$340,000 for the three and nine months September 30, 2016, respectively.
|
|
(2)
|
Non-accruing loans are included in the average amounts
outstanding.
|
|
(3)
|
Average balances based on amortized cost.
|
|
(4)
|
Fees and costs on loans are included in interest income.
|
Financial results
for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, reflected an increase in net
interest income, on a tax equivalent basis, of $643,000, or 6.27%, and the financial results for the nine months ended September
30, 2017 compared to the nine months ended September 30, 2016 reflected an increase of $2.2 million, or 7.20%.
Measured as a
percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.35%
for the three months ended September 30, 2017 compared to 3.44% for the three months ended September 30, 2016, and decreased to
3.44% for the nine months ended September 30, 2017 compared to 3.48% for the nine months ended September 30, 2016. The increase
in net interest income was primarily due to an increase in average loans, and the decrease in net interest margin is primarily
due to the increase in interest bearing liabilities and the cost of funds. Due to loan growth net interest income has continued
to increase. The increase in average cost of deposits was primarily in NOW and money market accounts resulting from market rate
increases and new product offerings.
Average interest-earning
assets increased $105.2 million, or 8.88%, to $1.29 billion for the three months ended September 30, 2017 compared to $1.19 billion
for the three months ended September 30, 2016, and average interest bearing liabilities increased $76.2 million, or 8.10%, to $1.02
billion for the three months ended September 30, 2017 compared to $941.7 million for the three months ended September 30, 2016.
Average interest-earning
assets increased $98.1 million, or 8.43%, to $1.26 billion for the nine months ended September 30, 2017 compared to $1.16 billion
for the nine months ended September 30, 2016, and average interest bearing liabilities increased $67.6 million, or 7.26%, to $998.9
million for the nine months ended September 30, 2017 compared to $931.3 million for the nine months ended September 30, 2016.
Total interest
income
(expressed on a fully taxable equivalent basis) was $13.1 million and $38.1 million for the three and nine months
ended September 30, 2017, respectively, compared to $11.7 million and $34.5 million for the three and nine months ended September
30, 2016, respectively. The Company’s rates earned on interest earning assets were 4.02% and 4.04% for the three and nine
months ended September 30, 2017, respectively, compared to 3.93% and 3.96% for the three and nine months ended September 30, 2016,
respectively.
Interest
income on loans
increased to $11.9 million and $34.8 million for the three and nine months ended September 30, 2017, respectively,
compared to $10.7 million and $31.1 million for the three and nine months ended September 30, 2016, respectively.
Average loans
outstanding increased $105.0 million, or 11.28%, to $1.04 billion for the three months ended September 30, 2017 compared to $930.8
million for the three months ended September 30, 2016. The average yield on loans receivable was consistent at 4.57% for both the
three months ended September 30, 2017 and 2016.
For the nine months
ended September 30, 2017, average loans outstanding increased $119.8 million, or 13.35%, to $1.02 billion compared to $897.9 million
for the nine months ended September 30, 2016. The average yield on loans receivable decreased to 4.57% for the nine months ended
September 30, 2017 compared to 4.62% for the nine months ended September 30, 2016. See the
Lending and Credit Management
section for further discussion of changes in the composition of the lending portfolio.
Total interest
expense
was to $2.2 million and $5.7 million for the three and nine months ended September 30, 2017, respectively, compared
to $1.5 million and $4.2 million for the three and nine months ended September 30, 2016, respectively. The Company’s rates
paid on interest bearing liabilities was 0.85% and 0.76% for the three and nine months ended September 30, 2017, respectively,
compared to 0.62% and 0.60% for the three and nine months ended September 30, 2016, respectively. See the
Liquidity Management
section for further discussion.
Interest
expense on deposits
increased to $1.3 million and $3.1 million for the three and nine months ended September 30, 2017,
respectively, compared to $789,000 and $2.3 million for the three and nine months ended September 30, 2016, respectively.
Average interest
bearing deposits increased $52.3 million, or 6.64%, to $838.9 million for the three months ended September 30, 2017 compared to
$786.7 million for the three months ended September 30, 2016. The average cost of deposits increased to 0.60% for the three months
ended September 30, 2017 compared to 0.40% for the three months ended September 30, 2016.
For the nine months
ended September 30, 2017, average interest bearing deposits increased $38.4 million, or 4.91%, to $819.2 million compared to $780.9
million for the nine months ended September 30, 2016. The average cost of deposits increased to 0.51% for the nine months ended
September 30, 2017 compared to 0.39% for the nine months ended September 30, 2016 primarily as a result of higher market interest
rates.
The Company’s
management is continuing to grow core deposits by offering new products. The increase in average cost of deposits was primarily
in NOW and money market accounts resulting from market rate increases and new product offerings.
Interest
expense on borrowings
increased to $919,000 and $2.6 million for the three and nine months ended September 30, 2017, respectively,
compared to $670,000 and $1.9 million for the three and nine months ended September 30, 2016, respectively.
Average borrowings
increased $24.0 million, or 15.48%, to $179.0 million for the three months ended September 30, 2017 compared to $155.0 million
for the three months ended September 30, 2016. The average cost of borrowings increased to 2.04% for the three months ended September
30, 2017 compared to 1.72% for the three months ended September 30, 2016.
For the nine months
ended September 30, 2017, average borrowings increased $29.3 million, or 19.46%, to $179.7 million for the nine months ended September
30, 2017 compared to $150.4 million for the nine months ended September 30, 2016. The average cost of borrowings increased to 1.90%
for the nine months ended September 30, 2017 compared to 1.67% for the nine months ended September 30, 2016.
The increase in
average borrowings was primarily due to an increase in Federal Home Loan advances used to fund loan growth, and the increase in
the average cost of borrowings was primarily due to the increase in the LIBOR rates reflected in the subordinated notes in the
periods discussed above. The increase See the
Liquidity Management
section for further discussion.
Non-interest Income and
Expense
Non-interest
income for the periods indicated was as follows:
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Non-interest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
$
|
878
|
|
|
$
|
882
|
|
|
$
|
(4
|
)
|
|
|
(0.5
|
)%
|
|
$
|
2,565
|
|
|
$
|
2,544
|
|
|
$
|
21
|
|
|
|
0.8
|
%
|
Bank card income and fees
|
|
|
664
|
|
|
|
593
|
|
|
|
71
|
|
|
|
12.0
|
|
|
|
1,941
|
|
|
|
1,875
|
|
|
|
66
|
|
|
|
3.5
|
|
Trust department income
|
|
|
288
|
|
|
|
216
|
|
|
|
72
|
|
|
|
33.3
|
|
|
|
828
|
|
|
|
699
|
|
|
|
129
|
|
|
|
18.5
|
|
Real estate servicing fees, net
|
|
|
70
|
|
|
|
(4
|
)
|
|
|
74
|
|
|
|
NM
|
|
|
|
557
|
|
|
|
(36
|
)
|
|
|
593
|
|
|
|
NM
|
|
Gain on sales of mortgage loans, net
|
|
|
225
|
|
|
|
266
|
|
|
|
(41
|
)
|
|
|
(15.4
|
)
|
|
|
599
|
|
|
|
653
|
|
|
|
(54
|
)
|
|
|
(8.3
|
)
|
Gain on sale of investment securities
|
|
|
0
|
|
|
|
111
|
|
|
|
(111
|
)
|
|
|
(100.0
|
)
|
|
|
0
|
|
|
|
602
|
|
|
|
(602
|
)
|
|
|
(100.0
|
)
|
Other
|
|
|
56
|
|
|
|
61
|
|
|
|
(5
|
)
|
|
|
(8.2
|
)
|
|
|
197
|
|
|
|
185
|
|
|
|
12
|
|
|
|
6.5
|
|
Total non-interest income
|
|
$
|
2,181
|
|
|
$
|
2,125
|
|
|
$
|
56
|
|
|
|
2.6
|
%
|
|
$
|
6,687
|
|
|
$
|
6,522
|
|
|
$
|
165
|
|
|
|
2.5
|
%
|
Non-interest
income as a % of total revenue *
|
|
|
16.2
|
%
|
|
|
16.4
|
%
|
|
|
|
|
|
|
|
|
|
|
17.5
|
%
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
* Total revenue is calculated as net interest income plus non-interest
income.
NM = not meaningful
Total non-interest
income
increased $56,000, or 2.6%, to $2.2 million for the quarter ended September 30, 2017 compared to $2.1 million for
the quarter ended September 30, 2016, and increased $165,000, or 2.5%, to $6.7 million for the nine months ended September 30,
2017 compared to $6.5 million for the nine months ended September 30, 2016.
Bank card
income and fees
increased $71,000 to $664,000 for the quarter ended September 30, 2017 compared to $593,000 for the quarter
ended September 30, 2016, and increased $66,000 to $1.9 million for both the nine months ended September 30, 2017 and 2016. The
increase was mainly the result of growth in debit card fees as a result of a higher volume of transactions this quarter. The table
below is a summary of bank card income and fees for the three and nine months ended September 30, 2017 and 2016.
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Debit card
|
|
$
|
616
|
|
|
$
|
555
|
|
|
$
|
61
|
|
|
|
11.0
|
%
|
|
$
|
1,821
|
|
|
$
|
1,724
|
|
|
$
|
97
|
|
|
|
5.6
|
%
|
Credit card
|
|
|
45
|
|
|
|
38
|
|
|
|
7
|
|
|
|
18.4
|
|
|
|
108
|
|
|
|
117
|
|
|
|
(9
|
)
|
|
|
(7.7
|
)
|
Merchant fees
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
3
|
|
|
|
(300.0
|
)
|
|
|
7
|
|
|
|
29
|
|
|
|
(22
|
)
|
|
|
(75.9
|
)
|
Business card
|
|
|
1
|
|
|
|
1
|
|
|
|
0
|
|
|
|
0.0
|
|
|
|
5
|
|
|
|
5
|
|
|
|
0
|
|
|
|
0.0
|
|
Total
|
|
$
|
664
|
|
|
$
|
593
|
|
|
$
|
71
|
|
|
|
12.0
|
%
|
|
$
|
1,941
|
|
|
$
|
1,875
|
|
|
$
|
66
|
|
|
|
3.5
|
%
|
Trust department
income
increased $72,000 to $288,000 for the quarter ended September 30, 2017 compared to $216,000 for the quarter ended
September 30, 2016, and increased $129,000 to $828,000 for the nine months ended September 30, 2017 compared to $699,000 for the
nine months ended September 30, 2016. The increase was primarily due to new trust customer relationships.
Real estate
servicing fees, net
of the change in valuation of mortgage serving rights increased $74,000 to $70,000 for the quarter
ended September 30, 2017 compared to $(4,000) for the quarter ended September 30, 2016, and increased $593,000 to $557,000 for
the nine months ended September 30, 2017 compared to $(36,000) for the nine months ended September 30, 2016. The increases in both
periods were primarily due to slower prepayment speeds resulting from a higher rate environment. Mortgage loan servicing fees earned
on loans sold were $209,000 for the quarter ended September 30, 2017 compared to $233,000 for the quarter ended September 30, 2016,
and $629,000 for the nine months ended September 30, 2017 compared to $654,000 for the nine months ended September 30, 2016.
The Company was
servicing $288.7 million of mortgage loans at September 30, 2017 compared to $294.4 million and $299.7 million at December 31,
2016 and September 30, 2016, respectively.
Gain on
sales of mortgage loans
decreased $41,000 to $225,000 for the quarter ended September 30, 2017 compared to $266,000 for
the quarter ended September 30, 2016, and decreased $54,000 to $599,000 for the nine months ended September 30, 2017 compared to
$653,000 for the nine months ended September 30, 2016. The Company sold loans of $10.1 million for the quarter ended September
30, 2017 compared to $11.2 million for the quarter ended September 30, 2016, and $26.3 million for the nine months ended September
30, 2017 compared to $28.8 million for the nine months ended September 30, 2016.
G
ain on sale of investment securities
-
During the nine months ended September 30, 2017 the Company received $2.7 million from proceeds on sales of available securities
and recognized gains of $0.1 compared to $60.7 million from proceeds on sales of available-for-sale debt securities and recognized
gains of $602,000 for the nine months ended September 30, 2016. These transactions in both periods reported were the result of
bond sales and purchases to replace several smaller holdings with fewer, larger investments without materially changing the duration
or yield of the investment portfolio.
Non-interest expense for the periods indicated was
as follows:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
$
|
|
|
%
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
Change
|
|
Non-interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
4,069
|
|
|
$
|
3,833
|
|
|
$
|
236
|
|
|
|
6.2
|
%
|
|
$
|
12,133
|
|
|
$
|
11,798
|
|
|
$
|
335
|
|
|
|
2.8
|
%
|
Employee benefits
|
|
|
1,446
|
|
|
|
1,230
|
|
|
|
216
|
|
|
|
17.6
|
|
|
|
4,188
|
|
|
|
3,920
|
|
|
|
268
|
|
|
|
6.8
|
|
Occupancy expense, net
|
|
|
719
|
|
|
|
730
|
|
|
|
(11
|
)
|
|
|
(1.5
|
)
|
|
|
2,027
|
|
|
|
2,037
|
|
|
|
(10
|
)
|
|
|
(0.5
|
)
|
Furniture and equipment expense
|
|
|
764
|
|
|
|
438
|
|
|
|
326
|
|
|
|
74.4
|
|
|
|
1,996
|
|
|
|
1,288
|
|
|
|
708
|
|
|
|
55.0
|
|
Processing expense, network and bank card expense
|
|
|
831
|
|
|
|
878
|
|
|
|
(47
|
)
|
|
|
(5.4
|
)
|
|
|
2,803
|
|
|
|
2,490
|
|
|
|
313
|
|
|
|
12.6
|
|
Legal, examination, and professional fees
|
|
|
331
|
|
|
|
277
|
|
|
|
54
|
|
|
|
19.5
|
|
|
|
928
|
|
|
|
939
|
|
|
|
(11
|
)
|
|
|
(1.2
|
)
|
FDIC insurance assessment
|
|
|
106
|
|
|
|
196
|
|
|
|
(90
|
)
|
|
|
(45.9
|
)
|
|
|
322
|
|
|
|
560
|
|
|
|
(238
|
)
|
|
|
(42.5
|
)
|
Advertising and promotion
|
|
|
342
|
|
|
|
283
|
|
|
|
59
|
|
|
|
20.8
|
|
|
|
845
|
|
|
|
734
|
|
|
|
111
|
|
|
|
15.1
|
|
Postage, printing, and supplies
|
|
|
234
|
|
|
|
244
|
|
|
|
(10
|
)
|
|
|
(4.1
|
)
|
|
|
729
|
|
|
|
771
|
|
|
|
(42
|
)
|
|
|
(5.4
|
)
|
Real estate foreclosure expense, net
|
|
|
78
|
|
|
|
49
|
|
|
|
29
|
|
|
|
59.2
|
|
|
|
330
|
|
|
|
232
|
|
|
|
98
|
|
|
|
42.2
|
|
Other
|
|
|
846
|
|
|
|
927
|
|
|
|
(81
|
)
|
|
|
(8.7
|
)
|
|
|
2,502
|
|
|
|
2,753
|
|
|
|
(251
|
)
|
|
|
(9.1
|
)
|
Total non-interest expense
|
|
$
|
9,766
|
|
|
$
|
9,085
|
|
|
$
|
681
|
|
|
|
7.5
|
%
|
|
$
|
28,803
|
|
|
$
|
27,522
|
|
|
$
|
1,281
|
|
|
|
4.7
|
%
|
Efficiency ratio *
|
|
|
75.0
|
%
|
|
|
78.5
|
%
|
|
|
|
|
|
|
|
|
|
|
73.8
|
%
|
|
|
76.1
|
%
|
|
|
|
|
|
|
|
|
Number of full-time equivalent employees
|
|
|
335
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Efficiency ratio
is calculated as non-interest expense as a percent of total revenue (net interest income and non-interest income).
Total non-interest
expense
increased $681,000, or 7.5%, to $9.8 million for the quarter ended September 30, 2017 compared to $9.1 million
for the quarter ended September 30, 2016, and increased $1.3 million, or 4.7%, to $28.8 million for the nine months ended September
30, 2017 compared to $27.5 million for the nine months ended September 30, 2016.
Salaries expense
increased
$236,000, or 6.2%, to $4.1 million for the quarter ended September 30, 2017 compared to $3.8 million for the quarter ended September
30, 2016, and increased $335,000, or 2.8%, to $12.1 million for the nine months ended September 30, 2017 compared to $11.8 million
for the nine months ended September 30, 2016. The increase was primarily due to an increase in personnel and annual merit increases.
Benefits expense
increased
$216,000, or 17.6%, to $1.4 million for the quarter ended September 30, 2017 compared to $1.2 million for the quarter ended September
30, 2016, and increased $268,000, or 6.8%, to $4.2 million for the nine months ended September 30, 2017 compared to $3.9 million
for the nine months ended September 30, 2016. The increase was primarily due to an increase in medical insurance premiums effective
July 1, 2017, and an increase in pension expense due to a lower discount rate.
Furniture and equipment expense
increased $326,000, or 74.4%, to $764,000 for the quarter ended September 30, 2017 compared to $438,000 for the quarter ended September
30, 2016, and increased $708,000, or 55.0%, to $2.0 million for the nine months ended September 30, 2017 compared to $1.3 million
for the nine months ended September 30, 2016. Beginning December 2016, the Company began upgrading its data processing infrastructure
to a hosted network environment. The process included changes in maintenance agreements, service providers, and equipment.
Processing, network, and bank
card expense
decreased $47,000, or 5.4%, to $831,000 for the quarter ended September 30, 2017 compared to $878,000 for
the quarter ended September 30, 2016, and increased $313,000, or 12.6%, to $2.8 million for the nine months ended September 30,
2017 compared to $2.5 million for the nine months ended September 30, 2016. The increase for both periods was primarily due to
a corporate wide network upgrade and changes in processing service providers.
FDIC insurance
assessment
decreased $90,000, or 45.9%, to $106,000 for the quarter ended September 30, 2017 compared to $196,000 for the
quarter ended September 30, 2016, and decreased $238,000, or 42.5%, to $322,000 for the nine months ended September 30, 2017 compared
to $560,000 for the nine months ended September 30, 2016. In February 2011, the FDIC adopted a rule that requires large institutions
to bear the burden of raising the reserve ratio form 1.15% to 1.35% in accordance with the Dodd-Frank Act. The quarter after the
reserve ratio reached 1.15%, lower assessment rates, surcharges, and new pricing for small institutions under $10 billion became
effective July 1, 2016 and appeared on the December 31, 2016 invoicing. Once the reserve ratio reaches 1.38%, small institutions,
such as Hawthorn, will receive credits to offset their contribution to raising the reserve ratio to 1.35%.
Real estate foreclosure expense,
net
increased $29,000, or 59.2%, to $78,000 for the quarter ended September 30, 2017 compared to $49,000 for the quarter
ended September 30, 2016, and increased $98,000, or 42.2%, to $330,000 for the nine months ended September 30, 2017 compared to
$232,000 for the nine months ended September 30, 2016. Net losses (gains) recognized on other real estate owned were $24,000 for
the quarter ended September 30, 2017 compared to $(17,000) for the quarter ended September 30, 2016, and $195,000 for the nine
months ended September 30, 2017 compared to $(64,000) for the nine months ended September 30, 2016. Expenses to maintain foreclosed
properties were $54,000 for the quarter ended September 30, 2017 compared to $64,000 for the quarter ended September 30, 2016,
and $136,000 for the nine months ended September 30, 2017 compared to $296,000 for the nine months ended September 30, 2016. The
decrease in expenses period over period was primarily due to sales of foreclosed assets.
Income taxes
Income
taxes
as a percentage of earnings before income taxes as reported in the consolidated financial statements were 32.4% for the quarter
ended September 30, 2017 compared to 34.7% for the quarter ended September 30, 2016. Income taxes as a percentage of earnings before
income taxes as reported in the consolidated financial statements were 33.6% for the nine months ended September 30, 2017 compared
to 33.8% for the nine months ended September 30, 2016. The decrease in the tax rate for the quarter ended September 30, 2017 in
comparison to the quarter ended September 30, 2016, is primarily due to an immaterial 2016 return to provision adjustment made
in the third quarter of 2017, as opposed to an immaterial 2015 return to provision adjustment made in the first quarter of 2016.
The tax rate was consistent for both the nine months ended September 30, 2017 and 2016.
Lending and Credit Management
Interest earned
on the loan portfolio is a primary source of interest income for the Company. Net loans represented 74.6% of total assets as of
September 30, 2017 compared to 74.9% as of December 31, 2016.
Lending activities
are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors. The Bank’s credit review
process is overseen by regional loan committees with established loan approval limits. In addition, a senior loan committee reviews
all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised
of senior managers of the Bank.
A summary of loans,
by major class within the Company’s loan portfolio as of the dates indicated is as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Commercial, financial, and agricultural
|
|
$
|
184,868
|
|
|
$
|
182,881
|
|
Real estate construction - residential
|
|
|
22,723
|
|
|
|
18,907
|
|
Real estate construction - commercial
|
|
|
91,102
|
|
|
|
55,653
|
|
Real estate mortgage - residential
|
|
|
250,736
|
|
|
|
259,900
|
|
Real estate mortgage - commercial
|
|
|
461,988
|
|
|
|
426,470
|
|
Installment loans to individuals
|
|
|
33,630
|
|
|
|
30,218
|
|
Total loans
|
|
$
|
1,045,047
|
|
|
$
|
974,029
|
|
Percent of categories to total loans:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
17.7
|
%
|
|
|
18.8
|
%
|
Real estate construction - residential
|
|
|
2.2
|
|
|
|
1.9
|
|
Real estate construction - commercial
|
|
|
8.7
|
|
|
|
5.7
|
|
Real estate mortgage - residential
|
|
|
24.0
|
|
|
|
26.7
|
|
Real estate mortgage - commercial
|
|
|
44.2
|
|
|
|
43.8
|
|
Installment loans to individuals
|
|
|
3.2
|
|
|
|
3.1
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The Company extends
credit to its local community market through traditional real estate mortgage products. The Company does not participate in extending
credit to sub-prime residential real estate markets. The Company does not lend funds for the type of transactions defined as “highly
leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations
of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does
not have any interest-earning assets that would have been included in nonaccrual, past due, or restructured loans if such assets
were loans.
The Company generally
does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required
by the secondary market are offered to qualified borrowers, but are not funded until the Company has a non-recourse purchase commitment
from the secondary market at a predetermined price. During the three and nine months ended September 30, 2017, the Company sold
approximately $10.1 million and $26.3 million of loans to investors, respectively, compared to $11.2 million and $28.8 million
for the three and nine months ended September 30, 2016, respectively. At September 30, 2017, the Company was servicing approximately
$288.7 million of loans sold to the secondary market compared to $294.4 million at December 31, 2016, and $299.7 million at September
30, 2016.
Risk Elements
of the Loan Portfolio
Management, the
senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established)
at least annually. Currently, loans in excess of $2.0 million in aggregate and all adversely classified credits identified by management
are reviewed. In addition, all other loans are reviewed on a sample basis. The senior loan committee reviews and reports to the
board of directors, on a monthly basis, past due, classified, and watch list loans in order to classify or reclassify loans as
loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans should be
considered impaired. Management follows the guidance provided in the FASB’s ASC Topic 310-10-35 in identifying and measuring
loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original
terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and
in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below.
Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical
loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Management
believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon
these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered
necessary by management to provide for probable losses inherent in the loan portfolio.
Nonperforming Assets
The following table summarizes nonperforming assets at
the dates indicated:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
3,005
|
|
|
$
|
982
|
|
Real estate construction - commercial
|
|
|
0
|
|
|
|
50
|
|
Real estate mortgage - residential
|
|
|
2,094
|
|
|
|
1,888
|
|
Real estate mortgage - commercial
|
|
|
943
|
|
|
|
420
|
|
Installment and other consumer
|
|
|
168
|
|
|
|
89
|
|
Total
|
|
$
|
6,210
|
|
|
$
|
3,429
|
|
Loans contractually past - due 90 days or more and still accruing:
|
|
|
|
|
|
|
|
|
Real estate mortgage - residential
|
|
$
|
117
|
|
|
$
|
54
|
|
Installment and other consumer
|
|
|
61
|
|
|
|
11
|
|
Total
|
|
$
|
178
|
|
|
$
|
65
|
|
Performing troubled debt restructurings
|
|
|
4,676
|
|
|
|
5,715
|
|
Total nonperforming loans
|
|
|
11,064
|
|
|
|
9,209
|
|
Other real estate owned and repossessed assets
|
|
|
13,177
|
|
|
|
14,162
|
|
Total nonperforming assets
|
|
$
|
24,241
|
|
|
$
|
23,371
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,045,047
|
|
|
$
|
974,029
|
|
Allowance for loan losses to loans
|
|
|
1.05
|
%
|
|
|
1.01
|
%
|
Nonperforming loans to loans
|
|
|
1.06
|
%
|
|
|
0.95
|
%
|
Allowance for loan losses to nonperforming loans
|
|
|
99.42
|
%
|
|
|
107.35
|
%
|
Allowance for loan losses to nonperforming loans, excluding performing TDR's
|
|
|
172.20
|
%
|
|
|
282.94
|
%
|
Nonperforming assets to loans, other real estate owned and repossessed assets
|
|
|
2.29
|
%
|
|
|
2.37
|
%
|
Total nonperforming
assets totaled $24.2 million at September 30, 2017 compared to $23.4 million at December 31, 2016. Nonperforming loans, defined
as loans on nonaccrual status, loans 90 days or more past due and still accruing, and TDRs totaled $11.1 million, or 1.06%, of
total loans at September 30, 2017 compared to $9.2 million, or 0.95%, of total loans at December 31, 2016. Non-accrual loans included
$1.0 million and $619,000 of loans classified as TDRs at September 30, 2017 and December 31, 2016, respectively.
As of September
30, 2017 and December 31, 2016, approximately $4.5 million and $4.0 million, respectively, of loans classified as substandard,
not included in the nonperforming asset table, were identified as potential problem loans having more than normal risk which raised
doubts as to the ability of the borrower to comply with present loan repayment terms. Management believes the general allowance
was sufficient to cover the risks and probable losses related to such loans at September 30, 2017 and December 31, 2016, respectively.
Total non-accrual
loans at September 30, 2017 increased $2.8 million to $6.2 million compared to $3.4 million at December 31, 2016. This increase
primarily consisted of a $729,000 increase in non-accrual real estate mortgage - commercial loans and real estate mortgage - residential
loans, and a $2.0 million increase in non-accrual commercial, financial, and agricultural loans primarily related to four loan
relationships totaling $1.9 million.
Loans past
due
90 days and still accruing interest at September 30, 2017, were $178,000 compared to $65,000
at December 31, 2016. Other real estate and repossessed assets at September 30, 2017 were $13.2 million compared to $14.2 million
at December 31, 2016. During the nine months ended September 30, 2017, $217,000 of nonaccrual loans, net of charge-offs taken,
moved to other real estate owned and repossessed assets compared to $2.0 million during the nine months ended September 30, 2016.
The
following table summarizes the Company’s TDRs at the dates indicated:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
(In thousands)
|
|
Number of
Contracts
|
|
|
Recorded
Investment
|
|
|
Specific
Reserves
|
|
|
Number of
Contracts
|
|
|
Recorded
Investment
|
|
|
Specific
Reserves
|
|
Performing TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
7
|
|
|
$
|
517
|
|
|
$
|
21
|
|
|
|
8
|
|
|
$
|
635
|
|
|
$
|
11
|
|
Real estate mortgage - residential
|
|
|
10
|
|
|
|
3,080
|
|
|
|
223
|
|
|
|
8
|
|
|
|
3,582
|
|
|
|
99
|
|
Real estate mortgage - commercial
|
|
|
2
|
|
|
|
1,079
|
|
|
|
115
|
|
|
|
3
|
|
|
|
1,498
|
|
|
|
123
|
|
Total performing TDRs
|
|
|
19
|
|
|
$
|
4,676
|
|
|
$
|
359
|
|
|
|
19
|
|
|
$
|
5,715
|
|
|
$
|
233
|
|
Nonperforming TDRs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural
|
|
|
2
|
|
|
$
|
194
|
|
|
$
|
8
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Real estate mortgage - residential
|
|
|
4
|
|
|
|
246
|
|
|
|
42
|
|
|
|
6
|
|
|
|
430
|
|
|
|
58
|
|
Real estate mortgage - commercial
|
|
|
4
|
|
|
|
598
|
|
|
|
122
|
|
|
|
2
|
|
|
|
189
|
|
|
|
119
|
|
Total nonperforming TDRs
|
|
|
10
|
|
|
$
|
1,038
|
|
|
$
|
172
|
|
|
|
8
|
|
|
$
|
619
|
|
|
$
|
177
|
|
Total TDRs
|
|
|
29
|
|
|
$
|
5,714
|
|
|
$
|
531
|
|
|
|
27
|
|
|
$
|
6,334
|
|
|
$
|
410
|
|
At September 30,
2017, loans classified as TDRs totaled $5.7 million, with $531,000 of specific reserves, of which $1.0 million were classified
as nonperforming TDRs and $4.7 million were classified as performing TDRs. This compared to $6.3 million of loans classified as
TDRs, with $410,000 of specific reserves, of which $619,000 were classified as nonperforming TDRs and $5.7 million were classified
as performing TDRs at December 31, 2016. Both performing and nonperforming TDRs are considered impaired loans. When an individual
loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted
at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. The net
decrease in total TDRs from December 31, 2016 to September 30, 2017 was primarily due to $811,000 of payments received partially
offset by three new TDR’s totaling $201,000.
Allowance for
Loan Losses and Provision
Allowance for
Loan Losses
The following table is a summary of the allocation of
the allowance for loan losses:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Allocation of allowance for loan losses at end of period:
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
3,406
|
|
|
$
|
2,753
|
|
Real estate construction - residential
|
|
|
146
|
|
|
|
108
|
|
Real estate construction - commercial
|
|
|
706
|
|
|
|
413
|
|
Real estate mortgage - residential
|
|
|
1,897
|
|
|
|
2,385
|
|
Real estate mortgage - commercial
|
|
|
4,457
|
|
|
|
3,793
|
|
Installment and other consumer
|
|
|
377
|
|
|
|
274
|
|
Unallocated
|
|
|
11
|
|
|
|
160
|
|
Total
|
|
$
|
11,000
|
|
|
$
|
9,886
|
|
The allowance for loan losses (ALL) was $11.0 million,
or 1.05%, of loans outstanding at September 30, 2017 compared to $9.9 million, or 1.01%, of loans outstanding at December 31, 2016,
and $9.5 million, or 1.00%, of loans outstanding at September 30, 2016. The ratio of the allowance for loan losses to nonperforming
loans, excluding performing TDR’s, was 172.20% at September 30, 2017, compared to 282.94% at December 31, 2016.
The following table is a summary of the general and specific
allocations of the allowance for loan losses:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Allocation of allowance for loan losses:
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment - specific reserves
|
|
$
|
1,738
|
|
|
$
|
1,080
|
|
Collectively evaluated for impairment - general reserves
|
|
|
9,262
|
|
|
|
8,806
|
|
Total
|
|
$
|
11,000
|
|
|
$
|
9,886
|
|
The
specific reserve component
applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair
values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected
future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At September 30, 2017,
$1.7 million of the Company’s ALL was allocated to impaired loans totaling approximately $10.9 million compared to $1.1 million
of the Company’s ALL allocated to impaired loans totaling approximately $9.1 million at December 31, 2016. Management determined
that $2.8 million, or 26%, of total impaired loans required no reserve allocation at September 30, 2017 compared to $2.1 million,
or 23%, at December 31, 2016 primarily due to adequate collateral values
,
acceptable payment
history and adequate cash flow ability.
The
incurred loss component
of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans
by asset type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent
methodology that considers historical loan loss experience by loan type. Beginning in the first quarter of 2016, the Company began
to lengthen its look-back period with the intent to increase such period from three to five years over the next two years. The
Company believes that the five-year look-back period, which is consistent with the Company’s practices prior to the start
of the economic recession in 2008, provides a representative historical loss period in the current economic environment. These
historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The
historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower
first experiencing financial difficulty and the recognition of a loss.
The Company’s methodology
includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information
available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors
are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic
conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of
past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations,
assessment of trends in collateral values, assessment of changes in the quality of the Company’s internal loan review department,
and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.
The specific and general reserve
allocations represent management’s best estimate of probable losses inherent in the loan portfolio at the evaluation date.
Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb
any credit losses.
Provision
A $555,000 and
$1.2 million provision for loan losses was required for the three and nine months ended September 30, 2017, respectively, compared
to a $300,000 and $975,000 for the three and nine months ended September 30, 2016, respectively. The Company is using a nineteen
quarter look-back period compared to fifteen quarters, as discussed above.
The following
table summarizes loan loss experience for the periods indicated:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Analysis of allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance beginning of period
|
|
$
|
10,545
|
|
|
$
|
9,392
|
|
|
$
|
9,886
|
|
|
$
|
8,604
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
|
37
|
|
|
|
157
|
|
|
|
97
|
|
|
|
295
|
|
Real estate construction - commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Real estate mortgage - residential
|
|
|
68
|
|
|
|
92
|
|
|
|
149
|
|
|
|
474
|
|
Real estate mortgage - commercial
|
|
|
4
|
|
|
|
27
|
|
|
|
20
|
|
|
|
137
|
|
Installment and other consumer
|
|
|
56
|
|
|
|
86
|
|
|
|
167
|
|
|
|
209
|
|
Total charge-offs
|
|
|
165
|
|
|
|
362
|
|
|
|
433
|
|
|
|
1,116
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial, and agricultural
|
|
$
|
12
|
|
|
$
|
26
|
|
|
$
|
55
|
|
|
$
|
203
|
|
Real estate construction - residential
|
|
|
12
|
|
|
|
-
|
|
|
|
87
|
|
|
|
-
|
|
Real estate construction - commercial
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
502
|
|
Real estate mortgage - residential
|
|
|
11
|
|
|
|
31
|
|
|
|
68
|
|
|
|
49
|
|
Real estate mortgage - commercial
|
|
|
5
|
|
|
|
36
|
|
|
|
26
|
|
|
|
128
|
|
Installment and other consumer
|
|
|
25
|
|
|
|
47
|
|
|
|
76
|
|
|
|
125
|
|
Total recoveries
|
|
|
65
|
|
|
|
140
|
|
|
|
312
|
|
|
|
1,007
|
|
Net charge-offs
|
|
|
100
|
|
|
|
222
|
|
|
|
121
|
|
|
|
109
|
|
Provision for loan losses
|
|
|
555
|
|
|
|
300
|
|
|
|
1,235
|
|
|
|
975
|
|
Balance end of period
|
|
$
|
11,000
|
|
|
$
|
9,470
|
|
|
$
|
11,000
|
|
|
$
|
9,470
|
|
Net Loan Charge-offs
The Company’s net loan charge-offs
were $100,000, or 0.01%, of average loans for the three months ended September 30, 2017, compared to net loan charge-offs of $222,000,
or 0.02%, of average loans for the three months ended September 30, 2016. The decrease in charge-offs quarter over quarter primarily
related to one commercial loan relationship recorded during the third quarter of 2016.
The Company’s net loan charge-offs
were $121,000, or 0.01%, of average loans for the nine months ended September 30, 2017, compared to net loan charge-offs of $109,000,
or 0.01%, of average loans for the nine months ended September 30, 2016. Although loan charge-offs decreased year over year, loan
recoveries also decreased from the prior year resulting in a net increase in charge-offs. During the nine months ended September
30, 2016, the Company received a significant recovery primarily related to one commercial loan relationship, along with a real
estate construction loan recovery resulting from the sale of collateral.
Liquidity and Capital Resources
Liquidity Management
The role of liquidity management
is to ensure funds are available to meet depositors' withdrawal and borrowers' credit demands while at the same time maximizing
profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity
to meet the demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract
funds from external sources, principally depositors. Due to the nature of services offered by the Company, management prefers to
focus on transaction accounts and full service relationships with customers.
The Company’s Asset/Liability
Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for the Company's liquidity position
and profile. A combination of daily, weekly, and monthly reports provided to management detail the following: internal liquidity
metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available
pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company's liquidity.
The Company has a number of sources
of funds to meet liquidity needs on a daily basis. The Company’s most liquid assets are comprised of available for sale investment
securities, federal funds sold, and excess reserves held at the Federal Reserve.
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Federal funds sold and other overnight interest-bearing deposits
|
|
$
|
41,227
|
|
|
$
|
1,406
|
|
Available-for-sale investment securities
|
|
|
212,650
|
|
|
|
214,512
|
|
Total
|
|
$
|
253,877
|
|
|
$
|
215,918
|
|
Federal funds sold and resale agreements
normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale
investment portfolio was $212.7 million at September 30, 2017 and included an unrealized net loss of $1.5 million. The portfolio
includes projected maturities and mortgage backed securities pay-downs of approximately $46.1 million over the next twelve months,
which offer resources to meet either new loan demand or reductions in the Company’s deposit base.
The Company pledges portions of
its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements
to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes required by law. At September 30, 2017 and
December 31, 2016, the Company’s unpledged securities in the available for sale portfolio totaled approximately $39.6 million
and $46.9 million, respectively.
Total investment securities pledged
for these purposes were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Investment securities pledged for the purpose of securing:
|
|
|
|
|
|
|
|
|
Federal Reserve Bank borrowings
|
|
$
|
10,131
|
|
|
$
|
9,211
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
45,205
|
|
|
|
43,054
|
|
Other deposits
|
|
|
117,749
|
|
|
|
115,330
|
|
Total pledged, at fair value
|
|
$
|
173,085
|
|
|
$
|
167,595
|
|
Liquidity is available from the
Company’s base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and
time deposits less than $250,000, less all brokered deposits under $250,000. At September 30, 2017, such deposits totaled $977.1
million and represented 88.2% of the Company’s total deposits. These core deposits are normally less volatile and are often
tied to other products of the Company through long lasting relationships. Time deposits and certificates of deposit of $250,000
and over totaled $130.8 million at September 30, 2017. These accounts are normally considered more volatile and higher costing
representing 11.8% of total deposits at September 30, 2017.
Core deposits at September 30, 2017
and December 31, 2016 were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Core deposit base:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
259,457
|
|
|
$
|
235,975
|
|
Interest checking
|
|
|
201,317
|
|
|
|
177,414
|
|
Savings and money market
|
|
|
318,150
|
|
|
|
276,295
|
|
Other time deposits
|
|
|
198,189
|
|
|
|
206,088
|
|
Total
|
|
$
|
977,113
|
|
|
$
|
895,772
|
|
Other components of liquidity are
the level of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings
are comprised of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and subordinated notes. Federal
funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved
credit lines. As of September 30, 2017, under agreements with these unaffiliated banks, the Bank may borrow up to $40.0 million
in federal funds on an unsecured basis and $17.9 million on a secured basis. There were no federal funds purchased outstanding
at September 30, 2017. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion
of the Company’s investment portfolio. At September 30, 2017, there was $32.6 million in repurchase agreements. The Company
may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window; although no such
borrowings were outstanding at September 30, 2017.
The Bank is a member of the Federal
Home Loan Bank of Des Moines (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. As of September
30, 2017, the Bank had $89.4 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding
subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.
Borrowings outstanding at September
30, 2017 and December 31, 2016 were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
(In thousands)
|
|
2017
|
|
|
2016
|
|
Borrowings:
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
$
|
32,555
|
|
|
$
|
31,015
|
|
Subordinated notes
|
|
|
49,486
|
|
|
|
49,486
|
|
Federal Home Loan Bank advances
|
|
|
89,408
|
|
|
|
92,900
|
|
Other borrowings
|
|
|
-
|
|
|
|
492
|
|
Total
|
|
$
|
171,449
|
|
|
$
|
173,893
|
|
The Company pledges certain assets,
including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish
lines of credit and borrow from these entities. Based on the type and value of collateral pledged, the FHLB establishes a collateral
value from which the Company may draw advances against this collateral. This collateral is also used to enable the FHLB to issue
letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value
of assets pledged to support borrowings from the discount window. The following table reflects collateral value of assets pledged,
borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as
follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
(In thousands)
|
|
FHLB
|
|
|
Federal
Reserve
Bank
|
|
|
Federal
Funds
Purchased
Lines
|
|
|
Total
|
|
|
FHLB
|
|
|
Federal
Reserve
Bank
|
|
|
Federal
Funds
Purchased
Lines
|
|
|
Total
|
|
Advance equivalent
|
|
$
|
312,610
|
|
|
$
|
9,916
|
|
|
$
|
47,935
|
|
|
$
|
370,461
|
|
|
$
|
314,602
|
|
|
$
|
9,015
|
|
|
$
|
49,020
|
|
|
$
|
372,637
|
|
Letters of credit
|
|
|
(25,000
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(25,000
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Advances outstanding
|
|
|
(89,408
|
)
|
|
|
0
|
|
|
|
0
|
|
|
|
(89,408
|
)
|
|
|
(92,900
|
)
|
|
|
0
|
|
|
|
(992
|
)
|
|
|
(93,892
|
)
|
Total available
|
|
$
|
198,202
|
|
|
$
|
9,916
|
|
|
$
|
47,935
|
|
|
$
|
256,053
|
|
|
$
|
221,702
|
|
|
$
|
9,015
|
|
|
$
|
48,028
|
|
|
$
|
278,745
|
|
At September 30, 2017, loans of
$490.8 million were pledged at the Federal Home Loan Bank as collateral for borrowings and letters of credit. At September 30,
2017, investments totaling $20.4 million were pledged to secure federal funds purchased lines and borrowing capacity at the Federal
Reserve Bank.
Sources and Uses of Funds
Cash and cash equivalents were $60.4
million at September 30, 2017 compared to $27.0 million at December 31, 2016. The $33.4 million increase resulted from changes
in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying
consolidated statement of cash flows for the nine months ended September 30, 2017. Cash flow provided from operating activities
consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $8.6 million for
the nine months ended September 30, 2017.
Investing activities consisting
mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio used
total cash of $68.3 million. The cash outflow primarily consisted of a $70.6 million increase in loans and $32.3 million purchases
of investment securities, partially offset by $34.5 million from maturities, calls and sales of investment securities.
Financing activities provided cash
of $93.2 million, resulting primarily from a $23.5 million increase in demand deposits, a $70.8 million increase in interest bearing
transaction accounts. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during
2017.
In the normal course of business,
the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit.
These transactions are managed through the Company's various risk management processes. Management considers both on-balance sheet
and off-balance sheet transactions in its evaluation of the Company's liquidity. The Company had $244.1 million in unused loan
commitments and standby letters of credit as of September 30, 2017. Although the Company's current liquidity resources are adequate
to fund this commitment level the nature of these commitments is such that the likelihood of such a funding demand is very low.
The Company is a legal entity, separate
and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing
liquidity needs primarily include funding its operating expenses and paying cash dividends to its shareholders. The Company paid
cash dividends to its shareholders totaling approximately $1.1 million and $815,000 for the nine months ended September 30, 2017
and 2016, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The
Bank declared and paid a $2.6 million dividend to the Company during the nine months ended September 30, 2017 compared to no dividends
were declared or paid for the same period of 2016. At September 30, 2017 and December 31, 2016, the Company had cash and cash equivalents
totaling $2.8 million and $3.9 million, respectively.
Capital Management
The Company and the Bank are subject
to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines,
the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification
of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other
factors.
In July 2013, the federal banking
agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
The phase-in period for the Company began on January 1, 2015. The Federal Reserve System’s (FRB) capital adequacy guidelines
require that bank holding companies maintain a Common Equity Tier 1 risk-based capital ratio equal to at least 4.5% of its risk-weighted
assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital ratio
equal to at least 8% of its risk-weighted assets. In addition, bank holding companies generally are required to maintain a Tier
1 leverage ratio of at least 4%.
In addition, the final rules establish
a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. Institutions
that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage
of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior
executive management. The capital conservation buffer requirement will be phased in over four years beginning in 2016. On January
1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and the requirement will increase
each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk weighted assets on January
1, 2019. Once fully phase in , the capital conservation buffer requirement effectively raises the minimum required risk-based capital
ratios to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.
Under the Basel III requirements,
at September 30, 2017 and December 31, 2016, the Company met all capital adequacy requirements and had regulatory capital ratios
in excess of the levels established for well-capitalized institutions, as shown in the following table as of periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Well-Capitalized Under
|
|
|
|
|
|
|
|
|
|
Required for Capital
|
|
|
Prompt Corrective Action
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Provision
|
|
(in thousands)
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
158,007
|
|
|
|
13.42
|
%
|
|
$
|
94,201
|
|
|
|
8.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
154,448
|
|
|
|
13.16
|
|
|
|
93,874
|
|
|
|
8.00
|
|
|
|
117,343
|
|
|
|
10.00
|
|
Tier I Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
131,479
|
|
|
|
11.17
|
%
|
|
$
|
70,650
|
|
|
|
6.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
143,288
|
|
|
|
12.21
|
|
|
|
70,406
|
|
|
|
6.00
|
|
|
|
93,874
|
|
|
|
8.00
|
|
Common Equity Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
98,847
|
|
|
|
8.39
|
%
|
|
$
|
52,988
|
|
|
|
4.50
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
143,288
|
|
|
|
12.21
|
|
|
|
52,804
|
|
|
|
4.50
|
|
|
|
76,273
|
|
|
|
6.50
|
|
Tier I Capital (to adjusted average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
131,479
|
|
|
|
9.62
|
%
|
|
$
|
54,682
|
|
|
|
4.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
143,288
|
|
|
|
10.52
|
|
|
|
54,503
|
|
|
|
4.00
|
|
|
|
68,129
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(
in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
152,864
|
|
|
|
13.88
|
%
|
|
$
|
88,125
|
|
|
|
8.00
|
%
|
|
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
148,304
|
|
|
|
13.51
|
|
|
|
87,810
|
|
|
|
8.00
|
|
|
$
|
109,763
|
|
|
|
10.00
|
|
Tier I Capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
125,779
|
|
|
|
11.42
|
%
|
|
$
|
66,093
|
|
|
|
6.00
|
%
|
|
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
138,258
|
|
|
|
12.60
|
|
|
|
65,858
|
|
|
|
6.00
|
|
|
$
|
87,810
|
|
|
|
8.00
|
|
Common Equity Tier I Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
94,818
|
|
|
|
8.61
|
%
|
|
$
|
49,570
|
|
|
|
4.50
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
138,258
|
|
|
|
12.60
|
|
|
|
49,393
|
|
|
|
4.50
|
|
|
|
71,346
|
|
|
|
6.50
|
|
Tier I capital (to adjusted average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
$
|
125,779
|
|
|
|
9.87
|
%
|
|
$
|
50,998
|
|
|
|
4.00
|
%
|
|
$
|
N.A.
|
|
|
|
N.A.
|
%
|
Bank
|
|
|
138,258
|
|
|
|
10.88
|
|
|
|
50,810
|
|
|
|
4.00
|
|
|
|
63,513
|
|
|
|
5.00
|
|