Attached files
file | filename |
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10-K - FORM 10-K - HAWTHORN BANCSHARES, INC. | c63754e10vk.htm |
EX-23 - EX-23 - HAWTHORN BANCSHARES, INC. | c63754exv23.htm |
EX-31.1 - EX-31.1 - HAWTHORN BANCSHARES, INC. | c63754exv31w1.htm |
EX-32.1 - EX-32.1 - HAWTHORN BANCSHARES, INC. | c63754exv32w1.htm |
EX-32.2 - EX-32.2 - HAWTHORN BANCSHARES, INC. | c63754exv32w2.htm |
EX-99.1 - EX-99.1 - HAWTHORN BANCSHARES, INC. | c63754exv99w1.htm |
EX-99.2 - EX-99.2 - HAWTHORN BANCSHARES, INC. | c63754exv99w2.htm |
EX-31.2 - EX-31.2 - HAWTHORN BANCSHARES, INC. | c63754exv31w2.htm |
Exhibit 13
2010
ANNUAL REPORT
TO
ANNUAL REPORT
TO
SHAREHOLDERS
HAWTHORN BANCSHARES, INC.
Lees Summit, Missouri
March 30, 2011
Dear Investors:
For 2010, our company reported a net loss available to common shareholders of $5.5 million compared
to a net profit of $3.0 million for 2009. On a per share basis, this equates to a net loss of $1.24
per common share.
The net loss for 2010 was driven primarily by expenses related to adjusting our other real estate
owned properties to fair value based on current appraisals and increased provision for loan losses
to address continued deteriorating asset quality within the existing portfolio (increases in
non-accrual loans, charge-offs, and foreclosures) particularly within the real estate construction
and real estate mortgage segments of the portfolio. Other real estate expenses (which included
impairment valuation write-downs) and loan loss provisions for 2010 increased over 2009 by $8.6
million and $6.9 million, respectively.
It is difficult to overcome such downward pressure on earnings; but the core performance of
Hawthorn remains strong and has even improved in recent years due to 2010s net interest margin
increasing to 3.78% from 2009s margin of 3.50%. I am pleased with our core growth and the work
staff has done to enhance margin dollars. Our success in this area has allowed us to absorb the
negative financial impact of the recession to a large extent.
With over 30 years of banking experience, I recognize that the sustainability of a bank is centered
on asset quality, capital strength and liquidity. Asset quality has been our biggest challenge
during the last couple of years. Hawthorns level of non-performing loans increased to 6.27% of
total loans at year-end 2010, up from 4.27% at year-end 2009 and this is clearly not acceptable.
The economic downturn and elevated unemployment rates in our market areas have impaired the ability
for some of our customers to make payments in accordance with contractual terms. As such, Hawthorn
has taken an active approach to obtain current appraisals so that market valuations can be used in
determining probable loan losses. Although Im disappointed by the increased credit losses and the
elevated level of non-performing loans, we are working diligently to limit losses, as well as
identify and resolve credit issues in a timely manner. These efforts are evidenced in the increased
volume of foreclosures and gross loan charge-offs realized during 2010. Loans taken into
foreclosure (other real estate owned) during 2010 totaled $23.7 million and gross charge-offs were
$16.2 million during the same period. Comparatively, transfers to other real estate during 2009
totaled $7.0 million and gross charge-offs were $6.8 million.
Hawthorns total risk-based capital was 17.05% at year end 2010 and our leverage capital was 11.00%
for the same period. As such, Hawthorn is classified as a well-capitalized bank by regulatory
definition. We are disappointed that 2010 earnings were not positive; however, lowering the
dividend rate and restricting asset growth enabled our capital levels to remain strong. In 2008, we
participated in the U.S. Treasurys Capital Purchase Program (commonly called TARP) which added
$30.3 million in additional capital to the company. As of December 31, 2010, inclusion of the TARP
funds in Hawthorns capital structure increased total risk-based capital from 13.95% to 17.05%.
While Hawthorn would continue to exceed regulatory well-capitalized levels if the TARP funds were
repaid, more evidence supporting an economic recovery is needed before it would be prudent to
eliminate the capital cushion provided by the TARP program.
With liquid assets totaling $208 million, Hawthorn has a strong liquidity position.
As I take over the role as chairman and chief executive officer of Hawthorn, I want to emphasize
that Hawthorn has a solid future. With strong core earnings, Hawthorn is fundamentally strong and
as the economy rebounds, we anticipate loan loss provisions and other real estate expenses will
return to pre-recessionary levels.
Sincerely,
David T. Turner
Chairman, Chief Executive Officer,
and President
A WORD CONCERNING 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 our Company and its
subsidiaries, including, without limitation:
| statements that are not historical in nature, and |
| statements preceded by, followed by or that include the words believes, expects, may, will, should, could, anticipates, estimates, intends or similar expressions. |
Forward-looking statements are not guarantees of future performance or results. They involve
risks, uncertainties and assumptions. Actual results may differ materially from those contemplated
by the forward-looking statements due to, among others, the following factors:
| competitive pressures among financial services companies may increase significantly, |
| changes in the interest rate environment may reduce interest margins, |
| general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets, |
| increases in non-performing assets in our 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 Hawthorn and its acquisition targets may be greater than expected, |
| legislative or regulatory changes may adversely affect the business in which Hawthorn and its subsidiaries are engaged, and |
| changes may occur in the securities markets. |
We have described under the caption Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2010, and in other reports that we file 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 we have not identified in this report could
also have this effect. You are cautioned not to put undue reliance on any forward-looking
statement, which speak only as of the date they were made.
3
HAWTHORN BANCSHARES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Through its branch network, our Company, Hawthorn Bancshares, Inc., provides a broad range of
commercial and personal banking services, including certificates of deposit, individual retirement
and other time deposit accounts, checking and other demand deposit accounts, interest checking
accounts, savings accounts, and money market accounts. We also provide a wide range of lending
services, including real estate, commercial, installment, and other consumer loans. Other financial
services that we provide include automatic teller machines, trust services, credit related
insurance, and safe deposit boxes. The geographic areas in which we provide our products and
services include the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield,
Branson and Lees Summit, Missouri. The products and services are offered to customers primarily
within these geographical areas.
Our Companys primary source of revenue is net interest income derived primarily from lending
and deposit taking activities. A secondary source of revenue is investment income. Our Company also
derives income from trust, brokerage, credit card and mortgage banking activities and service
charge income.
Much of our Companys business is commercial, commercial real estate development, and mortgage
lending. Our Company has experienced soft loan demand in the communities within which we operate
during the current economic slowdown. Our Companys income from mortgage brokerage activities is
directly dependent on mortgage rates and the level of home purchases and refinancings.
The successes of our Companys growth strategy depends primarily on the ability of our 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. Our Companys financial performance also depends, in part, on our 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 our Companys growth strategy depends on our
ability to maintain sufficient regulatory capital levels during general economic conditions and
during economic conditions that are beyond our control.
Our 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, our Bank provides trust services.
The deposit accounts of our Bank are insured by the Federal Deposit Insurance Corporation or
FDIC to the extent provided by law. The operations of our Bank are supervised and regulated by
the FDIC and the Missouri Division of Finance. Periodic examinations of our 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. Hawthorn Bancshares is subject to supervision and examination by the Federal Reserve
Board.
Except as otherwise provided herein, references herein to Hawthorn or our Company include
Hawthorn and its consolidated subsidiaries, and references herein to our Bank refers to Hawthorn
Bank and its constituent predecessors.
4
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial information for our Company as of
and for each of the years in the five-year period ended December 31, 2010. The selected
consolidated financial data should be read in conjunction with the Consolidated Financial
Statements of our Company, including the related notes, presented elsewhere herein.
Income Statement Data
(In thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Interest income |
$ | 58,739 | $ | 63,562 | $ | 69,715 | $ | 74,207 | $ | 71,423 | ||||||||||
Interest expense |
15,753 | 22,974 | 31,599 | 37,175 | 32,766 | |||||||||||||||
Net interest income |
42,986 | 40,588 | 38,116 | 37,032 | 38,657 | |||||||||||||||
Provision for loan losses |
15,255 | 8,354 | 8,211 | 1,154 | 1,326 | |||||||||||||||
Net interest income after
provision for loan losses |
27,731 | 32,234 | 29,905 | 35,878 | 37,331 | |||||||||||||||
Non-interest income |
10,481 | 10,702 | 9,294 | 10,223 | 8,618 | |||||||||||||||
Security gains (losses), net |
| 606 | 3 | (2 | ) | (18 | ) | |||||||||||||
Total non-interest income |
10,481 | 11,308 | 9,297 | 10,221 | 8,600 | |||||||||||||||
Non-interest expense |
44,851 | 36,730 | 75,975 | 35,054 | 30,148 | |||||||||||||||
Income (loss) before income
taxes |
(6,639 | ) | 6,812 | (36,773 | ) | 11,045 | 15,783 | |||||||||||||
Income tax (benefit) expense |
(3,087 | ) | 1,856 | (6,146 | ) | 3,245 | 4,908 | |||||||||||||
Net (loss) income |
(3,552 | ) | 4,956 | (30,627 | ) | 7,800 | 10,875 | |||||||||||||
Less: preferred stock
dividends |
1,513 | 1,517 | 50 | | | |||||||||||||||
and accretion of discount
on preferred stock |
476 | 477 | 16 | | | |||||||||||||||
Net (loss) income available to
common shareholders |
$ | (5,541 | ) | $ | 2,962 | $ | (30,693 | ) | $ | 7,800 | $ | 10,875 | ||||||||
Dividends on Common Stock |
||||||||||||||||||||
Declared |
$ | 1,136 | $ | 2,270 | $ | 3,486 | $ | 3,504 | $ | 3,503 | ||||||||||
Paid |
1,385 | 2,666 | 3,486 | 3,504 | 3,503 | |||||||||||||||
Ratio of total dividends
declared to net income |
N.M. | 76.64 | % | N.M. | 44.92 | % | 32.21 | % | ||||||||||||
Per Share Data |
||||||||||||||||||||
Basic (loss) earnings per
common share |
$ | (1.24 | ) | $ | 0.66 | $ | (6.83 | ) | $ | 1.73 | $ | 2.41 | ||||||||
Diluted (loss) earnings per
common share |
(1.24 | ) | 0.66 | (6.83 | ) | 1.71 | 2.39 | |||||||||||||
Basic weighted average shares
of common stock outstanding |
4,474,033 | 4,474,033 | 4,494,856 | 4,511,975 | 4,510,107 | |||||||||||||||
Diluted weighted average
shares of
common stock outstanding |
4,474,033 | 4,474,033 | 4,494,856 | 4,551,139 | 4,544,577 | |||||||||||||||
N.M. not meaningful
5
(In thousands, except per share data) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Balance Sheet Data (at period end) |
||||||||||||||||||||
Total assets |
$ | 1,200,172 | $ | 1,236,471 | $ | 1,279,699 | $ | 1,195,804 | $ | 1,142,712 | ||||||||||
Loans |
898,472 | 991,614 | 1,009,104 | 911,278 | 812,312 | |||||||||||||||
Investment securities |
178,978 | 152,927 | 149,401 | 151,742 | 183,566 | |||||||||||||||
Total deposits |
946,663 | 956,323 | 955,296 | 921,257 | 899,865 | |||||||||||||||
Subordinated notes |
49,486 | 49,486 | 49,486 | 49,486 | 49,486 | |||||||||||||||
Other borrowed money |
66,986 | 79,317 | 129,057 | 77,915 | 47,368 | |||||||||||||||
Common stockholders equity |
72,647 | 79,406 | 78,530 | 111,199 | 104,945 | |||||||||||||||
Total stockholders equity |
101,488 | 107,771 | 106,418 | 111,199 | 104,945 | |||||||||||||||
Balance Sheet Data (average balances) |
||||||||||||||||||||
Total assets |
$ | 1,236,841 | $ | 1,258,381 | $ | 1,251,496 | $ | 1,156,500 | $ | 1,146,150 | ||||||||||
Loans |
949,458 | 1,002,830 | 963,252 | 848,771 | 824,706 | |||||||||||||||
Investment securities |
165,213 | 151,907 | 156,870 | 171,179 | 182,902 | |||||||||||||||
Total deposits |
967,970 | 977,826 | 914,218 | 921,257 | 899,865 | |||||||||||||||
Subordinated notes |
49,486 | 49,486 | 49,486 | 49,486 | 49,486 | |||||||||||||||
Other borrowed money |
70,456 | 78,626 | 124,025 | 53,626 | 56,757 | |||||||||||||||
Common stockholders equity |
80,735 | 79,828 | 112,307 | 108,052 | 100,821 | |||||||||||||||
Total stockholders equity |
109,323 | 107,938 | 113,375 | 108,052 | 100,821 | |||||||||||||||
Key Ratios |
||||||||||||||||||||
Earnings Ratios |
||||||||||||||||||||
(Loss) return on average total assets |
(0.29 | )% | 0.39 | % | (2.45 | )% | 0.67 | % | 0.95 | % | ||||||||||
(Loss) return on average
common stockholders equity |
(6.86 | ) | 3.71 | (27.33 | ) | 7.22 | 10.79 | |||||||||||||
Efficiency ratio (3) |
83.89 | 71.61 | 160.25 | 74.18 | 63.80 | |||||||||||||||
Asset Quality Ratios |
||||||||||||||||||||
Allowance for loan losses to loans |
1.62 | 1.49 | 1.26 | 1.02 | 1.11 | |||||||||||||||
Nonperforming loans to loans (1) |
6.27 | 4.27 | 2.46 | 0.67 | 0.62 | |||||||||||||||
Allowance for loan losses to
nonperforming loans (1) |
25.87 | 34.94 | 50.94 | 152.54 | 177.95 | |||||||||||||||
Nonperforming assets to loans
and foreclosed assets (2) |
7.71 | 5.08 | 3.21 | 0.92 | 0.96 | |||||||||||||||
Net loan charge-offs to average loans |
1.63 | 0.62 | 0.50 | 0.10 | 0.17 | |||||||||||||||
Capital Ratios |
||||||||||||||||||||
Average stockholders equity to
average total assets |
8.84 | % | 8.58 | % | 9.06 | % | 9.34 | % | 8.80 | % | ||||||||||
Period-end common stockholders
equity to period-end assets
|
6.05 | 6.42 | 6.14 | 9.30 | 9.18 | |||||||||||||||
Period-end stockholders equity to
period-end assets |
8.46 | 8.72 | 8.32 | 9.30 | 9.18 | |||||||||||||||
Total risk-based capital ratio |
17.05 | 16.49 | 16.01 | 13.24 | 13.84 | |||||||||||||||
Tier 1 risk-based capital ratio |
14.25 | 14.01 | 13.55 | 11.08 | 11.28 | |||||||||||||||
Leverage ratio |
11.00 | 11.35 | 10.80 | 9.12 | 8.77 | |||||||||||||||
(1) | Nonperforming loans consist of nonaccrual loans, troubled debt restructurings, and loans contractually past due 90 days or more and still accruing interest. | |
(2) | Nonperforming assets consist of nonperforming loans and foreclosed assets. | |
(3) | Efficiency ratio is calculated as non-interest expense as a percent of revenue. Total revenue includes net interest income and non-interest income. |
6
CRITICAL ACCOUNTING POLICIES
The following accounting policies are considered most critical to the understanding of our
Companys financial condition and results of operations. These critical accounting policies require
managements 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 our critical accounting
policies on our business operations is discussed throughout Managements Discussion and Analysis
of Financial Condition and Results of Operations, where such polices affect our reported and
expected financial results. For a detailed discussion on the application of these and other
accounting policies, see Note 1 to our Companys consolidated financial statements.
Allowance for Loan Losses
We have identified the accounting policy related to the allowance for loan losses as critical
to the understanding of our Companys 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 our business operations is provided in Note 1 to our Companys
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.
Income Taxes
Income taxes are accounted for under the asset / liability method by recognizing the amount of
taxes payable or refundable for the current period and deferred tax assets and liabilities for
future tax consequences of events that been that have been recognized in an entitys financial
statements or tax returns. Judgment is required in addressing our Companys future tax consequences
of events that have been recognized in our consolidated financial statements or tax returns such as
realization of the effects of temporary differences, net operating loss carry forward, and changes
in tax laws or interpretations thereof. A valuation allowance is established when in the judgment
of management, it is more likely than not that such deferred tax assets will not become realizable.
In this case, our Company would adjust the recorded value of our deferred tax asset, which would
result in a direct charge to income tax expense in the period that the determination was made.
Given the sensitivity of the Companys financial performance to changes in net interest margins and
increasing reserves associated with loan losses and other real estate owned, sustained negative
financial performance could provide sufficient negative evidence to necessitate a deferred tax
asset valuation allowance. In addition, our Company is subject to the continuous examination of our
tax returns by the Internal Revenue Service and other taxing authorities. Our Company accrues for
interest related to income taxes in income tax expense. Total interest expense recognized was
$24,000 and $53,000 in 2010 and 2009, respectively. As of December 31, 2010 and 2009, total accrued
interest was $31,000 and $94,000, respectively.
Goodwill and Intangible Assets
Goodwill and intangible assets that have indefinite useful lives are not amortized,
but tested annually for impairment. Intangible assets that have finite useful lives, such as core
deposit intangibles and mortgage servicing rights, are amortized over their estimated useful lives.
Core deposit intangibles are amortized over periods of 7 to 8 years representing their estimated
lives using straight line and accelerated methods. Mortgage servicing rights are amortized using
straight line over the shorter of 7 years or the life of the loan.
When facts and circumstances indicate potential impairment of amortizable intangible assets,
our Company evaluates the recoverability of the carrying value based upon future cash flows
expected to result from the use of the underlying asset and its eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) is less than the
carrying value of the underlying asset, the Company recognizes an impairment loss. The impairment
loss recognized represents the amount by which the carrying value of the underlying asset exceeds
the fair
7
value of the underlying asset. As a result of the 2008 annual review, our Company
determined that goodwill was fully impaired and recorded an impairment charge of $40,323,775,
before tax.
Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets consist of loan collateral which 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 owned assets are initially recorded as held for sale at the lower of
the loan balance or 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. 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 a parcel of other real estate.
RESULTS OF OPERATIONS ANALYSIS
Our 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, our 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.
$ Change | % Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 10-09 | 09-08 | 10-09 | 09-08 | |||||||||||||||||||||
Net interest income |
$ | 42,986 | $ | 40,588 | $ | 38,116 | $ | 2,398 | $ | 2,472 | 5.9 | % | 6.5 | % | ||||||||||||||
Provision for loan losses |
15,255 | 8,354 | 8,211 | 6,901 | 143 | 82.6 | 1.7 | |||||||||||||||||||||
Noninterest income |
10,481 | 10,702 | 9,294 | (221 | ) | 1,408 | (2.1 | ) | 15.1 | |||||||||||||||||||
Investment securities
gains (losses), net |
| 606 | 3 | (606 | ) | 603 | NM | 20,100.0 | ||||||||||||||||||||
Noninterest expense |
44,851 | 36,730 | 75,975 | 8,121 | (39,245 | ) | 22.1 | (51.7 | ) | |||||||||||||||||||
(Loss) income before
income taxes |
(6,639 | ) | 6,812 | (36,773 | ) | (13,451 | ) | 43,585 | 197.5 | (118.5 | ) | |||||||||||||||||
Income tax (benefit)
expense |
(3,087 | ) | 1,856 | (6,146 | ) | (4,943 | ) | 8,002 | 266.3 | (130.2 | ) | |||||||||||||||||
Net (loss) income |
$ | (3,552 | ) | $ | 4,956 | $ | (30,627 | ) | $ | (8,508 | ) | $ | 35,583 | 171.7 | % | (116.2 | )% | |||||||||||
Less: preferred dividends |
1,513 | 1,517 | 50 | (4 | ) | 1,467 | | | ||||||||||||||||||||
and accretion of
discount |
476 | 477 | 16 | (1 | ) | 461 | | | ||||||||||||||||||||
Net (loss) income
available
to common shareholders |
$ | (5,541 | ) | $ | 2,962 | $ | (30,693 | ) | $ | (8,503 | ) | $ | 33,655 | 287.1 | % | (109.7 | )% | |||||||||||
Our Companys consolidated net loss of ($3,552,000) for the year ended December 31, 2010
decreased $8,508,000 compared to net income of $4,956,000 for the year ended December 31, 2009. Our
Company recorded preferred stock dividends and accretion on preferred stock of $1,989,000 for the
year ended December 31, 2010, resulting in a ($5,541,000) net loss available for common
shareholders compared to net income of $2,962,000 for the year ended December 31, 2009. Diluted
earnings per share decreased from $0.66 per common share to ($1.24) per common share. Results for
the year ended December 31, 2010 were negatively impacted by the $15,255,000 provision for loan
losses compared to $8,354,000 for the same time period in 2009. Our Company also recorded a
$6,158,000 valuation allowance for other real estate owned during the fourth quarter that
significantly increased noninterest expense. For the year ended December 31, 2010, the return on
average assets was (0.29)%, the return on average stockholders equity was (6.86)%, and the
efficiency ratio was 83.9%. Net interest margin increased from 3.50% to 3.78%. Net interest income,
on a tax equivalent basis, increased $2,317,000, or 8.0%, from 2009 to 2010.
Our Companys consolidated net income of $4,956,000 for the year ended December 31, 2009
increased $35,583,000 compared to a loss of $(30,627,000) for the year ended December 31, 2008. Our
Company recorded
8
preferred stock dividends of $1,994,000 for the year ended December 31, 2009,
resulting in $2,962,000 of net income available to common shareholders compared to a net loss of
$(30,693,000) for the year ended December 31, 2008. Diluted earnings per share increased from
$(6.83) per common share to $0.66 per common share. This $33,655,000 increase from 2008 is
primarily due to a one time $40,324,000 ($33,211,000 after tax) goodwill impairment charge to
income taken in the fourth quarter of 2008. Excluding this one time goodwill impairment charge, net
income available for the common shareholders increased $444,000 from $2,518,000 to $2,962,000. This
non-GAAP measure of operating results is discussed more fully below. Our Company did experience
substantial real estate refinancing activity in 2009, which contributed additional revenues of
approximately $2,001,000. However, this was offset by an industry-wide increase in FDIC insurance
assessments. Our Company paid insurance assessments of $2,519,000 during 2009 in comparison to
$204,000 during 2008. For the year ended December 31, 2009, the return on average assets was 0.39%,
the return on average common shareholders equity was 3.71%, and the efficiency ratio was 71.6%.
Net interest margin increased from 3.42% to 3.50%. Net interest income, on a tax equivalent basis,
increased $2,353,000 or 6.0% from 2008 to 2009.
Total assets at December 31, 2010 were $1,200,172,000, compared to $1,236,471,000 at December
31, 2009, a decrease of $36,298,000, or 2.9%. On July 1, 2010, our Company distributed a four
percent stock dividend for the second consecutive year to common shareholders of record at the
close of business May 19, 2010. For all periods presented, share information, including basic and
diluted earnings (loss) per share, have been adjusted retroactively to reflect the change.
Comparison of GAAP and Non-GAAP Information
As a supplement to our U.S. GAAP financial results, our Company has provided non-GAAP
operating results for the years ended December 31, 2009 and 2008. Our Company believes that these
non-GAAP financial measures are useful because they allow investors to assess, on a consistent
basis, our Companys performance exclusive of items management believes are not indicative of the
operations of our Company. Management uses non-GAAP financial measures to evaluate financials
results and to establish operational goals. These non-GAAP financial measures should be considered
a supplement to, and not a substitute for, financial measures determined in accordance with GAAP.
The non-GAAP measures presented below exclude the non-recurring pre-tax charge to write-off our
entire goodwill in the fourth quarter of 2008 which is explained in more detail in the
Non-interest Income and Expense section of this discussion and Note 6 to our Companys
consolidated financial statements.
$ Change | % Change | |||||||||||||||
(Dollars in thousands) | 2009 | 2008 | 09-08 | 09-08 | ||||||||||||
Non-interest expense (GAAP) |
$ | 36,730 | $ | 75,975 | $ | (39,245 | ) | (0.5 | )% | |||||||
Goodwill impairment |
| (40,324 | ) | 40,324 | N.M | |||||||||||
Non-interest expense (non-GAAP) |
36,730 | 35,651 | 1,079 | 3.0 | ||||||||||||
Net (loss) income (GAAP) |
$ | 4,956 | $ | (30,627 | ) | $ | 35,583 | (116.2 | )% | |||||||
Goodwill impairment, net of tax effect |
| 33,211 | (33,211 | ) | N.M | |||||||||||
Less: preferred dividends |
1,517 | 50 | 1,467 | N.M | ||||||||||||
and accretion of discount |
477 | 16 | 461 | N.M | ||||||||||||
Net income available to
common shareholders (non-GAAP) |
$ | 2,962 | $ | 2,518 | $ | 444 | 17.6 | % | ||||||||
GAAP basis: |
||||||||||||||||
Basic earnings (loss) per share |
$ | 0.66 | $ | (6.83 | ) | $ | 7.49 | (109.7 | )% | |||||||
Diluted earnings (loss) per share |
0.66 | (6.83 | ) | 7.49 | (109.7 | ) | ||||||||||
Return (loss) on average assets |
0.39 | % | (2.45 | )% | ||||||||||||
Return (loss) on average common equity |
3.71 | % | (27.33 | )% | ||||||||||||
Efficiency ratio |
71.61 | % | 160.25 | % | ||||||||||||
Non-GAAP basis: |
||||||||||||||||
Basic earnings per share |
$ | 0.66 | $ | 0.56 | $ | 0.10 | 17.9 | % | ||||||||
Diluted earnings per share |
0.66 | 0.56 | 0.10 | 17.9 | ||||||||||||
Return on average assets |
0.39 | % | 0.20 | % | ||||||||||||
Return on average common equity |
3.71 | % | 2.24 | % | ||||||||||||
Efficiency ratio |
71.61 | % | 75.20 | % | ||||||||||||
9
Comparison of years ending 2009 and 2008 Non-GAAP results:
Based on non-GAAP operating results as shown above, our Companys diluted earnings per common
share were $0.66 in 2009 compared to $0.56 in 2008. Consolidated net income for 2009 was
$2,962,000, compared to $2,518,000 in 2008. Return on average total assets increased from 0.20% in
2008 to 0.39% in 2009, and return on average common equity decreased from 2.24% in 2008 to 3.71% in
2009. The efficiency ratio was 71.6% in 2009 compared with 75.2% in 2008.
Net Interest Income
Net interest income is the largest source of revenue resulting from our Companys 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.
Average Balance Sheets
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 years in the three year period
ended December 31, 2010.
10
(Dollars In thousands) | 2010 | 2009 | 2008 | ||||||||||||||||||||||||||||||||||
Interest | Rate | Interest | Rate | Interest | Rate | ||||||||||||||||||||||||||||||||
Average | Income/ | Earned/ | Average | Income/ | Earned/ | Average | Income/ | Earned/ | |||||||||||||||||||||||||||||
Balance | Expense(1) | Paid(1) | Balance | Expense(1) | Paid(1) | Balance | Expense(1) | Paid(1) | |||||||||||||||||||||||||||||
ASSETS |
|||||||||||||||||||||||||||||||||||||
Loans: (2) (4) |
|||||||||||||||||||||||||||||||||||||
Commercial |
$ | 139,679 | $ | 7,739 | 5.54 | % | $ | 149,695 | $ | 8,151 | 5.45 | % | $ | 151,342 | $ | 9,468 | 6.26 | % | |||||||||||||||||||
Real estate construction -
residential |
37,954 | 1,959 | 5.16 | 36,630 | 2,137 | 5.83 | | | | ||||||||||||||||||||||||||||
Real estate construction -
commercial |
75,207 | 2,904 | 3.86 | 64,548 | 3,610 | 5.59 | | | | ||||||||||||||||||||||||||||
Real estate mortgage residential |
221,545 | 12,672 | 5.72 | 222,798 | 14,197 | 6.37 | 223,093 | 9,560 | 4.29 | ||||||||||||||||||||||||||||
Real estate mortgage commercial |
440,285 | 25,309 | 5.75 | 494,703 | 26,813 | 5.42 | 556,343 | 41,132 | 7.39 | ||||||||||||||||||||||||||||
Consumer |
34,787 | 2,626 | 7.55 | 34,456 | 2,606 | 7.56 | 32,474 | 2,606 | 8.02 | ||||||||||||||||||||||||||||
Investment in securities: (3) |
|||||||||||||||||||||||||||||||||||||
U.S. treasury |
790 | 15 | 1.9 | | | | | | | ||||||||||||||||||||||||||||
Government sponsored enterprises |
47,914 | 1,242 | 2.59 | 47,958 | 1,800 | 3.75 | 75,514 | 3,268 | 4.33 | ||||||||||||||||||||||||||||
Asset backed securities |
83,237 | 2,918 | 3.51 | 64,133 | 2,617 | 4.08 | 35,326 | 1,649 | 4.67 | ||||||||||||||||||||||||||||
State and municipal |
33,272 | 1,764 | 5.30 | 39,816 | 2,166 | 5.44 | 46,030 | 2,503 | 5.44 | ||||||||||||||||||||||||||||
Restricted Investments |
6,356 | 176 | 2.77 | 8,817 | 164 | 1.86 | 8,440 | 316 | 3.74 | ||||||||||||||||||||||||||||
Federal funds sold |
187 | | | 309 | | | 2,925 | 60 | 2.05 | ||||||||||||||||||||||||||||
Interest bearing deposits
in other financial institutions |
34,680 | 86 | 0.25 | 18,807 | 53 | 0.28 | 8,738 | 24 | 0.27 | ||||||||||||||||||||||||||||
Total interest earning assets |
1,155,893 | 59,410 | 5.14 | 1,182,670 | 64,314 | 5.44 | 1,140,225 | 70,586 | 6.19 | ||||||||||||||||||||||||||||
All other assets |
94,802 | 89,108 | 121,373 | ||||||||||||||||||||||||||||||||||
Allowance for loan losses |
(13,854 | ) | (13,397 | ) | (10,102 | ) | |||||||||||||||||||||||||||||||
Total assets |
$ | 1,236,841 | $ | 1,258,381 | $ | 1,251,496 | |||||||||||||||||||||||||||||||
LIABILITIES AND
STOCKHOLDERS EQUITY |
|||||||||||||||||||||||||||||||||||||
NOW accounts |
$ | 167,303 | $ | 960 | 0.57 | % | $ | 138,456 | $ | 1,131 | 0.82 | % | $ | 117,487 | $ | 1,317 | 1.12 | % | |||||||||||||||||||
Savings |
52,605 | 131 | 0.25 | 46,464 | 139 | 0.30 | 44,253 | 226 | 0.51 | ||||||||||||||||||||||||||||
Money market |
167,240 | 1,080 | 0.65 | 175,894 | 1,747 | 0.99 | 168,418 | 3,340 | 1.98 | ||||||||||||||||||||||||||||
Time deposits of $100,000 and over |
130,493 | 2,485 | 1.90 | 140,502 | 3,862 | 2.75 | 142,713 | 5,698 | 3.99 | ||||||||||||||||||||||||||||
Other time deposits |
318,891 | 7,211 | 2.26 | 351,597 | 10,543 | 3.00 | 319,919 | 12,872 | 4.02 | ||||||||||||||||||||||||||||
Total time deposits |
836,532 | 11,867 | 1.42 | 852,913 | 17,422 | 2.04 | 792,790 | 23,453 | 2.96 | ||||||||||||||||||||||||||||
Federal funds purchased and
securities sold under agreements
to repurchase |
32,723 | 75 | 0.23 | 33,923 | 88 | 0.26 | 41,633 | 869 | 2.09 | ||||||||||||||||||||||||||||
Subordinated notes |
49,486 | 1,526 | 3.08 | 49,486 | 2,447 | 4.94 | 49,486 | 3,046 | 6.16 | ||||||||||||||||||||||||||||
Other borrowed money |
70,456 | 2,285 | 3.24 | 78,626 | 3,017 | 3.84 | 124,025 | 4,231 | 3.41 | ||||||||||||||||||||||||||||
Total interest bearing liabilities |
989,197 | 15,753 | 1.59 | 1,014,948 | 22,974 | 2.26 | 1,007,934 | 31,599 | 3.14 | ||||||||||||||||||||||||||||
Demand deposits |
131,438 | 124,913 | 121,428 | ||||||||||||||||||||||||||||||||||
Other liabilities |
6,883 | 10,582 | 8,759 | ||||||||||||||||||||||||||||||||||
Total liabilities |
1,127,518 | 1,150,443 | 1,138,121 | ||||||||||||||||||||||||||||||||||
Stockholders equity |
109,323 | 107,938 | 113,375 | ||||||||||||||||||||||||||||||||||
Total liabilities and
stockholders equity |
$ | 1,236,841 | $ | 1,258,381 | $ | 1,251,496 | |||||||||||||||||||||||||||||||
Net interest income (FTE) |
$ | 43,657 | $ | 41,340 | $ | 38,987 | |||||||||||||||||||||||||||||||
Net interest spread |
3.55 | % | 3.18 | % | 3.05 | % | |||||||||||||||||||||||||||||||
Net interest margin |
3.78 | % | 3.50 | % | 3.42 | % | |||||||||||||||||||||||||||||||
(1) | Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled $671,000, $751,000 and $871,000 for the years ended December 31, 2010, 2009 and 2008, 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. |
11
Comparison of Years ended December 31, 2010 and 2009
Financial results for 2010 compared to 2009 included an increase in net interest income, on a
tax equivalent basis, of $2,317,000, or 8.0%. Average interest-earning assets decreased
$26,777,000, or 2.3% to $1,155,893,000 at December 31, 2010 compared to $1,182,670,000 at December
31, 2009 and average interest bearing liabilities decreased $25,751,000, or 2.5%, to $989,197,000
at December 31, 2010 compared to $1,014,948,000 at December 31, 2009.
Average loans outstanding decreased $53,372,000 or 5.3% to $949,458,000 for 2010 compared to
$1,002,830,000 for 2009. See the Lending and Credit Management section of this discussion for
further discussion of changes in the composition of our lending portfolio.
The following is a summary of the changes in average loan balance by major class within our
Companys loan portfolio:
$ | % | |||||||||||||||
Change | Change | |||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 10-09 | 10-09 | ||||||||||||
Average loans: |
||||||||||||||||
Commercial |
$ | 139,679 | $ | 149,695 | $ | (10,016 | ) | (6.7 | )% | |||||||
Real estate construction residential |
37,954 | 42,307 | (4,353 | ) | (10.3 | ) | ||||||||||
Real estate construction commercial |
75,207 | 74,969 | 238 | 0.3 | ||||||||||||
Real estate mortgage residential |
221,545 | 238,012 | (16,467 | ) | (6.9 | ) | ||||||||||
Real estate mortgage commercial |
440,285 | 463,391 | (23,106 | ) | (5.0 | ) | ||||||||||
Consumer |
34,788 | 34,456 | 332 | 1.0 | ||||||||||||
Total |
$ | 949,458 | $ | 1,002,830 | $ | (53,372 | ) | (5.3 | )% | |||||||
Average investment securities and federal funds sold decreased $13,184,000 or 8.7% to
$165,400,000 for 2010 compared to $152,216,000 for 2009. Average interest bearing deposits in other
financial institutions increased $15,873,000 to $34,680,000 at December 31, 2010 compared to
$18,807,000 at December 31, 2009. See the Liquidity Management section below for further
discussion.
The overall decrease in average interest bearing liabilities was due to a decrease in time
deposits and other borrowed money. Average time deposits decreased $16,381,000, or 1.9%, to
$836,532,000 at December 31, 2010 compared to $852,913,000 at December 31, 2009. Average other
borrowed money decreased $8,170,000 or 10.4% to $70,456,000 for 2010 compared to $78,626,000 for
2009. The decrease in 2010 reflects a net decrease in Federal Home Loan Bank advances.
Comparison of Years ended December 31, 2009 and 2008
Financial results for 2009 compared to 2008 included an increase in net interest income, on a
tax equivalent basis, of $2,353,000, or 6.0%. Average interest-earning assets increased
$42,445,000, or 3.7% to $1,182,670,000 at December 31, 2009 compared to $1,140,225,000 at December
31, 2008 and average interest bearing liabilities increased $7,014,000, or 0.7%, to $1,014,948,000
at December 31, 2009 compared to $1,007,934,000 at December 31, 2008.
Average loans outstanding increased $39,578,000 or 4.1% to $1,002,830,000 for 2009 compared to
$963,252,000 for 2008. The following is a summary of the changes in average loan balance by major
class within our Companys loan portfolio:
$ | % | |||||||||||||||
Change | Change | |||||||||||||||
(Dollars in thousands) | 2009 | 2008 | 09-08 | 09-08 | ||||||||||||
Average loans: |
||||||||||||||||
Commercial |
$ | 149,694 | $ | 151,342 | $ | (1,648 | ) | (1.1 | )% | |||||||
Real estate construction residential |
42,307 | 68,728 | (26,421 | ) | (38.4 | ) | ||||||||||
Real estate construction commercial |
74,969 | 80,918 | (5,949 | ) | (7.4 | ) | ||||||||||
Real estate mortgage residential |
238,012 | 223,093 | 14,919 | 6.7 | ||||||||||||
Real estate mortgage commercial |
463,391 | 406,697 | 56,694 | 13.9 | ||||||||||||
Consumer |
34,457 | 32,474 | 1,983 | 6.1 | ||||||||||||
Total |
$ | 1,002,830 | $ | 963,252 | $ | 39,578 | 4.1 | % | ||||||||
12
Average investment securities and federal funds sold decreased $7,579,000 or 4.7% to
$152,216,000 for 2009 compared to $159,795,000 for 2008. Average interest bearing deposits
increased $10,069,000 to $18,807,000 at December 31, 2009 compared to $8,738,000 at December 31,
2008. This increase was a result of changing our Companys overnight investment of excess funds
from federal funds sold to interest bearing reserve balances held at the Federal Reserve Bank.
Average time deposits increased $60,123,000, or 7.6%, to $852,913,000 at December 31, 2009
compared to $792,790,000 at December 31, 2008. The increase was primarily a result of increased
public fund deposits. Product specials promoting interest bearing checking accounts and certificate
of deposits also contributed to new deposits. Average federal funds purchased and securities sold
under agreements to repurchase decreased $7,710,000 or 18.5% to $33,923,000 for 2009 compared to
$41,633,000 for 2008. This reflects a $5,387,000 decrease in repurchase agreements for public funds
and a $2,323,000 decrease in federal funds purchased from 2008 to 2009. Average other borrowed
money decreased $45,399,000 or 36.6% to $78,626,000 for 2009 compared to $124,025,000 for 2008.
The decrease in 2009 reflects a net decrease in Federal Home Loan Bank advances.
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,
indentifying changes related to volumes and rates for the years ended December 31, 2010, compared
to December 31, 2009 and for the years ended December 31, 2009 compared to December 31, 2008. 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.
2010 | 2009 | |||||||||||||||||||||||
Change due to | Change due to | |||||||||||||||||||||||
Total | Average | Average | Total | Average | Average | |||||||||||||||||||
(Dollars In thousands) | Change | Volume | Rate | Change | Volume | Rate | ||||||||||||||||||
Interest income on a fully
taxable equivalent basis: |
||||||||||||||||||||||||
Loans: (1) (3) |
$ | (4,305 | ) | $ | (3,063 | ) | $ | (1,242 | ) | $ | (5,252 | ) | $ | 2,579 | $ | (7,831 | ) | |||||||
Investment securities: |
||||||||||||||||||||||||
U.S. treasury |
15 | | 15 | | | | ||||||||||||||||||
Government sponsored entities |
(558 | ) | (2 | ) | (556 | ) | (1,468 | ) | (1,077 | ) | (391 | ) | ||||||||||||
Asset backed securities |
301 | 705 | (404 | ) | 968 | 1,198 | (230 | ) | ||||||||||||||||
State and municipal(2) |
(402 | ) | (348 | ) | (54 | ) | (337 | ) | (338 | ) | 1 | |||||||||||||
Restricted Investments |
12 | (54 | ) | 66 | (152 | ) | 13 | (165 | ) | |||||||||||||||
Federal funds sold |
| | | (60 | ) | | (60 | ) | ||||||||||||||||
Interest bearing deposits
in other financial institutions |
33 | 40 | (7 | ) | 29 | 29 | | |||||||||||||||||
Total interest income |
(4,904 | ) | (2,722 | ) | (2,182 | ) | (6,272 | ) | 2,404 | (8,676 | ) | |||||||||||||
Interest expense: |
||||||||||||||||||||||||
NOW accounts |
(171 | ) | 207 | (378 | ) | (186 | ) | 210 | (396 | ) | ||||||||||||||
Savings |
(8 | ) | 17 | (25 | ) | (87 | ) | 10 | (97 | ) | ||||||||||||||
Money market |
(667 | ) | (82 | ) | (585 | ) | (1,593 | ) | 142 | (1,735 | ) | |||||||||||||
Time deposits of 100,000 and over |
(1,377 | ) | (259 | ) | (1,118 | ) | (1,836 | ) | (87 | ) | (1,749 | ) | ||||||||||||
Other time deposits |
(3,332 | ) | (915 | ) | (2,417 | ) | (2,329 | ) | 1,184 | (3,513 | ) | |||||||||||||
Federal funds purchased and
securities sold under agreements
to repurchase |
(13 | ) | (3 | ) | (10 | ) | (781 | ) | (136 | ) | (645 | ) | ||||||||||||
Subordinated notes |
(921 | ) | | (921 | ) | (599 | ) | | (599 | ) | ||||||||||||||
Other borrowed money |
(732 | ) | (294 | ) | (438 | ) | (1,214 | ) | (1,693 | ) | 479 | |||||||||||||
Total interest expense |
(7,221 | ) | (1,329 | ) | (5,892 | ) | (8,625 | ) | (370 | ) | (8,255 | ) | ||||||||||||
Net interest income on a fully
taxable equivalent basis |
$ | 2,317 | $ | (1,393 | ) | $ | 3,710 | $ | 2,353 | $ | 2,774 | $ | (421 | ) | ||||||||||
(1) | Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 35%, net of nondeductible interest expense. Such adjustments totaled $671,000, $751,000 and $871,000 for the years ended December 31, 2010, 2009 and 2008, respectively. |
13
(2) | Non-accruing loans are included in the average amounts outstanding. | |
(3) | Fees and costs on loans are included in interest income. |
Net interest income on a fully taxable equivalent basis increased $2,317,000, or 5.6%, to
$43,657,000 for 2010 compared to $41,340,000 for 2009 and followed a $2,353,000, or 6.0%, increase
for 2009 compared to 2008. Measured as
a percentage of average earning assets, the net interest margin (expressed on a fully taxable
equivalent basis) decreased from 3.42% for 2008 to 3.50% for 2009, and increased to 3.78% for 2010.
Our Companys net interest spread increased to 3.55% in 2010 from 3.18% in 2009 and 3.05% in 2008.
While our Company was able to decrease the rate paid on interest bearing liabilities to 1.59%
in 2010 from 3.14% in 2008, this decrease was partially offset by the decrease in the rates earned
on interest bearing assets from 6.19% in 2008 to 5.14% in 2010.
Non-interest Income and Expense
Non-interest income for the years ended December 31, 2010, 2009, and 2008 were as follows:
$ Change | % Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 10-09 | 09-08 | 10-09 | 09-08 | |||||||||||||||||||||
Non-interest Income |
||||||||||||||||||||||||||||
Service charges on deposit
accounts |
$ | 5,554 | $ | 5,864 | $ | 6,164 | $ | (310 | ) | $ | (300 | ) | (5.3 | )% | (4.9 | )% | ||||||||||||
Trust department income |
803 | 815 | 827 | (12 | ) | (12 | ) | (1.5 | ) | (1.5 | ) | |||||||||||||||||
Gain on sales of mortgage loans |
2,493 | 2,974 | 973 | (481 | ) | 2,001 | (16.2 | ) | 205.7 | |||||||||||||||||||
Other |
1,631 | 1,049 | 1,330 | 582 | (281 | ) | 55.5 | (21.1 | ) | |||||||||||||||||||
Total non-interest income |
$ | 10,481 | $ | 10,702 | $ | 9,294 | $ | (221 | ) | $ | 1,408 | (2.1 | )% | 15.1 | % | |||||||||||||
Investment securities
gains (losses), net |
$ | | $ | 606 | $ | 3 | $ | (606 | ) | $ | 603 | (100.0 | )% | NM | % | |||||||||||||
Non-interest income as a
% of total revenue * |
19.6 | % | 20.9 | % | 19.6 | % | ||||||||||||||||||||||
Total revenue per full time
equivalent employee |
$ | 157.3 | $ | 147.4 | $ | 137.8 | ||||||||||||||||||||||
* | Total revenue is calculated as net interest income plus non-interest income |
Years Ended December 31, 2010 and 2009
Noninterest income decreased $221,000 or 2.1% to $10,481,000 for 2010 compared to $10,702,000
for 2009. The decrease was primarily the result of a $481,000 decrease in the gains on sales of
mortgage loans and a $310,000 decrease in service charges on deposit accounts. Although refinancing
activity substantially increased during the last half of 2010, our Company experienced more
refinancing activity throughout 2009, impacting both volumes of loans sold and gains recognized.
Our Company was servicing $298,325,000 of mortgage loans at December 31, 2010 compared to
$269,475,000 at December 31, 2009. The decrease in noninterest income was partially offset by an
increase in other income that included a $268,000 refund of prior years processing fees and a
$227,000 increase in credit card income, of which $167,000 was due to a nonmaterial correction. Our
Company recognized $606,000 in gain on sales and calls of debt securities during 2009. Our Company
had no sales of debt securities during 2010.
Years Ended December 31, 2009 and 2008
Noninterest income increased $1,408,000 or 15.1% to $10,702,000 for 2009 compared to
$9,294,000 for 2008. The increase was primarily the result of a $2,001,000 increase in the gains
on sales of mortgage loans due to increased refinancing activity. Our Company was servicing
$269,475,000 of mortgage loans at December 31, 2009 compared to $213,074,000 at December 31, 2008.
This increase was partially offset by a $300,000 decrease in service charge income and a $281,000
decrease in other income. The decrease in other income includes an $112,000 increase in 2009 real
estate servicing fees offset by a $275,000 increase in amortization of mortgage loan servicing
rights, and a $71,000 decrease in brokerage and credit card income. Our Company recognized $606,000
in gain on sales and calls of debt securities during the 2009 compared to $3,000 during 2008.
14
Non-interest expense for the years ended December 31, 2010, 2009, and 2008 were as follows:
$ Change | % Change | |||||||||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 10-09 | 09-08 | 10-09 | 09-08 | |||||||||||||||||||||
Non-interest Expense |
||||||||||||||||||||||||||||
Salaries |
$ | 13,904 | $ | 13,253 | $ | 14,099 | $ | 651 | $ | (846 | ) | 4.9 | % | (6.0 | )% | |||||||||||||
Employee benefits |
3,995 | 4,204 | 4,151 | (209 | ) | 53 | (5.0 | ) | 1.3 | |||||||||||||||||||
Goodwill impairment |
| | 40,324 | 0 | N.M | N.M | N.M | |||||||||||||||||||||
Occupancy expense, net |
2,532 | 2,335 | 2,440 | 197 | (105 | ) | 8.4 | (4.3 | ) | |||||||||||||||||||
Furniture and equipment expense |
1,997 | 2,286 | 2,437 | (289 | ) | (151 | ) | (12.6 | ) | (6.2 | ) | |||||||||||||||||
FDIC insurance assessment |
1,651 | 2,519 | 204 | (868 | ) | 2,315 | (34.5 | ) | 1,134.8 | |||||||||||||||||||
Legal, examination, and professional fees |
1,441 | 1,222 | 1,145 | 219 | 77 | 17.9 | 6.7 | |||||||||||||||||||||
Advertising and promotion |
1,256 | 1,272 | 1,166 | (16 | ) | 106 | (1.3 | ) | 9.1 | |||||||||||||||||||
Postage, printing, and supplies |
1,201 | 1,168 | 1,221 | 33 | (53 | ) | 2.8 | (4.3 | ) | |||||||||||||||||||
Processing expense |
3,353 | 3,420 | 3,102 | (67 | ) | 318 | (2.0 | ) | 10.3 | |||||||||||||||||||
Other real estate expense |
9,804 | 1,189 | 862 | 8,615 | 327 | 724.6 | 37.9 | |||||||||||||||||||||
Other |
3,717 | 3,862 | 4,824 | (145 | ) | (962 | ) | (3.8 | ) | (19.9 | ) | |||||||||||||||||
Total non-interest expense |
$ | 44,851 | $ | 36,730 | $ | 75,975 | $ | 8,121 | $ | 1,079 | 22.1 | % | 1.4 | % | ||||||||||||||
Efficiency ratio* |
83.9 | % | 71.6 | % | 75.2 | % | ||||||||||||||||||||||
Salaries and benefits as a %
of total non-interest expense
* |
39.9 | % | 47.5 | % | 51.2 | % | ||||||||||||||||||||||
Number of full-time equivalent
employees |
340 | 348 | 344 | |||||||||||||||||||||||||
* | Goodwill impairment not included in ratio calculation |
Years Ended December 31, 2010 and 2009
Noninterest expense increased $8,121,000, or 22.1%, to $44,851,000 for 2010 compared to
$36,730,000 for 2009. Other real estate expense increased $8,615,000, or 724.6%, legal,
examination, and professional fees increased $219,000, or 17.9%, partially offset by a decrease in
Federal Deposit Insurance Corporation (FDIC) insurance assessment of $868,000, or 34.5%. The
increase in other real estate expense reflects expenses incurred related to the increase in our
Companys foreclosed property during 2010. $6,158,000 of this expense was incurred during the
fourth quarter when our Company recorded a provision to the valuation allowance for other real
estate owned based on current appraisals received on two commercial real estate properties. The
increase in legal, examination, and professional fees primarily resulted in an increase in accrued
expenses representing our Companys estimated obligation in a suit filed against Hawthorn Bank
found in favor of the customer. See Note 17 Commitments and Contingencies for further explanation
in the consolidated financial statements. The decrease in the FDIC insurance assessment is a result
of a decrease in the estimated expense accrued during 2010 in comparison to 2009 and an increase in
special assessments during 2009.
Years Ended December 31, 2009 and 2008
Noninterest expense decreased $39,245,000, or 51.7%, to $36,730,000 for 2009 compared to
$75,975,000 for 2008. This decrease is primarily a result of the $40,324,000 goodwill impairment
charge taken during the fourth quarter of 2008. Other items such as salary expense decreased
$846,000, or 6.0%, FDIC insurance assessment increased $2,315,000, real estate loan expense
increased $327,000, or 37.9%, and other expenses decreased $962,000 or 19.9%. The decrease in
salary expense includes a $362,000 decrease in salaries, a $393,000 reduction in incentive and
deferred compensation expense, and a $101,000 decrease in stock option compensation expense. The
increase in the FDIC insurance assessment is a result of higher regular and special assessment
rates in effect for the current year as well as the depletion of the Banks one-time FDIC
assessment credit. The increase in real estate loan expense reflects expenses
incurred on the maintenance and preparation to sell the increase in foreclosed properties,
including a $67,000 impairment charge on six of the properties. The decrease in other expenses
primarily is a result of a $591,000 donation of a large parcel of other real estate owned and an
abandoned branch to charitable organizations in 2008, a $100,000 final payment on a contract in
2008, a $89,000 decrease in correspondent bank charges, and a $33,000 decrease in insurance after
further consolidating accounts from the 2007 Bank charter merger.
15
Fourth Quarter Results for 2010
Comparing fourth quarter 2010 to third quarter 2010:
Our Companys net loss of ($6,251,000) for the fourth quarter ended December 31, 2010
decreased $7,674,000, compared to net income of $1,423,000 for the third quarter ended September
30, 2010. Net interest income decreased to $10,702,000 from $10,859,000 over the same period. This
decrease was primarily the result of a decrease in interest earning assets from $1,146,000 for the
third quarter ended September 30, 2010 to $1,132,000 for the fourth quarter ended December 31,
2010.
The fourth quarter 2010 provision for loan losses of $8,150,000 was $5,700,000 higher than
third quarter 2010s provision of $2,450,000 and was based upon managements determination of the
loan loss reserve required to cover probable losses in the loan portfolio at year-end and as a
result of increased nonperforming loans at year-end and receipt of current appraisals.
Noninterest income of $3,115,000 for fourth quarter 2010 increased $205,000 from third quarter
2010s noninterest income of $2,910,000. This increase was a result of $268,000 refund of prior
years processing fees.
Noninterest expense of $16,035,000 for fourth quarter 2010 increased by $6,670,000 from third
quarter 2010s noninterest expense of $9,365,000. $6,158,000 of this increase was incurred when our
Company recorded a provision to the valuation allowance for other real estate owned based on
current appraisals received on two commercial real estate properties. In addition, $275,000 of this
increase resulted from an increase in accrued expenses for our Companys estimated obligation in a
lawsuit filed against our Bank found in favor of the customer. See Note 17 Commitments and
Contingencies in the consolidated financial statements for further explanation.
Comparing fourth quarter 2010 to fourth quarter 2009:
Our Companys net loss of ($6,251,000) for the fourth quarter ended December 31, 2010
decreased $7,039,000, compared to net income of $788,000 for same period in 2009. Net interest
income of $10,702,000 increased $97,000 in the fourth quarter of 2010 compared to the fourth
quarter of 2009 due to an increase in net interest margin to 3.81% for 2010 compared to 3.66% for
the same period of 2009. This increase was partially offset by a decrease in average earning assets
of $36,589,000 in the fourth quarter of 2010 compared to the fourth quarter of 2009.
The fourth quarter 2010 provision for loan losses of $8,150,000 was $4,200,000 more than the
fourth quarter 2009 provision of $3,950,000 and was based upon managements determination of the
loan loss reserve required to cover probable losses in the loan portfolio at year-end and as a
result of increased nonperforming loans at year-end and receipt of current appraisals.
Noninterest income of $3,115,000 for fourth quarter 2010 increased by $586,000 from
noninterest income of $2,529,000 for fourth quarter 2009. $424,000 of the increase reflects gains
on sales of mortgage loans due to increased refinancing activity. Our Company also received a
$268,000 refund of prior years processing fees during the fourth quarter of 2010.
Noninterest expense of $16,035,000 for fourth quarter 2010 increased $7,000,000 from fourth
quarter 2009 noninterest expense of $9,034,000. $6,158,000 of this increase was incurred when our
Company recorded a provision to the valuation allowance for other real estate owned based on
current appraisals received on two commercial real estate properties.
Income taxes (benefit)
Income taxes as a percentage of earnings (loss) before income taxes as reported in the
consolidated financial statements were 46.5% for 2010, compared to 27.3% for 2009, and 16.7% for
2008. The increase in the effective tax rate for 2010 in comparison to 2009 is primarily the result
of tax exempt income and other tax benefits increasing the overall
income tax benefit related to the pre-tax loss. As a result, these calculated tax benefits
increase the statutory tax rate in a year where our Company has a pre-tax loss versus a decrease
the statutory tax rate in years with positive pre-tax income. The increase in the effective tax
rate for 2009 in comparison to 2008 is due to the decrease in 2008 earnings resulting from the
goodwill impairment charge. In addition, 2009 tax expense reflects the recognition of tax benefits
as a result of the expiration of the statute of limitations on our Companys 2005 state tax return
during the fourth quarter of 2009.
16
Lending and Credit Management
Interest earned on the loan portfolio is a primary source of interest income for our Company.
Net loans represented 73.7% of total assets as of December 31, 2010 compared to 79.0% as of
December 31, 2009.
Lending activities are conducted pursuant to an established loan policy approved by our Banks
Board of Directors. The Banks credit review process is comprised of a regional loan committee with
an established approval limit. 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 our Companys loan portfolio as of the dates indicated
are as follows:
Balance at December 31, | ||||||||||||||||||||
(In thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Amount | Amount | Amount | Amount | Amount | ||||||||||||||||
Commercial, financial, and agricultural |
$ | 131,382 | $ | 151,399 | $ | 153,386 | $ | 151,488 | $ | 145,697 | ||||||||||
Real estate construction residential |
31,834 | 38,841 | 49,623 | | | |||||||||||||||
Real estate construction commercial |
56,053 | 77,937 | 80,016 | 147,432 | 150,891 | |||||||||||||||
Real estate mortgage residential |
207,835 | 232,332 | 235,834 | 210,458 | 182,366 | |||||||||||||||
Real estate mortgage commercial |
439,069 | 453,975 | 456,696 | 365,094 | 296,488 | |||||||||||||||
Installment loans to individuals |
32,132 | 36,966 | 33,404 | 36,738 | 36,966 | |||||||||||||||
Deferred fees and costs, net |
167 | 164 | 144 | 68 | (96 | ) | ||||||||||||||
Total loans |
$ | 898,472 | $ | 991,614 | $ | 1,009,103 | $ | 911,278 | $ | 812,312 | ||||||||||
Our Companys loan portfolio decreased $93,142,000, or 9.4% from 2009 to 2010. This decrease
was primarily a result of a decrease in commercial loans of $20,017,000, or 13.2%, a decrease in
real estate mortgage residential loans of $24,498,000, or 10.5%, a decrease in real estate
mortgage commercial loans of $14,907,000, or 3.3%, and a decrease in real estate construction
commercial loans of $21,884,000, or 28.1%. The decrease in commercial loans and real estate
mortgage loans primarily reflects the payoff of four large commercial credits and three large real
estate mortgage loans. The decrease in individual consumer loans reflects the payoff of one large
consumer loan which was secured by a Bank certificate of deposit. Also contributing to the decrease
in total loans were gross charge-offs of $16,190,000 and $23,677,000 of assets transferred from
loans to other real estate owned and repossessed assets.
Our Companys loan portfolio decreased $17,490,000, or 1.7% from 2008 to 2009. This decrease
was primarily in our Banks commercial and real estate mortgage lending. Commercial loans
decreased $1,987,000, or 1.3%, real estate construction loans decreased $12,861,000, or 9.9%, and
real estate mortgage loans decreased $6,223,000 or 1.0%, from 2008 to 2009, respectively. Partially
offsetting these decreases was an increase in consumer loans of $3,582,000 or 10.7%. During the
current down-turn in the economy, management continues to focus on the improvement of asset
quality. The decrease in lending activities in the real estate construction market also reflects
the slow down in the housing industry and residential construction industry as well as foreclosures
on various residential construction properties.
During the current down-turn in the economy, management continues to focus on the improvement
of asset quality. Management has tightened underwriting standards and is focused on lending to
credit worthy borrowers with the capacity to service the debts. Where appropriate, management
actively works with existing borrowers to modify loan terms and conditions in order to assist the
borrowers in servicing their debt obligations to our Company. The decrease in
lending activities in the real estate construction market also reflects the slowdown in the
housing industry and residential construction industry as well as foreclosures on various
residential construction properties. Construction lending will continue to be closely monitored.
Our Company does not participate in extending credit to sub-prime residential real estate
markets. Our Company extends credit to its local community market through traditional real estate
mortgage products.
17
The contractual maturities of loan categories at December 31, 2010, and the break down of
those loans between fixed rate and floating rate loans are as follows:
Principal Payments Due | ||||||||||||||||
Over One | Over | |||||||||||||||
One Year | Year Through | Five | ||||||||||||||
Or Less | Five Years | Years | Total | |||||||||||||
Commercial, financial, and agricultural |
$ | 86,228 | $ | 42,831 | $ | 2,323 | $ | 131,382 | ||||||||
Real estate construction residential |
22,171 | 9,663 | | 31,834 | ||||||||||||
Real estate construction commercial |
45,560 | 9,496 | 997 | 56,053 | ||||||||||||
Real estate mortgage residential |
52,116 | 95,434 | 60,284 | 207,834 | ||||||||||||
Real estate mortgage commercial |
170,156 | 255,072 | 13,841 | 439,069 | ||||||||||||
Installment loans to individuals |
13,798 | 17,943 | 559 | 32,300 | ||||||||||||
Total loans net of unearned income |
$ | 390,029 | $ | 430,439 | $ | 78,004 | $ | 898,472 | ||||||||
Loans with fixed rates |
312,342 | 378,727 | 57,036 | 748,105 | ||||||||||||
Loans with floating rates |
77,687 | 51,712 | 20,968 | 150,367 | ||||||||||||
Total loans net of unearned income |
$ | 390,029 | $ | 430,439 | $ | 78,004 | $ | 898,472 | ||||||||
Our 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 our Company has a non-recourse purchase commitment
from the secondary market at a predetermined price. At December 31, 2010 our Company was servicing
approximately $298,325,000 of loans sold to the secondary market.
Real estate mortgage loans retained in our Companys portfolio generally include provisions
for rate adjustments at one to three year intervals. Commercial loans and real estate construction
loans generally have maturities of less than one year. Installment loans to individuals are
primarily fixed rate loans with maturities from one to five years.
Management along with 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 $2,000,000 in aggregate and all adversely classified credits identified by
management as containing more than usual risk are reviewed. In addition, loans below the above
scope are reviewed on a sample basis. On a monthly basis, the senior loan committee reviews and
reports to the Board of Directors 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 FASBs ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and
measuring loan impairment. If management determines that it is probable that all amounts due on a
loan will not be collected under the original terms of the loan agreement, the loan is considered
to be impaired. These loans are evaluated individually for impairment, and in conjunction with
current economic conditions and loss experience, allowances are estimated based on the fair value
as further discussed below. Loans not individually evaluated are aggregated and reserves are
recorded using a consistent methodology that considers historical loan loss experience by loan
type, delinquencies, current economic conditions, loan risk ratings and industry concentration.
Management believes, but there can be no assurance, that these procedures keep management informed
of potential problem loans. Based upon these procedures, both the allowance and provision for loan
losses are adjusted to maintain the allowance at a level considered adequate by management for
probable losses inherent in the loan portfolio.
Provision and Allowance for Loan Losses
The provision for loan losses increased $6,901,000 or 82.6% to $15,255,000 for 2010 compared
to $8,354,000 for 2009 and followed a $143,000 or 1.7% increase for 2009 compared to 2008.
The current economy has contributed to the deterioration of collateral values. The economic
downturn and elevated unemployment rates in our market area have impaired the ability for certain
of our customers to make payments on our loans in accordance with contractual terms. The increase
in the provision can be primarily attributed to loan losses for six loan relationships. Five of the
commercial real estate relationships have been or are in the process of being resolved through our
Companys foreclosure process. Three of the relationships involve commercial businesses that were
unable to survive during the economic downturn. Two of the relationships involve undeveloped
development projects which were unable to meet debt service requirements. The last significant loss
resulted from a non-owner occupied single and multi-family housing development which was adversely
affected by low occupancy rates. During 2010, our Company
18
realized full or partial charge offs on
346 loans totaling $16,190,000 of which 40% results from the aforementioned six commercial and
commercial real estate relationships.
Our Company has taken an active approach to obtain current appraisals and has adjusted the
provision to reflect the amounts management determined necessary to maintain the allowance for loan
losses at a level adequate to cover probable losses in the loan portfolio. Due to charge offs taken
during 2010, the allowance for loan losses decreased to $14,565,000 or 1.6% of loans outstanding at
December 31, 2010 compared to $14,797,000 or 1.5% of loans outstanding at December 31, 2009, and
$12,667,000 or 1.3% of loans outstanding at December 31, 2008.
The following table summarizes loan loss experience for the years indicated:
Years Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Analysis of allowance for
loan losses: |
||||||||||||||||||||
Balance beginning of year |
$ | 14,797 | $ | 12,667 | $ | 9,282 | $ | 9,015 | $ | 9,085 | ||||||||||
Charge-offs: |
||||||||||||||||||||
Commercial, financial, and
agricultural |
1,903 | 1,404 | 3,571 | 524 | 809 | |||||||||||||||
Real estate construction
residential |
933 | 1,012 | 492 | | | |||||||||||||||
Real estate construction
commercial |
4,556 | 450 | 189 | 56 | 84 | |||||||||||||||
Real estate mortgage
residential |
4,534 | 2,673 | 417 | 413 | | |||||||||||||||
Real estate mortgage
commercial |
3,841 | 728 | 115 | | 474 | |||||||||||||||
Installment loans to
individuals |
423 | 534 | 656 | 314 | 484 | |||||||||||||||
Total charge-offs |
16,190 | 6,801 | 5,440 | 1,307 | 1,851 | |||||||||||||||
Recoveries: |
||||||||||||||||||||
Commercial, financial, and
agricultural |
153 | 213 | 153 | 141 | 206 | |||||||||||||||
Real estate construction
residential |
30 | 5 | 34 | | | |||||||||||||||
Real estate construction
commercial |
22 | | 1 | 11 | 13 | |||||||||||||||
Real estate mortgage
residential |
228 | 61 | 1 | 96 | | |||||||||||||||
Real estate mortgage
commercial |
29 | 4 | 80 | 14 | 91 | |||||||||||||||
Installment loans to
individuals |
241 | 294 | 345 | 158 | 145 | |||||||||||||||
Total recoveries |
703 | 577 | 614 | 420 | 455 | |||||||||||||||
Net charge-offs |
15,487 | 6,224 | 4,826 | 887 | 1,396 | |||||||||||||||
Provision for loan losses |
15,255 | 8,354 | 8,211 | 1,154 | 1,326 | |||||||||||||||
Balance at end of year |
$ | 14,565 | $ | 14,797 | $ | 12,667 | $ | 9,282 | $ | 9,015 | ||||||||||
Loans outstanding: |
||||||||||||||||||||
Average |
$ | 949,458 | $ | 1,002,829 | $ | 963,252 | $ | 848,772 | $ | 824,706 | ||||||||||
End of period |
898,472 | 991,614 | 1,009,104 | 911,278 | 812,312 | |||||||||||||||
Allowance for loan
losses to loans outstanding: |
||||||||||||||||||||
Average |
% | 1.53 | 1.48 | % | 1.32 | % | 1.09 | % | 1.09 | % | ||||||||||
End of period |
1.62 | 1.49 | 1.26 | 1.02 | 1.11 | |||||||||||||||
Net charge-offs to average
loans outstanding |
1.63 | 0.62 | 0.50 | 0.10 | 0.17 | |||||||||||||||
As shown in the table above, our Company experienced net loan charge-offs of $15,487,000
during 2010 compared to $6,224,000 in 2009 and $4,826,000 in 2008. Net charge offs on commercial,
financial, and agricultural loans increased $559,000 from December 31, 2009 to December 31, 2010
compared to a $2,277,000 decrease from December 31, 2008 to December 31, 2009. The increase for
2010 was primarily due to three write-downs taken on two loans to reflect current collateral
values. Net charge offs on real estate construction commercial properties loans increased
$4,084,000 from December 31, 2009 to December 31, 2010 compared to a $262,000 increase from
December 31, 2008 to December 31, 2009. The increase for 2010 was primarily due to write-downs
taken on various loans to reflect current collateral values. Net charge offs on real estate
mortgage residential properties increased $1,694,000 from December 31, 2009 to December 31, 2010
compared to a $2,196,000 increase from December 31, 2008 to December 31, 2009. The increase for
2010 was primarily due to write-downs taken on foreclosed properties, from two significant customer
relationships, to reflect current collateral values. Net charge offs on real estate mortgage
commercial properties increased $3,088,000 from December 31, 2009 to December 31, 2010 compared to
a $689,000 increase from December 31, 2008 to December 31, 2009. The increase for 2010 was
primarily due to write-downs taken on various loans to reflect current collateral values. The ratio
of annualized total net loan charge-offs to total average loans was 1.63% at December 31, 2010
compared to 0.62% at December 31, 2009, and 0.50% at December 31, 2008.
19
Nonperforming loans, defined as loans on nonaccrual status, loans 90 days or more past due and
still accruing, and restructured loans totaled $56,302,000 or 6.27% of total loans at December 31,
2010 compared to $42,347,000 or 4.27% of total loans at December 31, 2009.
The following table summarizes our Companys nonperforming assets at the dates indicated:
Years Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||
Commercial, financial, and agricultural |
$ | 3,532 | $ | 2,067 | $ | 2,071 | $ | 2,332 | $ | 2,258 | ||||||||||
Real estate construction residential |
3,586 | 2,678 | 2,775 | | | |||||||||||||||
Real estate construction commercial |
10,067 | 9,277 | 7,572 | 866 | 1,657 | |||||||||||||||
Real estate mortgage residential |
5,672 | 6,692 | 4,345 | 658 | 644 | |||||||||||||||
Real estate mortgage commercial |
27,604 | 13,161 | 3,505 | 651 | 237 | |||||||||||||||
Installment loans to individuals |
126 | 279 | 119 | 32 | 73 | |||||||||||||||
Total nonaccrual loans |
50,587 | 34,154 | 20,387 | 4,539 | 4,869 | |||||||||||||||
Loans contractually past due 90 days
or more and still accruing: |
||||||||||||||||||||
Commercial, financial, and agricultural |
8 | 2 | 140 | 265 | 5 | |||||||||||||||
Real estate construction residential |
| | | | | |||||||||||||||
Real estate construction commercial |
| | 52 | 158 | | |||||||||||||||
Real estate mortgage residential |
| | 864 | 170 | ||||||||||||||||
Real estate mortgage commercial |
24 | | 547 | 189 | | |||||||||||||||
Installment loans to individuals |
| | 4 | 70 | 22 | |||||||||||||||
Total loans contractually past -due
90 days or more and still accruing |
32 | 2 | 743 | 1,546 | 197 | |||||||||||||||
Troubled debt restructurings accruing |
5,683 | 8,191 | 3,736 | | | |||||||||||||||
Total nonperforming loans |
56,302 | 42,347 | 24,866 | 6,085 | 5,066 | |||||||||||||||
Other real estate |
13,393 | 8,452 | 7,828 | 2,337 | 2,720 | |||||||||||||||
Repossessions |
616 | 39 | | | 15 | |||||||||||||||
Total nonperforming assets |
$ | 70,311 | $ | 50,838 | $ | 32,694 | $ | 8,422 | $ | 7,801 | ||||||||||
Loans |
$ | 898,472 | $ | 991,614 | $ | 1,009,103 | $ | 911,278 | $ | 812,313 | ||||||||||
Allowance for loan losses to loans |
1.62 | % | 1.49 | % | 1.26 | % | 1.02 | % | 1.11 | % | ||||||||||
Nonperforming loans to loans |
6.27 | % | 4.27 | % | 2.46 | % | 0.67 | % | 0.62 | % | ||||||||||
Allowance for loan losses to
nonperforming loans |
25.87 | % | 34.94 | % | 50.94 | % | 152.54 | % | 177.95 | % | ||||||||||
Nonperforming assets to loans and
foreclosed assets |
7.71 | % | 5.08 | % | 3.21 | % | 0.92 | % | 0.96 | % | ||||||||||
It is our Companys policy to discontinue the accrual of interest income on loans when
management believes that the borrowers financial condition, after consideration of business
conditions and collection efforts, is such that the collection of interest is doubtful, or upon
which 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 collectibles of such principal;
otherwise, such receipts are recorded as interest income on a cash basis. Interest on nonaccrual
loans, which would have been recorded under the original terms of the loans, was approximately
$2,529,000, $1,568,000 and $1,522,000 for the years ended December 31, 2010, 2009 and 2008,
respectively. Approximately $22,000, $158,000 and $239,000 was actually recorded as interest income
on such loans for the year ended December 31, 2010, 2009 and 2008, respectively.
Total non-accrual loans at year end 2010 increased $16,433,000 over 2009. The increase
resulted mainly from an increase of $14,443,000 in real estate mortgage commercial non-accrual
loans. The increase primarily represents five commercial customers with balances totaling
$17,694,000 which was partially offset by charge-offs and foreclosures.
Loans past due 90 days and still accruing interest increased $30,000 from December 31, 2009 to
December 31, 2010. Foreclosed real estate and other repossessions increased $5,518,000 to
$14,009,000 from December 31, 2009 to December 31, 2010.
20
At December 31, 2010, loans classified as troubled debt restructurings (TDR) totaled
$22,080,000, of which $16,397,000 was on non-accrual status and $5,683,000 was on accrual status.
At December 31, 2009, loans classified as TDR totaled $11,233,000, of which $3,042,000 was on
non-accrual status and $8,191,000 was on accrual status. Our Company has experienced an increase in
its loan delinquencies much like the rest of the banking industry as current economic conditions
negatively impact our borrowers ability to keep their debt payments current.
(Dollars in thousands) | 2010 | 2009 | ||||||||||||||||||||||
Number of | Recorded | Specific | Number of | Recorded | Specific | |||||||||||||||||||
Accruing TDRs | contracts | Investment | Reserves | contracts | Investment | Reserves | ||||||||||||||||||
Commercial, financial and
agricultural |
3 | $ | 128 | $ | 20 | 3 | $ | 264 | $ | 64 | ||||||||||||||
Real estate construction
commercial |
1 | 1,716 | 95 | | | | ||||||||||||||||||
Real estate mortgage- residential |
20 | 2,364 | 82 | 18 | 2,004 | 22 | ||||||||||||||||||
Real estate mortgage commercial |
4 | 1,475 | 14 | 4 | 5,923 | 897 | ||||||||||||||||||
28 | $ | 5,683 | $ | 211 | $ | 25 | $ | 8,191 | $ | 983 | ||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Number of | Recorded | Specific | Number of | Recorded | Specific | |||||||||||||||||||
TDRs - Non-accruals | contracts | Investment | Reserves | contracts | Investment | Reserves | ||||||||||||||||||
Commercial, financial and
agricultural |
5 | $ | 871.00 | $ | 76.00 | 2 | $ | 141.00 | $ | | ||||||||||||||
Real estate construction
commercial |
2 | 1,210 | | | | | ||||||||||||||||||
Real estate mortgage- residential |
6 | 1,092 | 67 | 1 | 199 | | ||||||||||||||||||
Real estate mortgage commercial |
5 | 13,224 | 1,005 | 7 | 2,702 | | ||||||||||||||||||
18 | $ | 16,397 | $ | 1,148 | $ | 10 | $ | 3,042 | $ | | ||||||||||||||
Total TDRs |
46 | $ | 22,080 | $ | 1,359 | 35 | $ | 11,233 | $ | 983 | ||||||||||||||
The ratio of nonperforming loans to loans increased from 2.46% at year end 2008 to 4.27% at
year end 2009 and to 6.27% at year end 2010. Our Company has experienced an increase in its loan
delinquencies much like the rest of the banking industry as current economic conditions negatively
impact our borrowers ability to keep their debt payments current.
The increase in the levels of charge offs has contributed to the decrease in the ratio of
allowance for loan losses to nonperforming loans from 50.94% at December 31, 2008 to 34.94% at
December 31, 2009, and to 25.87% at December 31, 2010. The majority of our nonperforming loans are
secured by real estate collateral. While our nonperforming loans have trended upward since 2008,
the underlying collateral coverage for nonperforming loans
supports the likelihood of collection of our principal, and therefore, we do not generally
estimate a proportionate upward trend in losses. Management believes that based on detailed
analysis of each nonperforming credit and the value of any associated collateral that the allowance
for loan losses at December 31, 2010 is sufficient to cover probable losses in the nonperforming
loans.
The net carrying value of impaired loans is generally based on the fair values of collateral
obtained through independent appraisals or internal evaluations, or by discounting the total
expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation
is recorded. At December 31, 2010, $6,376,000 of our Companys allowance for loan losses was
allocated to impaired loans totaling approximately $56,271,000 compared to $6,415,000 of our
Companys allowance for loan losses allocated to impaired loans totaling approximately $73,867,000
at December 31, 2009. Based upon detailed analysis of all impaired loans, management has determined
that $26,038,000, or 46%, of impaired loans require no reserve allocation at December 31, 2010
compared to $47,572,000, or 64%, at December 31, 2009. Management believes the excess value in the
collateral was sufficient at December 31, 2010 and 2009, and these loans did not require additional
reserves.
In addition to non-accrual loans and TDRs at December 31, 2009 included in the table above,
which were considered impaired, management had identified additional loans totaling approximately
$31,522,000 which are not included in the nonaccrual table above but are considered by management
to be impaired compared to $9,546,000 in December 31, 2008. At December 31, 2010 there were no
additional loans considered impaired that were not included in either non-accrual loans or TDRs.
21
As of December 31, 2010 and 2009 approximately $19,239,000 and $15,944,000, respectively, of
loans not included in the nonaccrual table above or identified by management as being impaired were
classified by management 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. The
$3,295,000 increase in classified loans is the result of several borrowers who have experienced
cash flow problems and as well as some deterioration in collateral value. Management elected to
allocate non-specific reserves to these credits based upon the inherent risk present.
The allowance for loan losses is available to absorb probable loan losses regardless of the
category of loan to be charged off. The allowance for loan losses consists of asset-specific
reserves, and reserves based on expected loss estimates.
The asset-specific component applies to loans evaluated individually for impairment and is
based on managements best estimate of proceeds from liquidating collateral. The actual timing and
amount of repayments and the ultimate realizable value of the collateral may differ from
managements estimate.
The expected loss component is determined by applying percentages to pools of loans by asset
type. These percentages are determined by using historical loss percentages. These expected loss
estimates are sensitive to changes in delinquency status, realizable value of collateral, and other
risk factors.
The unallocated portion of the allowance is based on managements evaluation of conditions
that are not directly reflected in the determination of the asset-specific component and the
expected loss component discussed above. The evaluation of inherent loss with respect to these
qualitative conditions is subject to a higher degree of uncertainty because they may not be
identified with specific problem credits or portfolio segments. Conditions evaluated in connection
with the unallocated portion of the allowance include general economic and business conditions
affecting our key lending areas, credit quality trends (including trends in substandard loans
expected to result from existing conditions), collateral values, specific industry conditions
within portfolio segments, bank regulatory examination results, and findings of our internal loan
review department.
The underlying assumptions, estimates and assessments used by management to determine these
components are continually evaluated and updated to reflect managements current view of overall
economic conditions and relevant factors impacting credit quality and inherent losses. Changes in
such estimates could significantly impact the allowance and provision for credit losses. Our
Company could experience credit losses that are different from the current estimates made by
management.
The following table is a summary of the allocation of the allowance for loan losses as of the
dates indicated:
Years Ended December 31, | ||||||||||||||||||||
(Dollars in thousands) | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Allocation of allowance for
loan losses at end of period: |
||||||||||||||||||||
Commercial, financial, and
agricultural |
$ | 2,931 | $ | 2,773 | $ | 1,712 | $ | 3,762 | $ | 3,114 | ||||||||||
Real estate construction residential |
2,067 | 348 | | | | |||||||||||||||
Real estate construction commercial |
1,339 | 1,740 | 2,490 | 590 | 755 | |||||||||||||||
Real estate mortgage residential |
3,922 | 3,488 | 557 | 381 | 820 | |||||||||||||||
Real estate mortgage commercial |
3,458 | 4,693 | 6,014 | 3,492 | 2,706 | |||||||||||||||
Installment loans to individuals |
231 | 380 | 391 | 419 | 529 | |||||||||||||||
Unallocated |
617 | 1,375 | 1,503 | 638 | 1,091 | |||||||||||||||
Total |
$ | 14,565 | $ | 14,797 | $ | 12,667 | $ | 9,282 | $ | 9,015 | ||||||||||
Percent of categories to total loans: |
||||||||||||||||||||
Commercial, financial, and
agricultural |
14.6 | % | 15.3 | % | 15.2 | % | 16.6 | % | 17.9 | % | ||||||||||
Real estate construction residential |
3.5 | 3.9 | 4.9 | | | |||||||||||||||
Real estate construction commercial |
6.2 | 7.9 | 7.9 | 16.2 | 18.6 | |||||||||||||||
Real estate mortgage residential |
23.2 | 23.4 | 23.4 | 23.1 | 22.5 | |||||||||||||||
Real estate mortgage commercial |
48.9 | 45.8 | 45.3 | 40.1 | 36.5 | |||||||||||||||
Installment loans to individuals |
3.6 | 3.7 | 3.3 | 4.0 | 4.5 | |||||||||||||||
Total |
100.0 | 100.0 | 100.0 | 100.0 | 100.0 | |||||||||||||||
22
The following table is a summary of the general and specific allocations within the allowance for
loan losses:
December 31, | December 31, | |||||||
(Dollars in thousands) | 2010 | 2009 | ||||||
Allocation of allowance for loan losses: |
||||||||
Specific reserve allocation for impaired loans |
$ | 6,376 | $ | 6,415 | ||||
General reserve allocation for all other non-impaired loans |
8,189 | 8,382 | ||||||
Total |
$ | 14,565 | $ | 14,797 | ||||
Management has established procedures that result in specific allowance allocations for any
estimated incurred loss. For loans not considered impaired, a general allowance allocation is
computed using factors developed over time based on actual loss experience. The specific and
general allocations represent managements best estimate of probable losses contained in the loan
portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific
and general allocations, the entire allowance is available to absorb any credit losses.
The specific reserve component of our allowance for loan losses at December 31, 2010 was
determined by using fair values of the underlying collateral through independent appraisals or
internal evaluations, or by discounting the total expected future cash flows. The general reserve
component of our allowance for loan losses at December 31, 2010 was determined by calculating
historical loss percentages for various loan categories over the previous ten quarters. Management
determined that the previous ten quarters were reflective of the loss characteristics of our
Companys loan portfolio during the recent economic downturn. These historical loss percentages
were then applied to the various categories of loans to determine an expected loss requirement for
the current portfolio. At December 31, 2010, the specific reserve component decreased $39,000 due
to a comparable decrease in the volume of impaired loans. During the same period, the general
reserve component declined from $8,382,000 at December 31, 2009 to $8,189,000 at December 31, 2010
due to usage of a historical loss experience more reflective of our Companys loss characteristics.
Prior to 2010, the historical loss percentage for non-impaired loans was based on a blend between
industry standards and our Companys five year loss experience.
At December 31, 2010, management allocated $13,948,000 of the $14,565,000 total allowance for
loan losses to specific loans and loan categories and $617,000 was unallocated. This is compared to
$13,422,000 of the $14,797,000 total allowance for loan losses allocated to specific loans and loan
categories and $1,375,000 that was unallocated at December 31, 2009. The decrease in the portion of
the allowance for loan losses related to non asset-specific reserves is the result of management
analyzing and assessing this portion of the allowance for loan losses on a more detailed level by
homogeneous loan categories for loans not considered impaired. Such analysis measured reserve
requirements based on historical loss experiences of loans in those individual categories and
therefore provided a more robust reserve methodology. Such reserve methodology considers the loss
experience for certain types of loans and loan grades for the past ten quarters. Given the
enhancements to the methodology for historical loss experience, the unallocated reserves for
certain qualitative factors have been reduced accordingly.
Our Company does not lend funds for the type of transactions defined as highly leveraged by
bank regulatory authorities or for foreign loans. Additionally, our Company does not have any
concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan
portfolio composition table. Our Company does not have any interest-earning assets which would have
been included in nonaccrual, past due, or restructured loans if such assets were loans.
Investment Portfolio
Our Company classifies its debt and equity securities into one of the following two
categories:
Held-to-Maturity includes investments in debt securities which our Company has the positive
intent and ability to hold until maturity. Available-for-Sale includes investments in debt and
equity securities not classified as held to maturity or trading (i.e., investments which our
Company has no present plans to sell in the near-term but may be sold in the future under different
circumstances). Our Companys investment portfolio consists of available-for-sale securities.
Debt securities classified as held-to-maturity are carried at amortized cost, while debt and
equity securities classified as available-for-sale are carried at estimated market value.
Unrealized holding gains and losses from available-for-sale securities are excluded from earnings
and reported, net of applicable taxes, as a separate component of stockholders equity until
realized.
Our Company does not engage in trading activities and accordingly does not have any debt or
equity securities classified as trading securities. Historically our Companys practice had been to
purchase and hold debt instruments until
23
maturity unless special circumstances exist. However,
since the investment portfolios major function is to provide liquidity and to balance our
Companys interest rate sensitivity position, all debt securities are classified as
available-for-sale.
At December 31, 2010, our investment portfolio classified as available-for-sale represented
14.9% of total consolidated assets. Future levels of held-to-maturity and available-for-sale
investment securities can be expected to vary depending upon liquidity and interest sensitivity
needs as well as other factors.
The following table presents the composition of the investment portfolio by major category for the
periods presented:
December 31, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
U.S. treasury |
$ | 1,028 | $ | | ||||
Government sponsored enterprises |
53,342 | 44,381 | ||||||
Asset-backed securities |
90,176 | 69,435 | ||||||
Obligations of states and political subdivisions |
34,432 | 39,111 | ||||||
Total available for sale debt securities |
178,978 | 152,927 | ||||||
As of December 31, 2010, the maturity of debt securities in the investment portfolio was as
follows:
Over One | Over Five | Weighted | ||||||||||||||||||||||
One Year | Through | Through | Over | Average | ||||||||||||||||||||
(In thousands) | Or Less | Five Years | Ten Years | Ten Years | Total | Yield (1) | ||||||||||||||||||
U.S. treasury |
$ | | $ | 1,028 | $ | | $ | | $ | 1,028 | 2.01 | % | ||||||||||||
Government sponsored enterprises |
802 | 51,592 | 948 | | 53,342 | 2.17 | ||||||||||||||||||
Asset-backed (2) |
458 | 73,500 | 16,218 | | 90,176 | 3.47 | ||||||||||||||||||
States and political subdivisions (3) |
2,753 | 11,745 | 15,286 | 4,648 | 34,432 | 5.09 | ||||||||||||||||||
Total available-for-sale debt securities |
$ | 4,013 | $ | 137,865 | $ | 32,452 | $ | 4,648 | $ | 178,978 | 3.37 | % | ||||||||||||
Weighted average yield (1) |
5.19 | % | 3.16 | % | 3.89 | % | 5.09 | % | 3.37 | % | ||||||||||||||
(1) | Weighted average yield is based on amortized cost. | |
(2) | Asset-backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio experience during the twelve months ended December 31, 2010 calculated separately for each mortgage-backed security. These repayment speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage interest rates. | |
(3) | Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the statutory Federal income tax rate of 34%. |
At December 31, 2010, $159,000 of debt securities classified as available-for-sale in the
table above had variable rate provisions with adjustment periods ranging from one week to twelve
months.
The following non-marketable securities are restricted securities which, lacking a market, are
carried at cost. These securities are reported in other assets. At December 31, 2010, $4,495,000 of
the total included Federal Home Loan Bank (Des Moines) stock held by the Bank in accordance with
debt and regulatory requirements. Other non-marketable securities include an $1,486,000 equity
investment in our Companys unconsolidated Trusts. (See Note 8 to our Companys consolidated
financials for further explanation on the Exchange National Trusts.)
December 31, | ||||||||
(In thousands) | 2010 | 2009 | ||||||
Federal Home Loan Bank of Des Moines Stock |
$ | 4,495 | $ | 5,107 | ||||
Federal Reserve Bank Stock |
| | ||||||
Midwest Independent Bank Stock |
151 | 151 | ||||||
Federal Agricultural Mortgage Corporation |
10 | 10 | ||||||
Investment in unconsolidated trusts |
1,486 | 1,486 | ||||||
Total non-marketable investment securities |
6,142 | 6,754 | ||||||
24
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 our Company, management prefers to focus on transaction
accounts and full service relationships with customers. Management believes it has the ability to
increase deposits at any time by offering rates slightly higher than the market rate.
Our Companys Asset/Liability Committee (ALCO), primarily made up of senior management, has
direct oversight responsibility for our Companys 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 our Companys liquidity.
Our Company has a number of sources of funds to meet liquidity needs on a daily basis. Our
Companys most liquid assets are comprised of available for sale investment securities, federal
funds sold, and securities purchased under agreements to resell, and excess reserves held at the
Federal Reserve as follows:
(dollars in thousands) | 2010 | 2009 | ||||||
Federal funds sold |
$ | 126 | $ | 90 | ||||
Federal Reserve excess reserves |
29,286 | 2,216 | ||||||
Available for sale investments securities |
178,978 | 152,927 | ||||||
Total |
$ | 208,390 | $ | 155,233 | ||||
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
$178,978,000 at December 31, 2010 and included an unrealized net gain of $1,680,000. The portfolio
includes maturities of approximately $4,012,000 over the next twelve months, which offer resources
to meet either new loan demand or reductions in our Companys deposit base. Our Company pledges
portions of its investment securities portfolio to secure public fund deposits, securities sold
under agreements to repurchase, trust funds, and borrowing capacity at the Federal Reserve Bank.
At December 31, 2010, total investment securities pledged for these purposes were as follows:
(dollars in thousands) | 2010 | |||
Investment securities pledged for the purpose of securing: |
||||
Federal Reserve Bank borrowings |
$ | 3,262 | ||
Repurchase agreements |
45,929 | |||
Other Deposits |
98,908 | |||
Total pledged, at fair value |
$ | 148,099 | ||
At December 31, 2010, our Companys unpledged securities in the available for sale portfolio
totaled approximately $30,879,000.
25
Liquidity is also available from our Companys base of core customer deposits, defined as
demand, interest, checking, savings, and money market deposit accounts. At December 31, 2010, such
deposits totaled $516,887,000 and represented 54.6% of our Companys total deposits. These core
deposits are normally less volatile and are often tied to other products of our Company through
long lasting relationships. Time deposits and certificates of deposit of $100,000 and over totaled
$429,776,000 at December 31, 2010. These accounts are normally considered more volatile and higher
costing representing 45.4% of total deposits at December 31, 2010.
(dollars in thousands) | 2010 | 2009 | ||||||
Core deposit base: |
||||||||
Non-interest bearing demand |
$ | 137,750 | $ | 135,018 | ||||
Interest checking |
160,225 | 139,624 | ||||||
Savings and money market |
218,912 | 214,660 | ||||||
Total |
$ | 516,887 | $ | 489,302 | ||||
Other components of liquidity are the level of borrowings from third party sources and the
availability of future credit. Our Companys outside borrowings are comprised of securities sold
under agreements to repurchase, FHLB advances, and subordinated notes as follows:
(dollars in thousands) | 2010 | 2009 | ||||||
Borrowings: |
||||||||
Federal funds purchased |
$ | | $ | 4,980 | ||||
Securities sold under agreements to repurchase |
30,068 | 31,665 | ||||||
FHLB advances |
66,986 | 79,317 | ||||||
Subordinated notes |
49,486 | 49,486 | ||||||
Total |
$ | 146,540 | $ | 160,468 | ||||
Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent
banks with which our Company maintains approved credit lines. As of December 31, 2010, under
agreements with these unaffiliated banks, the Bank may borrow up to $35,000,000 in federal funds on
an unsecured basis and $8,500,000 on a secured basis. There were no federal funds purchased
outstanding at December 31, 2010. Securities sold under agreements to repurchase are generally
borrowed overnight and are secured by a portion of our Companys investment portfolio. At December
31, 2010 there was $30,068,000 in repurchase agreements. Our Company may periodically borrow
additional short-term funds from the Federal Reserve Bank through the discount window; although no
such borrowings were outstanding at the year end. 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 December 31, 2010, the Bank had $66,986,000 in outstanding borrowings with the FHLB. In
addition, our Company has $49,486,000 in outstanding subordinated notes issued to wholly-owned
grantor trusts, funded by preferred securities issued by the trusts.
Our 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, our Company may
draw advances against this collateral. 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 our Company at December 31, 2010:
December 31, 2010 | ||||||||||||
Federal | ||||||||||||
(dollars in thousands) | FHLB | Reserve | Other | |||||||||
Collateral value pledged |
$ | 271,302 | $ | 3,262 | $ | 7,079 | ||||||
Advances outstanding |
(66,986 | ) | | | ||||||||
Letters of credit issued |
(96 | ) | | | ||||||||
Total |
$ | 204,220 | $ | 3,262 | $ | 7,079 | ||||||
26
Sources and Uses of Funds
Cash and cash equivalents were $50,980,000 at December 31, 2010 compared to $24,666,000 at
December 31, 2009. The $26,666,000 increase resulted from changes in the various cash flows
produced by operating, investing, and financing activities of our Company, as shown in the
accompanying consolidated statement of cash flows for the year ended December 31, 2010. Cash flow
provided from operating activities consists mainly of net income adjusted for certain non-cash
items. Operating activities provided cash flow of $21,456,000 during the year ended 2010. Investing
activities consisting mainly of purchases, sales and maturities of available for sale securities,
and changes in the level of the loan portfolio, provided cash flow of $36,324,000. The cash inflow
primarily consisted of a $53,926,000 decrease in the loan portfolio, $161,694,000 in proceeds from
maturities, calls, and pay-downs of investment securities, $9,689,000 in proceeds from sales of
other real estate owned and repossessions, partially offset by $189,082,000 purchases of investment
securities.
Financing activities used total cash of $31,466,000, resulting primarily from a $12,331,000
net repayment of FHLB advances, a decrease of $6,577,000 of federal funds purchased and securities
sold under agreements to repurchase, and a net $12,392,00 decrease in time deposits and
interest-bearing transaction accounts. Future short-term liquidity needs arising from daily
operations are not expected to vary significantly during 2010.
During 2008, liquidity risk became a concern affecting the general banking industry. Because
of the uncertainty in the economy, our Company decided to participate in the U.S. Treasury
Departments Capital Purchase Program (CPP), a voluntary program that provides capital to
financially healthy banks. During 2009, our Company elected to cease market purchases of treasury
stock and preserve its cash and capital position. Cash used for treasury stock purchases, net of
cash received in connection with stock programs, and dividend payments were as follows:
(Dollars in thousands) | 2010 | 2009 | 2008 | |||||||||
Purchases of treasury stock |
$ | | $ | | $ | 802 | ||||||
Cash dividends preferred |
1,513 | 1,370 | | |||||||||
Cash dividends common |
1,385 | 2,665 | 3,486 | |||||||||
Total |
$ | 2,898 | $ | 4,035 | $ | 4,288 | ||||||
Our Companys liquidity depends primarily on the dividends paid to it as the sole shareholder
of our subsidiary Bank. As discussed in Note 14 to our Companys consolidated financial statements,
the Bank will be required to receive regulatory approval prior to paying dividends to our Company
until such time as the Banks unappropriated retained earnings balance is restored to a positive
balance.
In the normal course of business, our Company enters into certain forms of off-balance sheet
transactions, including unfunded loan commitments and letters of credit. These transactions are
managed through our Companys various risk management processes. Management considers both
on-balance sheet and off-balance sheet transactions in its evaluation of our Companys liquidity.
In the section entitled, Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements,
below we disclose that our Company had $97,561,000 in unused loan commitments and standby letters
of credit as of December 31, 2010. While this commitment level would be difficult to fund given our
Companys current liquidity resources, we know that the nature of these commitments are such that
the likelihood of such a funding demand is very low.
Our Company is a legal entity, separate and distinct from the Bank, which must provide its own
liquidity to meet its operating needs. On December 19, 2008, as part of our Companys participation
in the U.S. Treasury Departments Capital Purchase Program (CPP), our Company issued 30,255 shares
of senior preferred stock and a ten year warrant to purchase approximately 265,471 shares of common
stock to the U.S. Department of Treasury in exchange for $30,255,000. See Note 12 to our Companys
consolidated financial statements. The Companys ongoing liquidity needs primarily include funding
its operating expenses and paying cash dividends to its common and preferred shareholders. During
the years ended December 31, 2010 and 2009,respectively, the Company paid cash dividends to its
common and preferred shareholders totaling $2,898,000 and $4,035,000. A large portion of the
Companys liquidity is obtained from the Bank in the form of dividends. See Note 14 to our
Companys consolidated financial statements. At December 31, 2010 and 2009, the Company had cash
and cash equivalents totaling $12,449,000 and $14,738,000 respectively.
Capital Management
Risk-based capital guidelines for financial institutions were adopted by regulatory
authorities effective January 1, 1991. These guidelines are designed to relate regulatory capital
requirements to the risk profiles of the specific institutions and to provide more uniform
requirements among the various regulators. Our Company is required to maintain a minimum risk-based
capital to risk-weighted assets ratio of 8.00%, with at least 4.00% being Tier 1 capital. In
addition,
27
a minimum leverage ratio, Tier 1 capital to adjusted total assets, of 3.00% must be maintained.
However, for all but the most highly rated financial institutions, a leverage ratio of 3.00% plus
an additional cushion of 100 to 200 basis points is expected.
Well-Capitalized | ||||||||||||||||
Regulatory | ||||||||||||||||
2010 | 2009 | 2008 | Guidelines | |||||||||||||
Risk-based capital ratios: |
||||||||||||||||
Total capital |
17.05 | % | 16.49 | % | 16.01 | % | 10.00 | % | ||||||||
Tier I capital |
14.25 | 14.01 | 13.55 | 6.00 | ||||||||||||
Leverage ratio |
11.00 | 11.35 | 10.80 | 5.00 | ||||||||||||
Commitments, Contractual Obligations, and Off-Balance Sheet Arrangements
The required payments of time deposits and other borrowed money, not including interest, at
December 31, 2010 are as follows:
Payments due by Period | ||||||||||||||||||||
Less than 1 | 1-3 | 3-5 | Over 5 | |||||||||||||||||
(Dollars in thousands) | Total | Year | Years | Years | Years | |||||||||||||||
Time deposits |
$ | 429,775 | $ | 304,222 | $ | 113,195 | $ | 5,196 | $ | 7,162 | ||||||||||
Other borrowed money |
66,986 | 38,576 | 18,410 | | 10,000 | |||||||||||||||
In the normal course of business, our Company is party to activities that contain credit,
market and operational risk that are not reflected in whole or in part in our Companys
consolidated financial statements. Such activities include traditional off-balance sheet credit
related financial instruments.
Our Company provides customers with off-balance sheet credit support through loan commitments
and standby letters of credit. Summarized credit-related financial instruments, including both
commitments to extend credit and letters of credit at December 31, 2010 are as follows:
Amount of Commitment Expiration per Period | ||||||||||||||||||||
Less than | 1-3 | 3-5 | Over 5 | |||||||||||||||||
(Dollars in thousands) | Total | 1 Year | Years | Years | Years | |||||||||||||||
Unused loan commitments |
$ | 94,115 | $ | 73,630 | $ | 9,654 | $ | 3,575 | $ | 7,256 | ||||||||||
Standby letters of credit |
3,446 | 2,808 | 619 | 19 | | |||||||||||||||
Since many of the unused commitments are expected to expire or be only partially used,
the total amount of commitments in the preceding table does not necessarily represent future cash
requirements.
Quantitative and Qualitative Disclosures About Market Risk
Interest Sensitivity
Our Companys exposure to market risk is reviewed on a monthly basis by our Companys
Asset/Liability Committee and Board of Directors. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be reflected as a loss of
future net interest income and/or a loss of current fair market values. The objective is to
measure the effect on net interest income and to adjust the balance sheet to minimize the inherent
risk while at the same time maximizing income. Management realizes certain risks are inherent and
that the goal is to identify and minimize those risks. Tools used by our Banks management include
the standard gap report subject to different rate shock scenarios. At December 31, 2010, the rate
shock scenario models indicated that annual net interest income could change by as much as (18.4)%
to 22.2% should interest rates rise or fall, respectively, within 300 basis points from their
current level over a one year period. However there are no assurances that the change will not be
more or less than this estimate. Management further believes this is an acceptable level of risk.
The following table represents the estimated interest rate sensitivity and periodic and
cumulative gap positions calculated as of December 31, 2010. Significant assumptions used for this
table included: loans will repay at historic repayment rates; certain interest-bearing demand
accounts are interest sensitive due to immediate repricing, and fixed
28
maturity deposits will not be withdrawn prior to maturity. A significant variance in actual
results from one or more of these assumptions could materially affect the results reflected in the
table.
Over | ||||||||||||||||||||||||||||
5 years or | ||||||||||||||||||||||||||||
no stated | ||||||||||||||||||||||||||||
(Dollars in thousands) | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Maturity | Total | |||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||
Investment securities |
$ | 3,722 | $ | 3,099 | $ | 13,730 | $ | 18,385 | $ | 29,357 | $ | 110,685 | $ | 178,978 | ||||||||||||||
Interest-bearing deposits |
29,562 | | | | | | 29,562 | |||||||||||||||||||||
Other restricted investments |
6,142 | | | | | | 6,142 | |||||||||||||||||||||
Federal funds sold and securities
purchased under agreements to resell |
126 | | | | | | 126 | |||||||||||||||||||||
Loans |
471,312 | 167,751 | 168,538 | 43,417 | 18,092 | 29,362 | 898,472 | |||||||||||||||||||||
Total |
$ | 510,864 | $ | 170,850 | $ | 182,268 | $ | 61,802 | $ | 47,449 | $ | 140,047 | $ | 1,113,280 | ||||||||||||||
LIABILITIES |
||||||||||||||||||||||||||||
Savings, Now deposits |
$ | | $ | | $ | 145,697 | $ | | $ | | $ | | $ | 145,697 | ||||||||||||||
Rewards checking, Super Now,
money market deposits |
233,529 | | 233,529 | |||||||||||||||||||||||||
Time deposits |
304,132 | 58,227 | 54,968 | 5,196 | 7,163 | | 429,686 | |||||||||||||||||||||
Federal funds purchased and
securities sold under
agreements to repurchase |
30,068 | | | | | | 30,068 | |||||||||||||||||||||
Subordinated notes |
49,486 | | | | | | 49,486 | |||||||||||||||||||||
Other borrowed money |
48,582 | 8,301 | 10,103 | | | | 66,986 | |||||||||||||||||||||
Total |
$ | 665,797 | $ | 66,528 | $ | 210,768 | $ | 5,196 | $ | 7,163 | $ | | $ | 955,452 | ||||||||||||||
Interest-sensitivity GAP |
||||||||||||||||||||||||||||
Periodic GAP |
$ | (154,933 | ) | $ | 104,322 | $ | (28,500 | ) | $ | 56,606 | $ | 40,286 | $ | 140,047 | $ | 157,828 | ||||||||||||
Cumulative GAP |
$ | (154,933 | ) | $ | (50,611 | ) | $ | (79,111 | ) | $ | (22,505 | ) | $ | 17,781 | $ | 157,828 | $ | 157,828 | ||||||||||
Ratio of interest-earnings
assets to interest-bearing liabilities |
||||||||||||||||||||||||||||
Periodic GAP |
0.77 | 2.57 | 0.86 | 11.89 | 6.62 | NM | 1.17 | |||||||||||||||||||||
Cumulative GAP |
0.77 | 0.93 | 0.92 | 0.98 | 1.02 | 1.17 | 1.17 | |||||||||||||||||||||
Impact of New Accounting Standards
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 which amends
ASC Topic 820, Fair Value Measurements and Disclosures. This update will provide more robust
disclosures about (1) the different classes of assets and liabilities measured at fair value, (2)
the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and
(4) the transfers between Levels 1, 2, and 3. This is effective for financial statements issued for
interim and annual periods ending after December 15, 2009. The disclosures required by this update
are reported in the notes to our Companys consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-10 which amends ASC Topic 810, Consolidation.
The objective of this update is to defer the effective date of the amendments to the consolidation
requirements made by FASB Statement 167 to a reporting entitys interest in certain types of
entities and clarify other aspects of the Statement 167 amendments. As a result of the deferral, a
reporting entity will not be required to apply the Statement 167 amendments to the Subtopic 810-10
consolidation requirements to its interest in an entity that meets the criteria to qualify for
deferral. However, the amendments in this Update do not defer the disclosure requirements in the
Statement 167 amendments to Topic 810. This is effective for financial statements issued for the
first annual period beginning after November 15, 2009,
29
and for interim periods with the first annual reporting period. The disclosures required by
this new update did not have a material effect in the notes to our Companys consolidated financial
statements.
In July 2010, the FASB issued ASU No. 2010-20 Receivables (ASC Topic 310):
Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This ASU requires expanded credit risk disclosures intended to provide investors with greater
transparency regarding the allowance for credit losses and the credit quality of financing
receivables. Under this ASU, companies are required to provide more information about the credit
quality of their financing receivables in the disclosures to financial statements, such as aging
information, credit quality indicators, changes in the allowance for credit losses, and the nature
and extent of troubled debt restructurings and their effect on the allowance for credit losses.
Both new and existing disclosures must be disaggregated by portfolio segment or class based on the
level of disaggregation that management uses when assessing its allowance for credit losses and
managing its credit exposure. The disclosures as of the end of a reporting period are effective for
annual periods ending on or after December 15, 2010. The disclosures about activity that occurs
during a reporting period will be effective for annual reporting periods beginning on or after
December 15, 2010. The disclosures required by this update are reported in the notes to our
Companys consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was incorporated into ASC
Topic 855 Subsequent Events (ASC 855). ASC 855 provides guidance on managements assessment of
subsequent events. The statement is not expected to significantly change practice because its
guidance is similar to that in American Institute of Certified Public Accountants Professional
Standards U.S. Auditing Standards Section 560, Subsequent Events, with some modifications. This
statement became effective for our Company on June 15, 2009. The adoption of this statement did
not have a material effect on our consolidated financial statements. In February 2010, the FASB
issued ASU No. 2010-09 Subsequent Events Amendments to Certain Recognition and Disclosure
Requirements, which removed the requirements in ASC 855 for an SEC filer to disclose the date
through which subsequent events have been evaluated for both issued and revised financial
statements. This update became effective upon issuance for our Company and the adoption of this
update did not have a material effect on our consolidated financial statements
In June 2009, the FASB issued authoritative guidance on accounting for transfers of financial
assets, which was subsequently incorporated into ASC Topic 860, Transfers and Servicing. The new
guidance amends ASC Topic 860 and requires more information about transfers of financial assets,
including securitization transactions, and where companies have continuing exposure to the risks
related to transferred financial assets. The guidance eliminates the concept of a qualifying
special-purpose entity, changes the requirements for derecognizing financial assets and requires
additional disclosures. This became effective for the first annual period beginning after November
15, 2009, and for interim periods within the first annual reporting period, and must be applied to
transfers occurring on or after the effective date. Our Company follows the requirements of the new
guidance, which did not significantly impact our consolidated financial statements or the
disclosures presented in our consolidated financial statements.
Effects of Inflation
The effects of inflation on financial institutions are different from the effects on other
commercial enterprises since financial institutions make few significant capital or inventory
expenditures which are directly affected by changing prices. Because bank assets and liabilities
are virtually all monetary in nature, inflation does not affect a financial institution as much as
do changes in interest rates. The general level of inflation does underlie the general level of
most interest rates, but interest rates do not increase at the rate of inflation as do prices of
goods and services. Rather, interest rates react more to changes in the expected rate of inflation
and to changes in monetary and fiscal policy.
Inflation does have an impact on the growth of total assets in the banking industry, often
resulting in a need to increase capital at higher than normal rates to maintain an appropriate
capital to asset ratio. In the opinion of management, inflation did not have a significant effect
on our Companys operations for the three years ended December 31, 2010.
30
CONSOLIDATED FINANCIAL STATEMENTS
The following consolidated financial statements of our Company and reports of our Companys
independent auditors appear on the pages indicated.
Page | ||||
Report of Independent Registered Public Accounting Firm. |
32 | |||
Consolidated Balance Sheets as of December 31, 2010 and 2009. |
33 | |||
Consolidated Statements of Operations for each of the years ended
December 31, 2010, 2009 and 2008. |
34 | |||
Consolidated Statements of Stockholders Equity and Comprehensive
Income (Loss) for each of the years ended December 31, 2010, 2009 and 2008. |
35 | |||
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2010, 2009 and 2008. |
36-37 | |||
Notes to Consolidated Financial Statements. |
38 |
31
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Hawthorn Bancshares, Inc.:
Hawthorn Bancshares, Inc.:
We have audited the accompanying consolidated balance sheets of Hawthorn Bancshares, Inc. and
subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated
statements of operations, stockholders equity and comprehensive income (loss), and cash flows for
each of the years in the three-year period ended December 31, 2010. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hawthorn Bancshares, Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2010, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Hawthorn Bancshares, Inc.s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 30, 2011 expressed an unqualified opinion on the effectiveness of Hawthorn Bancshares
Inc.s internal control over financial reporting.
/s/ KPMG LLP
St. Louis, Missouri
March 30, 2011
St. Louis, Missouri
March 30, 2011
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Consolidated Balance Sheets
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Loans |
$ | 898,472,463 | $ | 991,614,007 | ||||
Allowances for loan losses |
(14,564,867 | ) | (14,796,549 | ) | ||||
Net loans |
883,907,596 | 976,817,458 | ||||||
Investment in available-for-sale securities, at fair value |
178,977,550 | 152,926,685 | ||||||
Federal funds sold and securities purchased under agreements to resell |
125,815 | 89,752 | ||||||
Cash and due from banks |
50,853,985 | 24,575,943 | ||||||
Premises and equipment net |
36,980,503 | 38,623,293 | ||||||
Other real estate owned and repossessed assets net |
14,009,017 | 8,490,914 | ||||||
Accrued interest receivable |
5,733,684 | 6,625,557 | ||||||
Mortgage servicing rights |
2,355,990 | 2,020,964 | ||||||
Intangible assets net |
977,509 | 1,503,986 | ||||||
Cash surrender value life insurance |
2,001,965 | 1,929,910 | ||||||
Other assets |
24,248,590 | 22,866,092 | ||||||
Total assets |
$ | 1,200,172,204 | $ | 1,236,470,554 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Deposits: |
||||||||
Non-interest bearing demand |
$ | 137,749,571 | $ | 135,017,639 | ||||
Savings, interest checking and money market |
379,137,539 | 354,284,004 | ||||||
Time deposits $100,000 and over |
124,566,760 | 137,860,435 | ||||||
Other time deposits |
305,208,786 | 329,160,719 | ||||||
Total deposits |
946,662,656 | 956,322,797 | ||||||
Federal funds purchased and securities sold
under agreements to repurchase |
30,068,453 | 36,645,434 | ||||||
Subordinated notes |
49,486,000 | 49,486,000 | ||||||
Other borrowed money |
66,985,978 | 79,317,302 | ||||||
Accrued interest payable |
1,491,503 | 2,438,121 | ||||||
Other liabilities |
3,989,303 | 4,489,617 | ||||||
Total liabilities |
1,098,683,893 | 1,128,699,271 | ||||||
Stockholders equity: |
||||||||
Preferred stock, $1,000 par value Authorized and issued 30,255 shares |
28,841,242 | 28,364,768 | ||||||
Common stock, $1 par value Authorized 15,000,000 shares; issued 4,635,891 and 4,463,813 shares respectively |
4,635,891 | 4,463,813 | ||||||
Surplus |
28,928,545 | 26,970,745 | ||||||
Retained earnings |
41,857,302 | 50,576,551 | ||||||
Accumulated other comprehensive income, net of tax |
742,149 | 912,224 | ||||||
Treasury stock; 161,858 shares, at cost |
(3,516,818 | ) | (3,516,818 | ) | ||||
Total stockholders equity |
101,488,311 | 107,771,283 | ||||||
Total liabilities and stockholders equity |
$ | 1,200,172,204 | $ | 1,236,470,554 | ||||
See accompanying notes to consolidated financial statements.
33
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Consolidated Statements of Operations
Years ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
INTEREST INCOME |
||||||||||||
Interest and fees on loans |
$ | 53,088,943 | $ | 57,409,274 | $ | 62,636,558 | ||||||
Interest on debt securities: |
||||||||||||
Taxable |
4,214,192 | 4,495,259 | 4,989,794 | |||||||||
Nontaxable |
1,173,805 | 1,441,418 | 1,688,871 | |||||||||
Interest on federal funds sold and securities purchased
under agreements to resell |
193 | 373 | 60,550 | |||||||||
Interest on interest-bearing deposits |
85,913 | 52,761 | 23,755 | |||||||||
Dividends on other securities |
175,634 | 163,533 | 315,685 | |||||||||
Total interest income |
58,738,680 | 63,562,618 | 69,715,213 | |||||||||
INTEREST EXPENSE |
||||||||||||
Interest on deposits: |
||||||||||||
Savings, interest checking and money market |
2,170,718 | 3,017,488 | 4,883,042 | |||||||||
Time deposit accounts $100,000 and over |
2,484,929 | 3,862,075 | 5,698,073 | |||||||||
Other time deposit accounts |
7,211,251 | 10,542,476 | 12,871,957 | |||||||||
Interest on federal funds purchased and securities sold
under agreements to repurchase |
75,402 | 88,573 | 868,528 | |||||||||
Interest on subordinated notes |
1,525,553 | 2,446,742 | 3,046,238 | |||||||||
Interest on other borrowed money |
2,284,649 | 3,016,872 | 4,231,062 | |||||||||
Total interest expense |
15,752,502 | 22,974,226 | 31,598,900 | |||||||||
Net interest income |
42,986,178 | 40,588,392 | 38,116,313 | |||||||||
Provision for loan losses |
15,255,000 | 8,354,000 | 8,211,000 | |||||||||
Net interest income after provision for loan losses |
27,731,178 | 32,234,392 | 29,905,313 | |||||||||
NON-INTEREST INCOME |
||||||||||||
Service charges on deposit accounts |
5,553,532 | 5,864,090 | 6,163,650 | |||||||||
Trust department income |
803,132 | 814,988 | 826,546 | |||||||||
Gain on sale of mortgage loans, net |
2,493,465 | 2,973,630 | 973,095 | |||||||||
Other |
1,630,589 | 1,049,441 | 1,330,760 | |||||||||
Total non-interest income |
10,480,718 | 10,702,149 | 9,294,051 | |||||||||
INVESTMENT SECURITIES GAINS (LOSSES), NET |
| 605,716 | 2,773 | |||||||||
NON-INTEREST EXPENSE |
||||||||||||
Salaries and employee benefits |
17,898,448 | 17,457,123 | 18,250,469 | |||||||||
Goodwill impairment |
| | 40,323,775 | |||||||||
Occupancy expense, net |
2,531,847 | 2,335,496 | 2,440,082 | |||||||||
Furniture and equipment expense |
1,996,837 | 2,286,014 | 2,437,558 | |||||||||
FDIC insurance assessment |
1,651,052 | 2,518,743 | 204,131 | |||||||||
Legal, examination, and professional fees |
1,441,063 | 1,221,861 | 1,144,777 | |||||||||
Advertising and promotion |
1,256,302 | 1,272,046 | 1,165,559 | |||||||||
Postage, printing, and supplies |
1,201,072 | 1,168,290 | 1,220,938 | |||||||||
Processing expense |
3,353,354 | 3,419,939 | 3,101,562 | |||||||||
Other real estate expense |
9,803,809 | 1,188,972 | 862,474 | |||||||||
Other |
3,716,665 | 3,861,896 | 4,824,133 | |||||||||
Total non-interest expense |
44,850,449 | 36,730,380 | 75,975,458 | |||||||||
(Loss) income before income taxes |
(6,638,553 | ) | 6,811,877 | (36,773,321 | ) | |||||||
Income tax (benefit) expense |
(3,086,813 | ) | 1,856,120 | (6,145,965 | ) | |||||||
Net (loss) income |
(3,551,740 | ) | 4,955,757 | (30,627,356 | ) | |||||||
Preferred stock dividends |
1,512,750 | 1,516,952 | 50,425 | |||||||||
Accretion of discount on preferred stock |
476,474 | 476,474 | 15,665 | |||||||||
Net (loss) income available to common shareholders |
$ | (5,540,964 | ) | $ | 2,962,331 | $ | (30,693,446 | ) | ||||
Basic (loss) earnings per share |
$ | (1.24 | ) | $ | 0.66 | $ | (6.83 | ) | ||||
Diluted (loss) earnings per share |
$ | (1.24 | ) | $ | 0.66 | $ | (6.83 | ) | ||||
See accompanying notes to consolidated financial statements.
34
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
Accumulated | Total | |||||||||||||||||||||||||||
other | Stock - | |||||||||||||||||||||||||||
Preferred | Common | Retained | Comprehensive | Treasury | holders | |||||||||||||||||||||||
Stock | Stock | Surplus | Earnings | Income (Loss) | Stock | Equity | ||||||||||||||||||||||
Balance, December 31, 2007 |
$ | | $ | 4,298,353 | $ | 22,530,191 | $ | 85,728,114 | $ | 1,356,538 | $ | (2,714,373 | ) | $ | 111,198,823 | |||||||||||||
Net loss |
| | | (30,627,356 | ) | | | (30,627,356 | ) | |||||||||||||||||||
Change in unrealized gain (loss) on securities: |
||||||||||||||||||||||||||||
Unrealized gain on debt securities
available-for-sale, net of tax |
| | | | 1,325,559 | | 1,325,559 | |||||||||||||||||||||
Adjustment on sales and calls of
debt securities, net of tax |
| | | | (1,692 | ) | | (1,692 | ) | |||||||||||||||||||
Defined benefit pension plans: |
||||||||||||||||||||||||||||
Net loss arising during year, net of tax |
| | | | (1,696,706 | ) | | (1,696,706 | ) | |||||||||||||||||||
Amortization of prior service cost included
in net periodic pension cost, net of tax |
| | | | 21,854 | | 21,854 | |||||||||||||||||||||
Total other comprehensive loss |
(350,985 | ) | ||||||||||||||||||||||||||
Total comprehensive loss |
(30,978,341 | ) | ||||||||||||||||||||||||||
Stock based compensation expense |
| | 231,761 | | | | 231,761 | |||||||||||||||||||||
Issuance of 30,255 shares of preferred stock
and 245,443 common stock warrants,
net of expenses |
27,872,629 | | 2,382,371 | | | | 30,255,000 | |||||||||||||||||||||
Accretion of preferred stock discount |
15,665 | | | (15,665 | ) | | | | ||||||||||||||||||||
Treasury stock purchased |
| | | | | (802,445 | ) | (802,445 | ) | |||||||||||||||||||
Cash dividends declared, $0.84 per share |
| | | (3,486,415 | ) | | | (3,486,415 | ) | |||||||||||||||||||
Balance, December 31, 2008 |
$ | 27,888,294 | $ | 4,298,353 | $ | 25,144,323 | $ | 51,598,678 | $ | 1,005,553 | $ | (3,516,818 | ) | $ | 106,418,383 | |||||||||||||
Net income |
| | | 4,955,757 | | | 4,955,757 | |||||||||||||||||||||
Change in unrealized gain (loss) on securities: |
||||||||||||||||||||||||||||
Unrealized loss on debt securities
available-for-sale, net of tax |
| | | | (277,903 | ) | | (277,903 | ) | |||||||||||||||||||
Adjustment on sales and calls of
debt securities, net of tax |
| | | | (369,487 | ) | | (369,487 | ) | |||||||||||||||||||
Defined benefit pension plans: |
||||||||||||||||||||||||||||
Net gain arising during the year, net of tax |
| | | | 511,634 | | 511,634 | |||||||||||||||||||||
Amortization of prior service cost included
in net periodic pension cost, net of tax |
| | | | 42,427 | | 42,427 | |||||||||||||||||||||
Total other comprehensive loss |
(93,329 | ) | ||||||||||||||||||||||||||
Total comprehensive income |
4,862,428 | |||||||||||||||||||||||||||
Stock based compensation expense |
| | 130,459 | | | | 130,459 | |||||||||||||||||||||
Accretion of preferred stock discount |
476,474 | | | (476,474 | ) | | | | ||||||||||||||||||||
Stock dividend |
| 165,460 | 1,695,963 | (1,861,423 | ) | | | | ||||||||||||||||||||
Cash dividends declared, preferred stock |
(1,369,879 | ) | (1,369,879 | ) | ||||||||||||||||||||||||
Cash dividends declared, common stock |
| | | (2,270,108 | ) | | | (2,270,108 | ) | |||||||||||||||||||
Balance, December 31, 2009 |
$ | 28,364,768 | $ | 4,463,813 | $ | 26,970,745 | $ | 50,576,551 | $ | 912,224 | $ | (3,516,818 | ) | $ | 107,771,283 | |||||||||||||
Net loss |
| | | (3,551,740 | ) | | | (3,551,740 | ) | |||||||||||||||||||
Change in unrealized gain (loss) on securities: |
||||||||||||||||||||||||||||
Unrealized loss on debt securities
available-for-sale, net of tax |
| | | | (389,428 | ) | | (389,428 | ) | |||||||||||||||||||
Defined benefit pension plans: |
||||||||||||||||||||||||||||
Net gain arising during the year, net of tax |
| | | | 171,388 | | 171,388 | |||||||||||||||||||||
Amortization of prior service cost included
in net periodic pension cost, net of tax |
| | | | 47,965 | | 47,965 | |||||||||||||||||||||
Total other comprehensive loss |
(170,075 | ) | ||||||||||||||||||||||||||
Total comprehensive loss |
(3,721,815 | ) | ||||||||||||||||||||||||||
Stock based compensation expense |
| | 87,310 | | | | 87,310 | |||||||||||||||||||||
Accretion of preferred stock discount |
476,474 | | | (476,474 | ) | | | | ||||||||||||||||||||
Stock dividend |
| 172,078 | 1,870,490 | (2,042,568 | ) | | | | ||||||||||||||||||||
Cash dividends declared, preferred stock |
(1,512,750 | ) | (1,512,750 | ) | ||||||||||||||||||||||||
Cash dividends declared, common stock |
| | | (1,135,717 | ) | | | (1,135,717 | ) | |||||||||||||||||||
Balance, December 31, 2010 |
$ | 28,841,242 | $ | 4,635,891 | $ | 28,928,545 | $ | 41,857,302 | $ | 742,149 | $ | (3,516,818 | ) | $ | 101,488,311 | |||||||||||||
See accompanying notes to consolidated financial statements.
35
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Consolidated Statements of Cash Flows
Years ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net (loss) income |
$ | (3,551,740 | ) | $ | 4,955,757 | $ | (30,627,356 | ) | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Goodwill impairment |
| | 40,323,775 | |||||||||
Provision for loan losses |
15,255,000 | 8,354,000 | 8,211,000 | |||||||||
Depreciation expense |
1,963,842 | 2,044,257 | 2,158,740 | |||||||||
Net amortization (accretion) of debt securities, premiums, and discounts |
698,420 | 524,639 | (15,372 | ) | ||||||||
Amortization of intangible assets |
526,477 | 626,111 | 701,443 | |||||||||
Stock based compensation expense |
87,310 | 130,459 | 231,761 | |||||||||
Loss on sales and dispositions of premises and equipment |
59,716 | 137,209 | 49,830 | |||||||||
Loss (gain) on sales and dispositions of other real estate owned
and repossessions |
2,310,734 | (27,158 | ) | 464,411 | ||||||||
Provision for other real estate owned |
6,158,433 | | | |||||||||
Decrease in accrued interest receivable |
891,873 | 850,536 | 1,288,103 | |||||||||
Increase in cash surrender value -life insurance |
(72,055 | ) | (77,008 | ) | (32,370 | ) | ||||||
Increase in other assets |
(124,729 | ) | (4,419,959 | ) | (2,007,842 | ) | ||||||
Decrease in accrued interest payable |
(946,618 | ) | (1,409,294 | ) | (876,550 | ) | ||||||
Increase (decrease) in other liabilities |
30,164 | (730,764 | ) | (1,820,022 | ) | |||||||
Loss on sales of debt securities |
| (605,716 | ) | (2,773 | ) | |||||||
Origination of mortgage loans for sale |
(104,001,793 | ) | (150,628,000 | ) | (54,892,543 | ) | ||||||
Proceeds from the sale of mortgage loans |
106,547,681 | 153,601,630 | 55,865,638 | |||||||||
Gain on sale of mortgage loans, net |
(2,493,465 | ) | (2,973,630 | ) | (973,095 | ) | ||||||
Increase in net deferred tax asset |
(2,298,860 | ) | (1,016,107 | ) | (6,493,604 | ) | ||||||
Other, net |
415,823 | 414,193 | 79,181 | |||||||||
Net cash provided by operating activities |
21,456,213 | 9,751,155 | 11,632,355 | |||||||||
Cash flows from investing activities: |
||||||||||||
Net decrease (increase) in loans |
53,925,733 | 4,283,403 | (115,310,652 | ) | ||||||||
Purchase of available-for-sale debt securities |
(189,081,925 | ) | (156,459,542 | ) | (280,670,587 | ) | ||||||
Proceeds from maturities of available-for-sale debt securities |
114,899,133 | 115,169,758 | 212,071,519 | |||||||||
Proceeds from calls of available-for-sale debt securities |
46,795,100 | 24,237,200 | 42,282,640 | |||||||||
Proceeds from sales of available-for-sale debt securities |
| 12,546,609 | 30,920,778 | |||||||||
Purchase of FHLB stock |
(392,300 | ) | | (5,040,800 | ) | |||||||
Proceeds from sales of FHLB stock |
1,003,900 | 2,121,700 | 1,791,600 | |||||||||
Purchases of premises and equipment |
(549,285 | ) | (2,369,890 | ) | (1,034,021 | ) | ||||||
Proceeds from sales of premises and equipment |
34,528 | 632,165 | 51,450 | |||||||||
Proceeds from sales of other real estate owned and repossessions |
9,689,435 | 6,168,067 | 6,703,347 | |||||||||
Net cash provided (used) in investing activities |
36,324,319 | 6,329,470 | (108,234,726 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Net increase (decrease) in demand deposits |
2,731,931 | 9,772,439 | (13,110,320 | ) | ||||||||
Net increase in interest-bearing transaction accounts |
24,853,535 | 11,657,302 | 13,405,039 | |||||||||
Net (decrease) increase in time deposits |
(37,245,608 | ) | (20,403,333 | ) | 33,744,379 | |||||||
Net (decrease) increase in federal funds purchased and securities sold
under agreements to repurchase |
(6,576,981 | ) | 7,506,811 | 3,408,760 | ||||||||
Proceeds from Federal Home Loan Bank advances |
10,000,000 | 20,145,000 | 345,300,000 | |||||||||
Repayment of Federal Home Loan Bank advances |
(22,331,324 | ) | (69,885,181 | ) | (294,157,544 | ) | ||||||
Proceeds from issuance of preferred stock and warrants |
| | 30,255,000 | |||||||||
Purchase of treasury stock |
| | (802,445 | ) | ||||||||
Cash dividends paid preferred stock |
(1,512,750 | ) | (1,369,879 | ) | | |||||||
Cash dividends paid common stock |
(1,385,230 | ) | (2,665,557 | ) | (3,486,415 | ) | ||||||
Net cash (used) provided by financing activities |
(31,466,427 | ) | (45,242,398 | ) | 114,556,454 | |||||||
Net increase (decrease) in cash and cash equivalents |
26,314,105 | (29,161,773 | ) | 17,954,083 | ||||||||
Cash and cash equivalents, beginning of year |
24,665,695 | 53,827,468 | 35,873,385 | |||||||||
Cash and cash equivalents, end of year |
$ | 50,979,800 | $ | 24,665,695 | $ | 53,827,468 | ||||||
36
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Consolidated Statements of Cash Flows (continued)
Years ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Supplemental disclosures of cash flow information: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 16,699,120 | $ | 24,383,520 | $ | 32,475,450 | ||||||
Income taxes |
$ | 800,000 | $ | 1,487,000 | $ | 2,240,000 | ||||||
Supplemental schedule of noncash investing and financing activities: |
||||||||||||
Other real estate and repossessions acquired in settlement of loans |
$ | 23,676,706 | $ | 6,982,125 | $ | 12,658,929 | ||||||
See accompanying notes to consolidated financial statements.
37
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
(1) | Summary of Significant Accounting Policies |
Hawthorn Bancshares, Inc. (the Company) provides a broad range of banking services to individual and corporate customers located within the communities in and surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lees Summit, Missouri. The Company is subject to competition from other financial and nonfinancial institutions providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies. | ||
The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles and conform to predominant practices within the banking industry. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions, including the determination of the allowance for loan losses, values of 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 Companys management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements. | ||
On July 1, 2010, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on May 19, 2010. For all periods presented, share information, including basic and diluted earnings (loss) per share, have been adjusted retroactively to reflect this change | ||
In June 2009, the Financial Accounting Standards Board (FASB) issued authoritative guidance on The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards CodificationTM, or Codification, became the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission, or SEC, under authority of federal securities laws, are also sources of authoritative GAAP for SEC registrants. The Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. This is effective for financial statements issued for periods ending after September 15, 2009. The disclosures required by this new guidance are reported in the notes to the Companys consolidated financial statements. | ||
The significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below: |
Principles of Consolidation | |||
In December of 2008 and March of 2010, the Company formed Hawthorn Real Estate, LLC, and Real Estate Holdings of Missouri, LLC, respectively, (the Real Estate Companies); both are wholly owned subsidiaries of the Company. The consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), and the Real Estate Companies. All significant intercompany accounts and transactions have been eliminated in consolidation. | |||
Loans | |||
Loans which the Company has the intent and ability to hold for the foreseeable future or maturity are held for investment are stated at unpaid principal balance amount less unearned income and the allowance for loan losses. Income on loans is accrued on a simple-interest basis. Loan origination fees and certain direct costs are deferred and recognized over the life of the loan as an adjustment to yield. | |||
Non-Accrual Loans | |||
Loans are placed on nonaccrual status when management believes that the borrowers financial condition, after consideration of business conditions and collection efforts, is such that collection of interest is doubtful. |
38
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Subsequent interest payments received on such loans are applied to principal if doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current. | |||
Restructured Loans | |||
A modified or restructured loan is accounted for as a troubled debt restructuring (TDR) for any loans in which concessions are made to the borrower for economic or legal reasons that the Company would not otherwise consider and the borrower is experiencing financial difficulty. Once a loan has been classified as a TDR it remains a TDR for the life of the loan. The Company includes all accruing and non-accruing TDRs in the impaired and non-performing asset totals. TDRs are measured for impairment loss primarily by discounting the total expected future cash flows. | |||
Impaired Loans | |||
A loan is considered impaired when it is probable the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. Included in impaired loans are all non-accrual loans and loans whose terms have been modified in a troubled debt restructuring. Impaired loans are individually evaluated for impairment based on fair values of the underlying collateral, obtained through independent appraisals or internal valuations for a collateral dependent loan, or by discounting the total expected future cash flows. | |||
Loans Held for Sale | |||
The Bank originates certain loans which are sold in the secondary mortgage market. These long-term, fixed-rate loans are sold on a note-by-note basis. Immediately upon locking in an interest rate, the Company enters into an agreement to sell the mortgage loan servicing retained without recourse, thereby eliminating the Companys exposure to interest rate fluctuations. At December 31, 2010 and 2009, $62,000 and $114,000 mortgage loans were held for sale, respectively. | |||
Mortgage loan servicing fees earned on loans sold are reported as income when the related loan payments are collected net of amortization from mortgage servicing rights. Operational costs to service such loans are charged to expense as incurred. | |||
Allowance/ Provision for Loan Losses | |||
The allowance for loan losses is available to absorb probable incurred loan losses regardless of the category of loan to be charged off. The allowance for loan losses consists of asset-specific reserves, and reserves based on expected loss estimates. | |||
The asset-specific component applies to loans evaluated individually for impairment and is based on managements best estimate of proceeds from liquidating collateral. The actual timing and amount of repayments and the ultimate realizable value of the collateral may differ from managements estimate. The expected loss component is determined by applying percentages to pools of loans by asset type. These percentages are determined by using historical loss percentages. These expected loss estimates are sensitive to changes in delinquency status, realizable value of collateral, and other risk factors. | |||
The unallocated portion of the allowance is based on managements evaluation of conditions that are not directly reflected in the determination of the asset-specific component and the expected loss component discussed above. The evaluation of incurred loss with respect to these qualitative conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. Conditions evaluated in connection with the unallocated portion of the allowance include general economic and business conditions affecting the Companys key lending areas, credit quality trends (including trends in substandard loans |
39
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
expected to result from existing conditions), collateral values, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. | |||
Management has established procedures that result in specific allowance allocations for any estimated incurred loss. For loans not considered impaired, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations represent managements best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses. The specific reserve component of the Companys allowance for loan losses at December 31, 2010 was measured by fair values of the underlying collateral through independent appraisals, internal evaluations, or by discounting the total expected future cash flows. The general reserve component of the Companys allowance for loan losses at December 31, 2010 was determined by calculating historical loss percentages for various loan categories over the previous nine quarters. Management determined that the previous ten quarters were reflective of the loss characteristics of the Companys loan portfolio during the recent two year economic downturn. These historical loss percentages were then applied to the various categories of loans to determine an expected loss requirement for the current portfolio. Prior to 2010, the historical loss percentage for non-impaired loans was based on a blend between industry standards and the Companys five year loss experience. | |||
The underlying assumptions, estimates and assessments used by management to determine these components are continually evaluated and updated to reflect managements current view of overall economic conditions and relevant factors impacting credit quality and inherent losses. Changes in such estimates could significantly impact the allowance and provision for credit losses. The Company could experience credit losses that are different from the current estimates made by management. | |||
Loans, or portions of loans, are charged off to the extent deemed uncollectible. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. Once the fair value for a collateral dependent loan has been determined, any impaired amount is typically charged off unless the loan has other income streams to support repayment. For impaired loans which have other income streams to support repayment, a specific reserve is established for the amount determined to be impaired. | |||
Investment in Debt and Equity Securities | |||
At the time of purchase, debt securities are classified into one of two categories: available-for-sale or held-to-maturity. Held-to-maturity securities are those securities which the Company has the positive intent and ability to hold until maturity. All debt securities not classified as held-to-maturity are classified as available-for-sale. The Companys securities are classified as available-for-sale and are carried at fair value. Changes in fair value, excluding certain losses associated with other-than-temporary impairment, are reported in other comprehensive income, net of taxes, a component of stockholders equity. Securities are periodically evaluated for other-than-temporary impairment in accordance with guidance provided in the FASB ASC Topic 320, Investments Debt and Equity Securities. For those securities with other-than-temporary impairment, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it more likely than not that it will be required to sell the security before the anticipated recovery. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred, which is then recognized in current earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. | |||
Premiums and discounts are amortized using the interest method over the lives of the respective securities, with consideration of historical and estimated prepayment rates for mortgage-backed securities, as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings based on the specific identification method for determining the cost of securities sold. |
40
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Capital Stock of the Federal Home Loan Bank
The Bank, as a member of the Federal Home Loan Bank System administered by the Federal
Housing Finance Board, is required to maintain an investment in the capital stock of the
Federal Home Loan Bank of Des Moines (FHLB) in an amount equal to 12 basis points of the
Banks year-end total assets plus 4.45% of advances from the FHLB to the Bank. These
investments are recorded at cost, which represents redemption value.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation. Depreciation
applicable to buildings and improvements and furniture and equipment is charged to
expense using straight-line and accelerated methods over the estimated useful lives of
the assets. Such lives are estimated to be 5 to 40 years for buildings and improvements
and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to
expense as incurred.
Goodwill and Intangible Assets
Goodwill and intangible assets that have indefinite useful lives are not amortized, but
tested annually for impairment. Intangible assets that have finite useful lives, such as
core deposit intangibles and mortgage servicing rights, are amortized over their
estimated useful lives. Core deposit intangibles are amortized over periods of 7 to 8
years representing their estimated lives using straight line and accelerated methods.
Mortgage servicing rights are amortized using straight line over the shorter of 7 years
or the life of the loan.
When facts and circumstances indicate potential impairment of amortizable intangible
assets, the Company evaluates the recoverability of the carrying value based upon future
cash flows expected to result from the use of the underlying asset and its eventual
disposition. If the sum of the expected future cash flows (undiscounted and without
interest charges) is less than the carrying value of the underlying asset, the Company
recognizes an impairment loss. The impairment loss recognized represents the amount by
which the carrying value of the underlying asset exceeds the fair value of the underlying
asset. As a result of the 2008 annual review, the Company determined that goodwill was
fully impaired and recorded an impairment charge of $40,323,775, before tax.
Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets consist of loan collateral which 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 owned assets are initially recorded
as held for sale at the lower of the loan balance or 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. 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 a parcel of other real estate.
41
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Pension Plan
The Company provides a noncontributory defined benefit pension plan for all full-time
employees. The benefits are based on age, years of service and the level of compensation
during the employees highest ten years of compensation before retirement. Net periodic
costs are recognized as employees render the services necessary to earn the retirement
benefits. The Company records annual amounts relating to its pension plan based on
calculations that incorporate various actuarial and other assumptions including discount
rates, mortality, assumed rates of return, compensation increases and turnover rates.
The Company reviews its assumptions on an annual basis and may make modifications to the
assumptions based on current rates and trends when it is appropriate to do so. The
Company believes that the assumptions utilized in recording its obligations under its
plan are reasonable based on its experience and market conditions.
The Company follows authoritative guidance included in the FASB ASC Topic 715,
Compensation Retirement Plans under the subtopic Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to
recognize the overfunded or underfunded status of a defined benefit postretirement plan
(other than a multiemployer plan) as an asset or liability in its consolidated balance
sheet and to recognize changes in the funded status in the year in which the changes
occur through comprehensive income. This guidance also requires an employer to measure
the funded status of a plan as of the date of its fiscal year-end, with limited
exceptions. Additional disclosures are required to provide users with an understanding of
how investment allocation decisions are made, major categories of plan assets, and fair
value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and
Disclosures.
Income Taxes
Income taxes are accounted for under the asset / liability method by recognizing the
amount of taxes payable or refundable for the current period and deferred tax assets and
liabilities for future tax consequences of events that have been recognized in an
entitys financial statements or tax returns. Judgment is required in addressing the
Companys future tax consequences of events that have been recognized in the consolidated
financial statements or tax returns such as realization of the effects of temporary
differences, net operating loss carry forwards and changes in tax laws or interpretations
thereof. A valuation allowance is established when in the judgment of management, it is
more likely than not that such deferred tax assets will not become realizable. In this
case, the Company would adjust the recorded value of our deferred tax asset, which would
result in a direct charge to income tax expense in the period that the determination was
made. Likewise, the Company would reverse the valuation allowance when the realization of
the deferred tax asset is expected. In addition, the Company is subject to the continuous
examination of our tax returns by the Internal Revenue Service and other taxing
authorities. The Company accrues for penalties and interest related to income taxes in
income tax expense. Total interest expense recognized for the year ended 2010 and 2009
was $24,000 and $53,000, respectively. As of December 31, 2010 and 2009, total accrued
interest was $31,000 and $94,000, respectively.
Trust Department
Property held by the Bank in fiduciary or agency capacity for customers is not included
in the accompanying consolidated balance sheets, since such items are not assets of the
Company. Trust department income is recognized on the accrual basis.
Consolidated Statements of Cash Flows
For the purpose of the consolidated statements of cash flows, cash and cash equivalents
consist of federal funds sold and securities sold or purchased under agreements to
resell, cash, and due from banks.
42
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Stock-Based Compensation
The Companys stock-based employee compensation plan is described in Note 10, Stock
Compensation. In accordance with FASB ASC Topic 718, Compensation Stock Compensation,
the Company measures the cost of the stock-based compensation based on the grant-date
fair value of the award, recognizing the cost over the requisite service period. The fair
value of an award is estimated using the Black-Scholes option-pricing model. The expense
recognized is based on an estimation of the number of awards for which the requisite
service is expected to be rendered, and is included in salaries and employee benefits in
the accompanying consolidated statements of operations. The standard also requires that
excess tax benefits related to stock option exercises be reflected as financing cash
inflows instead of operating cash inflows.
Treasury Stock
The purchase of the Companys common stock is recorded at cost. Purchases of the stock
are made both in the open market and through negotiated private purchases based on market
prices. At the date of subsequent reissue, the treasury stock account is reduced by the
cost associated with such stock on a first-in-first-out basis.
Comprehensive Income
The Company reports comprehensive income (loss) in the consolidated statements of
stockholders equity and comprehensive income (loss).
Reclassifications
Certain prior year information has been reclassified to conform to the current year
presentation.
Impact of New Accounting Standards
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06 which
amends ASC Topic 820, Fair Value Measurements and Disclosures. This update will provide
more robust disclosures about (1) the different classes of assets and liabilities
measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in
Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This
is effective for financial statements issued for interim and annual periods ending after
December 15, 2009. The disclosures required by this update are reported in the notes to
the Companys consolidated financial statements.
In February 2010, the FASB issued ASU No. 2010-10 which amends ASC Topic 810,
Consolidation. The objective of this update is to defer the effective date of the
amendments to the consolidation requirements made by FASB Statement 167 to a reporting
entitys interest in certain types of entities and clarify other aspects of the Statement
167 amendments. As a result of the deferral, a reporting entity will not be required to
apply the Statement 167 amendments to the Subtopic 810-10 consolidation requirements to
its interest in an entity that meets the criteria to qualify for deferral. However, the
amendments in this Update do not defer the disclosure requirements in the Statement 167
amendments to Topic 810. This is effective for financial statements issued for the first
annual period beginning after November 15, 2009, and for interim periods with the first
annual reporting period. The disclosures required by this new update did not have a
material effect in the notes to the Companys consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20 Receivables (ASC Topic 310): Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.
This ASU requires expanded credit risk disclosures intended to provide investors with
greater transparency regarding the allowance for credit losses and the credit quality of
financing receivables. Under this ASU, companies are required to provide more information
about the credit quality of their financing receivables in the disclosures to financial
statements, such as aging information, credit quality indicators, changes in the
allowance for credit losses, and the nature and extent of troubled debt restructurings
and their effect on the allowance for credit losses. Both new and existing disclosures
43
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
must be disaggregated by portfolio segment or class based on the level of disaggregation
that management uses when assessing its allowance for credit losses and managing its
credit exposure. The disclosures as of the end of a reporting period are effective for
annual periods ending on or after December 15, 2010. The disclosures about activity that
occurs during a reporting period will be effective for interim and annual reporting
periods beginning on or after December 15, 2010. The disclosures required by this update
are reported in the notes to the Companys consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which was incorporated into
ASC Topic 855 Subsequent Events (ASC 855). ASC 855 provides guidance on managements
assessment of subsequent events. The statement is not expected to significantly change
practice because its guidance is similar to that in American Institute of Certified
Public Accountants Professional Standards U.S. Auditing Standards Section 560, Subsequent
Events, with some modifications. This statement became effective for the Company on June
15, 2009. The adoption of this statement did not have a material effect on the financial
statements. In February 2010, the FASB issued ASU No. 2010-09 Subsequent Events
Amendments to Certain Recognition and Disclosure Requirements, which removed the
requirements in ASC 855 for an SEC filer to disclose the date through which subsequent
events have been evaluated for both issued and revised consolidated financial statements.
This update became effective upon issuance for the Company and the adoption of this
update did not have a material effect on the consolidated financial statements.
In June 2009, the FASB issued authoritative guidance on accounting for transfers of
financial assets, which was subsequently incorporated into ASC Topic 860, Transfers and
Servicing. The new guidance amends ASC Topic 860 and requires more information about
transfers of financial assets, including securitization transactions, and where companies
have continuing exposure to the risks related to transferred financial assets. The
guidance eliminates the concept of a qualifying special-purpose entity, changes the
requirements for derecognizing financial assets and requires additional disclosures. This
became effective for the first annual period beginning after November 15, 2009, and for
interim periods within the first annual reporting period, and must be applied to
transfers occurring on or after the effective date. The Company follows the requirements
of the new guidance, which did not significantly impact the consolidated financial
statements or the disclosures presented in the consolidated financial statements.
(2) | Loans and Allowance for Loan Losses |
A summary of loans, by major class within the Companys loan portfolio, at December 31, 2010 and 2009 are as follows: |
2010 | 2009 | |||||||
Commercial, financial, and agricultural |
$ | 131,382,467 | $ | 151,399,300 | ||||
Real estate construction residential |
31,834,174 | 38,840,664 | ||||||
Real estate construction commercial |
56,052,910 | 77,936,569 | ||||||
Real estate mortgage residential |
207,834,488 | 232,332,124 | ||||||
Real estate mortgage commercial |
439,068,622 | 453,975,271 | ||||||
Installment and other consumer |
32,132,336 | 36,966,018 | ||||||
Unamortized loan origination fees and costs, net |
167,466 | 164,061 | ||||||
Total loans |
$ | 898,472,463 | $ | 991,614,007 | ||||
The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Clinton, Warsaw, Springfield, Branson and Lees Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles. |
44
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Following is a summary of activity in 2010 of loans made by the Bank to executive officers and directors or to entities in which such individuals had a beneficial interest. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present unfavorable features. |
Balance at December 31, 2009 |
$ | 2,333,285 | ||
New loans |
1,048,378 | |||
Amounts collected |
(771,663 | ) | ||
Balance at December 31, 2010 |
$ | 2,610,000 | ||
Allowance for loan losses |
The following is a summary of the allowance for loan losses for 2010, 2009 and 2008 is as follows: |
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Balance, beginning of year |
$ | 14,796,549 | 12,666,546 | 9,281,848 | ||||||||
Additions: |
||||||||||||
Provision for loan losses |
15,255,000 | 8,354,000 | 8,211,000 | |||||||||
Deductions: |
||||||||||||
Loans charged off |
16,189,501 | 6,800,942 | 5,439,827 | |||||||||
Less recoveries on loans |
(702,819 | ) | (576,945 | ) | (613,525 | ) | ||||||
Net loans charged off |
15,486,682 | 6,223,997 | 4,826,302 | |||||||||
Balance, end of year |
$ | 14,564,867 | 14,796,549 | 12,666,546 | ||||||||
The following table provides the balance in the allowance for loan losses at December 31, 2010, and the related loan balance by impairment methodology. Loans evaluated under ASC 310-10-35 include loans on non-accrual status, which are individually evaluated for impairment, troubled debt restructurings, and other impaired loans deemed to have similar risk characteristics. All other loans are collectively evaluated for impairment under ASC 450-20. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb credit losses. |
Real Estate | Real Estate | Installment and | ||||||||||||||||||||||
At December 31, 2010 | Commercial | Construction | Mortgage | other Consumer | Unallocated | Total | ||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Individually evaluated for
impairment |
1,737,159 | 1,753,553 | 2,885,034 | | | 6,375,746 | ||||||||||||||||||
Collectively evaluated for
impairment |
1,193,566 | 1,652,352 | 4,495,133 | 231,359 | 616,711 | 8,189,121 | ||||||||||||||||||
Total |
2,930,725 | 3,405,905 | 7,380,167 | 231,359 | 616,711 | 14,564,867 | ||||||||||||||||||
Loans outstanding: |
||||||||||||||||||||||||
Individually evaluated for
impairment |
3,659,857 | 15,368,803 | 37,116,025 | | | 56,144,685 | ||||||||||||||||||
Collectively evaluated for
impairment |
127,722,610 | 72,518,281 | 609,787,085 | 32,299,802 | | 842,327,778 | ||||||||||||||||||
Total |
131,382,467 | 87,887,084 | 646,903,110 | 32,299,802 | | 898,472,463 | ||||||||||||||||||
45
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Impaired loans |
Impaired loans totaled $56,270,543 and $73,866,745 at December 31, 2010 and 2009 respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings. Prior to 2010, other impaired loans continuing to accrue interest consisted of certain loans classified as substandard. Restructured loans have been extended to borrowers who are experiencing financial difficulty and who have been granted a concession. |
The categories of impaired loans at December 31, 2010 and 2009 are as follows: |
2010 | 2009 | |||||||
Non-accrual loans |
$ | 50,586,887 | $ | 34,153,731 | ||||
Other impaired loans continuing to accrue interest |
| 31,522,027 | ||||||
Troubled debt restructurings continuing to accrue interest |
5,683,656 | 8,190,987 | ||||||
Total impaired loans |
$ | 56,270,543 | $ | 73,866,745 | ||||
At December 31, 2010, loans classified as troubled debt restructurings (TDR) totaled $22,080,000, of which $16,397,000 was on non-accrual status and $5,683,000 was on accrual status. At December 31, 2009, loans classified as TDR totaled $11,233,000, of which $3,042,000 was on non-accrual status and $8,191,000 was on accrual status.. Reserves allocated to troubled debt restructurings were $1,359,079 and $983,111 at December 31, 2010 and 2009. |
Interest income recognized on loans in non-accrual status and contractual interest that would be recorded had the loans performed in accordance with their original contractual terms is as follows: |
2010 | 2009 | 2008 | ||||||||||
Contractual interest due on non-accrual loans |
$ | 2,529,289 | $ | 1,568,271 | $ | 1,521,701 | ||||||
Interest income recognized on loans in non-accrual status |
22,356 | 158,124 | 239,320 | |||||||||
Net reduction in interest income |
$ | 2,551,645 | $ | 1,726,395 | $ | 1,761,021 | ||||||
46
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
The specific reserve component of the Companys allowance for loan losses at December 31, 2010 and 2009 was determined by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows. 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 $662,348, $436,787, and $116,521, for the years ended December 31, 2010, 2009, and 2008, respectively. Average impaired loans as calculated on a monthly basis during the period were $63,751,587 and $39,049,298 at December 31, 2010, and 2009 respectively. |
The following table provides additional information about impaired loans at December 31, 2010 and 2009, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided: |
At December 31, 2010 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
Investment | Balance | Allowance | ||||||||||
With no related allowance recorded: |
||||||||||||
Commercial, financial and
Agricultural |
$ | 441,861 | 629,296 | $ | | |||||||
Real estate construction residential |
1,769,622 | 2,355,936 | | |||||||||
Real estate construction commercial |
8,297,388 | 9,393,368 | | |||||||||
Real estate residential |
2,463,735 | 2,950,560 | | |||||||||
Real estate commercial |
12,939,973 | 14,869,833 | | |||||||||
Consumer |
125,858 | 132,688 | | |||||||||
Total |
$ | 26,038,437 | $ | 30,331,681 | $ | | ||||||
With an allowance recorded: |
||||||||||||
Commercial, financial and
Agricultural |
3,217,995 | 3,260,009 | 1,737,159 | |||||||||
Real estate construction residential |
1,816,276 | 1,848,593 | 1,552,406 | |||||||||
Real estate construction commercial |
3,485,517 | 4,740,517 | 201,147 | |||||||||
Real estate residential |
5,576,292 | 5,669,041 | 1,117,141 | |||||||||
Real estate commercial |
16,136,025 | 16,215,862 | 1,767,893 | |||||||||
Total |
$ | 30,232,106 | $ | 31,734,022 | $ | 6,375,746 | ||||||
Total impaired loans |
$ | 56,270,543 | $ | 62,065,703 | $ | 6,375,746 | ||||||
47
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
At December 31, 2009 | ||||||||||||
Unpaid | ||||||||||||
Recorded | Principal | Related | ||||||||||
Investment | Balance | Allowance | ||||||||||
With no related allowance recorded: |
||||||||||||
Commercial, financial and
Agricultural |
$ | 300,964 | $ | 319,624 | $ | | ||||||
Real estate construction residential |
1,034,816 | 1,044,975 | | |||||||||
Real estate construction commercial |
20,601,132 | 20,503,178 | | |||||||||
Real estate residential |
6,400,676 | 6,644,249 | | |||||||||
Real estate commercial |
18,950,865 | 18,966,554 | | |||||||||
Consumer |
283,732 | 283,731 | | |||||||||
Total |
$ | 47,572,185 | $ | 47,762,311 | $ | | ||||||
With an allowance recorded: |
||||||||||||
Commercial, financial and
Agricultural |
$ | 2,651,009 | $ | 2,449,627 | $ | 1,403,798 | ||||||
Real estate construction residential |
1,733,491 | 2,299,565 | 309,000 | |||||||||
Real estate residential |
9,268,616 | 9,445,808 | 1,745,553 | |||||||||
Real estate commercial |
12,641,444 | 12,778,796 | 2,956,378 | |||||||||
Total |
$ | 26,294,560 | $ | 26,973,796 | $ | 6,414,729 | ||||||
Total impaired loans |
$ | 73,866,745 | $ | 74,736,107 | $ | 6,414,729 | ||||||
Age Analysis of Past Due and Non-Accrual Loans |
Current or | 90 Days | |||||||||||||||||||
Less Than | Past Due | |||||||||||||||||||
30 Days | 30 - 89 Days | And Still | ||||||||||||||||||
Past Due | Past Due | Accruing | Non-Accrual | Total | ||||||||||||||||
Commercial, Financial, and
Agricultural |
127,315,586 | 534,865 | $ | | $ | 3,532,016 | $ | 131,382,467 | ||||||||||||
Real Estate Construction Residential |
28,200,876 | 47,400 | | 3,585,898 | 31,834,174 | |||||||||||||||
Real Estate Construction Commercial |
45,511,088 | 474,934 | | 10,066,888 | 56,052,910 | |||||||||||||||
Real Estate Mortgage Residential |
199,386,784 | 2,775,654 | | 5,672,050 | 207,834,488 | |||||||||||||||
Real Estate Mortgage Commercial |
409,906,845 | 1,557,599 | | 27,604,178 | 439,068,622 | |||||||||||||||
Installment and Other Consumer |
31,784,217 | 356,812 | 32,916 | 125,857 | 32,299,802 | |||||||||||||||
Total at December 31, 2010 |
$ | 842,105,396 | $ | 5,747,264 | $ | 32,916 | $ | 50,586,887 | $ | 898,472,463 | ||||||||||
It is the Companys policy to discontinue the accrual of interest income on loans when management believes that the borrowers financial condition, after consideration of business conditions and collection efforts, is such that the collection of interest is doubtful, or upon which 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 collectibles of such principal; otherwise, such receipts are recorded as interest income on a cash basis. |
48
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
The following table provides information about the credit quality of the loan portfolio using the Companys internal rating system reflecting managements risk assessment. Recent reviews by the Companys credit officer identified areas of concern that resulted in heightened attention being given to reducing concentrations of credit and, in particular, to strengthening credit quality and administration. Loans are placed on watch status when (1) one or more weaknesses which could jeopardize timely liquidation exits; or (2) the margin or liquidity of an asset is sufficiently tenuous that adverse trends could result in a collection problem. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or of 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. 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) upon which 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. |
Real Estate | Real Estate | Installment and | ||||||||||||||||||
At December 31, 2010 | Commercial | Construction | Mortgage | other Consumer | Total | |||||||||||||||
Watch |
21,981,367 | 16,919,978 | 44,234,865 | 564,489 | 83,700,699 | |||||||||||||||
Substandard |
2,840,703 | 5,000,571 | 17,058,382 | 441,514 | 25,341,170 | |||||||||||||||
Non-accrual |
3,532,016 | 13,652,786 | 33,276,228 | 125,857 | 50,586,887 | |||||||||||||||
Total |
28,354,086 | 35,573,335 | 94,569,475 | 1,131,860 | 159,628,756 | |||||||||||||||
(3) | Investment Securities |
A summary of investment securities by major category, at fair value, consisted of the following at December 31, 2010 and 2009. |
2010 | 2009 | |||||||
U.S. treasury |
$ | 1,027,891 | $ | | ||||
Government sponsored enterprises |
53,341,551 | 44,380,798 | ||||||
Asset-backed securities |
90,176,241 | 69,434,650 | ||||||
Obligations of states and political subdivisions |
34,431,867 | 39,111,237 | ||||||
Total available for sale securities |
$ | 178,977,550 | $ | 152,926,685 | ||||
All of our Companys investment securities are classified as available for sale, as discussed in more detail below. Asset backed securities include agency mortgage-backed securities, which are guaranteed by government sponsored agencies such as the FHLMC, FNMA and GNMA. Our Company does not invest in subprime originated mortgage-backed or collateralized debt obligation instruments. |
Investment securities which are classified as restricted equity securities primarily consist of Federal Home Loan Bank Stock and our Companys interest in statutory trusts. These securities are reported at cost in other assets in the amount of $6,141,950 and $6,753,550, as of December 31, 2010 and 2009 respectively. |
49
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2010 and 2009 are as follows: |
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | ||||||||||||||
cost | gains | losses | Fair value | |||||||||||||
December 31, 2010 |
||||||||||||||||
U.S Treasury |
$ | 999,823 | $ | 28,068 | $ | | $ | 1,027,891 | ||||||||
Government sponsored enterprises |
53,516,545 | 327,051 | 502,045 | 53,341,551 | ||||||||||||
Asset-backed securities |
88,634,760 | 1,905,377 | 363,896 | 90,176,241 | ||||||||||||
Obligations of states and political
subdivisions |
34,146,782 | 555,240 | 270,155 | 34,431,867 | ||||||||||||
Total available for sale securities |
$ | 177,297,910 | $ | 2,815,736 | $ | 1,136,096 | $ | 178,977,550 | ||||||||
Weighted average yield at end of period |
3.37 | % | ||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | ||||||||||||||
cost | gains | losses | Fair value | |||||||||||||
December 31, 2009 |
||||||||||||||||
Government sponsored enterprises |
$ | 44,059,540 | $ | 371,258 | $ | 50,000 | $ | 44,380,798 | ||||||||
Asset-backed securities |
68,092,852 | 1,585,774 | 243,976 | 69,434,650 | ||||||||||||
Obligations of states and political
subdivisions |
38,456,246 | 708,196 | 53,205 | 39,111,237 | ||||||||||||
Total available for sale securities |
$ | 150,608,638 | $ | 2,665,228 | $ | 347,181 | $ | 152,926,685 | ||||||||
Weighted average yield at end of period |
4.11 | % | ||||||||||||||
The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2010, 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 | |||||||
cost | value | |||||||
Due in one year or less |
$ | 3,522,221 | $ | 3,554,697 | ||||
Due after one year through five years |
64,234,241 | 64,364,269 | ||||||
Due after five years through ten years |
16,207,546 | 16,234,320 | ||||||
Due after ten years |
4,699,142 | 4,648,023 | ||||||
88,663,150 | 88,801,309 | |||||||
Asset-backed securities |
88,634,760 | 90,176,241 | ||||||
Total |
$ | 177,297,910 | $ | 178,977,550 | ||||
Debt securities with carrying values aggregating approximately $148,099,000 and $132,322,000 at December 31, 2010 and 2009, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. |
50
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
2010 | 2009 | 2008 | ||||||||||
Proceeds from sales |
$ | | $ | 12,546,609 | $ | 30,920,778 | ||||||
Gains |
| 605,716 | 2,733 | |||||||||
Losses |
| | | |||||||||
Net gains (losses) |
$ | | $ | 605,716 | $ | 2,733 | ||||||
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 December 31, 2010 and 2009, were as follows: |
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
Number of | ||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Investment | Fair | Unrealized | ||||||||||||||||||||||
At December 31, 2010 | Value | Losses | Value | Losses | Positions | Value | Losses | |||||||||||||||||||||
Government sponsored
enterprises |
$ | 20,504,526 | $ | (502,045 | ) | $ | | $ | | 19 | $ | 20,504,526 | (502,045 | ) | ||||||||||||||
Asset-backed securities |
21,177,793 | (363,896 | ) | | | 20 | 21,177,793 | $ | (363,896 | ) | ||||||||||||||||||
Obligations of states
and
political
subdivisions |
8,038,946 | (270,155 | ) | | | 29 | 8,038,946 | (270,155 | ) | |||||||||||||||||||
$ | 49,721,265 | $ | (1,136,096 | ) | $ | | $ | | 68 | $ | 49,721,265 | $ | (1,136,096 | ) | ||||||||||||||
Less than 12 months | 12 months or more | Total | ||||||||||||||||||||||||||
Number of | ||||||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Investment | Fair | Unrealized | ||||||||||||||||||||||
At December 31, 2009 | Value | Losses | Value | Losses | Positions | Value | Losses | |||||||||||||||||||||
Government sponsored
enterprises |
$ | 5,943,819 | $ | (50,000 | ) | $ | | $ | | 6 | $ | 5,943,819 | (50,000 | ) | ||||||||||||||
Asset-backed securities |
14,600,160 | (243,904 | ) | 20,551 | (72 | ) | 15 | 14,620,711 | $ | (243,976 | ) | |||||||||||||||||
Obligations of states
and
political
subdivisions |
3,576,780 | (53,205 | ) | | | 14 | 3,576,780 | (53,205 | ) | |||||||||||||||||||
$ | 24,120,759 | $ | (347,109 | ) | $ | 20,551 | $ | (72 | ) | 35 | $ | 24,141,310 | $ | (347,181 | ) | |||||||||||||
Our Companys available for sale portfolio consisted of approximately 333 securities at December 31, 2010. None of these securities had been in the loss position for 12 months or longer. The $1,136,000 unrealized loss included in other comprehensive income at December 31, 2010 was caused by interest rate increases. 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. |
Our Companys available for sale portfolio consisted of approximately 305 securities at December 31, 2009. One of these securities had been in the loss position for 12 months or longer. The $72 unrealized loss included in other comprehensive income at December 31, 2009 on this asset-backed security was caused by interest rate increases. Because the decline in fair value is attributable to changes in interest rates and not credit quality this investment was not considered other-than-temporarily impaired. |
51
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
(4) Premises and Equipment
A summary of premises and equipment at December 31, 2010 and 2009 is as follows:
2010 | 2009 | |||||||
Land and land improvements |
$ | 10,324,154 | $ | 9,837,854 | ||||
Buildings and improvements |
32,209,975 | 31,220,427 | ||||||
Furniture and equipment |
10,992,544 | 10,734,460 | ||||||
Construction in progress |
207,880 | 1,882,773 | ||||||
Total |
53,734,553 | 53,675,514 | ||||||
Less accumulated depreciation |
16,754,050 | 15,052,221 | ||||||
Net premises and equipment |
$ | 36,980,503 | $ | 38,623,293 | ||||
Depreciation expense for the past three years is as follows:
For the Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Depreciation expense |
$ | 1,963,842 | $ | 2,044,257 | $ | 2,158,740 | ||||||
(5) Real Estate Acquired in Settlement of Loans
2010 | 2009 | |||||||
Commercial |
$ | 67,421 | $ | 146,250 | ||||
Real estate mortgage construction |
13,229,199 | 5,059,924 | ||||||
Real estate mortgage |
6,254,221 | 3,245,852 | ||||||
Total |
19,550,841 | 8,452,026 | ||||||
Less valuation allowance for other real estate owned |
(6,158,433 | ) | | |||||
Total |
$ | 13,392,408 | $ | 8,452,026 | ||||
Activity in the valuation allowance for other real estate owned in settlement of loans for the
years ended December 31, 2010, 2009, and 2008 is summarized as follows:
2010 | 2009 | 2008 | ||||||||||
Balance, beginning of year |
$ | | $ | | $ | | ||||||
Provision for other real estate owned |
6,158,433 | | | |||||||||
Charge-offs |
| | | |||||||||
Balance, end of year |
$ | 6,158,433 | $ | | $ | | ||||||
52
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
(6) Goodwill and Other Intangible Assets
The Companys goodwill is tested annually for potential impairment. As a result of the 2008
annual review, the Company determined that the goodwill was fully impaired as of December 31,
2008, and recorded an impairment charge of $40,323,775, in the fourth quarter of 2008.
A summary of other intangible assets at and for the years ended December 31, 2010 and 2009 is
as follows:
For the Years Ended December 31, | ||||||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Carrying | Accumulated | Net | Carrying | Accumulated | Net | |||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | |||||||||||||||||||
Amortizable intangible assets: |
||||||||||||||||||||||||
Core deposit intangible |
$ | 7,060,224 | $ | (6,082,715 | ) | $ | 977,509 | $ | 7,060,224 | $ | (5,556,238 | ) | $ | 1,503,986 | ||||||||||
Mortgage servicing rights |
3,067,368 | (711,378 | ) | 2,355,990 | 2,945,019 | (924,055 | ) | 2,020,964 | ||||||||||||||||
Total intangible assets |
$ | 10,127,592 | $ | (6,794,093 | ) | $ | 3,333,499 | $ | 10,005,243 | $ | (6,480,293 | ) | $ | 3,524,950 | ||||||||||
Changes in the net carrying amount of other intangible assets for the years ended December 31,
2010 and 2009 are shown in the following table:
Core Deposit | Mortgage | |||||||
Intangible | Servicing | |||||||
Asset | Rights | |||||||
Balance at December 31, 2008 |
$ | 2,130,097 | $ | 1,171,225 | ||||
Additions |
| 1,765,832 | ||||||
Amortization |
(626,111 | ) | (916,093 | ) | ||||
Balance at December 31, 2009 |
1,503,986 | 2,020,964 | ||||||
Additions |
| 1,168,701 | ||||||
Amortization |
(526,477 | ) | (833,675 | ) | ||||
Balance at December 31, 2010 |
$ | 977,509 | $ | 2,355,990 | ||||
Mortgage servicing rights (MSRs) are amortized over the shorter of 7 years or the life of the
loan. They are periodically reviewed for impairment and if impairment is indicated, recorded
at fair value. At December 31, 2010 and 2009, no temporary impairment was recognized. The fair
value of MSRs is based on the present value of expected cash flows, as further discussed in
Fair Value of Financial Instruments. Mortgage loans serviced for others totaled approximately
$298,325,000 and $269,475,000 at December 31, 2010 and 2009, respectively. Included in other
noninterest income were real estate servicing fees for the years ended December 31, 2010, 2009
and 2008 of $927,000, $888,290, and $776,000, respectively.
53
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
The Companys amortization expense on intangible assets in any given period may be different
from the estimated amounts depending upon the acquisition of intangible assets, changes in
mortgage interest rates, prepayment rates and other market conditions. The following table
shows the estimated future amortization expense based on existing asset balances and the
interest rate environment as of December 31, 2010 for the next five years:
Core Deposit | Mortgage | |||||||
Intangible | Servicing | |||||||
Asset | Rights | |||||||
2011 |
$ | 434,763 | $ | 551,000 | ||||
2012 |
408,062 | 448,000 | ||||||
2013 |
134,684 | 365,000 | ||||||
2014 |
| 297,000 | ||||||
2015 |
| 241,000 | ||||||
The aggregate amortization expense of intangible assets subject to amortization for the past
three years is as follows:
For the Years Ended December 31, | ||||||||||||
Aggregate amortization expense | 2010 | 2009 | 2008 | |||||||||
Core deposit intangible asset |
$ | 526,477 | $ | 626,111 | $ | 701,443 | ||||||
Mortgage servicing rights |
833,675 | 916,093 | 641,040 | |||||||||
(7) Deposits
The scheduled maturities of total time deposits are as follows:
2010 | 2009 | |||||||
Due within: |
||||||||
One year |
$ | 304,221,827 | $ | 342,749,968 | ||||
Two years |
58,226,647 | 74,118,865 | ||||||
Three years |
54,968,145 | 20,481,957 | ||||||
Four years |
5,196,284 | 27,461,147 | ||||||
Five years |
7,162,643 | 2,123,433 | ||||||
Thereafter |
| 85,784 | ||||||
$ | 429,775,546 | $ | 467,021,154 | |||||
54
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
At December 31, 2010 and 2009, our Company had certificates and other time deposits in
denominations of $100,000 or more which mature as follows:
2010 | 2009 | |||||||
Due within: |
||||||||
Three months or less |
$ | 19,997,962 | $ | 35,336,996 | ||||
Over three months through six months |
35,685,505 | 30,808,596 | ||||||
Over six months through twelve months |
37,901,059 | 44,787,905 | ||||||
Over twelve months |
30,982,234 | 26,926,938 | ||||||
$ | 124,566,760 | $ | 137,860,435 | |||||
The Federal Reserve Bank required the Bank to maintain cash or balances of $23,564,000 and
$22,096,000 at December 31, 2010 and 2009, respectively, to satisfy reserve requirements.
Average compensating balances held at correspondent banks were $667,000 and $760,000 at
December 31, 2010 and 2009, respectively. The Bank maintains such compensating balances with
correspondent banks to offset charges for services rendered by those banks.
(8) Borrowings
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (repurchase agreements)
Information relating to federal funds purchased and repurchase agreements is as follows:
Year End | Average | Average | Maximum | |||||||||||||||||
Weighted | Weighted | Balance | Outstanding at | Balance at | ||||||||||||||||
Rate | Rate | Outstanding | any Month End | December 31, | ||||||||||||||||
2010 |
||||||||||||||||||||
Federal funds purchased |
| % | 1.0 | % | $ | 425,805 | $ | | $ | | ||||||||||
Short-term repurchase agreements |
0.2 | 0.2 | 32,297,375 | 38,239,420 | 30,068,453 | |||||||||||||||
Total |
30,068,453 | |||||||||||||||||||
2009 |
||||||||||||||||||||
Federal funds purchased |
0.9 | % | 0.9 | % | $ | 1,507,904 | $ | 7,175,000 | $ | 4,980,000 | ||||||||||
Short-term repurchase agreements |
0.2 | 0.2 | 32,414,635 | 32,489,362 | 31,665,434 | |||||||||||||||
Total |
36,645,434 | |||||||||||||||||||
The securities underlying the agreements to repurchase are under the control of the Bank. All
securities sold under agreements to repurchase are secured by a portion of the Companys
investment portfolio.
Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $35,300,000
on an unsecured basis and $8,500,000 on a secured basis at December 31, 2010.
55
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Other Borrowings
Other borrowings of the Company consisted of the following at December 31, 2010:
2010 | 2009 | |||||||||||||||||||||||
Year End | Year End | |||||||||||||||||||||||
Maturity | Year End | Weighted | Year End | Weighted | ||||||||||||||||||||
Borrower | Date | Balance | Rate | Balance | Rate | |||||||||||||||||||
FHLB advances |
Subsidiary bank | 2010 | | na | 22,331,324 | 4.6 | % | |||||||||||||||||
2011 | $ | 38,575,989 | 3.6 | % | $ | 38,575,989 | 3.6 | % | ||||||||||||||||
2012 | 8,283,528 | 1.6 | % | 8,283,528 | 1.6 | % | ||||||||||||||||||
2013 | 10,126,461 | 1.6 | % | 126,461 | 4.1 | % | ||||||||||||||||||
2014 | | na | | na | ||||||||||||||||||||
2015 | | na | | na | ||||||||||||||||||||
2016-18 | 10,000,000 | 2.5 | % | 10,000,000 | 2.5 | % | ||||||||||||||||||
Total |
66,985,978 | 79,317,302 | ||||||||||||||||||||||
Subordinated notes |
The Company | 2034 | 25,774,000 | 3.0 | % | 25,774,000 | 3.0 | % | ||||||||||||||||
2035 | 23,712,000 | 2.1 | % | 23,712,000 | 6.3 | % | ||||||||||||||||||
Total |
$ | 49,486,000 | $ | 49,486,000 | ||||||||||||||||||||
The Bank subsidiary of the Company is a member of the Federal Home Loan Bank of Des Moines
(FHLB) and has access to term financing from the FHLB. These borrowings are secured under a
blanket agreement which assigns all investment in Federal Home Loan Bank of Des Moines stock,
as well as mortgage loans equal to 125% to 175% (based on collateral type) of the outstanding
advance balance, to secure amounts borrowed by the Bank. The outstanding balance of
$66,986,000 includes $10,000,000 which the FHLB may call for early payment within the next two
years. The FHLB has also issued letters of credit totaling $96,000 at December 31, 2010. Based
upon the collateral pledged to the Federal Home Loan Bank of Des Moines at December 31, 2010,
the Bank could borrow up to an additional $204,220,000 under the agreement.
On March 17, 2005, Exchange Statutory Trust II, a business trust issued $23,000,000 of
30-year floating rate Trust Preferred Securities (TPS) to a TPS Pool. The floating rate
is equal to a three-month LIBOR rate plus 1.83% and reprices quarterly (2.13% at December
31, 2010). The TPS can be prepaid without penalty at any time after five years from the
issuance date.
The TPS represent preferred interests in the trust. The Company invested approximately
$712,000 in common interests in the trust and the purchaser in the private placement purchased
$23,000,000 in preferred interests. The proceeds were used by the trust to purchase from the
Company its 30-year deeply subordinated debentures whose terms mirror those stated above for
the TPS. The debentures are guaranteed by the Company pursuant to a subordinated guarantee.
Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and
December 17 of each year that the TPS are outstanding. The trustee for the TPS holders is U.S.
Bank, N.A.. The trustee does not have the power to take enforcement action in the event of a
default under the TPS for five years from the date of default. In the event of default,
however, the Company would be precluded from paying dividends until the default is cured.
On March 17, 2004, Exchange Statutory Trust I, a Delaware business trust and subsidiary of the
Company issued $25,000,000 of floating TPS to a TPS Pool. The floating rate is equal to the
three-month LIBOR rate plus 2.70% and reprices quarterly (3.00% at December 31, 2010). The TPS
are fully, irrevocably, and unconditionally guaranteed on a subordinated basis by the Company.
The proceeds of the TPS were invested in junior subordinated debentures of the Company.
Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and
December 17 of each year that the TPS are outstanding. The TPS mature on March 17, 2034. That
maturity date may be shortened if certain conditions are met.
56
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
The Exchange Statutory Trusts are not consolidated in the Companys financial statements.
Accordingly, the Company does not report the securities issued by the Exchange Statutory
Trusts as liabilities, and instead reports the subordinated notes issued by the Company and
held by the Exchange Statutory Trusts as liabilities. The amount of the subordinated notes as
of December 31, 2010 and 2009 was $49,486,000. The Company has recorded the investments in
the common securities issued by the Exchange Statutory Trusts aggregating $1,486,000, and the
corresponding obligations under the subordinated notes, as well as the interest income and
interest expense on such investments and obligations in its consolidated financial statements.
(9) Income Taxes
The composition of income (benefit) tax expense for 2010, 2009, and 2008 is as follows:
2010 | 2009 | 2008 | ||||||||||
Current: |
||||||||||||
Federal |
$ | (836,846 | ) | $ | 2,131,373 | $ | 1,236,327 | |||||
State |
79,556 | 354,072 | | |||||||||
Total current |
(757,290 | ) | 2,485,445 | 1,236,327 | ||||||||
Deferred: |
||||||||||||
Federal |
(2,090,598 | ) | (564,779 | ) | (6,625,134 | ) | ||||||
State |
(238,925 | ) | (64,546 | ) | (757,158 | ) | ||||||
Total deferred |
(2,329,523 | ) | (629,325 | ) | (7,382,292 | ) | ||||||
Total income tax (benefit) expense |
$ | (3,086,813 | ) | $ | 1,856,120 | $ | (6,145,965 | ) | ||||
Applicable income tax (benefit) expense for financial reporting purposes differ from the
amount computed by applying the statutory Federal income tax rate for the reasons noted in the
table below:
2010 | 2009 | 2008 | ||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||
Income (loss) before provision for
income tax (benefit) expense |
$ | (6,638,553 | ) | $ | 6,811,877 | $ | (36,773,321 | ) | ||||||||||||||||
Tax at statutory Federal income tax rate |
$ | (2,257,108 | ) | 34.00 | % | $ | 2,316,038 | 34.00 | % | $ | (12,502,929 | ) | 34.00 | % | ||||||||||
Goodwill impairment |
| | | | 7,112,827 | (19.34 | ) | |||||||||||||||||
Tax-exempt income |
(445,020 | ) | 6.70 | (508,002 | ) | (7.46 | ) | (570,506 | ) | 1.55 | ||||||||||||||
State income tax, net of Federal
tax benefit |
(105,184 | ) | 1.58 | 191,087 | 2.81 | | | |||||||||||||||||
Other, net |
(279,501 | ) | 4.22 | (143,003 | ) | (2.10 | ) | (185,357 | ) | 0.50 | ||||||||||||||
Provision for income tax (benefit)
expense |
$ | (3,086,813 | ) | 46.50 | % | $ | 1,856,120 | 27.25 | % | $ | (6,145,965 | ) | 16.71 | % | ||||||||||
57
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
The components of deferred tax assets and deferred tax liabilities at December 31, 2010 and
2009 are as follows:
2010 | 2009 | |||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 5,680,298 | $ | 5,770,654 | ||||
Nonaccrual loan interest |
1,208,665 | 710,918 | ||||||
Core deposit intangible |
873,017 | 804,457 | ||||||
Goodwill |
3,263,670 | 3,621,401 | ||||||
Impairment of other real estate owned |
2,547,425 | | ||||||
Deferred compensation |
46,878 | 68,543 | ||||||
Other |
687,834 | 795,133 | ||||||
Total deferred tax assets |
14,307,787 | 11,771,106 | ||||||
Deferred tax liabilities: |
||||||||
Premises and equipment |
999,943 | 756,632 | ||||||
Mortgage servicing rights |
789,759 | 585,215 | ||||||
FHLB stock dividend |
102,921 | 102,921 | ||||||
Available-for-sale securities |
655,060 | 904,038 | ||||||
Pension |
118,265 | 208,839 | ||||||
Other |
6,345 | 16,230 | ||||||
Total deferred tax liabilities |
2,672,293 | 2,573,875 | ||||||
Net deferred tax asset |
$ | 11,635,494 | $ | 9,197,231 | ||||
The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the periods in which
the deferred tax assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these temporary differences at December 31, 2010 and,
therefore, has not established a valuation reserve.
At December 31, 2010, the accumulation of prior years earnings representing tax bad debt
deductions of the Bank was $2,931,503. If these tax bad debt reserves were charged for losses
other than bad debt losses, the Bank would be
required to recognize taxable income in the amount of the charge. It is not contemplated that
such tax-restricted retained earnings will be used in a manner that would create federal
income tax liabilities.
The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain
tax positions. At December 31, 2010, the Company had $221,000 of gross unrecognized tax
benefits that if recognized would affect the effective tax rate. The Company believes that
during 2011 it is reasonably possible that there would be a reduction of $221,000 in gross
unrecognized tax benefits as a result of the lapse of statute of limitations for the 2007 tax
year.
58
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
At December 31, 2010, total interest was approximately $32,000. A reconciliation of the
beginning and ending amount of the unrecognized tax benefits is as follows:
2010 | 2009 | 2008 | ||||||||||
Unrecognized tax benefits as of January 1, |
$ | 562,076 | $ | 748,942 | $ | 956,577 | ||||||
Gross amounts of the increases and decreases in unrecognized
tax benefits as a result of tax positions taken during prior years |
| | | |||||||||
Gross amounts of the increases and decreases in unrecognized
tax benefits as a result of tax positions taken during year |
| | | |||||||||
The amount of decreases in unrecognized tax benefits
relating to settlements with taxing authorities |
| | | |||||||||
Reductions to unrecognized benefits as a result of a lapse of the
applicable statute of limitations |
(221,725 | ) | (186,866 | ) | (207,635 | ) | ||||||
Unrecognized tax benefits as of December 31, |
$ | 340,351 | $ | 562,076 | $ | 748,942 | ||||||
(10) Employee Benefit Plans
Employee benefits charged to operating expenses are summarized in the table below.
2010 | 2009 | 2008 | ||||||||||
Payroll taxes |
$ | 1,105,599 | $ | 1,096,793 | $ | 1,119,073 | ||||||
Medical plans |
1,544,670 | 1,494,166 | 1,466,232 | |||||||||
401k match |
318,518 | 306,042 | 294,098 | |||||||||
Pension plan |
864,871 | 890,692 | 854,407 | |||||||||
Profit-sharing |
2 | 282,904 | 205,515 | |||||||||
Other |
161,210 | 133,803 | 211,501 | |||||||||
Total employee benefits |
$ | 3,994,870 | $ | 4,204,400 | $ | 4,150,826 | ||||||
In 2008, the Companys profit-sharing plan was amended to include 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 years shown. In
addition, employees were able to make additional tax-deferred contributions.
Pension
The Company also 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
Companys 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 $554,000 contribution to the defined benefit plan in 2010, and the
minimum required contribution for 2011 is estimated to be $997,000. The Company has not
determined whether it will make any contributions other than the minimum required funding
contribution for 2011.
59
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Obligations and Funded Status at December 31
2010 | 2009 | |||||||
Change in projected benefit obligation: |
||||||||
Balance, January 1 |
$ | 9,400,952 | $ | 8,420,847 | ||||
Service cost |
844,178 | 850,940 | ||||||
Interest cost |
556,047 | 509,482 | ||||||
Actuarial loss (gain) |
59,386 | (151,710 | ) | |||||
Benefits paid |
(205,383 | ) | (228,607 | ) | ||||
Balance, December 31 |
10,655,180 | 9,400,952 | ||||||
Change in plan assets: |
||||||||
Fair value, January 1 |
7,993,695 | 5,995,985 | ||||||
Actual gain (loss) return on plan assets |
954,332 | 1,226,317 | ||||||
Employer contribution |
554,000 | 1,000,000 | ||||||
Benefits paid |
(205,382 | ) | (228,607 | ) | ||||
Fair value, December 31 |
9,296,645 | 7,993,695 | ||||||
Funded status at end of year |
$ | (1,358,535 | ) | $ | (1,407,257 | ) | ||
Accumulated benefit obligation |
$ | 8,172,291 | $ | 6,918,597 | ||||
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 years ended December 31, 2010, 2009 and 2008:
2010 | 2009 | 2008 | ||||||||||
Service costbenefits earned
during the year |
$ | 844,178 | $ | 850,940 | $ | 820,401 | ||||||
Interest costs on projected
benefit obligations |
556,047 | 509,482 | 452,524 | |||||||||
Expected return on plan assets |
(613,982 | ) | (539,283 | ) | (454,344 | ) | ||||||
Amortization of prior service cost |
78,628 | 78,628 | 78,628 | |||||||||
Amortization of net gains |
| (9,075 | ) | (42,802 | ) | |||||||
Net periodic pension expense |
$ | 864,871 | $ | 890,692 | $ | 854,407 | ||||||
60
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Amounts not yet reflected in net periodic benefit cost and included in accumulated other
comprehensive income (loss) at December 31, 2010 and 2009 are shown below, including amounts
recognized in other comprehensive income during the periods. All amounts are shown on a
pre-tax basis.
2010 | 2009 | |||||||
Prior service costs |
$ | (757,440 | ) | $ | (836,068 | ) | ||
Net accumulated actuarial net gain (loss) |
223,639 | (57,326 | ) | |||||
Accumulated other comprehensive loss |
(533,801 | ) | (893,394 | ) | ||||
Cumulative employer contributions in excess of net periodic benefit cost |
(824,734 | ) | (513,863 | ) | ||||
Net amount recognized at December 31, balance sheet |
$ | (1,358,535 | ) | $ | (1,407,257 | ) | ||
Net (gain) loss arising during period |
$ | (280,964 | ) | $ | (838,744 | ) | ||
Prior service cost amortization |
(78,628 | ) | (78,628 | ) | ||||
Amortization of net actuarial gain / (loss) |
| 9,075 | ||||||
Total recognized in other comprehensive income |
$ | (359,592 | ) | $ | (908,297 | ) | ||
Total recognized in net periodic pension cost
and other comprehensive income |
$ | 505,279 | $ | (17,605 | ) | |||
The estimated prior service cost for the defined benefit pension plan that will be
amortized from accumulated other comprehensive income into net periodic cost in 2011 is
$78,628. For 2011, there is no estimated amount of actuarial gain or loss subject to
amortization into net periodic pension cost.
Assumptions utilized to determine benefit obligations as of December 31, 2010, 2009 and 2008
and to determine pension expense for the year then ended are as follows:
2010 | 2009 | 2008 | ||||||||||
Determination of Benefit obligation at year end: |
||||||||||||
Discount rate |
5.75 | % | 6.00 | % | 6.15 | % | ||||||
Annual rate of compensation increase |
4.50 | % | 4.50 | % | 4.50 | % | ||||||
Determination of Pension expense for year ended: |
||||||||||||
Discount rate for the service cost |
5.75 | % | 6.00 | % | 6.25 | % | ||||||
Annual rate of compensation increase |
4.50 | % | 4.50 | % | 4.50 | % | ||||||
Expected long-term rate of return on plan assets |
7.00 | % | 7.00 | % | 7.00 | % | ||||||
The assumed overall expected long-term rate of return on pension plan assets used in
calculating 2010 pension expense was 7%. Determination of the plans rate of return is based
upon historical returns for equities and fixed income indexes. During the past five years the
Companys plan assets have experienced the following annual returns: 12.4% in 2010, 22.0% in
2009, (32.6)% in 2008, 7.4% in 2007, and 14.4% in 2006. The rate used in plan calculations may
be adjusted by management for current trends in the economic environment. With a traditional
investment mix of over half of the plans investments in equities, the actual return for any
one plan year may fluctuate significantly with changes in the stock market. Due to a decline
in the economy and a decrease in discount rates used in the actuarial calculation of plan
income, the Company expects to incur $893,000 expense in 2011 compared to $865,000 in 2010.
61
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Plan Assets
The investment policy of the pension plan is designed for growth in value while minimizing
risk to the overall portfolio. The Company diversifies the assets through investments in
domestic and international fixed income securities and domestic and international equity
securities. The assets are readily marketable and can be sold to fund benefit payment
obligations as they become payable. The Companys long-term investment target mix for the plan
is 70% equity securities and 30% fixed income. The Company regularly reviews its policies on
the investment mix and may make changes depending on economic conditions and perceived
investment mix.
The fair value of the Companys pension plan assets at December 31, 2010 and 2009 by asset
category are as follows:
Fair Value Measurements | ||||||||||||||||
At December 31, 2010 Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Fair Value | Identical | Observable | Unobservable | |||||||||||||
December 31, | Assets | Inputs | Inputs | |||||||||||||
Description | 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Cash equivalents |
$ | 1,123,265 | $ | 1,123,265 | $ | | $ | | ||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap (a) |
3,364,627 | 3,364,627 | | | ||||||||||||
U.S. mid-cap (b) |
1,138,036 | 1,138,036 | | | ||||||||||||
U.S. small-cap (c) |
445,318 | 445,318 | | | ||||||||||||
International (d) |
1,276,752 | 1,276,752 | | | ||||||||||||
Fixed income securities: |
||||||||||||||||
U.S. Govt Agency Obligations (e) |
993,464 | | 993,464 | | ||||||||||||
Corporate investment grade (e) |
682,715 | | 682,715 | | ||||||||||||
Corporate non-investment grade (e) |
272,468 | | 272,468 | | ||||||||||||
Total |
$ | 9,296,645 | $ | 7,347,998 | $ | 1,948,647 | $ | | ||||||||
(a) | This category is comprised of low-cost equity index funds not actively managed that track the S&P 500. | |
(b) | This category is comprised of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450. | |
(c) | This is comprised of actively managed mutual funds. | |
(d) | 44% of this category is comprised of low-cost equity index funds not actively managed that track the MSCI EAFE. | |
(e) | This category is comprised of individual bonds. |
62
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Fair Value Measurements | ||||||||||||||||
At December 31, 2009 Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Fair Value | Identical | Observable | Unobservable | |||||||||||||
December 31, | Assets | Inputs | Inputs | |||||||||||||
Description | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Cash equivalents |
$ | 790,415 | $ | 790,415 | $ | | $ | | ||||||||
Equity securities: |
||||||||||||||||
U.S. large-cap (a) |
3,222,262 | 3,222,262 | | | ||||||||||||
U.S. mid-cap (b) |
418,330 | 418,330 | | | ||||||||||||
U.S. small-cap (c) |
509,926 | 509,926 | | | ||||||||||||
International (d) |
1,154,615 | 1,154,615 | | | ||||||||||||
Fixed income securities: |
||||||||||||||||
U.S. Govt Agency Obligations (e) |
1,123,535 | | 1,123,535 | | ||||||||||||
Corporate investment grade (e) |
530,042 | | 530,042 | | ||||||||||||
Corporate non-investment grade (e) (f) |
244,570 | | 244,570 | | ||||||||||||
Total |
$ | 7,993,695 | $ | 6,095,548 | $ | 1,898,147 | $ | | ||||||||
(a) | This category is comprised of low-cost equity index funds not actively managed that track the S&P 500. | |
(b) | This category is comprised of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450. | |
(c) | This is comprised of actively managed mutual funds. | |
(d) | 37% of this category is comprised of low-cost equity index funds not actively managed that track the MSCI EAFE. | |
(e) | This category is comprised of individual bonds. | |
(f) | 24% of this category is comprised of non-rated bonds. |
The following future benefit payments are expected to be paid: |
Pension | ||||
Year | benefits | |||
2011 |
$ | 309,352 | ||
2012 |
312,368 | |||
2013 |
319,389 | |||
2014 |
390,519 | |||
2015 |
403,134 | |||
2016 to 2020 |
2,401,519 | |||
(11) | Stock Compensation |
The Companys stock option plan provides for the grant of options to purchase up to 486,720 shares of the Companys 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, except 10,294 options issued in 2008 to acquire shares that vested immediately. |
63
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
The following table summarizes the Companys stock option activity: |
Weighted average | ||||||||||||||||||||||||
Number of shares | exercise price | |||||||||||||||||||||||
December 31 | December 31 | |||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Outstanding, beginning of year |
286,948 | 288,493 | 262,694 | $ | 24.11 | $ | 24.13 | $ | 25.17 | |||||||||||||||
Granted |
| | 40,578 | | | 19.42 | ||||||||||||||||||
Exercised |
| | | | | | ||||||||||||||||||
Forfeited |
| (1,545 | ) | (14,779 | ) | | 29.06 | 29.67 | ||||||||||||||||
Expired |
(36,457 | ) | | | 15.10 | | | |||||||||||||||||
Outstanding, end of year |
250,491 | 286,948 | 288,493 | $ | 25.42 | $ | 24.11 | $ | 24.13 | |||||||||||||||
Exercisable, end of year |
209,159 | 224,309 | 197,550 | $ | 25.50 | $ | 23.75 | $ | 23.30 | |||||||||||||||
Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2010. |
Options outstanding at December 31, 2010 had a weighted average remaining contractual life of approximately five years and no intrinsic value. Options outstanding at December 31, 2009 had a remaining contractual life of approximately five years and no intrinsic value. No stock options were granted during 2010 or 2009. |
Options exercisable at December 31, 2010 had a weighted average remaining contractual life of approximately four years and no intrinsic value. Options exercisable at December 31, 2009 had a weighted average remaining contractual life of approximately four years and no intrinsic value. No stock options were exercised during 2010 or 2009. |
Total stock-based compensation expense for the years ended December 31, 2010, 2009, and 2008 was $87,000, $130,000, and $232,000, respectively. As of December 31, 2010, the total unrecognized compensation expense related to non-vested stock awards was $156,000 and the related weighted average period over which it is expected to be recognized is approximately three years. |
The weighted average grant-date fair values of stock options granted during 2008 and the weighted average significant assumptions used to determine those fair values, using the Black-Scholes option-pricing model, are as follows: |
2008 | ||||
Fair value per share at grant date |
$ | 4.42 | ||
Significant assumptions: |
||||
Risk-free interest rate at grant date |
3.14 | % | ||
Expected annual rate of
quarterly dividends |
4.00 | |||
Expected stock price volatility |
30 | |||
Expected life to exercise (years) |
7.73 | |||
64
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
(12) | Preferred Stock |
On December 19, 2008, the Company announced its participation in the U.S. Treasury Departments Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. This program is designed to attract broad participation by banking institutions to help stabilize the financial system by encouraging lending. The Company has used the funds received, as discussed below, to continue to provide loans to its customers and to look for ways to deploy additional funds to benefit the communities in the Companys market area. |
Participating in this program included the Companys issuance of 30,255 shares of senior preferred stock (with a par value of $1,000 per share) and a ten year warrant to purchase approximately 265,471 shares of common stock (see below for additional information) to the U.S. Department of Treasury in exchange for $30,255,000. The proceeds received were allocated between the preferred stock and the common stock warrant based upon their relative fair values. This resulted in the recording of a discount on the preferred stock upon issuance that reflects the value allocated to the warrant. The discount on the preferred stock will be accreted over five years, consistent with managements estimate of the life of the preferred stock. Such accretion will be treated as additional dividends on the preferred stock. The allocated carrying values of the senior preferred stock and common stock warrant at December 31, 2010 were $28,841,000 and $2,382,000, respectively. |
The preferred shares carry a 5% cumulative dividend for the first five years and 9% thereafter if not redeemed. The preferred shares are redeemable after three years at par plus accrued dividends, or before three years if the Company raises Tier 1 capital in an amount equal to the preferred stock issued. The preferred stock generally does not have any voting rights, subject to an exception in the event the Company fails to pay dividends on the preferred stock for six or more quarterly periods, whether or not consecutive. Under such circumstances, the Treasury will be entitled to vote to elect two directors to the board until all unpaid dividends have been paid or declared and set apart for payment. The Company is prohibited from paying any dividends with respect to shares of common stock unless all accrued and unpaid dividends are paid in full on the senior preferred stock for all past dividend periods. The Treasury Department may also transfer the senior preferred stock to a third party at any time. |
Assumptions were used in estimating the fair value of common stock warrant on the date of its issuance. The weighted average expected life of the common stock warrant represents the period of time that common stock warrant is expected to be outstanding. The-risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of issuance. The expected volatility is based on the average expected life the warrant. The following assumptions were used in estimating the fair value for the common stock warrant using the Black-Scholes option-pricing model: |
Fair value per warrant at issue date |
$ | 7.02 | ||
Significant assumptions: |
||||
Risk-free interest rate at issue date |
2.29 | % | ||
Expected stock price volatility |
33.9 | |||
Expected life to exercise (years) |
10.00 | |||
The common stock warrant is exercisable immediately with a ten year term, in whole or in part, at an exercise price of $17.10 per share. The preferred stock and warrant are classified as stockholders equity in the consolidated balance sheet and qualify, for regulatory capital purposes, as Tier I capital. For the year ended December 31, 2010, the Company had declared and paid $1,513,000 of dividends and amortized $476,000 of accretion of the discount on preferred stock. |
65
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
(13) | (Loss) earnings per Share |
Basic (loss) earnings per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted (loss) earnings per share gives effect to all dilutive potential common shares that were outstanding during the year. The calculations of basic and diluted (loss) earnings per share are as follows: |
2010 | 2009 | 2008 | ||||||||||
Basic (loss) earnings per common share: |
||||||||||||
Net (loss) income |
$ | (3,551,740 | ) | $ | 4,955,757 | $ | (30,627,356 | ) | ||||
Less: |
||||||||||||
Preferred stock dividends |
1,512,750 | 1,516,952 | 50,425 | |||||||||
Accretion of discount on preferred stock |
476,474 | 476,474 | 15,665 | |||||||||
Net (loss) income available to
common shareholders |
$ | (5,540,964 | ) | $ | 2,962,331 | $ | (30,693,446 | ) | ||||
Basic (loss) earnings per share |
$ | (1.24 | ) | $ | 0.66 | $ | (6.83 | ) | ||||
Diluted (loss) earnings per common share: |
||||||||||||
Net (loss) income |
$ | (3,551,740 | ) | $ | 4,955,757 | $ | (30,627,356 | ) | ||||
Less: |
||||||||||||
Preferred stock dividends |
1,512,750 | 1,516,952 | 50,425 | |||||||||
Accretion of discount on preferred stock |
476,474 | 476,474 | 15,665 | |||||||||
Net (loss) income available to
common shareholders |
$ | (5,540,964 | ) | $ | 2,962,331 | $ | (30,693,446 | ) | ||||
Average shares outstanding |
4,474,033 | 4,474,033 | 4,494,856 | |||||||||
Effect of dilutive stock options |
| | | |||||||||
Average shares outstanding including
dilutive stock options |
4,474,033 | 4,474,033 | 4,494,856 | |||||||||
Diluted (loss) earnings per share |
$ | (1.24 | ) | $ | 0.66 | $ | (6.83 | ) | ||||
Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Companys 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 common 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. |
The following options to purchase shares during the fiscal years ended 2010, 2009, and 2008 were not included in the respective computations of diluted earnings (loss) 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. |
Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Anti-dilutive shares option shares |
250,491 | 286,948 | 288,492 | |||||||||
Anti-dilutive shares warrant shares |
265,471 | 265,471 | 265,471 | |||||||||
66
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
(14) | Capital Requirements |
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 Companys consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. |
Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of December 31, 2010 and 2009, the Company and the Bank meet all capital adequacy requirements to which they are subject. |
As of December 31, 2010, the most recent notification from the regulatory authorities categorized the bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since the notifications that management believes have changed the Banks categories. |
67
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
The actual and required capital amounts and ratios for the Company and the Bank as of December 31,
2010 and 2009 are as follows (dollars in thousands):
Minimum | Well-Capitalized | |||||||||||||||||||||||
Actual | Capital requirements | Capital Requirements | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||
Total capital (to risk-weighted assets): |
||||||||||||||||||||||||
Company |
$ | 159,510 | 17.05 | % | $ | 74,863 | 8.00 | % | | | ||||||||||||||
Hawthorn Bank |
130,361 | 14.18 | 73,548 | 8.00 | $ | 91,834 | 10.00 | % | ||||||||||||||||
Tier I capital (to risk-weighted assets): |
||||||||||||||||||||||||
Company |
$ | 133,349 | 14.25 | $ | 37,431 | 4.00 | % | | | |||||||||||||||
Hawthorn Bank |
118,837 | 12.93 | 36,774 | 4.00 | $ | 55,161 | 6.00 | % | ||||||||||||||||
Tier I capital (to adjusted average assets): |
||||||||||||||||||||||||
Company |
$ | 133,349 | 11.00 | $ | 36,360 | 3.00 | % | | | |||||||||||||||
Hawthorn Bank |
118,837 | 9.99 | 35,685 | 3.00 | $ | 59,475 | 5.00 | % | ||||||||||||||||
Minimum | Well-Capitalized | |||||||||||||||||||||||
Actual | Capital requirements | Capital Requirements | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
December 31, 2009 |
||||||||||||||||||||||||
Total capital (to risk-weighted assets): |
||||||||||||||||||||||||
Company |
$ | 165,969 | 16.49 | % | $ | 80,502 | 8.00 | % | | | ||||||||||||||
Hawthorn Bank |
134,673 | 13.62 | 79,129 | 8.00 | $ | 98,911 | 10.00 | % | ||||||||||||||||
Tier I capital (to risk-weighted assets): |
||||||||||||||||||||||||
Company |
$ | 140,974 | 14.01 | $ | 40,251 | 4.00 | % | | | |||||||||||||||
Hawthorn Bank |
122,285 | 12.36 | 39,564 | 4.00 | $ | 59,347 | 6.00 | % | ||||||||||||||||
Tier I capital (to adjusted average assets): |
||||||||||||||||||||||||
Company |
$ | 140,974 | 11.35 | $ | 37,254 | 3.00 | % | | | |||||||||||||||
Hawthorn Bank |
122,285 | 10.04 | 36,556 | 3.00 | $ | 60,926 | 5.00 | % | ||||||||||||||||
Bank dividends are the principal source of funds for payment of dividends by the Company to its
stockholders. The Bank is subject to regulations which require the maintenance of minimum capital
requirements. As a result of the Bank paying out dividends to the Company in excess of its 2010
earnings, the Banks unappropriated retained earnings balance at December 31, 2010 is negative. As
a result, the Bank must obtain regulatory approval prior to paying dividends to the Company until
such time as the unappropriated retained earnings balance is restored to a positive balance.
(15) | 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 December 31, 2010 and 2009, there were no transfers into or out of Level 2. |
68
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
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 Companys 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 has 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 Companys valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis: | ||
Available-for-sale securities |
Available-for-sale securities are recorded at fair value on a recurring basis. Available-for-sale securities is the only balance sheet category the Company is required, in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP), to carry at fair value on a recurring basis. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider 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 bonds terms and conditions, among other things. |
69
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Fair Value Measurements | ||||||||||||||||
At December 31, 2010 Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
Description | December 31, 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
U.S. treasury |
$ | 1,027,891 | $ | | $ | 1,027,891 | $ | | ||||||||
Government sponsored enterprises |
53,341,551 | | 53,341,551 | | ||||||||||||
Asset-backed securities |
90,176,241 | | 90,176,241 | | ||||||||||||
Obligations of states and political
subdivisions |
34,431,867 | | 34,431,867 | | ||||||||||||
Total |
$ | 178,977,550 | $ | 178,977,550 | $ | | ||||||||||
Fair Value Measurements | ||||||||||||||||
At December 31, 2009 Using | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | ||||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Fair Value | Assets | Inputs | Inputs | |||||||||||||
Description | December 31, 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Government sponsored enterprises |
$ | 44,380,798 | $ | | $ | 44,380,798 | $ | | ||||||||
Asset-backed securities |
69,434,650 | 69,434,650 | ||||||||||||||
Obligations of states and political
subdivisions |
39,111,237 | 39,111,237 | ||||||||||||||
Total |
$ | 152,926,685 | $ | 152,926,685 | $ | | ||||||||||
Valuation methods for instruments measured at fair value on a nonrecurring basis |
Following is a description of the Companys 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 December 31, 2010, the Company identified $30.2 million in impaired loans that had specific allowances for losses aggregating $6.4 million. Related to these loans, there was $14.6 million in charge-offs recorded during 2010. | ||
Other Real Estate Owned and Repossessed Assets |
Other real estate owned and repossessed assets consist of loan collateral which 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 owned 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 our internal staff. In the case of non-real |
70
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
estate collateral, reliance is placed on a
variety of sources, including external estimates of value and judgment based on experience
and expertise of internal specialists. Subsequent to foreclosure, valuations are updated
periodically, and the assets may be written down to reflect a new cost basis. Because many of
these inputs are not observable, the measurements are classified as Level 3.
Fair Value Measurements Using | ||||||||||||||||||||
Quoted Prices | ||||||||||||||||||||
in Active | ||||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||
Fair Value | Identical | Observable | Unobservable | |||||||||||||||||
December 31, | Assets | Inputs | Inputs | Total Gains | ||||||||||||||||
Description | 2010 | (Level 1) | (Level 2) | (Level 3) | (Losses)* | |||||||||||||||
Impaired loans: |
||||||||||||||||||||
Commercial, financial, & agricultural |
$ | 1,480,836 | $ | | $ | | $ | 1,480,836 | $ | (1,634,544 | ) | |||||||||
Real estate construction residential |
263,870 | | | 263,870 | (863,399 | ) | ||||||||||||||
Real estate construction commercial |
3,284,371 | | | 3,284,371 | (4,496,156 | ) | ||||||||||||||
Real estate mortgage residential |
4,459,151 | | | 4,459,151 | (3,971,927 | ) | ||||||||||||||
Real estate mortgage commercial |
14,368,132 | | | 14,368,132 | (3,626,892 | ) | ||||||||||||||
Total |
$ | 23,856,360 | $ | | $ | | $ | 23,856,360 | $ | (14,592,918 | ) | |||||||||
Other real estate owned
and repossessed assets |
$ | 14,009,017 | $ | | $ | | $ | 14,009,017 | $ | (3,528,011 | ) | |||||||||
Fair Value Measurements Using | ||||||||||||||||||||
Quoted Prices | ||||||||||||||||||||
in Active | ||||||||||||||||||||
Markets for | Other | Significant | ||||||||||||||||||
Fair Value | Identical | Observable | Unobservable | |||||||||||||||||
December 31, | Assets | Inputs | Inputs | Total Gains | ||||||||||||||||
Description | 2009 | (Level 1) | (Level 2) | (Level 3) | (Losses)* | |||||||||||||||
Impaired loans: |
||||||||||||||||||||
Commercial, financial, & agricultural |
$ | 970,937 | $ | | $ | | $ | 970,937 | $ | (1,043,465 | ) | |||||||||
Real estate construction residential |
1,776,267 | | | 1,776,267 | (778,041 | ) | ||||||||||||||
Real estate construction commercial |
272,106 | | | 272,106 | (160,727 | ) | ||||||||||||||
Real estate mortgage residential |
7,104,961 | | | 7,104,961 | (1,914,530 | ) | ||||||||||||||
Real estate mortgage commercial |
9,755,560 | | | 9,755,560 | (323,522 | ) | ||||||||||||||
Total |
$ | 19,879,831 | $ | | $ | | $ | 19,879,831 | $ | (4,220,285 | ) | |||||||||
Other real estate owned
and repossessed assets |
$ | 8,490,914 | $ | | $ | | $ | 8,490,914 | $ | (1,367,207 | ) | |||||||||
* | Total gains (losses) reported for other real estate owned and repossessed assets includes charge offs, valuation write downs, and net losses taken during the periods reported. |
(16) | 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 value of loans is estimated based on present values using applicable risk-adjusted spreads to the U. S. Treasury curve to approximate current interest rates applicable to each category of such financial instruments. 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. |
71
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
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 Funds Sold, Cash, and Due from Banks | ||
For federal funds sold, cash, and due from banks, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period. | ||
Mortgage Servicing Rights | ||
The fair value of mortgage servicing rights is based on the discounted value of contractual cash flows utilizing servicing rate, constant prepayment rate, servicing cost, and discount rate factors. | ||
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. | ||
Other Borrowings | ||
The fair value of subordinated notes and other borrowings, Federal Home Loan borrowings, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities. |
72
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
A summary of the carrying amounts and fair values of the Companys financial instruments at
December 31, 2010 and 2009 is as follows:
2010 | 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
amount | value | amount | value | |||||||||||||
Assets: |
||||||||||||||||
Loans |
$ | 883,907,596 | $ | 889,291,000 | $ | 976,817,458 | $ | 984,305,000 | ||||||||
Investment in debt securities |
178,977,550 | 178,977,550 | 152,926,685 | 152,926,685 | ||||||||||||
Federal fund sold and
securities purchased under
agreements to resell |
125,815 | 125,815 | 89,752 | 89,752 | ||||||||||||
Cash and due from banks |
50,853,985 | 50,853,985 | 24,575,943 | 24,575,943 | ||||||||||||
Mortgage servicing rights |
2,355,990 | 3,027,000 | 2,020,964 | 2,904,000 | ||||||||||||
Accrued interest receivable |
5,733,684 | 5,733,684 | 6,625,557 | 6,625,557 | ||||||||||||
$ | 1,121,954,620 | $ | 1,128,009,034 | $ | 1,163,056,359 | $ | 1,171,426,937 | |||||||||
Liabilities: |
||||||||||||||||
Deposits: |
||||||||||||||||
Demand |
$ | 137,749,571 | $ | 137,749,571 | $ | 135,017,639 | $ | 135,017,639 | ||||||||
NOW |
160,225,356 | 160,225,356 | 139,623,577 | 139,623,577 | ||||||||||||
Savings |
54,722,129 | 54,722,129 | 47,637,148 | 47,637,148 | ||||||||||||
Money market |
164,190,054 | 164,190,054 | 167,023,279 | 167,023,279 | ||||||||||||
Time |
429,775,546 | 437,996,000 | 467,021,154 | 478,011,000 | ||||||||||||
Federal funds purchased and
securities sold under
agreements to repurchase |
30,068,453 | 30,068,453 | 36,645,434 | 36,645,434 | ||||||||||||
Subordinated notes |
49,486,000 | 21,105,000 | 49,486,000 | 18,329,000 | ||||||||||||
Other borrowings |
66,985,978 | 69,329,000 | 79,317,302 | 80,557,000 | ||||||||||||
Accrued interest payable |
1,491,503 | 1,491,503 | 2,438,121 | 2,438,121 | ||||||||||||
$ | 1,094,694,590 | $ | 1,076,877,066 | $ | 1,124,209,654 | $ | 1,105,282,198 | |||||||||
Off-Balance Sheet Financial Instruments |
The fair value of commitments to extend credit and standby letters of credit are 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, which are competitive in the markets in which it operates. See Note 16 for further discussion. | ||
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 Companys 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. |
73
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
(17) | 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 Companys 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 December 31, 2010, no amounts have been accrued for any estimated losses for these financial instruments. | ||
The contractual amount of off-balance-sheet financial instruments as of December 31, 2010 and 2009 is as follows: |
2010 | 2009 | |||||||
Commitments to extend credit |
$ | 94,114,449 | 131,592,651 | |||||
Standby letters of credit |
3,446,527 | 2,799,828 | ||||||
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. Of the total commitments to extend credit, approximately $28,810,000 and $47,625,000 represent fixed-rate loan commitments at December 31, 2010 and 2009, respectively. 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 customers 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 managements 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 Companys customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining term of standby letters of credit range from one month to five years at December 31, 2010. | ||
The Company and its subsidiaries, are defendants in various legal actions incidental to the Companys past and current business activities. At December 31, 2010 and 2009, the Companys consolidated balance sheets included liabilities for these legal actions of $275,000 and $0, respectively. Based on the Companys analysis, and considering the inherent uncertainties associated with litigation, we do not believe that it is reasonably possible that these legal actions will materially adversely affect the Companys consolidated financial statements or results of operations in the near term. | ||
On November 18, 2010, a suit was filed against Hawthorn Bank (the Bank) in the Circuit Court of Jackson County for the Eastern Division of Missouri state court by a customer alleging that the fees associated with the Banks automated overdraft program in connection with its debit card and ATM cards constitute unlawful interest in violation of Missouris usury laws. The suit seeks class-action status for Bank customers who have paid overdraft fees on their checking accounts. The Bank has filed for a motion to dismiss the suit. At this early stage of the litigation, it is not possible for management of the Bank to determine the probability of a material adverse outcome or reasonably estimate the amount of any potential loss. | ||
On December 17, 2009, a suit was filed against Hawthorn Bank (the Bank) in Circuit Court of Jackson County for the Eastern Division of Missouri state court by a customer alleging that the Bank had not followed through on its |
74
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
commitment to fund a loan request. A jury found in favor of the customer and at December 31, 2010, the Company carried a liability of $275,000 representing its estimated obligation. The Company is currently evaluating the appeals process and the probable outcome is presently not determinable. |
(18) | Condensed Financial Information of the Parent Company Only |
Following are the condensed financial statements of Hawthorn Bancshares, Inc. (Parent only) as of
and for the years indicated:
Condensed Balance Sheets
December 31, | ||||||||
2010 | 2009 | |||||||
Assets |
||||||||
Cash and due from bank subsidiaries |
$ | 12,448,772 | $ | 14,737,805 | ||||
Investment in equity securities |
1,486,000 | 1,486,000 | ||||||
Investment in subsidiaries |
138,677,199 | 142,793,737 | ||||||
Premises and equipment |
3,662 | 6,103 | ||||||
Deferred tax asset |
166,349 | 238,049 | ||||||
Other assets |
21,430 | 26,034 | ||||||
Total assets |
$ | 152,803,412 | $ | 159,287,728 | ||||
Liabilities and Stockholders Equity |
||||||||
Subordinated notes |
$ | 49,486,000 | $ | 49,486,000 | ||||
Other liabilities |
1,829,101 | 2,030,445 | ||||||
Stockholders equity |
101,488,311 | 107,771,283 | ||||||
Total liabilities and stockholders equity |
$ | 152,803,412 | $ | 159,287,728 | ||||
Condensed Statements of Operations
For the Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Income |
||||||||||||
Interest and dividends received from subsidiaries |
$ | 4,405,349 | $ | 247,842 | $ | 8,188,422 | ||||||
Total income |
4,405,349 | 247,842 | 8,188,422 | |||||||||
Expenses |
||||||||||||
Interest on subordinated notes |
1,525,553 | 2,446,742 | 3,046,238 | |||||||||
Other |
2,904,355 | 3,057,108 | 3,564,043 | |||||||||
Total expenses |
4,429,908 | 5,503,850 | 6,610,281 | |||||||||
(Loss) income before income tax benefit and
equity in undistributed income of subsidiaries |
(24,559 | ) | (5,256,008 | ) | 1,578,141 | |||||||
Income tax benefit |
1,449,929 | 1,918,880 | 1,980,100 | |||||||||
Equity in undistributed (loss) income of subsidiaries |
(4,977,110 | ) | 8,292,885 | (34,185,597 | ) | |||||||
Net (loss) income |
$ | (3,551,740 | ) | $ | 4,955,757 | $ | (30,627,356 | ) | ||||
75
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
Condensed Statements of Cash Flows
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net (loss) income |
$ | (3,551,740 | ) | $ | 4,955,757 | $ | (30,627,356 | ) | ||||
Adjustments to reconcile net income (loss) to
net cash provided by operating activities: |
||||||||||||
Depreciation |
2,441 | 3,404 | 5,242 | |||||||||
Equity in undistributed (income) losses of subsidiaries |
4,977,110 | (8,292,885 | ) | 34,185,596 | ||||||||
Stock based compensation expense |
87,310 | 130,459 | 231,761 | |||||||||
(Increase) decrease in deferred tax asset |
(37,876 | ) | 120,281 | 303,126 | ||||||||
Other, net |
381,702 | (109,419 | ) | (484,985 | ) | |||||||
Net cash provided by (used in) operating activities |
1,858,947 | (3,192,403 | ) | 3,613,384 | ||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of premise and equipment |
| (3,052 | ) | | ||||||||
Proceeds from sale premise and equipment |
| 500 | | |||||||||
Investment in subsidiary |
(1,250,000 | ) | (8,000,000 | ) | (10,000,000 | ) | ||||||
Net cash used in investing activities |
(1,250,000 | ) | (8,002,552 | ) | (10,000,000 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of
preferred stock and warrant |
| | 30,255,000 | |||||||||
Purchase of treasury stock |
| | (802,445 | ) | ||||||||
Cash dividends paid preferred stock |
(1,512,750 | ) | (1,369,879 | ) | | |||||||
Cash dividends paid common stock |
(1,385,230 | ) | (2,665,557 | ) | (3,486,415 | ) | ||||||
Net cash (used in) provided by
financing activities |
(2,897,980 | ) | (4,035,436 | ) | 25,966,140 | |||||||
Net (decrease) increase in cash
and due from banks |
(2,289,033 | ) | (15,230,391 | ) | 19,579,524 | |||||||
Cash and due from banks at beginning of year |
14,737,805 | 29,968,196 | 10,388,672 | |||||||||
Cash and due from banks at end of year |
$ | 12,448,772 | $ | 14,737,805 | $ | 29,968,196 | ||||||
76
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2010, 2009, and 2008
(19) | Quarterly Financial Information (Unaudited) |
Year Ended December 31, 2010
Year | ||||||||||||||||||||||||
First | Second | Third | Fourth | to | ||||||||||||||||||||
(In thousands except per share data) | quarter | quarter | quarter | quarter | Date | |||||||||||||||||||
Interest income |
$ | 14,873 | $ | 15,103 | $ | 14,625 | $ | 14,138 | $ | 58,739 | ||||||||||||||
Interest expense |
4,562 | 3,989 | 3,766 | 3,436 | 15,753 | |||||||||||||||||||
Net interest income |
10,311 | 11,114 | 10,859 | 10,702 | 42,986 | |||||||||||||||||||
Provision for loan losses |
2,505 | 2,150 | 2,450 | 8,150 | 15,255 | |||||||||||||||||||
Noninterest income |
2,006 | 2,450 | 2,910 | 3,115 | 10,481 | |||||||||||||||||||
Noninterest expense |
9,131 | 10,320 | 9,365 | 16,035 | 44,851 | |||||||||||||||||||
Income tax (benefit) expense |
187 | 312 | 531 | (4,117 | ) | (3,087 | ) | |||||||||||||||||
Net income (loss) |
$ | 494 | $ | 782 | $ | 1,423 | $ | (6,251 | ) | $ | (3,552 | ) | ||||||||||||
Preferred stock dividends |
370 | 382 | 379 | 382 | 1,513 | |||||||||||||||||||
Accretion of discount on preferred stock |
119 | 119 | 119 | 119 | 476 | |||||||||||||||||||
Net income (loss) available to common stockholders |
$ | 5 | $ | 281 | $ | 925 | $ | (6,752 | ) | $ | (5,541 | ) | ||||||||||||
Net income (loss) per share: |
||||||||||||||||||||||||
Basic earnings (loss) per share |
$ | | $ | 0.06 | $ | 0.21 | $ | (1.51 | ) | $ | (1.24 | ) | ||||||||||||
Diluted earnings (loss) per share |
| 0.06 | 0.21 | (1.51 | ) | (1.24 | ) | |||||||||||||||||
Year Ended December 31, 2009
Year | ||||||||||||||||||||
First | Second | Third | Fourth | to | ||||||||||||||||
(In thousands except per share data) | quarter | quarter | quarter | quarter | Date | |||||||||||||||
Interest income |
$ | 16,034 | $ | 16,061 | $ | 15,910 | $ | 15,557 | $ | 63,562 | ||||||||||
Interest expense |
6,504 | 6,043 | 5,474 | 4,953 | 22,974 | |||||||||||||||
Net interest income |
9,530 | 10,018 | 10,436 | 10,604 | 40,588 | |||||||||||||||
Provision for loan losses |
1,750 | 1,404 | 1,250 | 3,950 | 8,354 | |||||||||||||||
Noninterest income |
2,765 | 2,807 | 2,601 | 3,135 | 11,308 | |||||||||||||||
Noninterest expense |
8,995 | 9,661 | 9,040 | 9,034 | 36,730 | |||||||||||||||
Income tax (benefit) expense |
494 | 555 | 840 | (33 | ) | 1,856 | ||||||||||||||
Net income |
$ | 1,056 | $ | 1,205 | $ | 1,907 | $ | 788 | $ | 4,956 | ||||||||||
Preferred stock dividends |
374 | 383 | 378 | 382 | 1,517 | |||||||||||||||
Accretion of discount on preferred stock |
119 | 119 | 119 | 120 | 477 | |||||||||||||||
Net income available to common stockholders |
$ | 563 | $ | 703 | $ | 1,410 | $ | 286 | $ | 2,962 | ||||||||||
Net income per share: |
||||||||||||||||||||
Basic earnings per share |
$ | 0.13 | $ | 0.16 | $ | 0.32 | $ | 0.06 | $ | 0.66 | ||||||||||
Diluted earnings per share |
0.13 | 0.16 | 0.32 | 0.06 | 0.66 | |||||||||||||||
77
MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS
Market Price. Our Companys common stock trades on Nasdaqs global select market
under the stock symbol of HWBK. The following table sets forth the range of high and low bid
prices of our Companys common stock by quarter for each quarter in 2010 and 2009 in which the
stock was traded.
2010 | High | Low | ||||||
First Quarter |
12.50 | 9.08 | ||||||
Second Quarter |
13.20 | 11.06 | ||||||
Third Quarter |
13.37 | 8.69 | ||||||
Fourth Quarter |
10.21 | 8.26 |
2009 | High | Low | ||||||
First Quarter |
11.30 | 11.30 | ||||||
Second Quarter |
9.90 | 9.90 | ||||||
Third Quarter |
9.75 | 9.38 | ||||||
Fourth Quarter |
9.65 | 9.40 |
Shares Outstanding. As of March 14, 2011, our Company had issued 4,635,891 shares of
common stock, of which 4,474,033 shares were outstanding. The outstanding shares were held of
record by approximately 1,453 shareholders. Our Company has a warrant outstanding for the purchase
of 265,471 shares of common stock. In addition, our Company has 30,255 shares of cumulative,
perpetual preferred stock outstanding. The warrant and preferred shares were issued pursuant to the
U.S. Treasurys Capital Purchase Program (or CPP).
Dividends. The following table sets forth information on dividends paid by our
Company in 2010 and 2009.
Dividends | ||||
Month Paid | Per Share | |||
January, 2010 |
$ | 0.11 | ||
April, 2010 |
0.11 | |||
July, 2010 |
0.05 | |||
October, 2010 |
0.05 | |||
Total for 2010 |
$ | 0.32 | ||
January, 2009 |
$ | 0.21 | ||
April, 2009 |
0.21 | |||
July, 2009 |
0.11 | |||
October, 2009 |
0.11 | |||
Total for 2009 |
$ | 0.64 | ||
Our Board of Directors intends that our Company will continue to pay quarterly dividends. The
actual amount of quarterly dividends and the payment, as well as the amount, of any special
dividend ultimately will depend on the payment of sufficient dividends by our subsidiary Bank to
our Company. The payment by our Bank of dividends to our Company will depend upon such factors as
our Banks financial condition, results of operations and current and anticipated cash needs,
including capital requirements. As discussed in Note 14 to our Companys consolidated financial
statements, the Bank will be required to receive regulatory approval prior to paying dividends to
our Company until such time as the Banks unappropriated retained earnings balance is restored to a
positive balance. In addition to the above limitations, our ability to pay dividends on our common
stock is limited by our participation in the Treasurys Capital Purchase Program (or CPP). Prior to
December 19, 2011, unless we have redeemed the Series A preferred stock issued to the U.S. Treasury
in the CPP or the U.S. Treasury has transferred the Series A preferred stock to a third party, we
must receive the consent of the U.S. Treasury before we can pay quarterly dividends on our common
stock of more than $0.20 per share. Furthermore, if we are not current in the payment of quarterly
dividends on the Series A preferred stock, we cannot pay dividends on our common stock.
78
Stock Performance Graph. The following performance graph shows a comparison of
cumulative total returns for our Company, the Nasdaq Stock Market (U.S. Companies), and a peer
index of financial institutions having total assets of between $1 billion and $5 billion for the
period from December 31, 2005, through December 31, 2010. The cumulative total return on investment
for each of the periods for our Company, the Nasdaq Stock Market (U.S. Companies) and the peer
index is based on the stock price or index at January 1, 2005. The performance graph assumes that
the value of an investment in our common stock and each index was $100 at December 31, 2005 and
that all dividends were reinvested. The information presented in the performance graph is
historical in nature and is not intended to represent or guarantee future returns.
The comparison of cumulative total returns presented in the above graph was plotted using the
following index values and common stock price values:
12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 | |||||||||||||||||||||||||||
Hawthorn Bancshares, Inc. |
$ | 100.00 | $ | 109.75 | $ | 89.52 | $ | 64.10 | $ | 38.81 | $ | 37.25 | ||||||||||||||||||||
Nasdaq Composite
(U.S. Companies) |
$ | 100.00 | $ | 110.39 | $ | 122.15 | $ | 73.32 | $ | 106.57 | $ | 125.91 | ||||||||||||||||||||
Index of financial
institutions ($1 billion to $5 billion) |
$ | 100.00 | $ | 115.72 | $ | 84.29 | $ | 69.91 | $ | 50.11 | $ | 56.81 | ||||||||||||||||||||
79
DIRECTORS AND EXECUTIVE OFFICERS OF OUR COMPANY
Name | Position with Our Company | Position with Subsidiary Bank | Principal Occupation | |||
David T. Turner
|
Chairman, Chief Executive Officer, President and Director -Class III | Chairman, Chief Executive Officer, Director of Hawthorn Bank, President of Hawthorn Bank | Position with Hawthorn Bancshares and Hawthorn Bank | |||
Charles G.
Dudenhoeffer, Jr.
|
Director-Class II | Director of Hawthorn Bank | Retired | |||
Philip D. Freeman
|
Director-Class I | Director of Hawthorn Bank | Owner/Manager, Freeman Mortuary, Jefferson City, Missouri |
|||
Kevin L. Riley
|
Director-Class III | Director of Hawthorn Bank | Co-owner, Riley Chevrolet, Buick, GMC Cadilac, and Riley Toyota Scion, Jefferson City, Missouri | |||
James E. Smith
|
Director-Class I | Director of Hawthorn Bank | Retired | |||
Gus S. Wetzel, II
|
Director-Class II | Director of Hawthorn Bank | Physician, Wetzel Clinic, Clinton, Missouri |
|||
Richard G. Rose
|
Chief Financial Officer | Senior Vice President and Chief Financial Officer of Hawthorn Bank | Position with Hawthorn Bancshares and Hawthorn Bank | |||
Kathleen L. Bruegenhemke
|
Senior Vice President, Chief Risk Officer and Corporate Secretary | Senior Vice President and Chief Risk Officer | Position with Hawthorn Bancshares and Hawthorn Bank |
ANNUAL REPORT ON FORM 10-K
A copy of our Companys Annual Report on Form 10-K for the year ended December 31, 2010, as filed
with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge
to shareholders entitled to vote at the 2011 annual meeting of shareholders upon written request to
Kathleen L. Bruegenhemke, Secretary, Hawthorn Bancshares, Inc., 132 East High Street, Jefferson
City, Missouri 65101. Our Company will provide a copy of any exhibit to the Form 10-K to any such
person upon written request and the payment of our Companys reasonable expenses in furnishing such
exhibits.
80