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Section 1: 10-K (10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

(Mark One)

☒           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to _________________.

Commission file number: 0‑23636

HAWTHORN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

Missouri

43‑1626350

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

132 East High Street, Box 688, Jefferson City, Missouri 65102

(Address of principal executive offices)                                         (Zip Code)

(573) 761‑6100

(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class

 

Name of Each Exchange on Which Registered

None

 

N/A

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $1.00 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒    No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒   No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a  smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b‑2 of the Exchange Act.

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

Non-accelerated filer ☐

 

 

 

Smaller reporting company  ☒

Emerging growth company  ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes   No 

The aggregate market value of the 4,721,742 shares of voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the $21.90 closing price of such common equity on June 29,  2018, the last business day of the registrant's most recently completed second fiscal quarter, was $103,406,154.  Aggregate market value excludes an aggregate of 1,299,173 shares of common stock held by officers and directors and by each person known by the registrant to own 5% or more of the outstanding common stock on such date.  Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. As of March 14, 2019, the registrant had 6,278,481 shares of common stock, par value $1.00 per share, issued and 6,034,843 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference into the indicated parts of this report:  (1) 2018 Annual Report to Shareholders - Part II and (2) definitive Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A - Part III.

 

 

 

 


 

PART I

Item 1.  Business.

This report and the documents incorporated by reference herein contain forward-looking statements, which are inherently subject to risks and uncertainties.  See "Forward Looking Statements" under Item 7 of this report.

General

The Company, Hawthorn Bancshares, Inc., is a bank holding company registered under the Bank Holding Company Act of 1956, as amended.  Hawthorn Bancshares, Inc. was incorporated under the laws of the State of Missouri on October 23, 1992 as Exchange National Bancshares, Inc. and changed its name to Hawthorn Bancshares, Inc. in August 2007.  The Company owns all of the issued and outstanding capital stock of Union State Bancshares, Inc., which in turn owns all of the issued and outstanding capital stock of Hawthorn Bank.  The Company and Union State Bancshares each received approval from the Federal Reserve and elected to become a financial holding company on October 21, 2001.

The Company acquired Hawthorn Bank and its constituent predecessor banks, as well as Union State Bancshares, in a series of transactions that are summarized as follows:

·

On April 7, 1993 the Company acquired all of the issued and outstanding capital stock of The Exchange National Bank of Jefferson City, a national banking association, pursuant to a corporate reorganization involving an exchange of shares;

·

On November 3, 1997, the Company acquired Union State Bancshares, Inc., and Union's wholly-owned subsidiary, Union State Bank and Trust of Clinton;

·

On January 3, 2000, the Company acquired Osage Valley Bank;

·

Following the May 4, 2000 acquisition of Citizens State Bank of Calhoun by Union State Bank, Citizens State Bank merged into Union State Bank to form Citizens Union State Bank & Trust;

·

On June 16, 2000,  the Company acquired City National Savings Bank, FSB, which was then merged into Exchange National Bank; and

·

On May 2, 2005, the Company acquired all of the issued and outstanding capital stock of Bank 10, a Missouri state bank.

On December 1, 2006, the Company announced its development of a strategic plan in which, among other things, Exchange National Bank, Citizens Union State Bank, Osage Valley Bank and Bank 10 would be consolidated into a single bank under a Missouri state trust charter.  This consolidation was completed in October 2007, and the subsidiary bank is now known as Hawthorn Bank.

Except as otherwise provided herein, references herein to the "Company" or "Hawthorn" include Hawthorn Bancshares, Inc. and its consolidated subsidiaries, and references herein to the "Bank" refers to Hawthorn Bank and its constituent predecessors.

Description of Business

Company.  The Company is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company.  The Company's activities currently are limited to ownership, indirectly through its subsidiary (Union State Bancshares, Inc.), of the outstanding capital stock of Hawthorn Bank.  In addition to ownership of its subsidiaries, the Company may seek expansion through acquisition and may engage in those activities (such as investments in banks or operations that are financial in nature) in which it is permitted to engage under applicable

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law.  It is not currently anticipated that the Company will engage in any business other than that directly related to its ownership of its banking subsidiary or other financial institutions.

Union.  Union State Bancshares, Inc. is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company.  Union's activities currently are limited to ownership of the outstanding capital stock of Hawthorn Bank.  It is not currently anticipated that Union will engage in any business other than that directly related to its ownership of Hawthorn Bank.

Hawthorn Bank.  Hawthorn Bank was founded in 1932 as a Missouri bank and converted to a Missouri trust company on August 16, 1989.  However, its predecessors trace their lineage back to the founding of Exchange National Bank in 1865.  Hawthorn Bank has 23 banking offices, including its principal office at 132 East High Street in Jefferson City's central business district.  See "Item 2. Properties".

Hawthorn Bank is a full service bank conducting a general banking and trust business, offering its customers checking and savings accounts, internet banking, debit cards, certificates of deposit, trust services, brokerage services, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, single payment personal loans, installment loans and commercial and residential real estate loans.

Hawthorn Bank's deposit accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law.  Hawthorn Bank's operations are supervised and regulated by the FDIC and the Missouri Division of Finance.  Periodic examinations of Hawthorn Bank are conducted by representatives of the FDIC and the Missouri Division of Finance.  Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of the holders of Hawthorn Bank's common stock.  See "Regulation Applicable to Bank Holding Companies" and "Regulation Applicable to the Bank".

Hawthorn Real Estate.  Hawthorn Real Estate, LLC, a non-bank subsidiary of the Company, was formed in December 2008 in order to purchase and hold various nonperforming assets of Hawthorn Bank.  The purpose for holding these nonperforming assets in Hawthorn Real Estate is to allow for the orderly disposition of these assets and strengthen Hawthorn Bank's financial position.

HB Realty, LLC. HB Realty, LLC, a Missouri limited liability company ("HB Realty"), was formed in February 2018 and commenced operations in April 2018. HB Realty is intended to qualify as a "real estate investment trust" under the Internal Revenue Code of 1986, as amended (the "IRC"). HB Realty was formed in order to hold certain mortgage loans and participation interests contributed to it by Hawthorn Bank. HB Realty was initially capitalized with mortgage loans and participation interests having an approximate aggregate book value of $404,665,296. As of December 31, 2018, the approximate aggregate book value of the mortgage loans and participation interests held by HB Realty was $445,350,930. 

Initially, Hawthorn Bank was the sole common member and the sole preferred member of HB Realty, owning

all 1,000 common shares and all 1,000 preferred shares. On April 1, 2018, Hawthorn Bank contributed all 1,000 common shares and 850 preferred shares to Jefferson City IHC, LLC, a Missouri limited liability company that is wholly owned by Hawthorn Bank ("JCIHC"). Under the IRC, a real estate investment trust must have at least one hundred (100) owners. Pursuant to a newly established Hawthorn Bank Real Estate Investment Trust Ownership Plan, Hawthorn Bank will make available to certain employees of Hawthorn Bank, as an employee benefit, up to a total of 150 preferred shares of HB Realty. Each selected employee will have the opportunity to own one preferred share of HB Realty. It is anticipated that these preferred shares will be transferred to employees beginning in January 2019. Each preferred share is generally entitled to an annual dividend of thirty dollars ($30) and a liquidation amount of $500. Although dividends are not guaranteed, it is expected that HB Realty will pay dividends in December of each year. By virtue of its ownership of JCIHC, Hawthorn Bank indirectly owns the remaining economic interest associated with membership interests in HB Realty.

Through its ownership of JCIHC, Hawthorn Bank is, indirectly, the controlling member of HB Realty and is entitled to control the appointment of managers of HB Realty. The initial Board of Managers of HB Realty, which is

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responsible for the management of the business and affairs of HB Realty, is comprised of David T. Turner, Kathleen L. Bruegenhemke, Gregg A. Bexten and W. Bruce Phelps.

Hawthorn Risk Management, Inc., a non-bank subsidiary of the Company, which was formed and began operations on December 28, 2017, is a Missouri-based captive insurance company which provides property and casualty insurance coverage to the Company and the Bank for which insurance may not be currently available or economically feasible in today's insurance marketplace. Hawthorn Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. Hawthorn Risk Management, Inc. is subject to the regulations of the State of Missouri and undergoes periodic examinations by the Missouri Division of Insurance.

 

Employees

As of December 31, 2018, Hawthorn and its subsidiaries had approximately 273 full-time and 28 part-time employees.  None of its employees is presently represented by any union or collective bargaining group, and the Company considers its employee relations to be satisfactory.

Competition

Bank holding companies and their subsidiaries and affiliates encounter intense competition from nonbanking as well as banking sources in all of their activities.  The Bank's competitors include other commercial banks, thrifts, savings banks, credit unions, and money market mutual funds.  Thrifts and credit unions now have the authority to offer checking accounts and to make corporate and agricultural loans and were granted expanded investment authority by recent federal regulations.  In addition, large national and multinational corporations have in recent years become increasingly visible in offering a broad range of financial services to all types of commercial and consumer customers.  In the Bank's service areas, new competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on the Bank's market share of deposits and loans in such service areas.

The Bank experiences substantial competition for deposits and loans within both its primary service areas of Jefferson City, Columbia, Clinton, Lee's Summit, Warsaw, Springfield, and Branson, Missouri and its secondary service area of the nearby communities in Cole, Boone, Henry, Cass, Benton, and Greene counties of Missouri.  Hawthorn Bank's principal competition for deposits and loans comes from other banks within its primary service areas and, to an increasing extent, other banks in nearby communities.  Based on publicly available information, management believes that Hawthorn Bank is the third largest (in terms of deposits) of the twelve banks within Cole county, the eleventh largest (in terms of deposits) of thirty-one banks within Boone county, the largest (in terms of deposits) of the eight banks within Henry county, the third largest (in terms of deposits) of the eighteen banks within Cass county, and the second largest (in terms of deposits) of the five banks within Benton county. The main competition for Hawthorn Bank's trust services is from other commercial banks, including those of the Kansas City metropolitan area.

Regulation Applicable to Bank Holding Companies

General.  As a registered bank holding company and a financial holding company under the Bank Holding Company Act (the "BHC Act") and the Gramm-Leach-Bliley Act (the "GLB Act"), Hawthorn is subject to supervision and examination by the Board of Governors of the Federal Reserve System (the "FRB").  The FRB has authority to issue cease and desist orders against bank holding companies if it determines that their actions represent unsafe and unsound practices or violations of law.  In addition, the FRB is empowered to impose civil money penalties for violations of banking statutes and regulations.  Regulation by the FRB is intended to protect depositors of the Bank, not the shareholders of Hawthorn. Hawthorn also is subject to a number of restrictions and requirements imposed by the Sarbanes-Oxley Act of 2002 relating to internal controls over financial reporting, disclosure controls and procedures, loans to directors or executive officers of the Hawthorn and its subsidiaries, the preparation and certification of Hawthorn's consolidated financial statements, the duties of Hawthorn's audit committee, relations with and functions performed by Hawthorn's independent registered public accounting firm, and various accounting and corporate governance matters.

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Limitation on Activities.  The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  In addition, under the GLB Act, a bank holding company, all of whose controlled depository institutions are "well capitalized" and "well managed" (as defined in federal banking regulations) with "satisfactory" Community Reinvestment Act ratings, may declare itself to be a "financial holding company" and engage in a broader range of activities.  As noted above, Hawthorn is registered as a financial holding company.

A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental or complementary to activities that are financial in nature.  "Financial in nature" activities include:

·

securities underwriting, dealing and market making;

·

sponsoring mutual funds and investment companies;

·

insurance underwriting and insurance agency activities;

·

merchant banking; and

·

activities that the FRB determines to be financial in nature or incidental to a financial activity or which is complementary to a financial activity and does not pose a safety and soundness risk.

A financial holding company that desires to engage in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity.  Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system.

A financial holding company generally may acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature without prior approval from the FRB.  Prior FRB approval is required, however, before the financial holding company may acquire control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association.  In addition, under the FRB's merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company's controlled depository institutions.

If any subsidiary bank of a financial holding company ceases to be "well-capitalized" or "well-managed" and fails to correct its condition within the time period that the FRB specifies, the FRB has authority to order the financial holding company to divest its subsidiary banks.  Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company.  If any subsidiary bank of a financial holding company receives a rating under the Community Reinvestment Act (the "CRA") of less than "satisfactory", then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations until the rating is raised to "satisfactory" or better.

Limitation on Acquisitions.  The BHC Act requires a bank holding company to obtain prior approval of the FRB before:

·

taking any action that causes a bank to become a controlled subsidiary of the bank holding company;

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·

acquiring direct or indirect ownership or control of voting shares of any bank or bank holding company, if the acquisition results in the acquiring bank holding company having control of more than 5% of the outstanding shares of any class of voting securities of such bank or bank holding company, and such bank or bank holding company is not majority-owned by the acquiring bank holding company prior to the acquisition;

·

acquiring substantially all of the assets of a bank; or

·

merging or consolidating with another bank holding company.

Regulatory Capital Requirements.  The FRB has issued risk-based and leverage capital guidelines applicable to United States banking organizations.  If a bank holding company's capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends and make acquisitions of new bank subsidiaries may be restricted or prohibited.  The risk-based capital guidelines that applied to us and our subsidiary bank prior to January 1, 2015 were based on the 1988 capital accord, referred to as Basel I, of the International Basel Committee on Banking Supervision (which we refer to as the "Basel Committee"), a committee of central banks and bank supervisors, as implemented by federal bank regulators. In 2008, the bank regulatory agencies began to phase-in capital standards based on a second capital accord issued by the Basel Committee, referred to as Basel II, for large or "core" international banks (generally defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more). Because we do not anticipate controlling any large or "core" international bank in the foreseeable future, Basel II presently does not apply to us.  On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III.  In July 2013, the federal banking agencies announced new risk-based capital and leverage ratios to conform to the Basel III framework and address provisions of the Dodd-Frank Act.  With respect to the Company and the Bank, these requirements become effective on January 1, 2015.

The FRB's risk-based guidelines generally define a three-tier capital framework.  Common Equity Tier 1 Capital generally includes common stock instruments and related surplus (net of treasury stock), retained earnings, and, subject to certain adjustments, minority common equity interests in subsidiaries, less goodwill and certain other adjustments.  The rules require accumulated other comprehensive income to flow through to regulatory capital unless a one-time, irrevocable opt-out election is made. We did not make the opt-out election. Banking organizations are required to deduct goodwill and other intangible assets (other than certain mortgage servicing assets), net of associated deferred tax liabilities, from Common Equity Tier 1 Capital.  Deferred tax assets arising from temporary timing differences that cannot be realized through net operating loss (NOL) carrybacks are also deducted.  Deferred tax assets that can be realized through NOL carrybacks are not deducted but are subject to 100% risk weighting.  Defined benefit pension fund assets, net of any associated deferred tax liability, are deducted from Common Equity Tier 1 Capital unless the banking organization has unrestricted and unfettered access to such assets.  Reciprocal cross-holdings of capital instruments in any other financial institutions are deducted from capital, not just holdings in other depository institutions.  For this purpose, financial institutions are broadly defined to include securities and commodities firms, hedge and private equity funds and non-depository lenders.  Banking organizations are required to deduct non-significant investments (less than 10% of outstanding stock) in the capital of other financial institutions (including investments in trust preferred securities) to the extent these exceed 10% of Common Equity Tier 1 Capital subject to a 15% of Common Equity Tier 1 Capital cap.  Greater than 10% investments must be deducted if they exceed 10% of Common Equity Tier 1 Capital.  If the aggregate amount of certain items excluded from capital deduction due to a 10% threshold exceeds 17.65% of Common Equity Tier 1 Capital, the excess must be deducted.  The federal banking agencies did not adopt a proposed rule as part of the new regulations that would have significantly changed the risk-weighting for residential mortgages.  Instead, the amended regulations continue to follow the capital rules that historically have applied to us, which assign a 50% risk-weighting to "qualifying mortgage loans" which generally consist of residential first mortgages with an 80% loan-to-value ratio (or which carry mortgage insurance that reduces the bank's exposure to 80%) that are not more than 90 days past due.  All other mortgage loans have a 100% risk weight.  The revised regulations apply a 250% risk-weighting to mortgage servicing rights, deferred tax assets that cannot be realized through NOL carrybacks and investments in the capital instruments of other financial institutions that are not deducted from capital.  The revised regulations also create a new 150% risk-weighting category for "high volatility commercial real estate loans" which are credit facilities for the acquisition, construction or development of real property other than for certain community development projects, agricultural land and one- to four-family residential

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properties or commercial real projects where: (i) the loan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate's "as completed" value before the loan is made.

Tier 1 Capital generally includes Common Equity Tier 1 Capital plus Additional Tier 1 Capital elements, such as non-cumulative perpetual preferred stock and similar instruments meeting specified criteria and minority interests in subsidiaries that do not satisfy the requirements for Common Equity Tier 1 Capital treatment.  Cumulative preferred stock (other than cumulative preferred stock issued to the U.S. Treasury under the Capital Purchase Program or the Small Business Lending Fund) does not qualify as Additional Tier 1 Capital.  Trust preferred securities and other non-qualifying capital instruments issued prior to May 19, 2010 by bank and savings and loan holding companies with less than $15 billion in assets as of December 31, 2009 or by mutual holding companies may continue to be included in Tier 1 Capital but will be phased out over 10 years beginning in 2016 for all other banking organizations.  These non-qualifying capital instruments, however, may be included in Tier 2 Capital. Tier 2 Capital may also include certain qualifying debt and the allowance for credit losses up to 1.25% of risk-weighted assets and other adjustments.

The sum of the three tiers of capital less investments in unconsolidated subsidiaries represents the total capital. The risk-based capital ratios are calculated by dividing Common Equity Tier 1, Tier 1 and total capital by risk-weighted assets (including certain off-balance sheet activities).  The FRB's capital adequacy guidelines require that bank holding companies maintain a Common Equity Tier 1 risk-based capital ratio equal to at least 4.5% of its risk-weighted assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital ratio equal to at least 8% of its risk-weighted assets.  In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%.

On December 31, 2018, Hawthorn was in compliance with the FRB's capital adequacy guidelines.  Hawthorn's capital ratios on December 31, 2018 and the minimum requirements as of that date are shown below:

 

 

 

 

 

 

 

 

 

Tier 1 Leverage Ratio

    

Common Equity Tier 1 Risk-

    

Tier 1 Risk-Based Capital

    

 

    

(4% minimum

 

Based Capital Ratio (4.5%

 

Ratio (6% minimum

 

Total Risk-Based

 

requirement)

 

minimum requirement)

 

requirement)

 

Capital Ratio (8%)

 

9.55

%

8.48

%

11.21

%

13.28

%

 

In addition to higher capital requirements, bank holding companies are required to maintain a common equity Tier 1 capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements.  Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.  The capital conservation buffer requirement will be phased in over four years beginning in 2016. On January 1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and the requirement will increase each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk weighted assets on January 1, 2019. Once fully phased in, the capital conservation buffer requirement effectively raises the minimum required risk-based capital ratios to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the "EGRRCPA") directs the federal

banking agencies to develop a specified Community Bank Leverage Ratio, or CBLR, (that is, the ratio of a bank's equity capital to its consolidated assets) of not less than 8% and not more than 10%. On November 21, 2018, federal regulators released a proposed rulemaking that would, if enacted, provide certain banks and their holding companies with the option to elect out of complying with the Basel III Capital Rules. Under the proposal, a qualifying community banking organization would be eligible to elect the community bank leverage ratio framework if it has a community bank leverage ratio, or CBLR, greater than 9% at the time of election.

A qualifying community banking organization, or QCBO, is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with:

·

total consolidated assets of less than $10 billion;

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·

total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets;

·

total trading assets and trading liabilities of 5% or less of total consolidated assets;

·

mortgage servicing assets of 25% or less of CBLR tangible equity; and

·

temporary difference deferred tax assets of 25% or less of CBLR tangible equity.

A QCBO may elect out of complying with the Basel III Capital Rules if, at the time of the election, the QCBO has a CBLR above 9%. The numerator of the CBLR is referred to as "CBLR tangible equity" and is calculated as the QCBO's total capital as reported in compliance with Call Report and FR Y-9C instructions ("Reporting Instructions") (prior to including non-controlling interests in consolidated subsidiaries) less:

·

accumulated other comprehensive income (referred to in the industry as AOCI);

·

intangible assets, calculate in accordance with Reporting Instructions, other than mortgage servicing assets; and

·

deferred tax assets that arise from net operating loss and tax credit carry forwards net of any related valuations allowances.

The denominator of the CBLR is the QCBO's average total consolidated assets, calculated in accordance with

Reporting Instructions and less intangible assets and deferred tax assets deducted from CBLR tangible equity.

 

As of December 31, 2018, the Company and the Bank each qualified to elect the community bank leverage ratio framework because they had a CBLR of greater than 9%. The Company will continue to monitor this rulemaking. If and when the rulemaking goes into effect, the Company and the Bank will consider whether it would be possible and advantageous at that time to elect to comply with the community bank leverage ratio framework.

Interstate Banking and Branching.  Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), a bank holding company is permitted to acquire the stock or substantially all of the assets of banks located in any state regardless of whether such transaction is prohibited under the laws of any state.  The FRB will not approve an interstate acquisition if, as a result of the acquisition, the bank holding company would control more than 10% of the total amount of insured deposits in the United States or would control more than 30% of the insured deposits in the home state of the acquired bank.  The 30% of insured deposits state limit does not apply if the acquisition is the initial entry into a state by a bank holding company or if the home state waives such limit.  The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches.  The Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010, a subset of the Dodd-Frank Act discussed below, permits banks to acquire and establish de novo branches in other states if a state bank in that other state would be permitted to establish the branch.

Under the Riegle-Neal Act, individual states may restrict interstate acquisitions in two ways.  A state may prohibit an out-of-state bank holding company from acquiring a bank located in the state unless the target bank has been in existence for a specified minimum period of time (not to exceed five years).  A state may also establish limits on the total amount of insured deposits within the state which are controlled by a single bank holding company, provided that such deposit limit does not discriminate against out-of-state bank holding companies.

Source of Strength.  Bank holding companies, such as the Company, are required by statute to serve as a source of financial strength for their subsidiary depository institutions, by providing financial assistance to their insured depository institution subsidiaries in the event of financial distress.  Under the source of strength requirement, the Company could be required to provide financial assistance to the Bank should it experience financial distress.  Furthermore, the FRB has the right to order a bank holding company to terminate any activity that the FRB believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank.  The regulators may require these and other actions in support of controlled banks even if such action is not in the best interests of the bank holding company or its stockholders.

Liability of Commonly Controlled Institutions.  Under cross-guaranty provisions of the Federal Deposit Insurance Act (the "FDIA"), bank subsidiaries of a bank holding company are liable for any loss incurred by the Deposit Insurance Fund (the "DIF"), the federal deposit insurance fund for banks, in connection with the failure of any other bank subsidiary of the bank holding company.

8


 

Bank Secrecy Act and USA PATRIOT Act.  The Company and the Bank must comply with the requirements of the Bank Secrecy Act (the "BSA").  The BSA was enacted to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, drug trafficking, money laundering, and other crimes.  Since its passage, the BSA has been amended several times.  These amendments include the Money Laundering Control Act of 1986, which made money laundering a criminal act, as well as the Money Laundering Suppression Act of 1994, which required regulators to develop enhanced examination procedures and increased examiner training to improve the identification of money laundering schemes in financial institutions.  The USA PATRIOT Act, established in 2001, substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States.  The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent, and report money laundering and terrorist financing.  The regulations include significant penalties for non-compliance.

Missouri Bank Holding Company Regulation.  Missouri prohibits any bank holding company from acquiring ownership or control of any bank or Missouri depository trust company that has Missouri deposits if, after such acquisition, the bank holding company would hold or control more than 13% of total Missouri deposits.  Because of this restriction, among others, a bank holding company, prior to acquiring control of a bank or depository trust company that has deposits in Missouri, must receive the approval of the Missouri Division of Finance.

Regulation Applicable to the Bank

General.  Hawthorn Bank, a Missouri state non-member depository trust company, is subject to the regulation of the Missouri Division of Finance and the FDIC.  The FDIC is empowered to issue cease and desist orders against the Bank if it determines that any activities of the Bank represent unsafe and unsound banking practices or violations of law.  In addition, the FDIC has the power to impose civil money penalties for violations of banking statutes and regulations.  Regulation by these agencies is designed to protect the depositors of the Bank; not shareholders of Hawthorn.

Bank Regulatory Capital Requirements.  The FDIC has adopted minimum capital requirements applicable to state non-member banks, which are similar to the capital adequacy guidelines established by the FRB for bank holding companies.  Federal banking laws classified an insured financial institution in one of the following five categories, depending upon the amount of its regulatory capital:

·

"well-capitalized" if it has a total Tier 1 leverage ratio of 5% or greater, a Common Equity Tier 1 risk-based capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8% or greater and a total risk-based capital ratio of 10% or greater (and is not subject to any order or written directive requiring the bank to adhere to a higher capital ratio);

·

"adequately capitalized" if it has a total Tier 1 leverage ratio of 4% or greater, a Common Equity Tier 1 risk-based capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a total risk-based capital ratio of 8% or greater;

·

"undercapitalized" if it has a total Tier 1 leverage ratio that is less than 4%, a Common Equity Tier 1 risk-based capital ratio that is less than 4.5%, a Tier 1 risk-based capital ratio that is less than 6% or a total risk-based capital ratio that is less than 8%;

·

"significantly undercapitalized" if it has a total Tier 1 leverage ratio that is less than 3%, a Common Equity Tier 1 risk-based capital ratio that is less than 3%, a Tier 1 risk-based capital ratio that is less than 4% or a total risk-based ratio that is less than 6%; and

·

"critically undercapitalized" if it has a Tier 1 leverage ratio that is equal to or less than 2%.

Federal regulatory agencies are required to take prompt corrective action against undercapitalized financial institutions.  On December 31, 2018, the Bank was classified as "well-capitalized," which is required for Hawthorn to

9


 

remain a financial holding company.  The capital ratios and classifications of the Bank as of December 31, 2018 and the minimum requirements as of such date are shown on the following chart.

 

 

 

 

 

 

 

 

 

 

    

Common Equity Tier 1

    

 

    

 

 

Tier 1 Leverage Ratio

 

Risk-Based Capital Ratio

 

Tier 1 Risk-Based Capital

 

 

 

(5% minimum

 

(6.5% minimum

 

Ratio (8% minimum

 

Total Risk-Based Capital

 

requirement)

 

requirement

 

requirement)

 

Ratio (10%)

 

10.43

%  

12.24

%  

12.24

%  

13.19

%

 

Limitations on Interest Rates and Loans to One Borrower.  The rate of interest a bank may charge on certain classes of loans is limited by state and federal law.  At certain times in the past, these limitations have resulted in reductions of net interest margins on certain classes of loans.  Federal and state laws impose additional restrictions on the lending activities of banks. The maximum amount that a Missouri state-chartered bank may lend to any one person or entity is generally limited to 15% of the unimpaired capital of the bank located in a city having a population of 100,000 or more, 20% of the unimpaired capital of the bank located in a city having a population of less than 100,000 and over 7,000, and 25% of the unimpaired capital of the bank if located elsewhere in the state.  In the case of Missouri state-chartered banks with a composite rating of 1 or 2 under the Capital, Assets, Management, Earnings, Liquidity and Sensitivity (CAMELS) rating system, the maximum amount is the greater of (i) the limits listed in the foregoing sentence or (ii) 25% of the unimpaired capital of the bank.

Payment of Dividends.  The Company's primary source of funds is dividends from the Bank, and the Bank is subject to federal and state laws limiting the payment of dividends.  Under the FDIA, an FDIC-insured institution may not pay dividends while it is undercapitalized or if payment would cause it to become undercapitalized.  The National Bank Act and Missouri banking law also prohibit the declaration of a dividend out of the capital and surplus of the bank.

Community Reinvestment Act.  The Bank is subject to the CRA and implementing regulations. The CRA regulations establish the framework and criteria by which the bank regulatory agencies assess an institution's record of helping to meet the credit needs of its community, including low- and moderate-income neighborhoods.  CRA ratings are taken into account by regulators in reviewing certain applications made by Hawthorn and its banking subsidiary.

Limitations on Transactions with Affiliates.  Hawthorn and its non-bank subsidiaries are "affiliates" within the meaning of the Federal Reserve Act.  The amount of loans or extensions of credit which the Bank may make to non-bank affiliates, or to third parties secured by securities or obligations of the non-bank affiliates, are substantially limited by the Federal Reserve Act and the FDIA.  Such acts further restrict the range of permissible transactions between a bank and an affiliated company.  A bank and its subsidiaries may engage in certain transactions, including loans and purchases of assets, with an affiliated company only if the terms and conditions of the transaction, including credit standards, are substantially the same as, or at least as favorable to the bank as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms and conditions that would be offered to non-affiliated companies.

Other Banking Activities.  The investments and activities of the Bank are also subject to regulation by federal and state banking agencies regarding, among other things, investments in subsidiaries, investments for their own account (including limitations on investments in junk bonds and equity securities), loans to officers, directors and their affiliates, security requirements, anti-tying limitations, anti-money laundering, financial privacy and customer identity verification requirements, truth-in-lending, the types of interest bearing deposit accounts which it can offer, trust department operations, brokered deposits, audit requirements, issuance of securities, branching and mergers and acquisitions.

Changes in Laws and Monetary Policies

Recent Legislation.  Various pieces of legislation, including proposals to change substantially the financial institution regulatory system, are from time to time introduced and considered by the Missouri state legislature and the United States Congress.  In July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which enacted substantial changes to the legal framework of the entire financial services industry.  The Dodd-Frank Act mandates the passage of numerous rules and regulations by various regulatory agencies over the next few years. It also creates the Consumer Financial Protection Bureau, which will overtake

10


 

supervision of most providers of consumer financial products and services, and will be empowered to declare acts or practices related to the delivery of a consumer financial product or service to be "unfair, deceptive or abusive."  This law will continue to change banking regulation and the operating environment of Hawthorn in substantial and unpredictable ways.  These changes could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions.  Hawthorn cannot predict the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its business.

Key provisions of the EGRRCPA as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as "qualified mortgages" for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high-volatility commercial real estate, which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.

Fiscal Monetary Policies.  Hawthorn's business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies.  Hawthorn is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States.  Among the instruments of monetary policy available to the FRB are:

·

conducting open market operations in United States government securities;

·

changing the discount rates of borrowings of depository institutions;

·

imposing or changing reserve requirements against depository institutions' deposits; and

·

imposing or changing reserve requirements against certain borrowings by bank and their affiliates.

These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.  The policies of the FRB have a material effect on Hawthorn's business, results of operations and financial condition.

The references in the foregoing discussion to various aspects of statutes and regulation are merely summaries, which do not purport to be complete and which are qualified in their entirety by reference to the actual statutes and regulations.

Available Information

The address of the Company's principal executive offices is 132 East High Street, Jefferson City, Missouri 65101 and the telephone number at this location is (573)761‑6100.  The Company's common stock trades on the Nasdaq Global Select Market under the symbol "HWBK".

We electronically file certain documents with the Securities and Exchange Commission (SEC).  We file annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K (as appropriate), along with any related amendments and supplements.  From time-to-time, we also may file registration and related statements pertaining to equity or debt offerings.  You may read and download the Company's SEC filings over the internet from several commercial document retrieval services as well as at the SEC's internet website (www.sec.gov).  You may also read and copy the Company's SEC filings at the SEC's public reference room located at 100 F Street, NE., Washington, DC 20549.  

11


 

Please call the SEC 1‑800‑SEC‑0330 for further information concerning the public reference room and any applicable copy charges.

The Company's internet website address is www.hawthornbancshares.com.  Under the "Documents" menu tab of the Company's website (www.hawthornbancshares.com), we make available, without charge, the Company's public filings with the SEC, including the Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, or any amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934.  Please note that any internet addresses provided in this report are for information purposes only and are not intended to be hyperlinks.  Accordingly, no information found and/or provided at such internet addresses is intended or deemed to be incorporated by reference herein.

 

Item 1A.  Risk Factors.

Risk Factors

We are identifying important risks and uncertainties that could affect the Company's results of operations, financial condition or business and that could cause them to differ materially from the Company's historical results of operations, financial condition or business, or those contemplated by forward-looking statements made herein or elsewhere, by, or on behalf of, the Company.  Factors that could cause or contribute to such differences include, but are not limited to, those factors described below.  The risk factors highlighted below are not necessarily the only ones that the Company faces.

Because We Primarily Serve Central And West Central Missouri, A Decline In The Local Economic Conditions Could Lower The Company's Profitability.  The profitability of Hawthorn is dependent on the profitability of its banking subsidiary, which operates out of central and west central Missouri.  The financial condition of this bank is affected by fluctuations in the economic conditions prevailing in the portion of Missouri in which its operations are located.  Accordingly, the financial conditions of both Hawthorn and its banking subsidiary would be adversely affected by deterioration in the general economic and real estate climate in Missouri.

An increase in unemployment, a decrease in profitability of regional businesses or real estate values or an increase in interest rates are among the factors that could weaken the local economy.  With a weaker local economy:

·

customers may not want or need the products and services of the Bank,

·

borrowers may be unable to repay their loans,

·

the value of the collateral security of the Bank's loans to borrowers may decline,

·

the number of loan delinquencies and foreclosures may increase, and

·

the overall quality of the Bank's loan portfolio may decline.

Originating mortgage loans and consumer loans is a significant source of profits for Hawthorn's banking subsidiary.  If individual customers in the local area do not want or need these loans, profits may decrease.  Although the Bank could make other investments, the Bank may earn less revenue on these investments than on loans.  Also, the Bank's losses on loans may increase if borrowers are unable to make payments on their loans.

Interest Rate Changes May Reduce The Profitability Of The Company And Of The Bank.  The primary source of earnings for Hawthorn's banking subsidiary is net interest income.  To be profitable, the Bank has to earn more money in interest and fees on loans and other interest-earning assets than it pays as interest on deposits and other interest-bearing liabilities and as other expenses.  If prevailing interest rates decrease, the amount of interest the Bank earn on loans and investment securities may decrease more rapidly than the amount of interest the Bank has to pay on deposits and other interest-bearing liabilities.  This would result in a decrease in the profitability of Hawthorn and its banking subsidiary.

12


 

Changes in the level or structure of interest rates also affect:

·

the Bank's ability to originate loans,

·

the value of the Bank's loan and securities portfolios,

·

the Bank's ability to realize gains from the sale of loans and securities,

·

the average life of the Bank's deposits, and

·

the Bank's ability to obtain deposits.

Fluctuations in interest rates will ultimately affect both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the fair value of all interest-earning assets, other than interest-earning assets that mature in the short term.  The Bank's interest rate management strategy is designed to stabilize net interest income and preserve capital over a broad range of interest rate movements by matching the interest rate sensitivity of assets and liabilities.  Although Hawthorn believes that its Bank's current mix of loans, mortgage-backed securities, investment securities and deposits is reasonable, significant fluctuations in interest rates may have a negative effect on the profitability of the Bank.

Our Business Depends On Our Ability To Successfully Manage Credit Risk.  The operation of our business requires us to manage credit risk.  As a lender, our banking subsidiary is exposed to the risk that borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment.  In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers.  In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our loan officers follow those standards.  The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net income.  As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition or results of operations.

The Company's Profitability Depends On The Bank's Asset Quality And Lending Risks.  Success in the banking industry largely depends on the quality of loans and other assets.  The loan officers of Hawthorn's banking subsidiary are actively encouraged to identify deteriorating loans.  Loans are also monitored and categorized through an analysis of their payment status. The Bank's failure to timely and accurately monitor the quality of its loans and other assets could have a materially adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.  There is a degree of credit risk associated with any lending activity.  The Bank attempts to minimize its credit risk through loan diversification.  Although the Bank's loan portfolio is varied, with no undue concentration in any one industry, substantially all of the loans in the portfolio have been made to borrowers in central, west central, and southwest Missouri.  Therefore, the loan portfolio is susceptible to factors affecting the central, west central, and southwest Missouri area and the level of non-performing assets is heavily dependent upon local conditions.  There can be no assurance that the level of the Bank's non-performing assets will not increase above current levels.  High levels of non-performing assets could have a materially adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.

The Provision For Probable Loan Losses May Need To Be Increased.  Hawthorn's banking subsidiary makes a provision for loan losses based upon management's estimate of probable losses in the loan portfolio and its consideration of prevailing economic and environmental conditions.  The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond the Company's  control, and these losses may exceed current estimates.  We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future.  The Bank may need to increase the provision for loan losses through additional

13


 

provisions in the future if, among other things, the financial condition of any of its borrowers deteriorates, if its borrower fails to perform its obligations to it, or if real estate values decline.  Furthermore, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's loan portfolio, provision for loan losses, and real estate acquired by foreclosure.  Such agencies may require the Bank to recognize additions to the provision for loan losses based on their judgments of information available to them at the time of the examination.  Any additional provision for probable loan losses, whether required as a result of regulatory review or initiated by Hawthorn itself, may materially alter the financial outlook of Hawthorn and its banking subsidiary and may have a material adverse effect on the Company's  financial condition and results of operations.

In June of 2016, the Financial Accounting Standards Board, or FASB, decided to review how banks estimate losses in the allowance calculation, and it issued the final current expected credit loss standard, or CECL.  Currently, the impairment model is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms.  This model will be replaced by the new CECL model that will become effective for us for the first interim and annual reporting periods beginning after December 15, 2019. Under the new CECL model promulgated under ASU 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", we will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. The ASU will require new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters.

Management is currently evaluating the impact of these changes to our financial position and results of operations. We anticipate a significant change in the processes and procedures to calculate the allowance, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. We expect to continue developing and implementing processes and procedures to ensure we are fully compliant with the CECL requirements at its adoption date. The allowance is a material estimate of ours, and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the allowance at adoption date. At this time, an estimate of the impact to the Company's financial statements is not known, but the impact could be significantly impacted by the composition, characteristics and quality of the underlying loan portfolio at the time of adoption.

Adverse Market Conditions In The U.S. Economy And The Markets In Which We Operate Could Adversely Impact The Company's Business.  General downward economic trends, reduced availability of commercial credit, and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs.  Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other.  This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity.  Competition among depository institutions for deposits has increased significantly.  Financial institutions have experienced decreased access to deposits or borrowings.

Although there has been a modest recovery in the domestic economy, there can be no assurance that the economy will not enter into another recession, whether in the near or long term future.  Furthermore, real estate values and the demand for commercial real estate loans have not fully recovered, and reduced availability of commercial credit and continuing unemployment have negatively impacted the credit performance of commercial and consumer credit.  Additional market developments such as a relapse or worsening of economic conditions in other parts of the world would likely exacerbate the lingering effects of the difficult market conditions experienced by us and others in the financial services industry and could further slow, stall or reverse the slow recovery in the U.S.  A  further deterioration of overall market conditions, a continuation of the economic downturn or prolonged economic stagnation in the Company's  markets may have a negative impact on its business, financial condition, results of operations and the trading price of its common stock.  If the strength of the U.S. economy in general and the strength of the economy in areas where we lend were to

14


 

stagnate or decline, this could result in, among other things, a deterioration in credit quality or a reduced demand for credit, including a resultant adverse effect on the Company's  loan portfolio and provision for losses on loans.  This may exacerbate the Company's  exposure to credit risk, impair the Company's  ability to assess the creditworthiness of its customers or to estimate the values of its assets and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us.  Negative conditions in the real estate markets where we operate could adversely affect borrowers' ability to repay their loans and the value of the underlying collateral.  Real estate values are affected by various factors, including general economic conditions, governmental rules or policies and natural disasters.  These factors may adversely impact borrowers' ability to make required payments, which in turn, may negatively impact the Company's  financial results.  As a result of the difficult market and economic conditions referred to above, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and for bank regulatory agencies to be very aggressive in responding to concerns and trends identified in examinations.  This increased government action may increase costs and limit the Company's  ability to pursue certain business opportunities.

We cannot predict whether the difficult market and economic conditions will improve in the near future.  A worsening of these conditions would likely exacerbate the adverse effects of these difficult conditions on the Company,  its customers and the other financial institutions in its market.  As a result, we may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds, and the Company's  business, financial condition, results of operations and stock price may be adversely affected.

The Soundness Of Other Financial Institutions Could Adversely Affect Us.  The Company's  ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.  We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients.  As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.  Many of these transactions expose us to credit risk in the event of default of a counterparty or client.  In addition, the Company's  credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us.  There is no assurance that any such losses would not materially and adversely affect the Company's  results of operations.

Deterioration In The Housing Market Could Cause Further Increases In Delinquencies And Non-Performing Assets, Including Loan Charge-Offs, And Depress The Company's Income And Growth.  The volume of one-to-four family residential mortgages and home equity lines of credit may decrease during economic downturns as a result of, among other things, a decrease in real estate values, an increase in unemployment, a slowdown in housing price appreciation or increases in interest rates.  These factors could reduce earnings and consequently the Company's  financial condition because:

·

borrowers may not be able to repay their loans;

·

the value of the collateral securing loans may decline further;

·

the quality of the Company's  loan portfolio may decline further; and

·

customers may not want or need the Company's  products and services.

Any of these scenarios could cause an increase in delinquencies and non-performing assets, require us to charge-off a higher percentage of loans, increase substantially the provision for losses on loans, or make fewer loans, which would reduce income.

The FDIC's Changes in the Calculation of Deposit Insurance Premiums and Ability to Levy Special Assessments Could Increase The Company's Non-Interest Expense And May Reduce Its Profitability.  The range of base assessment rates historically varies from 12 to 45 basis points depending on an institution's risk category, with newly

15


 

added financial measures resulting in increased assessment rates for institutions heavily relying on brokered deposits to support rapid asset growth.  However, the Dodd-Frank Act requires the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments.  On February 9, 2011, the FDIC adopted a final rule that defines the assessment base as the average consolidated total assets during the assessment period minus the average tangible equity of the insured depository institution during the assessment period. The FDIC also imposed a new assessment rate scale (which was revised further in 2016). Under the new system, banks will pay assessments at a rate between 3 and 30 basis points per assets minus tangible equity, depending upon an institution's risk category (the final rule also includes progressively lower assessment rate schedules when the FDIC's reserve ratio reaches certain levels).  The rulemaking changes the current assessment rate schedule so the schedule will result in the collection of assessment revenue that is approximately the same as generated under the current rate schedule and current assessment base.  Nearly all banks with assets less than $10 billion will pay smaller deposit insurance assessments as a result of the new rule.  The majority of the changes in the FDIC's final rule became effective on April 1, 2011.  The FDIC has the statutory authority to impose special assessments on insured depository institutions in an amount, and for such purposes, as the FDIC may deem necessary.  The change in the calculation methodology for deposit insurance premiums and the possible emergency special assessments could increase non-interest expense and may adversely affect the Company's  profitability.

We May Elect Or Be Compelled To Seek Additional Capital In The Future, But That Capital May Not Be Available When It Is Needed.  We are required by regulatory authorities to maintain adequate levels of capital to support operations.  In addition, we may elect to raise additional capital to support the growth of the Company's  business or to finance acquisitions, if any, or we may elect to raise additional capital for other reasons.  In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors.  Should we elect or be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, common stock or securities convertible into common stock, which could dilute your ownership interest in the Company.  Although we remain "well-capitalized" and have not had a deterioration in liquidity, the future cost and availability of capital may be adversely affected by illiquid credit markets, economic conditions and a number of other factors, many of which are outside of the Company's  control.  Accordingly, we cannot assure you of the ability to raise additional capital if needed or on terms acceptable to us.  If we cannot raise additional capital when needed or on terms acceptable to us, it may have a material adverse effect on the Company's  financial condition and results of operations.

If We Are Unable To Successfully Compete For Customers In The Company's Market Area, The Company's Financial Condition And Results Of Operations Could Be Adversely Affected.  Hawthorn's banking subsidiary faces substantial competition in making loans, attracting deposits and providing other financial products and services.  The Bank has numerous competitors for customers in its market area. 

Such competition for loans comes principally from:

other commercial banks

mortgage banking companies

savings banks

finance companies

savings and loan associations

credit unions

 

Competition for deposits comes principally from:

other commercial banks

brokerage firms

savings banks

insurance companies

savings and loan associations

money market mutual funds

credit unions

mutual funds (such as corporate and government securities funds)

 

Many of these competitors have greater financial resources and name recognition, more locations, more advanced technology and more financial products to offer than the Bank.  Competition from larger institutions may increase due to an acceleration of bank mergers and consolidations in Missouri and the rest of the nation.  In addition, the Gramm-Leach-Bliley Act removes many of the remaining restrictions in federal banking law against cross-ownership between banks and

16


 

other financial institutions, such as insurance companies and securities firms.  The law will likely increase the number and financial strength of companies that compete directly with the Bank.  The profitability of the Bank depends of its continued ability to attract new customers and compete in Missouri.  New competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on the Bank's market share of deposits and loans in the Bank's service areas.  If the Bank is unable to successfully compete, its financial condition and results of operations will be adversely affected.

We May Experience Difficulties In Managing Growth And In Effectively Integrating Newly Acquired Companies.  As part of the Company's  general strategy, it may continue to acquire banks and businesses that it believes provide a strategic fit with its business.  To the extent that the Company does grow, there can be no assurances that we will be able to adequately and profitably manage such growth.  Acquiring other banks and businesses will involve risks commonly associated with acquisitions, including:

·

potential exposure to liabilities of the banks and businesses acquired;

·

difficulty and expense of integrating the operations and personnel of the banks and businesses acquired;

·

difficulty and expense of instituting the necessary systems and procedures, including accounting and financial reporting systems, to manage the combined enterprises on a profitable basis;

·

potential disruption to existing business and operations;

·

potential diversion of the time and attention of management; and

·

impairment of relationships with and the possible loss of key employees and customers of the banks and businesses acquired.

The success of the Company's  internal growth strategy will depend primarily on the ability of the Bank to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated.  There is no assurance that we will be successful in implementing the Company's  internal growth strategy.

We May Be Adversely Affected By Changes In Laws And Regulations Affecting The Financial Services Industry.  Banks and bank holding companies such as Hawthorn are subject to regulation by both federal and state bank regulatory agencies.  The regulations, which are designed to protect borrowers and promote certain social policies, include limitations on the operations of banks and bank holding companies, such as minimum capital requirements and restrictions on dividend payments.  The regulatory authorities have extensive discretion in connection with their supervision and enforcement activities and their examination policies, including the imposition of restrictions on the operation of a bank, the classification of assets by an institution and requiring an increase in a bank's allowance for loan losses. These regulations are not necessarily designed to maximize the profitability of banking institutions.

In July 2010, President Barack Obama signed into law the Dodd-Frank Act, which enacted substantial changes to the legal framework of the entire financial services industry.  The Dodd-Frank Act mandates the passage of numerous rules and regulations by various regulatory agencies over the next few years. This legislation will change banking regulation and the operating environment of Hawthorn in substantial and unpredictable ways.  It could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions.  Hawthorn cannot predict the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its business.

These, and other future changes in the banking laws and regulations and tax and accounting rules applicable to financial institutions, could have a material adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.

The Short-Term And Long-Term Impact Of The Changing Regulatory Capital Requirements And New Capital Rules Is Uncertain.  The federal banking agencies have substantially amended the regulatory capital rules applicable to us and the Bank. The amendments implement the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act.  The amended rules include new minimum risk-based capital and leverage ratios, which became effective in January 2015, with certain requirements to be phased in beginning in 2016, and refined the definition of what constitutes "capital" for purposes of calculating those ratios.

17


 

The application of more stringent capital requirements to us and the Bank could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements.  Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could further limit the Company's  ability to make distributions, including paying out dividends or buying back shares.

The EGRRCPA directs the federal banking agencies to develop a specified Community Bank Leverage Ratio (that is, the ratio of a bank's equity capital to its consolidated assets) of not less than 8% and not more than 10%. On November 21, 2018, federal regulators released a proposed rulemaking that would, if enacted, provide certain banks and their holding companies with the option to elect out of complying with the Basel III Capital Rules. Under the proposal, a qualifying community banking organization would be eligible to elect the community bank leverage ratio framework if it has a community bank leverage ratio, or CBLR, greater than 9% at the time of election. The proposal is described in more detail above under the section entitled "Regulatory Capital Requirements."  The Company will continue to monitor this rulemaking. If and when the rulemaking goes into effect, the Company and the Bank will determine whether they are qualified under the community bank leverage ratio framework and, if so, whether it would be possible and advantageous at that time to elect to comply with the community bank leverage ratio framework.

Non-Compliance with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Community Reinvestment Act, Fair Lending Laws Or Other Laws And Regulations Could Result In Fines Or Sanctions, And Curtail Expansion Opportunities.  Financial institutions are required under the USA PATRIOT and Bank Secrecy Acts to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities.  Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department's Office of Financial Crimes Enforcement Network if such activities are detected.  These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts.  Failure or the inability to comply with the USA PATRIOT Act and Bank Secrecy Act statutes and regulations could result in fines or penalties, curtailment of expansion opportunities, enforcement actions, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems.  During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations.  In addition, the U.S. Government imposed and will continue to expand laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks.

The Bank Is A Community Bank And Our Ability To Maintain The Bank's Reputation Is Critical To The Success Of Our Business And The Failure To Do So Could Materially Adversely Affect Our Performance.  The Bank is a community bank, and its reputation is one of the most valuable components of our business.  As such, we strive to conduct our business in a manner that enhances our reputation.  This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.  If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.

The Company's Success Largely Depends On The Efforts Of Its Executive Officers.  The success of Hawthorn and its banking subsidiary has been largely dependent on the efforts of David Turner, Chairman, CEO, and President and the other executive officers.  These individuals are expected to continue to perform their services.  However, the loss of the services of Mr. Turner, or any of the other key executive officers could have a materially adverse effect on Hawthorn and its subsidiary bank.

If We Fail To Maintain An Effective System Of Internal Control Over Financial Reporting, We May Not Be Able To Accurately Report Our Financial Results Or Prevent Fraud, And, As A Result, Investors And Depositors Could Lose Confidence In Our Financial Reporting, Which Could Adversely Affect Our Business, The Trading Price Of Our Stock, And Our Ability To Attract Additional Deposits.  We are required to include in our annual reports filed with the SEC a report from our management regarding internal control over financial reporting.  As a result, we documented and evaluated our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and SEC rules and regulations, which require an annual management report on our internal control over financial reporting, including, among other matters, management's assessment of the effectiveness of

18


 

internal control over financial reporting.  Failure or circumvention of our system of internal control could have an adverse effect on our business, profitability, and financial condition, and could result in regulatory actions and loss of investor confidence.  Additionally, if we fail to identify and correct any significant deficiencies or material weaknesses in the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current and potential stockholders and depositors could lose confidence in our financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock and our ability to attract additional deposits.

We Are Subject To Security And Operational Risks Relating To Our Use Of Technology That Could Damage Our Reputation And Our Business.  We rely heavily on communications and information systems to conduct our business.  Furthermore, we have access to large amounts of confidential financial information and control substantial financial assets, including those belonging to our customers, to whom we offer remote access, and we regularly transfer substantial financial assets by electronic means.  Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers.  Any failure, interruption or breach in security of our systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.  Although we intend to continue to implement security technology and establish operational procedures to prevent such damage, our security measures may not be successful.

In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data.  A failure of such security measures could have a material adverse effect on our financial condition and results of operations.  We also face the risk of operational disruption, failure, termination or capacity constraints caused by third parties that facilitate our business activities by providing technology such as software applications, as well as financial intermediaries.  Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure.

We also face the potential risk of loss due to fraud, including commercial checking account fraud, automated teller machine ("ATM") skimming and trapping, write-offs necessitated by debit card fraud, and other forms of online banking fraud, which are becoming more sophisticated and present new challenges as mobile banking increases, as well as employee fraud.  Employee errors could also subject us to financial claims for negligence.  We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud.  Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

The Operation Of Our Business, Including Our Interaction With Customers, Are Increasingly Done Via Electronic Means, And This Has Increased Our Risks Related To Cybersecurity.  We rely on the successful and uninterrupted functioning of our information technology and telecommunications systems to conduct our business. This includes internally developed systems, the systems of third-party service providers, and digital and mobile technologies.  Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems, and could damage our reputation, result in loss of customer business, subject us to regulatory scrutiny, or expose us to civil litigation and possible financial liability.  We are exposed to the risk of cyber-attacks in the normal course of business, which can result from deliberate attacks or unintentional events.  We have observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption.  Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites.  Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access.  The objectives of cyber-attacks vary widely and can include theft of financial assets, intellectual property, or other sensitive information, including the information belonging to our banking customers.  Cyber-attacks may also be directed at disrupting our operations.

19


 

We may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks.  Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; increased cybersecurity protection costs that may include organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.

We Continually Encounter Technological Change, And We Cannot Predict How Changes In Technology Will Affect Our Business.  The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven by products and services, which include developments in:

telecommunications

internet-based banking

data processing

telebanking

automation

debit cards and so-called "smart cards"

 

The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.  Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.  Many of our competitors have substantially greater resources to invest in technological improvements.  We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers.  Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

We Rely On Others To Provide Key Components Of Our Business Infrastructure.  Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing.  While we have selected these third party vendors carefully, we do not control their actions.  Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively.  Replacing these third party vendors could also entail significant delay and expense.

The Price Of Our Common Stock Could Fluctuate Significantly, And This Could Make It Difficult For You To Resell Shares Of Our Common Stock At Times Or At Prices You Find Attractive. The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility during the recent economic downturn.  In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers' underlying financial strength.  As a result, the trading volume in our common stock could fluctuate more than usual and cause significant price variations to occur.  This could make it difficult for you to resell shares of our common stock at times or at prices you find attractive.

The trading price of the shares of our common stock will depend on many factors that could change from time to time and could be beyond our control.  Among the factors that could affect our stock price are those identified under the heading "Forward-Looking Statements" in Item 7 of this report and as follows:

·

actual or anticipated quarterly fluctuations in our operating results and financial condition;

·

changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our common stock or those of other financial institutions;

·

failure to meet analysts' revenue or earnings estimates;

20


 

·

speculation in the press or investment community generally or relating to our reputation, our market area, our competitors or the financial services industry in general;

·

strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;

·

actions by our current stockholders, including sales of common stock by existing stockholders and/or directors and executive officers;

·

fluctuations in the stock price and operating results of our competitors;

·

future sales of our equity, equity-related or debt securities;

·

changes in the frequency or amount of dividends or share repurchases;

·

proposed or adopted regulatory changes or developments;

·

investigations, proceedings or litigation that involve or affect us;

·

trading activities in our common stock, including short-selling;

·

domestic and local economic factors unrelated to our performance; and

·

general market conditions and, in particular, developments related to market conditions for the financial services industry.

A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.

The Trading Volume In Our Common Stock Has Been Low, And The Sale Of A Substantial Number Of Shares Of Our Common Stock In The Public Market Could Depress The Price Of Our Common Stock And Make It Difficult For You To Sell Your Shares.  Our common stock is listed to trade on the NASDAQ Global Select Market, but is thinly traded.  As a result, you may not be able to sell your shares of common stock on short notice.  Additionally, thinly traded stock can be more volatile than stock trading in an active public market.  The sale of a substantial number of shares of our common stock at one time could temporarily depress the market price of our common stock, making it difficult for you to sell your shares and impairing our ability to raise capital.

Our Common Stock Is Not Insured By Any Governmental Entity.  Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity.

Additional Factors.  Additional risks and uncertainties that may affect the future results of operations, financial condition or business of the Company and its banking subsidiary include, but are not limited to: (i) adverse publicity, news coverage by the media, or negative reports by brokerage firms, industry and financial analysts regarding the Bank or the Company; and (ii) changes in accounting policies and practices.

 

Item 1B.  Unresolved Staff Comments.

None.

21


 

Item 2.  Properties.

Neither the Company nor Union State Bancshares owns or leases any property.  The Company's principal offices are located at 132 East High Street,  Jefferson City, Missouri 65101.  The table below provides a list of the Bank's facilities.

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Net Book

 

 

 

 

 

 

Value at

 

 

Approximate

 

Owned or

 

12/31/2018

Location

 

Square Footage

 

Leased

 

(in thousands)

8127 East 171st Street, Belton, MO

 

13,000

 

Owned

 

$

1,629

4675 Gretna Road, Branson, MO

 

11,000

(1)

Owned

 

$

1,246

1000 West Buchanan Street, California, MO

 

2,270

 

Owned

 

$

324

102 North Second Street, Clinton, MO

 

11,524

 

Owned

 

$

1,277

1400 East Ohio Street, Clinton, MO

 

13,551

 

Owned

 

$

2,665

1712 East Ohio Street, Clinton, MO (inside a Wal-Mart store)

 

540

 

Leased

(2)

$

42

1110 Club Village Drive, Columbia, MO

 

5,000

 

Owned

 

$

1,331

29 S. Ninth St., Suites 201-202, Columbia, MO

 

1,500

 

Leased

(3)

 

N/A

115 South 2nd Street, Drexel, MO

 

4,000

 

Owned

 

$

131

100 Plaza Drive, Harrisonville, MO

 

4,000

 

Owned

 

$

458

17430 East 39th Street, Independence, MO

 

4,070

 

Owned

 

$

553

220 West White Oak, Independence, MO

 

1,800

 

Owned

 

$

43

132 East High Street, Jefferson City, MO

 

34,800

 

Owned

 

$

2,676

3701 West Truman Blvd, Jefferson City, MO

 

21,000

 

Owned

 

$

376

211 West Dunklin Street, Jefferson City, MO

 

2,500

 

Owned

 

$

1,514

800 Eastland Drive, Jefferson City, MO

 

4,100

 

Owned

 

$

668

3600 Amazonas Drive, Jefferson City, MO

 

26,000

 

Owned

 

$

2,294

300 S.W. Longview Blvd, Lee's Summit, MO

 

11,700

 

Owned

 

$

1,887

5 Victory lane, Suite 203, Liberty, MO

 

1,667

 

Leased

(4)

 

N/A

335 Chestnut, Osceola, MO

 

1,580

 

Owned

 

$

81

595 VFW Memorial Drive, St. Robert, MO

 

2,236

 

Owned

 

$

58

321 West Battlefield, Springfield, MO

 

12,500

(5)

Owned

 

$

660

200 West Main Street, Warsaw, MO

 

8,900

 

Owned

 

$

88

1891 Commercial Drive, Warsaw, MO

 

11,000

 

Owned

 

$

1,465

 

 

 

 

 

 

 

 


(1)

Of the 11,000 square feet of space, 2,384 square feet of space is leased to a non-affiliate.

(2)

The term of this lease began in February 2019 and ends in January 2024.

(3)

The term of this lease began in April 2018 and ends in April 2019.

(4)

The term of this lease began in May 2016 and ends in April 2019.

(5)

Of the 12,500 square feet of space, 5,873 square feet of space is available to be leased to a non-affiliate.

Management believes that the condition of each of the Bank's facilities presently is adequate for its business and that such facilities are adequately covered by insurance.

 

Item 3.  Legal Proceedings.

The information required by this Item is set forth in Note 18,  Commitments and Contingencies, in the Company's consolidated financial statements.

 

Item 4.  Mine Safety Disclosures.

Not applicable

22


 

EXECUTIVE OFFICERS OF THE REGISTRANT

Executive officers of the Company are appointed by the board of directors and serve at the discretion of the board.  The following table sets forth certain information with respect to all executive officers of the Company.

 

Name

    

Age

    

Position

David T. Turner

 

62

 

Chairman, Chief Executive Officer, President and Director

W. Bruce Phelps

 

68

 

Senior Vice President and Chief Financial Officer

Kathleen L. Bruegenhemke

 

53

 

Senior Vice President, Secretary and Director

 

The business experience of the executive officers of the Company for the last five years is as follows:

David T. Turner has served as a director of the Company and of Hawthorn Bank (or of its constituent predecessors) since January 1997.  He has served as president of the Company since March 2002 and as chairman and chief executive officer of the Company since January 2011.  He also currently serves as chairman, chief executive officer and president of Hawthorn Bank. Mr. Turner has served as vice chairman of the Company from June 1998 through March 2002 and as senior vice president of the Company from 1993 until June 1998.  He served as president of a predecessor to Hawthorn Bank from January 1997 through March 2002 when he assumed the position of chairman, chief executive officer and president.  He served as senior vice president of that same predecessor from June 1992 through December 1996 and as its vice president from 1985 until June 1992. 

W. Bruce Phelps has served as Senior Vice President and Chief Financial Officer of the Company since January 2012 and Senior Vice President and Chief Financial Officer of Hawthorn Bank since January 2012. Prior to joining the Company, he served as Controller of Pulaski Bank from 2009 until January 2012.  Previously Mr. Phelps served as Principal of WBP Consulting in providing financial consulting and support services for clients in the St. Louis area, and as Chief Financial Officer for Champion Bank, St. Louis, Missouri.

Kathleen L. Bruegenhemke has served as a director of our Company and of Hawthorn Bank since March 2017 and as Chief Operating Officer of Hawthorn Bank since January 2017.  From October 2014 until December 2016 she served as Columbia Market President of Hawthorn Bank. She has served as Senior Vice President and Secretary of the Company since November 1997 and as Chief Risk Officer of the Company since June 2006.  From January 1992 until November 1997, she served as Internal Auditor of Hawthorn Bank (or of one of its constituent predecessors).   Prior to joining the Bank, Ms. Bruegenhemke served as a Commissioned Bank Examiner for the Federal Deposit Insurance Corporation. Ms. Bruegenhemke is a certified public accountant and possesses considerable expertise in overseeing various finance, regulatory compliance and risk management aspects of community banking, which she attained through over 30 years of service, first as a bank regulator and then as a dedicated employee of Hawthorn Bank.

There is no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was selected as an officer.

 

PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Pursuant to General Instruction G(2) to Form 10‑K, the information required by this Item, other than that referred to below, is incorporated herein by reference to the information under the caption "Market Price of and Dividends on Equity Securities and Related Matters" in the Company's  2018 Annual Report to Shareholders.

We refer you to Item 12 of this report under the caption "Securities Authorized For Issuance Under Equity Compensation Plans" for certain equity plan information.

23


 

The Company's  Purchases of Equity Securities

There were no purchases made by or on behalf of the Company or any "affiliated purchaser" (as defined by applicable rules of the SEC) of shares the Company's common stock during the fourth quarter of the year ended December 31, 2018: The authorization previously provided by the Board of Directors for the repurchase of the Company's common stock, in which management was given discretion to determine the number and pricing of the shares to be purchased as well as the timing of any such purchases, expired on September 8, 2018.

Recent Issuance of Securities

None.

 

Item 6.  Selected Financial Data.

Pursuant to General Instruction G(2) to Form 10‑K, the information required by this Item is incorporated herein by reference to the information under the caption "Selected Consolidated Financial Data" in the Company's  2018 Annual Report to Shareholders.

 

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operation.

Pursuant to General Instruction G(2) to Form 10‑K, the information required by this Item is incorporated herein by reference to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's  2018 Annual Report to Shareholders.

Forward-Looking Statements

This report, including information included or incorporated by reference in this report, contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, strategy, future performance and business of the Company and its subsidiaries, including, without limitation:

·

statements that are not historical in nature, and

·

statements preceded by, followed by or that include the words "believes," "expects," "may," "will," "should," "could," "anticipates," "estimates," "intends" or similar expressions.

Forward-looking statements are not guarantees of future performance or results.  They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

·

competitive pressures among financial services companies may increase significantly,

·

changes in the interest rate environment may reduce interest margins,

·

general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of the Company's  loans and other assets,

·

increases in non-performing assets in the Company's  loan portfolios and adverse economic conditions may necessitate increases to the provisions for loan losses,

·

costs or difficulties related to the integration of the business of Hawthorn and its acquisition targets may be greater than expected,

24


 

·

legislative, regulatory, or tax law changes may adversely affect the business in which Hawthorn and its subsidiaries are engaged, and

·

changes may occur in the securities markets.

We have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements, which factors are identified in Item 1A of this report under the heading "Risk Factors."  Other factors that we have not identified in this report could also have this effect.  You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date such statement is made.  Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

 

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

The Company's exposure to market risk is reviewed on a regular basis by our Bank's asset/liability committee and board of directors.  Interest rate risk is the potential of economic losses due to future interest rate changes.  These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.  The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.  Management realizes certain risks are inherent and that the goal is to identify and minimize those risks.

Tools used by the Bank's management include modeling the effects on net interest income under different rate shock scenarios.  At December 31, 2018, the Company's rate shock scenario models indicated that annual net interest income could change by as much as 0.26% or 4.17% should interest rates rise or fall, respectively, 200 basis points from their current level over a one-year period. These levels of interest rate risk are within limits set by the board in the Company's  Funds Management, Investment Asset Liability Policy and Management believes this is an acceptable level of interest rate risk. However, there are no assurances that the change will not be more or less than this estimate.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item, other than that provided above, is incorporated herein by reference to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures About Market Risk" in the Company's  2018 Annual Report to Shareholders.

 

Item 8.  Financial Statements and Supplementary Data.

Pursuant to General Instruction G(2) to Form 10‑K, the information required by this Item is incorporated herein by reference to the report of the independent registered public accounting firm and the information under the caption "Consolidated Financial Statements" in the Company's  2018 Annual Report to Shareholders.

 

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a‑15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2018. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2018, the Company's disclosure controls and procedures were effective.

25


 

Internal Controls Over Financial Reporting.

Management's Report on Internal Control Over Financial Reporting.

The Company's management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a‑15(f).  Under the supervision and with the participation of the Company's  management, including the Company's  principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting, as of December 31, 2018, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).  Based upon its assessment, management has concluded that, as of December 31, 2018, the Company's internal control over financial reporting, is effective based on the criteria established in Internal Control-Integrated Framework (2013).

Management's assessment of the effectiveness of internal control over financial reporting, as of December 31, 2018, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Controls.

There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors 

Hawthorn Bancshares, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Hawthorn Bancshares, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated March 14, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

26


 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s / KPMG LLP

St. Louis, Missouri

 

March 14, 2019

 

 

 

Item 9B.  Other Information.

None.

 

PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item, other than that referred to below, is incorporated herein by reference to:

(i)

the information under the caption "Item 1: Election of Directors--What is the structure of our board and how often are directors elected?" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii)

the information under the caption "Item 1: Election of Directors--Who are this year's nominees?" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(iii)

the information under the caption "Item 1: Election of Directors--What is the business experience of the nominees and of our continuing board members?" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(iv)

the information under the caption "Executive Officers of the Registrant" in Part I of this report;

27


 

(v)

the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(vi)

the information under the caption "Corporate Governance and Board Matters--Consideration of Director Nominees" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and

(vii)

the information under the caption "Corporate Governance and Board Matters--Committees of the Board--Audit Committee" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

New Director Appointment

On March 13, 2019, the board of directors of the Company voted unanimously to increase its size from six to seven directors, effective March 13, 2019, and to fill the resulting vacancy with the appointment of Jonathan Holtaway.  Mr. Holtaway will be a Class I director of the Company and will have a term expiring at the time of the annual meeting of shareholders in 2020.  Concurrent with this appointment, he is also being added as a member of the board of directors of Hawthorn Bank.

Mr. Holtaway is President of Ategra Capital Management, LLC, a registered investment advisor founded by Mr. Holtaway in 2005 and based in Vienna, Virginia.  He serves as managing member of Ategra GP, LLC, the general partner of Ategra Community Financial Institution Fund, LP., a fund which invests primarily in the securities of companies in the bank and thrift industry.  From July 1992 until September 2001, Mr. Holtaway served as Managing Director and Partner of Danielson Associates, an investment banking company which provided advisory services to community financial institutions.  It is anticipated that Board discussions and decisions will benefit from his understanding of the fundamentals of community banking derived from his over 25 years of experience as an analyst of, advisor to, and investor in, community banks and other financial institutions.

Our board of directors has determined that Mr. Holtaway satisfies the independence requirements of the NASDAQ Stock Market.  It is anticipated that he will be appointed to serve on one or more committees of the board, although the specifics of any such appointment have not yet been determined.

There is no arrangement or understanding between Mr. Holtaway and any other person pursuant to which was selected as a director of the Company or of the Bank, and there are no transactions between Mr. Holtaway and the Company that would be reportable under Item 404 of SEC Regulation S-K.  Consistent with the compensation provided for other outside (non-employee) members of the Company's board of directors, Mr. Holtaway will receive a monthly retainer of $1,500 and $600 for each board and committee meeting attended, respectively.  For his service to Hawthorn Bank as an outside (non-employee) director, he will be paid $600 for each meeting of the board attended.

Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics for directors, officers and employees including, the its principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions.  This Code of Business Conduct and Ethics is posted on the Company's internet website (www.hawthornbancshares.com) under the "Governance Documents" menu tab and is available for your examination.  A copy of this Code will be furnished without charge upon written request to Corporate Secretary, Hawthorn Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101.  Any substantive amendment to, or waiver from, a provision of this Code that applies to the Company's principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions will be disclosed in a report on Form 8‑K.

 

28


 

Item 11.  Executive Compensation.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item is incorporated herein by reference to:

(i)

the information under the caption "Executive Compensation and Related Matters" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii)

the information under the caption "Corporate Governance and Board Matters--Director Compensation" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item, other than that presented below, is incorporated herein by reference to the information under the caption "Ownership of Common Stock" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Securities Authorized For Issuance Under Equity Compensation Plans

The Company has no equity compensation plan for its employees pursuant to which options, rights, warrants or other equity awards may be granted. As of December 31, 2018 the Company had no outstanding options, rights or warrants granted under any equity compensation plan.

 

 

 

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item is incorporated herein by reference to:

(i)

the information under the caption "Related Party Transactions" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii)

the information under the caption "Item 1: Election of Directors--What is the structure of our board and how often are directors elected?" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and

(iii)

the information under the caption "Corporate Governance and Board Matters--Committees of the Board" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

 

Item 14.  Principal Accounting Fees and Services.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item is incorporated herein by reference to the information under the caption "Independent Registered Public Accounting Firm Fees and Services" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

 

29


 

PART IV

Item 15.  Exhibits, Financial Statement Schedules.

(a)

Exhibits, Financial Statements and Financial Statement Schedules:

1.

Financial Statements:

The following consolidated financial statements of the Company and reports of the Company's independent registered public accounting firm, included in the Company's Annual Report to Shareholders for the year ended December 31, 2018 under the caption "Consolidated Financial Statements", are incorporated herein by reference:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets as of December 31, 2018 and 2017.

Consolidated Statements of Income for the years ended December 31, 2018,  2017, and 2016.

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018,  2017, and 2016.

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2018,  2017, and 2016.

Consolidated Statements of Cash Flows for the years ended December 31, 2018,  2017, and 2016.

Notes to the Consolidated Financial Statements.

2.

Financial Statement Schedules:

Financial statement schedules have been omitted because they either are not required or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.

3.

Exhibits:

 

 

 

Exhibit No.

    

Description

 

 

 

3.1

 

Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's current report on Form 8‑K on August 9, 2007 and incorporated herein by reference).

3.2

 

Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company's current report on Form 8‑K on June 8, 2009 and incorporated herein by reference).

4.1

 

Specimen certificate representing shares of the Company's $1.00 par value Common Stock (filed as Exhibit 4.1 to the Company's current report on Form 8‑K/A on June 23, 2017 and incorporated herein by reference).

10.1

 

Form of Change of Control Agreement and schedule of parties thereto (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10Q for the quarterly period March 31, 2005 and incorporated herein by reference). *

10.2

 

Hawthorn Bancshares, Inc. Excess Benefit Plan (filed as Exhibit 10.2 to the Company's current report on Form 8-K on November 13, 2018 and incorporated herein by reference). *

30


 

 

 

 

Exhibit No.

    

Description

 

 

 

10.3

 

Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.  

10.3.1

 

First Amendment to Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.

10.3.2

 

Second Amendment to Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.

13

 

The Company's 2018 Annual Report to Shareholders (only those portions of this Annual Report to Shareholders which are specifically incorporated by reference into this Annual Report on Form 10‑K shall be deemed to be filed with the Commission).

14

 

Code of Business Conduct and Ethics of the Company

21

 

List of Subsidiaries.

23

 

Consent of Independent Registered Public Accounting Firm.

24

 

Power of Attorney (included on the signature page to this Annual Report on Form 10‑K).

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a‑14(a) and Rule 15d‑14(a) of the Securities Exchange Act, as amended.

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a‑14(a) and Rule 15d‑14(a) of the Securities Exchange Act, as amended.

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)


*Management contracts or compensatory plans or arrangements required to be identified by Item 15(a).

(b)

Exhibits.

See exhibits identified above under Item 15(a)3.

(c)

Financial Statement Schedules.

See financial statement schedules identified above under Item 15(a)2, if any.

31


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

HAWTHORN BANCSHARES, INC.

 

 

Dated: March 14, 2019 

By

/s/

David T. Turner

 

 

David T. Turner, Chairman of the Board,

 

 

President and Chief Executive Officer

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David T. Turner and W. Bruce Phelps, or either of them, his attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

 

Date

 

Signature and Title

 

 

 

March 14, 2019

 

/s/ David T. Turner

 

 

David T. Turner, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

 

 

 

March 14, 2019

 

/s/ W. Bruce Phelps

 

 

W. Bruce Phelps, Chief Financial Officer

 

 

(Principal Financial Officer and Principal Accounting Officer)

 

 

 

March 14, 2019

 

/s/ Kathleen L. Bruegenhemke

 

 

Kathleen L. Bruegenhemke, Director

 

 

 

March 14, 2019

 

/s/ Frank E. Burkhead

 

 

Frank E. Burkhead, Director

 

 

 

March 14, 2019

 

/s/ Philip D. Freeman

 

 

Philip D. Freeman, Director

 

 

 

March 14, 2019

 

/s/ Kevin L. Riley

 

 

Kevin L. Riley, Director

 

 

 

March 14, 2019

 

/s/ Gus S. (Jack) Wetzel III

 

 

Gus S. (Jack) Wetzel III, Director

 

 

 

March 14, 2019

 

 

 

 

Jonathan D. Holtaway, Director

 

 

 

32


 

EXHIBIT INDEX

 

HIDDEN_ROW

 

 

 

 

Exhibit No.

    

Description

    

Page No.

10.2

 

Hawthorn Bancshares, Inc. Excess Benefit Plan (filed as Exhibit 10.2 to the Company's current report on Form 8-K on November 13, 2018 and incorporated herein by reference). 

 

 

10.3

 

Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.

 

 

10.3.1

 

First Amendment to Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.

 

 

10.3.2

 

Second Amendment to Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.

 

 

13

 

The Company's 2018 Annual Report to Shareholders (only those portions of this Annual Report to Shareholders which are specifically incorporated by reference into this Annual Report on Form 10‑K shall be deemed to be filed with the Commission).

 

 

14

 

Code of Business Conduct and Ethics of the Company.

 

 

21

 

List of Subsidiaries.

 

 

23

 

Consent of Independent Registered Public Accounting Firm.

 

 

24

 

Power of Attorney (included on the signature page to this Annual Report on Form 10‑K).

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a‑14(a) and Rule 15d‑14(a) of the Securities Exchange Act, as amended.

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a‑14(a) and Rule 15d‑14(a) of the Securities Exchange Act, as amended.

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101

 

Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL).*

 

 


*As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

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(Back To Top)

Section 2: EX-10.3 (EX-10.3)

hwbk_Ex_10_3

 

Exhibit 10.3

 

PURCHASE AND LIMITED ASSUMPTION AGREEMENT OF BRANCH

THIS PURCHASE AND LIMITED ASSUMPTION AGREEMENT OF BRANCH (this “Agreement”) made and entered into this 17th day of October, 2018 (the “Effective Date”), by and between Hawthorn Bank, a Missouri state-chartered bank with its main office located in Jefferson City, Missouri (“Seller”), and Branson Bank, a Missouri state-chartered bank with its main office located in Branson, Missouri (“Buyer”).

R E C I T A L S:

WHEREAS, Seller operates a branch banking office located at 4675 Gretna Road, Branson, Missouri  65616 (the “Branson Branch”).

WHEREAS, Seller desires to sell and Buyer desires to purchase and acquire (i) the Branson Branch and (ii) certain assets of Seller maintained at the Branson Branch.

WHEREAS, Seller desires to transfer and Buyer desires to assume (i) the deposit accounts at or for the Branson Branch, and (ii) certain other liabilities pertaining to the continuing operations thereof. 

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, each intending to be legally bound, do hereby agree as follows:

1. Subject Property Defined.  The term “Subject Property” as used in this Agreement, shall mean and include the following: 

(a) All of Seller’s right, title, and interest in and to that certain real property legally described on Exhibit “A” and attached hereto and made a part hereof (the “Real Property”), upon which the Branson Branch is operated, and any and all records, files, books and any other documents and instruments relating to the Real Property.  The Real Property shall also include all rights, benefits, privileges, hereditaments, appurtenances, and easements related to the Real Property, including, without limitation, all rights, rights-of-way, roadways, roadbeds, reversions, strips, gores, and any interests in any alleys, streets, or roads abutting or adjacent to the Real Property, and all right, title, and interest of Seller in and to any awards made or to be made in lieu thereof (the Real Property, together will all such other rights and benefits, hereinafter collectively referred to as “Land”).

(b) All of Seller’s right, title, and interest in and to any and all structures, buildings, and other improvements located on the Land, including, without limitation, that certain banking facility and drive up comprised of approximately 12,232 square feet of bank building with an additional 1,165 square feet of drive through and canopy, all fixtures including ATM, safe deposit boxes (exclusive of the contents of leased safe deposit boxes) and safe deposit box contracts and any keys or combinations thereto, pneumatic equipment, parking lots, and related

 


 

facilities and improvements (hereinafter collectively referred to as the “Improvements”), and any and all records, files, books and any other documents and instruments relating to the Improvements.  If, prior to the Closing Date, any item described in this sub-paragraph (b) is damaged or destroyed by fire or other casualty, the insurance proceeds relating thereto will be assigned to Buyer.

(c) All of Seller’s right, title and interest in and to the furniture, fixtures, equipment, improvements and other items of tangible personal property located at the Branson Branch as of the close of business on the Closing Date, together with sign structures, and all personal property used in connection with the safe deposit box business being transferred to Buyer hereunder (exclusive of the contents of leased safe deposit boxes) (collectively, the “Tangible Personal Property”), except as set forth on Exhibit “B” (to be prepared and attached as part of this Agreement on or before the Inspection Completion Date) (the “Excluded Personal Property”).  If, prior to the Closing Date, any item of Tangible Personal Property is stolen, destroyed or otherwise lost, such item will be excluded from the sale contemplated hereby, and the term “Tangible Personal Property” as used herein will exclude any such item(s).  If, prior to the Closing Date, any item of Tangible Personal Property is damaged by fire or other casualty, such item(s), if reasonably repairable, will be sold to Buyer (in accordance with the provisions hereof) and the insurance proceeds relating to such item will be assigned to Buyer, it being understood that if any such item is not reasonably repairable, it will be excluded from the sale contemplated hereby.

(d) All of Seller’s right, title, and interest in and to any all contracts or agreements (but only to the extent assignable and transferable without any consents or other restrictions) relating to the upkeep, repair, maintenance, or operation of the Land, the Improvements, or the Tangible Personal Property, to the extent such contracts or agreements are not cancelable upon thirty (30) days’ or shorter prior notice (hereinafter collectively referred to as the “Operating Contracts”), a list of which Operating Contracts is attached hereto as Exhibit “C”, and all of Seller’s obligations and liabilities arising from and after the Closing Date under the Operating Contracts;

(e) All of Seller’s rights under, or created by, the existing lease attached hereto as Exhibit “D” between Seller and Lifestyle Contractors, and all of Seller’s obligations and liabilities arising from and after the Closing Date under the existing lease;

(f) All of Seller’s teller working cash, petty cash and vault cash at the Branson Branch as of the close of business on the Closing Date (“Cash on Hand”);

(g) All of the Seller’s deposit liabilities maintained at the Branson Branch, and all records relating to said deposit liabilities wherever located, in accordance with the terms of the agreements pertaining to such deposits, as shown on the books and records of Seller as of the close of business on the Closing Date, including accrued but unpaid interest thereon through the Closing Date (hereinafter “Deposits”). As used herein, the term “Deposits” includes all of the deposit products offered by Seller from the Branson Branch, including, without limitation, passbook accounts, statement accounts, checking accounts, money market accounts, and certificates of deposit;

2

 


 

(h) All records and documentation in whatever form or format relating to any item of the Subject Property; and

(i) Any statutory or common law right, title and interest in and relating to any item of the Subject Property that Seller may own or have and assign, including, without limitation, claims, causes of action, rights of recovery or set-offs, and credit of any kind or nature relating to the Subject Property or any item thereof.

(j) Seller is not selling, assigning, conveying, transferring or delivering, nor will Buyer acquire, any rights or interest in or to: (i) the name “Hawthorn Bank” or any derivation thereof, or (ii) any logos, service marks or trademarks, advertising materials or slogans or any similar items used by Seller or any affiliate of Seller in connection with its business, whether or not such is or was copyrighted or registered. No later than the Closing Date, weather permitting, Seller will remove all signs, logos and other insignia identifying or identified with Seller from the Branson Branch. No signs, logos or insignia identifying or identified with Buyer may be installed in or affixed to the premises until after the close of business on the Closing Date. On and after the Closing Date, Buyer will not use the name or service mark of Seller in any manner in connection with the operation of the Branson Branch. No activity conducted by Buyer on or after the Closing Date will state or imply that Seller is in any way involved as a partner, joint venturer or otherwise in the business of Buyer. Buyer will, at Seller’s discretion, either dispose of or make available to Seller for pick-up, any remaining signs, logos and insignia of Seller removed by Buyer from the Branson Branch after Closing.

2. Sale of Subject Property and Assumption of Liabilities.  Upon the terms and subject to the conditions set forth in this Agreement, (a) Seller shall sell, transfer, assign, and convey to Buyer, and Buyer shall purchase and accept from Seller, all right, title and interest of Seller in and to the Subject Property at the Closing (as hereinafter defined), and (b) Seller shall transfer and assign to Buyer, and Buyer shall assume from Seller and agree to pay, perform and discharge the assumed liabilities arising under the Subject Property, including, without limitation, the Deposits and the Operating Contracts.  Unless otherwise specifically specified herein, Buyer is not assuming any liabilities of Seller which have arisen or may arise or be established in connection with the conduct of business at the Branson Branch prior to the Closing Date

3. Purchase Price.    The calculation and payment of the Purchase Price (defined herein) will be made as follows:

(a) Seller will pay to Buyer an amount of cash (the “Purchase Price”), in addition to the transfer of Cash on Hand, equal to:

(i) the aggregate amount of principal and accrued interest of the Deposits;  plus

(ii) the net amount of any prorated items required by Section 3(e) hereof owed by Seller to Buyer; minus

(iii) the net amount of any prorated items required by Section 3(e) hereof owed by Buyer to Seller;  minus

3

 


 

(iv) $500,000 for the Land; minus

(v) $3,022,260 for the Improvements; minus

(vi) the aggregate amount for the Tangible Personal Property to be agreed upon by Buyer and Seller on or before the Inspection Completion Date;  minus

(vii) the amount of Cash on Hand; minus

(viii) a premium of 4.1% for all Deposits; provided that on the Adjustment Payment Date (as defined below), Buyer will provide a report based upon the accounts transferred which discloses the previously identified out-of-area accounts.  Those will be compared to the same accounts in existence at Closing and will compare collected balance totals from Closing to the test date.  The parties will adjust the premium paid according to the tested subset.  The subset shall be composed of eighty (80) deposit accounts identified as “out of area” and three (3) other accounts and one “Missouri First Link account, all as set forth on Exhibit “E”.  In the event that any of the deposit accounts lists in exhibit “E” are not still on deposit with Buyer 180 days after the Closing Date, Seller shall reimburse Buyer the above premium on said accounts pursuant to paragraph (d) hereof.

(b) Attached as Exhibit “F” is a sample calculation of the Purchase Price, which is based upon the financial information set forth in Seller’s Call Report, dated as of June 30, 2018.

(c) On the Closing Date, Seller will transfer to Buyer, by wire transfer in immediately available funds to an account designated by Buyer, an amount which Seller estimates to be the amount of the Purchase Price, which estimated amount will be based upon the Deposits, the proration amounts, the Cash on Hand, and the premium as of the close of business on the third business day prior to the Closing Date (collectively, the “Estimated Purchase Price”).

(d) On the 180th day after the Closing Date or such earlier date as may be agreed to in writing by the parties (the “Adjustment Payment Date”), an adjustment payment (the “Adjustment Payment”) will be made by Seller to Buyer, so as to correct any discrepancy between the amount of the Estimated Purchase Price paid under Section 3(c) hereof and the Purchase Price calculated in accordance with this Section 3(a) and any adjustment in accordance with Section 17(e).  Buyer will provide to Seller a closing statement which reflects the calculation of the Adjustment Payment relative to the Estimated Purchase Price.  The Adjustment Payment due to Buyer (if any) pursuant to this paragraph will be paid to Buyer not later than ten (10) days after the Adjustment Payment Date by Seller by wire transfer in immediately available funds to an account designated by Buyer, with interest thereon from the Closing Date through the Adjustment Payment Date at a rate equal to the effective Federal Funds rate as published by the Federal Reserve.

(e) The parties intend that Seller will operate for its own account the business conducted at the Branson Branch until five o’clock (5:00 p.m.) on the Closing Date, and that Buyer will operate such business for its own account on and after five o’clock (5:00 p.m.) on the Closing Date.  Thus, except as otherwise specifically provided in this Agreement, items of expense directly

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attributable to the operation of the Branson Branch (which will not include any general overhead expenses of Seller) will be prorated as of the close of business on the Closing Date, whether or not such adjustment would normally be made as of such time, including, without limitation, (i) telephone, electric, gas, water, and other utility services (to the extent it is not possible to transfer such services into the name of Buyer as of the Closing Date), (ii) taxes associated with the Land and Tangible Personal Property, (iii) assessments (including, without limitation, assessments attributable to FDIC deposit insurance), (iv) payments due on Operating Contracts, and (v) similar expenses related to the Subject Property transferred hereunder.  To the extent any such item has been prepaid by Seller for a period extending beyond the Closing Date, there will be a proportionate adjustment in favor of Seller.

(f) The allocation of the Purchase Price, as adjusted in accordance with Section 3(d) above, is intended to comply with the allocation method required by Section 1060 of the Internal Revenue Code of 1986, as amended.  The parties will (i) each report the federal, state and local and other tax consequences of the purchase and assumption contemplated hereby (including the filing of Internal Revenue Service Form 8594) in a manner consistent with such allocation and (ii) take no position in any tax filing, return, proceeding, audit or otherwise which is inconsistent with such allocation.  Within thirty (30) days following the Closing Date, Buyer shall provide to Seller a copy of IRS Form 8594 and any required exhibits thereto (the “Asset Acquisition Statement”) with Buyer’s proposed allocation of the consideration payable with respect to Seller’s Assets.  Buyer and Seller shall agree upon the Asset Acquisition Statement within sixty (60) days after the Closing Date; provided that if Buyer and Seller are unable to agree upon an allocation schedule within such sixty (60) day period, the allocation schedule shall be prepared by an accounting firm acceptable to Buyer and Seller.  The fees of such accounting firm incurred in preparing the allocation schedule shall be paid equally by Buyer and Seller. 

(g) Simultaneously with the execution of this Agreement, Buyer shall deliver to Hogan Land Title Company (the “Title Company”) the sum of Twenty Thousand Dollars ($20,000.00) (“Escrow Deposit”) which Escrow Deposit shall be held in escrow by the Title Company. 

4. Permitted Encumbrances.  At Closing, Seller shall convey the Real Property by special warranty deed (the “Deed”), conveying the Real Property to Buyer subject to the following “Permitted Encumbrances”:

(a) Real estate, personal property and ad valorem taxes and assessments for the year of the Closing and subsequent years; and

(b) Prior restrictions, reservations, and prohibitions imposed by governmental entities, including, without limitation, all applicable building, zoning, land use, health, safety, and environmental ordinances, resolutions, and regulations; and any and all land conveyed, used, or deeded for road purposes; and

(c) Any matter deemed to be a Permitted Encumbrance pursuant to Section 5 below; and

(d) All matters created by, through, or under Buyer. 

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5. Title.

(a) Buyer has obtained, at Buyer’s expense, a title report in the form of an ALTA owner’s title insurance commitment with respect to and insuring the Real Property from the Title Company pursuant to which the Title Company shall agree to insure title. 

(b) Within ninety (90) days after the Effective Date (the “Inspection Completion Date”), Buyer shall have the right to obtain at the Buyer’s expense an up-to-date survey on the Land dated no earlier than on the Effective Date (“Survey”) which Survey shall be certified to Buyer and the Title Company under seal by surveyor licensed by the State of Missouri showing the description of the Real Property and calculation of the acreage and square footage of the Real Property and overlay all easements, rights of way, improvements, fences, utilities, poles, water areas, and all other matters affecting title to the Real Property as of the effective date of the title commitment.  The Buyer shall have ninety  (90) days from the Effective Date to review the Survey for any issues. 

(c) Buyer shall have until forty-five (45) days from the Effective Date in which to examine the title work (“Title Review Period”).  If title, as shown in the title commitment, is found to be subject to any matters other than the Permitted Exceptions, Buyer shall, within said Title Review Period, notify Seller in writing, specifying the defects and the actions deemed necessary to cure the same (the “Objection Notice”).  Any matters which Buyer fails to timely object to by the end of the Title Review Period shall be deemed waived and shall be deemed a Permitted Encumbrance.  On or before a date which is three (3) business days following Seller’s receipt of the Objection Notice, Seller shall notify Buyer in writing of which matters, if any, reflected in the Objection Notice that Seller elects to seek to cure (the “Agreed Title Defects”).  In the event that there are any matters set forth in the Objection Notice which are not agreed as title defects, then Buyer’s sole and exclusive remedy shall be to terminate this Agreement by sending written notice to Seller on or before the Title Review Period, in which event the Title Company shall immediately return the Escrow Deposit to Buyer, and the parties shall thereafter be released of all further obligations each to the other under this Agreement.  In the event the Buyer does not elect to terminate this Agreement, then the defects are deemed waived. 

(d) Seller shall use its good faith efforts to cause the Agreed Title Defects to be cured five (5) days before Closing, but shall not be obligated to bring any action or proceeding or expend any funds to undertake any such cure; provided, however, Seller shall be obligated to satisfy and discharge, on or before Closing, any mortgages or monetary liens encumbering the Real Property, caused directly by Seller, and which can be removed and/or satisfied at Closing by the payment of a known and liquidated sum of money under $10,000.00 in the aggregate.  Before Closing, Buyer may have the title commitment updated with respect to the Real Property, and if such update should reveal any matter materially and adversely affecting the marketability of title to the Real Property arising after the effective date of the title commitment, other than the Permitted Encumbrances, or if Seller has not cured the Agreed Title Defects, Buyer shall notify Seller of same and Seller shall have until five (5) days before Closing to cure any such matters.  If Seller is unable to cure such matters on or prior to five (5) days before Closing, Buyer shall have the option to either:  (i) accept title to the Real Property subject to such additional matters and the Agreed Title Defects, as applicable, as additional Permitted Encumbrances and without diminution

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of the Purchase Price; or (ii) terminate this Agreement by written notice to Seller wherein this Agreement shall terminate and the Escrow Deposit returned to Buyer.

6. Due Diligence; Inspections

(a) The parties hereto acknowledge that Buyer, as of the Effective Date, has not yet had an opportunity to fully review, examine, and evaluate all aspects of the Subject Property.  If, on or prior to 5:00 p.m., on the Inspection Completion Date, Buyer determines, in its sole discretion that the Subject Property, or any part thereof, is unsatisfactory to the Buyer for any reason, Buyer shall have the right to give notice to Seller electing to terminate the Agreement, provided such notice is delivered by 5:00 p.m. on the Inspection Completion Date.  In the event such notice is timely delivered by the Buyer to the Seller, then the Escrow Deposit shall be released to Seller and this Agreement shall terminate and neither party shall have any further rights or obligations under this Agreement.  If such notice is not given by the Inspection Completion Date, then the condition set forth herein shall be deemed satisfied and the remainder of the Agreement shall remain in full force and effect according to its terms. 

(b) Seller shall timely make available to Buyer copies of any documentation reasonably requested by Buyer that is in Seller’s possession or control with respect to the Subject Property, including, but not limited to, any survey, report, environmental audit, approval, appraisal, permit, license, construction plans or specifications, title work, leases, depository information (but only as it pertains to the Branson Branch) and any other documents or instruments related to the Subject Property (collectively, “Inspection Materials”). 

(c) Buyer acknowledges that all Inspection Materials are proprietary and confidential in nature and will be delivered to Buyer solely to assist Buyer in determining the feasibility of purchasing the Subject Property.  Accordingly, as a material inducement to Seller to deliver the Inspection Materials to Buyer, Buyer hereby covenants and agrees that neither it nor any of its representatives shall, at any time, directly or indirectly, sell, transfer, publish, divulge, display, reveal, or communicate any of the Inspection Materials or the information contained therein, to any person whatsoever and Buyer continues to be bound by the Confidentiality Agreement signed by the parties on April 9, 2018. 

(d) Within five (5) days after the termination of this Agreement for any reason, Buyer shall, as instructed by Seller, either (i) return and deliver to Seller all of the Inspection Materials or (ii) destroy the same and verify such to the Seller. 

(e) Buyer hereby acknowledges, covenants, and agrees that any survey, report, environmental audit, approval, appraisal, permit, license, plans or specifications, and any other documents or instruments related to the Subject  Property prepared by Seller or any third party and provided to Buyer pursuant to this Agreement are provided without representation or warranty of any kind whatsoever, either express or implied, and is without recourse to Seller with respect to the accuracy of any information or statements contained therein. 

(f) In conducting any inspections, investigations, tests, or other examinations of, or related to, the Subject Property, Buyer and its agents and contractors shall:  (i) not undertake any such inspections, investigations, tests, or other examinations on the premises of the Seller, or

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any portion thereof, unless the same are first coordinated and approved by Seller, and in the presence of Seller or its agents or representatives or Clint Caffey; (ii) not disturb any Seller customers, or interfere with the use and quiet enjoyment of the Subject Property as a branch banking facility; (iii) not interfere with the operation and maintenance of the Subject Property, or any part thereof; (iv) not damage any part of the Subject Property or any other personal property located on or used in connection with the operation and maintenance of the Subject Property; (v) not injure or otherwise cause bodily harm to Seller or its agents, representatives, contractors, employees, contractors, guests, or invitees or employees; (vi) promptly pay, when due, the costs of all tests, investigations, and examinations undertaken by Buyer with respect to the Subject Property; (vii) not permit any liens to be placed upon the Subject Property or any portion thereof; and (viii) fully restore the Subject Property to the condition it was in prior to the performance of any of Buyer’s inspections, tests or examinations. 

(g) Buyer agrees to hold the Seller and its agents and assigns harmless from any loss or claim while conducting any inspection, test or examinations on the Subject Property. 

7. The Closing.  The closing hereunder (“Closing”) shall take place through the use of the Title Company on a date mutually agreed upon in writing, by the parties, but in any case, on or before March 11, 2019 (the “Closing Date”), preferably on a Friday; provided that such date is following the receipt of all approvals from any regulatory authorities having jurisdiction over the transaction contemplated hereby, and the satisfaction of all conditions and the lapse of all applicable waiting periods associated therewith.  Buyer and Seller each agree that they will use their commercially reasonable efforts for the Closing to take place on Friday, February 8, 2019. Buyer and Seller agree that the Closing does not need to occur simultaneously with data processing conversion.

8. Conditions Precedent to Closing.    

(a) Conditions to Buyer’s Obligations.  The following shall be conditions precedent to the Buyer’s obligation to close the transactions contemplated hereby: 

(i) The receipt of all required regulatory approvals (state and federal) and the expiration of any applicable waiting period;

(ii) No material adverse change upon the Subject Property between the date of this Agreement and the Closing Date;

(iii) Buyer has received all documents required to be received from Seller on or prior to the Closing Date;

(iv) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the purchase and assumption transaction contemplated by this Agreement is in effect and no proceeding by any bank regulatory authority or other governmental agency seeking any of the foregoing is pending.  There has not been any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the

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purchase and assumption transaction contemplated by this Agreement which makes the consummation of such transaction illegal;

(v) All Seller’s representations and warranties shall be true and correct in all material respects as of the date hereof and as of the time of Closing as if made anew at such times; and

(vi) Seller shall have performed in all material respects all of the covenants and agreements contain in this Agreement that require performance at or prior to Closing.

(b) Conditions to Seller’s Obligations.  The following shall be conditions precedent to the Seller’s obligation to close the transactions contemplated here:

(i) The receipt of all required regulatory approvals (state and federal) and the expiration of any applicable waiting period;

(ii) Seller has received all documents required to be received from Buyer on or prior to the Closing Date;

(iii) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the purchase and assumption transaction contemplated by this Agreement is in effect and no proceeding by any bank regulatory authority or other governmental agency seeking any of the foregoing is pending.  There has not been any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the purchase and assumption transaction contemplated by this Agreement which makes the consummation of such transaction illegal;

(iv) All Buyer’s representations and warranties shall be true and correct in all material respects as of the date hereof and as of the time of Closing as if made anew at such times; and

(v) Buyer shall have performed in all material respects all of the covenants and agreements contain in this Agreement that require performance at or prior to Closing.

9. Representations and Warranties of Seller.  Seller represents and warrants to Buyer that the following representations and warranties are true and correct in all material respects as of the date of this Agreement and as of the Closing Date, except as set forth in Seller’s disclosure schedules attached hereto.  All references to “to the best of Seller’s knowledge” (or similar phrases) shall be deemed to mean the actual knowledge of Clint Caffey or David Turner (as opposed to imputed or constructive knowledge). The disclosure schedule shall be arranged in numbered sections contained in this Section 9 and any information disclosed therein under any section of the disclosure schedule shall be deemed disclosed and incorporated into any other section of the disclosure schedule as and to the extent it is reasonably determined on the face of the disclosure contained therein that such deemed disclosure and incorporation would be appropriate.

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(a) Seller has the full right, power, and authority to own, operate and convey the Subject Property and fully perform this Agreement, and does not need any further consents, joinders, or other authorization from any governmental entities except from the applicable regulatory authorities to execute, deliver, and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. 

(b) Seller is a Missouri state-charted bank, duly organized, validly existing, and in good standing under the laws of the State of Missouri. 

(c) The execution and delivery by Seller of this Agreement, and the performance by Seller of all of its obligations hereunder, have been duly and validly authorized and approved by Seller pursuant to all applicable laws, and no other company action on the part of Seller is necessary to execute this Agreement and consummate the transaction contemplated herein.  This Agreement has been duly and validly executed by Seller and (assuming due authorization, execution and delivery by Buyer) constitutes the valid and legally binding agreement of Seller, enforceable against Seller in accordance with its terms, subject to bankruptcy insolvency, reorganization or other similar law affecting the enforcement of creditors’ rights generally and to general principles of equity, whether considered in a proceeding at law or in equity.  The execution and delivery of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby, subject to the fulfillment of the terms and compliance with the provisions hereof and all regulatory approvals, will not conflict with, or result in the breach of, or a default with respect to any of the terms, conditions, or provisions of any laws applicable to Seller, or of the charter or by-laws of Seller, or any agreement or other instrument to which Seller is a party or is subject, or by which Seller or any of its properties or any item of the Subject Property is bound, which breach would reasonably be expected to have a material adverse effect on the business or properties of the Branson Branch after the Closing Date. 

(d) To the best of Seller’s knowledge, there is no currently pending or threatened suit, action, claim or proceeding against Seller, nor has Seller received any written notification relating to the Subject Property, or any part thereof, relating to a federal, state, county, or municipal department, commission, board, bureau or agency or other governmental or administrative agency or entity, including, but not limited to, those matters and subjects described in subparagraph (f) of paragraph 10 of this Agreement.

(e) Seller has received no actual written notice that there is any pending condemnation proceeding with respect to the Real Property or the Improvements, or any part thereof. 

(f) To the best of Seller’s knowledge, there are no claims, pending or threatened as to any transactions as to the Deposits or any threats as to cyber security.

(g) Seller hereby represents that it has good and marketable title for the Subject Property, subject only to Permitted Encumbrances and those exceptions accepted or waiver by Buyer.  Other than as specifically set forth otherwise herein, Seller specifically disclaims and makes no other warranties or representations as to the environmental condition of the Real Property, the Subject Property or to any other fact concerning the Subject Property.  Except as set forth in subparagraph (e) of paragraph 1, there are no leases, subleases, licenses or similar

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agreements permitting any party to lease, use or occupy space in or on the Real Property or the Improvements.

(h) There are no other existing claims or agreements for brokerage commissions, finders’ fees, or similar compensation to any person or party engaged by or otherwise representing Seller in connection with the purchase and assumption transaction contemplated by this Agreement.

(i) The Deposits are insured by the FDIC to the fullest extent permitted under federal law.  The Deposits are (i) in all respects genuine and enforceable obligations of Seller and have been acquired and maintained in material compliance with all applicable laws, including, but not limited to, the Truth in Savings Act and regulations promulgated thereunder; (ii) were acquired in the ordinary course of Seller’s business; and, to the best of Seller’s knowledge, (iii) are not subject to any claims that are superior to the rights of persons shown on the records delivered to Buyer indicating the owners of the Deposits, other than claims against such Deposit owners, such as state and federal tax liens, garnishments and other judgment claims, which have matured or may mature into claims against the respective Deposits.  Seller has, for all completed calendar years prior to Closing, has duly and timely sent to each holder of a Deposit all required I.R.S. Forms 1099 and other tax information reporting forms and similar notifications required of Seller.

(j) A true and complete copy of each contract to be assigned to and assumed by Buyer is listed in Exhibit “C”.  To the best of Seller’s knowledge, each contract is valid and enforceable according to its terms.  Seller is not in material default under any contact to be assigned and assumed and, to the best of Seller’s knowledge, there has been no event which, with notice or the lapse of time, or both, would constitute a material default under any contract to be assigned by Seller and assumed by Buyer, including, but not limited to, the consummation of the transactions contemplated by this Agreement.

(k) Although Buyer is purchasing the Subject Property and each item thereof in an “as is” and “where is” and “with all faults” basis, to the best of Seller’s knowledge, Seller has not received any written notification that any software it is using has not been used without a proper license for the same.

(l) The representations and warranties of the Seller contained in this Section 9 as qualified by the disclosure schedules (and any updates thereto) constitute the sole and exclusive representations and warranties of the Seller to the Buyer in connection with the transactions contemplated hereby, and all other representations and warranties of any kind or nature expressed or implied (including, but not limited to, any relating to the future or historical financial condition, results of operations, prospects, business, assets or liabilities of the Seller), whether made by the Seller or any of its affiliates or any of their respective managers, members, partners, officers, directors, employees, advisors, consultants, agents or representatives, are specifically disclaimed by the Seller.  The Seller does not make or provide any warranty or representation, express or implied, as to the quality, merchantability, fitness for a particular purpose, conformity to samples, or condition of the business’s assets or any part thereof.

10. Representations and Warranties of Buyer.  Buyer represents and warrants to Seller as of the date of this Agreement and as of the Closing Date as follows: 

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(a) Buyer has the full right, power, and authority to enter into and perform this Agreement and to purchase the Subject Property, and does not need any further consents, joinders, or other authorizations from any governmental entity other than its regulators to execute, deliver and perform its obligations under this Agreement, and to consummate the transactions contemplated hereby. 

(b) Buyer is a Missouri state-chartered bank, duly organized, validly existing, and in good standing under the laws of the State of Missouri. 

(c) The execution and delivery by Buyer of this Agreement, and the performance by Buyer of all its obligations hereunder, have been duly and validly authorized and approved by Buyer pursuant to all applicable laws and no other action on the part of Buyer is necessary to execute this Agreement and consummate the transactions contemplated herein.  This Agreement and each of the other documents, instruments, and agreements executed by Buyer in connection herewith, have been duly and validly executed by Buyer and constitute the valid and legally binding agreements of Buyer, enforceable against Seller in accordance with their respective terms. 

(d) To the best of Buyer’s knowledge, there is no currently pending or threatened suit, action, claim, or proceeding against Buyer or any of its affiliates affecting the ability of Buyer to carry out this Agreement, or any of the transactions contemplated hereby.  

(e) Since June 30, 2018, there has not occurred any material adverse change in the financial condition, business, prospects or affairs of Buyer, and Buyer has paid all of the debts and obligations in connection with the operation of its business as they become due (except those, if any, contested in good faith). 

(f) The Purchase Price reflects that the Subject Property is being purchased by Buyer on an “as is,” “where is” and “with all faults” basis and that it has conducted to its satisfaction an independent investigation and verification of the financial condition, results of operations, assets, liabilities, properties and projected operations of Seller and the Branson Branch, and, in making its determination to proceed with the transactions contemplated by this Agreement, Buyer has relied solely on the results of its own independent investigation and verification and the representations and warranties of Seller expressly and specifically set forth in Section 9 as qualified by the disclosure schedules (and any updates thereto).  Seller does not make or provide, and Buyer hereby waives, any warranty or representation, express or implied, as to (i) the quality, merchantability, fitness for a particular purpose, conformity to samples, or condition of the Subject Property or any part thereof, (ii) any applicable building, zoning or fire laws or regulations or with respect to compliance therewith or with respect to the existence of or compliance with any required permits, if any, of any governmental agency; (iii) the availability or existence of any water, sewer or utilities, any rights thereto, or any water, sewer or utility districts; (iv) access to any public or private sanitary sewer system; (v) the habitability, marketability, or profitability of the property; (vi) the manner or quality of the construction or materials, if any, incorporated into the Subject Property; (vii) any misstatements or inaccuracies contained in the property materials; or (viii) the presence of any hazardous substances in any Improvements on the Subject Property, including, without limitation, asbestos or formaldehyde, or the presence of any environmentally hazardous wastes or materials on or under the Subject Property.  Without limiting the generality of the

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foregoing, Buyer acknowledges that Seller shall have no liability to Buyer with respect to the condition of the Subject Property under common law, or any federal, state or local law or regulation, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended, 42 U.S.C.A. Sections 9601 et. seq., the Resource Conservation and Recovery Act, as Amended, 42 U.S.C. Section 6901, et. seq; the Clean Air Act, as Amended, 42 U.S.C. Section 7401, et. seq; the Federal Water Pollution Control Act, as Amended, 33 U.S.C. Section 1251, et. seq; the Toxic Substances Control Act, as Amended, 15 U.S.C. Section 9601, et. seq; the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et. seq; the Safe Drinking Water Act, 42 U.S.C. Section 300F, et. seq; and all comparable state and local laws, and any common law (including, without limitation, common law that may impose strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any hazardous substance.  BUYER SPECIFICALLY ACKNOWLEDGES AND AGREES THAT, OTHER THAN THE REPRESENTATIONS SET FORTH IN SECTION 9, NEITHER SELLER NOR ANY OTHER PERSON (INCLUDING, ANY MEMBER, MANAGER, OFFICER, DIRECTOR, EMPLOYEE OR AGENT OF ANY OF THE FOREGOING, WHETHER IN ANY INDIVIDUAL, CORPORATE OR ANY OTHER CAPACITY) IS MAKING, AND BUYER IS NOT RELYING ON, ANY REPRESENTATIONS, WARRANTIES, OR OTHER STATEMENTS OF ANY KIND WHATSOEVER, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, AS TO ANY MATTER CONCERNING SELLER, THE BRANSON BRANCH, THE SUBJECT PROPERTY, THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, OR THE ACCURACY OR COMPLETENESS OF ANY INFORMATION PROVIDED TO (OR OTHERWISE ACQUIRED BY) BUYER OR ANY OF THE BUYER’S REPRESENTATIVES.

(g) In connection with the investigation by Buyer of the Seller and the Branson Branch,  Buyer has received or may receive from Seller certain projections, forward looking statements and other forecasts.  Buyer acknowledges that there are uncertainties inherent in attempting to make such projections, forward looking statements and other forecasts, that Buyer is familiar with such uncertainties, that Buyer is taking full responsibility for making their own evaluation of the adequacy and accuracy of all projections, forward looking statements and other forecasts so furnished to it (including the reasonableness of the assumptions underlying such projections, forward looking statements and other forecasts), and that neither Seller nor any of its respective affiliates or any of its respective managers, members, partners, officers, directors, employees, advisors, consultants, agents or representatives, whether in an individual, corporate or any other capacity, will have or be subject to any liability or indemnification obligation to Buyer or any other person resulting from (nor shall Buyer have any claim with respect to) the distribution to Buyer, or Buyer’s use of, or reliance on, any information, documents, projections, forecasts or other material made available to Buyer in certain “data rooms,” confidential information memoranda or management presentations in expectation of, or in connection with, the transactions contemplated by this Agreement, regardless of the legal theory under which such liability or obligation may be sought to be imposed, whether sounding in contract or tort, or whether at law or in equity, or otherwise.

(h) There are no other existing claims or agreements for brokerage commissions, finders’ fees, or similar compensation to any person or party engaged by or

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otherwise representing Buyer in connection with the purchase and assumption transaction contemplated by this Agreement.

(i) Buyer does not have any knowledge that any of the representations and warranties of the Seller in this Agreement are not true and correct in all material respects, and does not have any knowledge of any material errors in, or omissions from, the disclosure schedules.

(j) The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby, subject to the fulfillment of the terms and compliance with the provisions hereof and all regulatory approvals, will not conflict with, or result in the breach of, or a default with respect to any of the terms, conditions, or provisions of any laws applicable to Buyer, or of the charter or by-laws of Buyer, or any agreement or other instrument to which Buyer is a party or is subject.

11. Covenants of the Parties Prior to Closing

(a) Conduct of Seller Pending Closing.  During the period from the Effective Date until the Closing Date, the Seller hereby covenants and agrees to continue to conduct the business of the Seller at the Branson Branch in the ordinary course of business and consistent with past practice.  Seller shall maintain its present insurance coverage as it relates to the Subject Property through the Closing Date.

(b) Notice of Developments.  Seller shall give Buyer prompt written notice of any development that is materially adverse to the business, operations, properties or assets of the Branson Branch. 

(c) No Property Changes.  From and after the Effective Date, Seller will refrain from making any material changes to the Real Property; knowingly creating or incurring or permitting to exist any material mortgage, lien, pledge or other matter in any way affecting the Real Property, or the title thereof, except for matters to be paid off by Seller at Closing; or committing any waste or nuisance on the Real Property. 

(d) Regulatory Approvals.    Buyer will file, on a date mutually agreed by the parties hereto, but no later than thirty (30) days after the Effective Date, all regulatory applications required in order to consummate the purchase and assumption transaction contemplated by this Agreement, including, without limitation, the necessary applications for the approval of the Missouri Division of Finance and the Federal Deposit Insurance Corporation. Buyer will provide to Seller a copy of the non-confidential portions of such applications and correspondence pertaining thereto contemporaneously with the filing or receipt of same. Buyer will timely file all documents required to obtain all necessary permits and approvals required to carry out the purchase and assumption transaction contemplated by this Agreement, will pay all expenses incident thereto and will use its best efforts to obtain such permits and approvals on a timely basis. Buyer will provide Seller, as soon as is reasonable, copies of correspondence between Buyer and the pertinent regulatory agencies relating to such applications.

(e) Consummation of the Agreement. The parties will use their commercially reasonable efforts to perform and fulfill all conditions and obligations on its part to be performed

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or fulfilled under this Agreement and to effect the purchase and assumption transaction contemplated by this Agreement in accordance with the terms and conditions hereof.

(f) Employees.    On the Closing Date, Seller will terminate the employment of each employee of Seller working at, or exclusively with the operations of the Branson Branch of Seller, and compensate all currently to the date of Closing, including all accrued wages and vacation time. Buyer has the opportunity, but not the obligation, to hire any or all of such employees from and after the Closing Date.  Seller shall give Buyer a list of its employees working at, or exclusively with the operations of the Branson Branch within five (5) days after the Effective Date hereof, which list shall include all information Seller has with respect each employee, including compensation, bonuses, benefits and terms of employment.  Seller and Buyer will conduct a joint meeting with the employees as soon as is reasonably practicable after the Effective Date to notify the employees of this signing of this Agreement and Buyer’s intent, but not obligation, to re-employ the employees.

(g) Damage or Destruction of Personal or Real Property.  If prior to Closing, there is any damage to or destruction or theft of any item of the Subject Property, or either Buyer or Seller receives or obtains written notice of any proceeding that affects the Subject Property, or any item thereof, then Buyer shall be entitled to and will be assigned at Closing (i) all insurance proceeds payable with respect to the damage, destruction or theft of the item of Subject Property, with Seller paying over to Buyer any deductible under the applicable policy, and (ii) any award of payment received in connection with any proceeding concerning the Subject Property, including any condemnation or eminent domain proceeding.

12. Prorations.

(a) Prorations. The parties intend that Seller will operate for its own account the business conducted at the Branson Branch until the close of business on the Closing Date, and that Buyer will operate such business for its own account on and after the Closing Date.  Thus, except as otherwise specifically provided in this Agreement, items of expense directly attributable to the operation of the Branson Branch will be prorated as of the close of business on the Closing Date, whether or not such adjustment would normally be made as of such time, including, without limitation, (i) telephone, electric, gas, water, and other utility services (to the extent it is not possible to transfer such services into the name of Buyer as of the Closing Date), (ii) taxes associated with the Real Property and Tangible Personal Property, (iii) assessments (including, without limitation, assessments attributable to FDIC deposit insurance), (iv) payments due on Operating Contracts, and (v) similar expenses related to the Subject Property transferred hereunder.  To the extent any such item has been prepaid by Seller for a period extending beyond the Closing Date, there will be a proportionate adjustment in favor of Seller.

(b) Settlement Prorations.  Seller and Buyer shall cooperate with one another in good faith prior to the Closing Date to prepare a mutually acceptable schedule of all of the prorations and adjustments contemplated in this Section.   

13. Closing Costs.    

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(a) Seller Costs.  Seller shall be responsible for the following specific costs associated with this transaction:  (i) the cost of obtaining and preparing any corrective or curative title instruments; and (ii) one half of the Title Company’s fee for acting as a closing agent.

(b) Buyer Costs.  Except for the specific costs which Seller is responsible for under this Section above, and except for its own attorneys’ fees, which will be handled as set forth in Section 13(c) below all other costs of any nature and kind related to the transaction shall be the sole responsibility of Buyer.

(c) Attorneys’ Fees.  Except as otherwise specifically provided herein, the parties shall each bear their own respective attorneys’ fees. 

14. Documents to be Delivered

(a) At the Closing, after approval of all regulatory authorities necessary to Close and simultaneously with the payment of the Purchase Price, Seller shall deliver to Buyer the following, all in the form and substance reasonably acceptable to Seller and Buyer:  (i) the Purchase Price adjusted for all prorations, credits and adjustments, of which the Escrow Deposit will be accounted for, (ii) the executed Deed for the Land, fixtures and Improvements; (iii) standard no-lien affidavit in form required to delete the standard pre-printed exceptions to the Title Policy; (iv) an executed bill of sale for the Improvements, Deposits and the Tangible Personal Property; (v) an executed assignment and assumption of the lease with Lifestyle Contractors, Deposits and any Operating Contracts; (vi) a “FIRPTA Affidavit” establishing the Seller is not a “foreign corporation”; (vii) authority documentation reasonably requested by Buyer or reasonably required by the Title Company to evidence Seller’s authority to close the transactions contemplated by this Agreement; (viii) such other documents and instruments contemplated by this Agreement and reasonably requested by Buyer, and (ix) any manuals, combinations, keys, and alarm codes.

(b) At the Closing, Buyer shall execute and deliver, as applicable, to Seller the following, all in a form and substance reasonably acceptable to Seller and Buyer:  (i) an assignment and assumption of the lease with Lifestyle Contractors, Deposits and Operating Contracts; (ii) authority documentation reasonably requested by Seller or the Title Company to evidence Buyer’s authority to close the transactions contemplated by this Agreement; and (iii) such other documents and instruments contemplated by this Agreement and reasonably requested by Seller. 

(c) At the Closing, Seller and Buyer shall mutually execute and deliver to each other a closing statement in customary form, and such other instruments required by this Agreement. 

15. Indemnification.  

(a) Indemnification of Buyer. Seller will indemnify, hold harmless and defend Buyer (and each of Buyer’s directors, officers, subsidiaries, successors and assigns, and affiliates) (collectively, the “Buyer’s Indemnified Parties”) from and against any and all damage, loss, liability, cost, claim, or expense (including reasonable legal fees and expenses) incurred or suffered by Buyer’s Indemnified Parties (i) arising out of or resulting from the breach or inaccuracy of or failure to comply with any representation, warranty or covenant made by the Seller in this

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Agreement which survives the Closing Date as specified in Section 18(b) hereof; (ii) arising out of or resulting from or based upon any Excluded Personal Property; or (iii) arising out of or resulting from Seller’s operation of the Branson Branch before the Closing Date.

(b) Indemnification of Seller.   Buyer will indemnify, hold harmless and defend Seller (and Seller’s directors, officers, subsidiaries, successors and assigns, and affiliates) (collectively, the “Seller’s Indemnified Parties”) from and against any and all damage, loss, liability, cost, claim, or expense (including reasonable legal fees and expenses) incurred or suffered by Seller’s Indemnified Parties (i) arising out of or resulting from the breach or inaccuracy of or failure to comply with any representation, warranty or covenant made by Buyer in this Agreement which survives the Closing Date as specified in Section 18(b) hereof; (ii) by reason of any failure of the Buyer to pay, honor, perform or otherwise discharge the liabilities assumed related to the Subject Property on or after the Closing Date; or (iii) arising out of or resulting from Buyer’s operation of the Branson Branch on or after the Closing Date.

(c) Procedure and Limitations. No indemnification will be provided under Sections 15(a) or 15(b) unless the amount of any claim or aggregate claims exceeds $25,000, and then only to the extent of such excess.  Any indemnified party will give the indemnitor prompt notice of any claim hereunder; provided, the failure to give such notice will not affect the right to indemnification hereunder unless the indemnitor was materially prejudiced by such failure.  The indemnitor will have the right to defend at its own expense any claim for which the indemnitor is liable hereunder, but no settlement or compromise of such claim may be effected which materially affects the indemnified party without its consent thereto, which will not be unreasonably withheld.  The indemnified party will cooperate with the indemnitor in the defense of any such claims and may participate therein with its own counsel at its own expense.

16. Termination or Abandonment

(a) Mutual Agreement.  This Agreement may be terminated by the mutual written agreement of the parties at any time prior to the Closing Date.

(b) Breaches of Representations or Agreements.  In the event that there is a material breach in any of the representations and warranties or agreements of Seller or Buyer, which breach is not cured within 20 days after notice to cure such breach is given to the breaching party by the non-breaching party, then the non-breaching party may terminate and cancel this Agreement by providing written notice of such action to the other party hereto.

(c) Failure of Conditions.  In the event that any of the conditions to the obligations of either party are not satisfied or waived on or prior to the Closing Date, and if any applicable cure period provided in Section 16(b) hereof has lapsed, then such party may terminate and cancel this Agreement by delivery of written notice of such action to the other party on such date.

(d) Denial of Regulatory Approval.  If any regulatory application filed pursuant to this Agreement should be finally denied or disapproved by the respective regulatory authority, then this Agreement thereupon will be deemed terminated and canceled; provided, however, that a request for additional information from, or undertakings by, the applicant, as a condition for

17

 


 

approval, will not be deemed to be a denial or disapproval so long as the applicant diligently provides the requested information or agrees to the requested undertaking.  If any regulatory agency requests that an application be withdrawn and the applicant, in consultation with the other party to this Agreement, is unable to resolve the concern or objections of such agency, the applicant will be deemed to have failed to obtain regulatory approval.  In the event an application is denied but is subject to an appeal, petition for review, or similar such act on the part of the applicant (hereinafter referred to as the “appeal”) then the application will be deemed denied unless the applicant and the other party to this Agreement agree in writing to appeal the denial and the applicant prepares and timely files such appeal and continues the appellate process for purposes of obtaining the necessary approval, provided, however, that Seller will have the right, at its election, to terminate this Agreement if such appeal remains unresolved for a period exceeding 30 days.

(e) Automatic Termination.  Either Buyer or Seller may, by written notice to the other, terminate this Agreement if the Closing has not occurred on or before March 11, 2019 for reasons other than the failure of the party seeking to terminate to fully comply with its obligations hereunder; provided that such date will be extended if all required regulatory approvals have been obtained and the parties are waiting for the expiration of all regulatory waiting periods to close the transaction, and further provided, that such date may be extended by the mutual agreement of Seller and Buyer on or prior to the date this Agreement would otherwise terminate.

(f) Termination by Buyer. In addition to methods described in this paragraph 16, Buyer may terminate this Agreement as provided in Section 5 or Section 6.

(g) Liabilities.  In the event that this Agreement is terminated pursuant to the provisions of Section 16 hereof, no party hereto will have any liability to any other party for costs, expenses, damages or otherwise; provided, that, notwithstanding the foregoing, in the event that this Agreement is terminated pursuant to Section 16(b) hereof on account of a willful breach of any of the representations and warranties set forth herein, or any breach of any of the agreements set forth herein, then the non-breaching party will be entitled to recover its damages from the breaching party.

17. Transitional and Post-Closing Matters

(a) Notification to Branson Branch Customers. Buyer will:

(i) jointly with Seller, as soon as practicable after the execution and delivery of this Agreement on a date as mutually agreed by Buyer and Seller, prepare and mail to each depositor whose Deposit is to be assumed by Buyer, a letter, in form and substance mutually satisfactory to the parties, informing such depositor of the nature of such transaction and the continuing availability of services to be provided by Buyer in the Branson Branch on and after the Closing Date; and

(ii) at its own cost and expense, cause to be printed deposit tickets, checks, withdrawal orders and all other requisite banking transactional forms, and ATM, check and debit cards for each account which constitutes a Deposit and mail such deposit tickets, checks, withdrawal orders and other forms and ATM, check

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and debit cards to each customer having such an account so as to be received by such customer on or within three (3) days prior to the Closing Date, each such document to be encoded with Buyer’s identification numbers and to be accompanied by Buyer’s letter, in form and substance reasonably satisfactory to Seller, advising that, from and after the Closing Date, such newly issued deposit tickets, checks, withdrawal orders and other forms and ATM, check and debit cards are to be used instead of the corresponding existing documents of Seller with respect to the customer’s Deposit account maintained at the Branson Branch, and that any such existing documents of Seller are to be destroyed; and take any other actions required by law or regulation or by any court or regulatory authority to notify customers or depositors of the Branson Branch or residents of the communities in which the Branson Branch is located of the transfers and assumptions occurring pursuant to this Agreement.  The out-of-pocket cost of the mailings required by subsections (a) and (b) of this section will be borne by Buyer.

(b) Payment Instruments.  Following the Closing, Buyer agrees to pay in accordance with law all checks, drafts, and withdrawal orders (including ACH debits) which are properly drawn by depositors with respect to the Deposits assumed by Buyer, which are duly endorsed (or for which necessary endorsements are deemed supplied by applicable law) and otherwise properly payable, in light of credit balances and overdraft privileges, if any, applicable to such depositors, and presented to Buyer by mail, over its counters, or through the check-clearing system of the banking industry, and in all other respects to discharge, in the usual course of the banking business, the duties and obligations of Seller with respect to the balances due and owing to the depositors whose Deposits are assumed by Buyer.

(c) Statements.  Seller will issue statements to its customers which include all transactions with respect to the Deposits through the close of business on the Closing Date, and Buyer will issue statements for all transactions with respect to the Deposits thereafter.  Routine interest and service charge calculations will be processed by the Seller on such customer statements as of the close of business on the Closing Date.

(d) Limited Correspondent.  For a period of sixty (60) calendar days after the Closing Date, Seller will act as Buyer’s limited correspondent for the processing of checks, drafts and withdrawal orders drawn before or after the Closing on the draft, check or withdrawal order forms provided by Seller on Deposits assumed by Buyer hereunder.  For the 60-day period, Seller will use commercially reasonable efforts to transmit to Buyer via facsimile or by imaging, on a timely basis, a copy of each day’s checks, drafts and withdrawal orders, which are on draft, check or withdrawal order forms provided by Seller on Deposits assumed by Buyer hereunder.  Buyer will determine disposition of presented items and notify Seller of such disposition within three (3) hours of receipt of the copies of such items, if receipt occurs on a business day between the hours of 8:00 a.m. and 3:00 p.m., or by 10:00 a.m. the following business day if receipt does not occur on a business day between the hours of 8:00 a.m. and 3:00 p.m.  Items mistakenly routed or presented after the 60-day period will be returned.  Seller and Buyer will make arrangements to provide for the daily settlement through the Clearing Account (as defined below) with immediately available funds by Buyer of any such items honored by Seller pursuant to Buyer’s instructions.

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(e) Uncollected Items.  At Closing, Buyer will establish an account with Seller (the “Clearing Account”).  Buyer and Seller will settle daily through the Clearing Account the amount of all items included in the Deposits on the Closing Date which are returned to Seller after the Closing Date as uncollected; provided, that Seller will, upon Buyer’s making such payment, deliver each such item to Buyer and will assign to Buyer any and all rights which Seller may have or obtain in connection with such returned items.    To the extent that such a returned or uncollected item is not collected prior to the 180th day after the Closing Date, or such earlier date as may be agreed to in writing by the parties (the “Adjustment Payment Date”) as set forth in subparagraph (d) of paragraph 3) the amount of said uncollected items shall be included in the Adjustment Payment to be made from Seller to Buyer.  Buyer shall use its best and commercially reasonable efforts to collect such items.

(f) ACH.  For a period of ninety (90) days beginning on the Closing Date, Seller will use commercially reasonable efforts to transmit to Buyer information with respect to Automated Clearing House (“ACH”) originators effecting debits or credits to the accounts of the Deposit.  Buyer will use its best commercially reasonable efforts to notify all ACH originators effecting debits or credits to the accounts of the Deposit of the purchase and assumption transactions contemplated by this Agreement.  For a period of ninety (90) days beginning on the Closing Date, Seller will honor all ACH items related to accounts of Deposit which are mistakenly routed or presented to Seller.  Seller will make no charge to Buyer for honoring such items, and will use its commercially reasonable efforts to transmit to Buyer via facsimile or by imaging, by 11:00 a.m. or as soon as practicable thereafter, each day’s ACH data that is to be posted that day.  Items mistakenly routed or presented after the 90-day period will be returned to the presenting party.  Seller and Buyer will make arrangements to provide for the daily settlement through the Clearing Account with immediately available funds by Buyer of any ACH items honored by Seller.

(g) Deposits.  For a period of sixty (60) calendar days after the Closing Date, Seller will forward to Buyer as soon as reasonably possible any deposits received by Seller made with respect to Deposits.  Buyer will reimburse Seller upon demand for checks returned on payments forwarded by Seller to Buyer. 

(h) Access to Records.  Seller and Buyer mutually agree to maintain all records and other documents relating to the Subject Property for such periods as provided in Seller and Buyer’s respective record retention policies and required by applicable law, and to examine, inspect, copy and reproduce such records and other documents relating to such Subject Property as may be reasonably requested by the other party.  Seller shall provide the first $2,500.00 of cost of examination and photocopying at Seller’s customary rates without charge to Buyer.  Any charges for such examination and photocopying in excess of this amount will be charged to Buyer at a rate not greater than Seller’s  customary rates for similar requests by its customers.

(i) Information Reporting. With respect to the Deposits purchased and assumed by Buyer pursuant to this Agreement, Seller will be responsible for reporting to the customer and to the Internal Revenue Service (and any state or local taxing authority as required by law) all interest paid or earned by the customer prior to and including the Closing Date, and Buyer will be responsible for reporting to the customer and to the Internal Revenue Service (and any state or local taxing authority as required by law) all interest paid or earned by the customer after the Closing Date.

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(j) Transition.  From and after the date of this Agreement, Seller and Buyer agree to fully cooperate with and assist one another in connection with the transition and conversion of all customer accounts, files (including data processing files) and other information which are being purchased and assumed by Buyer pursuant to the terms hereof.  Additionally, each of the Buyer and Seller agree to provide each other, upon reasonable prior notice, with such information and data as is necessary to allow Seller and Buyer to comply with all tax, regulatory reporting, audit or other compliance obligations relating to the customers, employees and operations of the Branson Branch, and each of Seller and Buyer agree to timely take any and all action as required by law to comply with such tax, regulatory and/or reporting obligations.

18. Miscellaneous. 

(a) Notices. All notices, requests, demands or other communications provided for hereunder shall be addressed to the parties as follows:

 

As to Seller:

 

 

 

 

 

With a copy to (which shall not constitute notice):

Mr. David Turner
Hawthorn Bank CEO
132 E. High Street
P.O. Box 688
Jefferson City, MO  65102

 

 

 

Nate Van Emon

Stinson Leonard Street LLP

1201 Walnut Street, Suite 2900

Kansas City, MO  64106

 

 

 

 

 

 

 

As to Buyer:

Bill Jones
1501 State Highway 248
Branson, MO  65616

 

With a copy to:

 

Lee Viorel

Lowther & Johnson

901 E St Louis St #20

Springfield, MO 65806

 

And to:

 

David L. Wieland

Wieland & Condry, LLC

1548 E. Primrose

Springfield, MO 65804

 

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Notice shall be in writing and shall be deemed delivered:  (i) if mailed by certified mail, return receipt requested, postage prepaid and properly addressed to the address above, then three (3) business days after deposit of same in a regularly maintained US Mail receptacle;  (ii) if mailed by Federal Express, UPS or other nationally recognized overnight courier service, next business day delivery, then one (1) business day after deposit of same in regularly maintained receptacle of such overnight courier; or (iii) if hand delivered, then upon hand delivery thereof. 

(b) Survival.  Subject to the limitations and other provisions of this Agreement, the representations and warranties herein shall survive the Closing and shall remain in full force and effect until the date that is twelve (12) months from the Closing.  None of the covenants or other agreements contained in this Agreement shall survive the Closing, other than those which by their terms contemplate performance after the Closing, and each such surviving covenant or other agreement shall survive the Closing for the period contemplated by its terms.

(c) Time is of the Essence.  The parties hereto agree that time is of the essence with respect to the performance of the obligations hereunder.  The parties agree that in the event that any date on which performance is to occur falls on a Saturday, Sunday or state or national holiday, then the time for such performance shall be extended until the next business day thereafter occurring. 

(d) Captions and Paragraph Headings; Gender.  Captions and Section headings contained in this Agreement are for convenience and reference only and in no way define, describe, extend or limit the scope or intent of this Agreement, nor the intent of any provision hereof.  All terms and words used in this Agreement regardless of the number and gender in which used, shall be deemed to include any other gender or number as the context or use thereof may require. 

(e) No Waiver.  No waiver of any provision of this Agreement shall be effective unless it is in writing, signed by the party against whom it is asserted and any such written waiver shall only be applicable to the specific instance to which it relates and shall not be deemed to be a continuing or future waiver. 

(f) Execution and Counterparts.  This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed and considered on and the same Agreement, and same shall become effective when counterparts have been signed by each party and each party has delivered its signed counterpart to the other party.  In the even that any signature is delivered by facsimile transmission or by e-mail deliver of a “.pdf” format file or other similar format file, such signature shall be deemed an original for all purposes and shall create a valid and binding obligation of the party executing same with the same force and effect as if such facsimile or “.pdf” signature page was an original thereof. 

(g) Binding Effect.  This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 

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(h) Governing Law.  This Agreement shall be construed and interpreted according to the laws of the State of Missouri without giving effect to any choice or conflict of law provision or rule (whether of the State of Missouri or any other jurisdiction). 

(i) VenueANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY MAY BE INSTITUTED IN THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA OR THE COURTS OF THE STATE OF MISSOURI LOCATED IN THE CITY OF SPRINGFIELD AND COUNTY OF GREENE COUNTY, AND EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING. SERVICE OF PROCESS, SUMMONS, NOTICE OR OTHER DOCUMENT BY MAIL TO SUCH PARTY’S ADDRESS SET FORTH HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT. THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR ANY PROCEEDING IN SUCH COURTS AND IRREVOCABLY WAIVE AND AGREE NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

(j) Entire Agreement.  This Agreement, including the Exhibits attached hereto and the documents delivered pursuant hereto, sets forth all the promises, covenants, agreements, conditions and understandings between the parties hereto with respect to the subject matter hereof, and supersedes all prior or contemporaneous agreements, understandings, inducements or conditions, expressed or implied, oral or written, except as herein contained. 

(k) Invalid Provisions.  If any one of the provisions contained in this Agreement, for any reason, shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if the invalid, illegal or unenforceable provision had never been contained herein. 

(l) Relationship.  Nothing contained in this Agreement shall constitute or be construed to be or create a partnership, joint venture or any other relationship between Seller and buyer other than the relationship of a buyer and seller of real property as set forth in this Agreement. 

(m) Modification.  This Agreement shall not be modified (and no purported modification thereof shall be effective) unless in writing and signed by both parties.

(n) Joint Preparation.  The preparation of this Agreement has been a joint effort of the parties and the resulting documents shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. 

(o) Exhibits.  The Exhibits attached hereto contain additional terms of this Agreement and are incorporated herein by reference. 

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

 

 

 

 

HAWTHORN BANK

 

 

 

 

 

 

 

 

By:

/s/ David T. Turner

 

 

 

David T. Turner, CEO

 

 

 

 

 

 

 

 

BRANSON BANK

 

 

 

 

 

 

 

 

By:

/s/ Bill W. Jones

 

 

 

Bill W. Jones, CEO

 

 

 

 

 

 

 

 

 

 

 

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Section 3: EX-10.3.1 (EX-10.3.1)

hwbk_Ex1031

Exhibit 10.3.1

 

FIRST AMENDMENT TO

 

PURCHASE AND LIMITED ASSUMPTION AGREEMENT OF BRANCH

 

THIS   FIRST   AMENDMENT  TO  PURCHASEAND  LIMITEDASSUMPTION

AGREEMENT OF BRANCH (this "First Amendment") made and entered into as of this 15th day of January, 2019 by and between Hawthorn Bank, a Missouri state-chartered bank with its main office located in Jefferson City, Missouri ("Seller"), and Branson Bank, a Missouri state­ chartered bank with its main office located in Branson, Missouri ("Buyer").

 

RECITALS:

 

WHEREAS, Buyer and Seller entered into a Purchase and Limited Assumption Agreement of Branch on the 17th day of October, 2018 (hereinafter referred to as the "Agreement"), and

 

WHEREAS, Buyer and Seller desires to amend one part of said Agreement, while the balance of the Agreement remains in full force and effect as previously executed.

 

AGREEMENT:

 

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, each intending to be legally bound, do hereby agree as follows:

 

1. Extension of Inspection Completion Date. The "Inspection Completion Date," as defined in Section 5(b) of the Agreement, shall be extended to ninety-seven (97) days after the Effective Date.

 

2. Balance of Agreement Reaffirmed. Other than as amended in this First Amendment, the Agreement shall remain in full force and effect, and is hereby reaffirmed in its entirety.

 

3. Governing Law. This First Amendment shall be governed by the  laws of the  State of Missouri and applicable federal laws and regulations.

 

4. Counterparts. This First Amendment may be executed in any number of counterparts and the counterparts, taken together, shall be deemed to form one original instrument.

 

[signatures on following page]

 

 

 

 

 

 

 

 

 

 


 

 

IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment as of the day and year first above written.

 

HAWTHORN BANK

 

 

 

 

 

By

/s/

David T. Turner

 

David T. Turner, CEO

 

 

 

 

BRANSON BANK

 

 

 

 

 

By

/s/

Bill W. Jones

 

Bill W. Jones, CEO

 

 

 

 

 

 

 

 


(Back To Top)

Section 4: EX-10.3.2 (EX-10.3.2)

hwbk_Ex1032

Exhibit 10.3.2

 

 

SECOND AMENDMENT TO

 

PURCHASE AND LIMITED ASSUMPTION AGREEMENT OF BRANCH

 

THIS SECOND AMENDMENT TO PURCHASE AND LIMITED ASSUMPTION

AGREEMENT OF BRANCH (this "Second Amendment") made and entered into as of this 22d day of January, 2019 by and between Hawthorn Bank, a Missouri state-chartered bank with its main office located in Jefferson City, Missouri ("Seller"), and Branson Bank, a Missouri state­ chartered bank with its main office located in Branson, Missouri ("Buyer").

 

RECITALS:

 

WHEREAS, Buyer and Seller entered into a Purchase and Limited Assumption Agreement of Branch on the 17th day of October, 2018 (hereinafter referred to as the "Agreement"), and

 

WHEREAS, Buyer and Seller entered into a First Amendment of Purchase and Limited Assumption Agreement on the 15th day of January, 2019 (hereinafter referred to as the "First Amendment"), and

 

WHEREAS, Buyer and Seller again desire to amend one part of said Agreement, while the balance of the Agreement, as amended by the First Amendment remains in full force and effect as previously executed.

 

AGREEMENT:

 

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, each intending to be legally bound, do hereby agree as follows:

 

1. Amendment   of  Purchase  Price.Section 3(a)(v) shall be amended to be

$2,992,260, and section 3(a)(vi) shall be amended to be zero.

 

2. Balance of Agreement Reaffirmed. Other than as amended in the First and Second Amendments, the Agreement shall remain in full force and effect, and is hereby reaffirmed in its entirety.

 

3. Governing Law. This Second Amendment shall be governed by the laws of the State of Missouri and applicable federal laws and regulations.

 

4. Counterparts. This Second Amendment may be executed in any number of counterparts and the counterparts, taken together, shall be deemed to form one original instrument.

 

[signatures on following page]

 

 

 

 

 

 

 

 


 

 

 

IN WTINESS WHEREOF, the parties hereto have duly executed this Second Amendment as of the day and year first above written.

HAWTHORN BANK

 

 

 

 

 

 

By

/s/

David T. Turner

 

David T. Turner, CEO

 

 

 

BRANSON BANK

 

 

 

 

By

/s/

Bill W. Jones

 

Bill W. Jones, CEO

 

 

 

 


(Back To Top)

Section 5: EX-13 (EX-13)

hwbk_Ex13

Exhibit 13

2018

ANNUAL REPORT

TO

SHAREHOLDERS

 

HAWTHORN BANCSHARES, INC.

Jefferson City, Missouri

 

 


 

 

Hawthorn_Bancshares_Opt3[1]

March 14, 2019

Dear Shareholders:

Net income for 2018 was $10.7 million, or $1.78 per diluted share, compared to $3.4 million, or $0.56 per diluted share, for 2017.  Included in the 2017 net income is a $4.1 million charge, or $0.68 per diluted share, that includes $3.1 million resulting from application of the Tax Cuts and Jobs Act (the “Tax Act”) enacted in the fourth quarter of 2017, and $1.0 million resulting from tax planning initiatives implemented at year-end 2017.  The 2018 net income reflects a 43.5% increase in non-GAAP earnings per diluted common share excluding the impact of the Tax Act and tax planning initiatives.

Although a portion of the increased earnings for 2018 resulted from the lower tax rate enacted by the Tax Act and tax planning initiatives, our pre-tax income also increased by $1.1 million, or 9.4%.  Loan growth continued to contribute to these increased earnings as net loans increased $77.4 million, or 7.3%, from the last year-end leading to a $1.7 million increase in net interest income over the prior year.  This growth was achieved without a deterioration in loan quality as nonperforming loans to total loans decreased from 0.56% at December 31, 2017, to 0.49% at December 31, 2018.

Our 2018 net interest margin of 3.30% continues to be squeezed by increased interest expense during the recent rising interest rate environment although the last two quarters of 2018 have shown increases from the prior linked quarters compared to the 11 basis points decline year over year. Non-interest income of $9.3 million for 2018 increased $0.4 million, or 4.4%, from the prior year mostly due to increased service charge and bankcard income.  Non-interest expense of $40.3 million for 2018 was $1.5 million, or 3.9%, higher than the prior year. This increase over the prior year was mostly due to a $0.9 million increase in salaries and a $0.5 million increase in benefits.  One-time bonuses paid to staff in the first quarter 2018 as a result of the benefits accruing from the enactment of the Tax Act contributed $0.4 million of the salary increase as did annual cost of living increases averaging 3%.  The increase in benefits was due to higher medical and pension benefit costs.

As of December 31, 2018, we have been able to reduce our full-time equivalent head count by 45, or approximately 14%, since December 31, 2017, most of which occurred in the latter half of 2018.  As a result, the cost savings from this reduction will be more fully realized in 2019. We continue to pursue initiatives to improve our efficiency ratio including right sizing our branch network.  To this end, we closed  our Windsor branch during the fourth quarter 2018 and completed the sale of our Branson branch in February 2019. While these transactions are not expected to have a significant effect on loan or deposit volumes, they will further reduce head count and operating expenses.

Our capital levels at December 31, 2018 continue to exceed regulatory well capitalized thresholds with 9.55% of leverage capital and 13.28% of total risk-based capital.

Maintaining strong asset quality while achieving sustainable growth and improving our net interest margin are our primary initiatives.  As is evident from this year’s financial results, we have taken proactive steps to reduce costs and improve efficiencies, which should continue into the coming year.  I am committed to further improving earnings performance; sustaining sound and proper capital levels; and paying regular dividends.

Hawthorn's staff, management, Board of Directors and Advisory Board members are committed to the continued growth of our strong community bank and delivering long term value to our shareholders.  We appreciate your support and encourage you to continue to use Hawthorn Bank for your banking needs and request that you refer prospective customers to your bank.

Sincerely,

Signature Dave2

David T. Turner,

Chairman & Chief Executive Officer

 

 


 

 

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 the Company, Hawthorn Bancshares, Inc., and its subsidiaries, including, without limitation:

·

statements that are not historical in nature, and

·

statements preceded by, followed by or that include the words believes,  expects, may, will, should, could, anticipates, estimates, intends or similar expressions.

Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

·

competitive pressures among financial services companies may increase significantly,

·

changes in the interest rate environment may reduce interest margins,

·

general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

·

increases in non-performing assets in the Company's loan portfolios and adverse economic conditions may necessitate increases to our provisions for loan losses,

·

costs or difficulties related to the integration of the business of the Company and its acquisition targets may be greater than expected,

·

legislative, regulatory, or tax law changes may adversely affect the business in which the Company and its subsidiaries are engaged, and

·

changes may occur in the securities markets.

We have described under the caption Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, and in other reports filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.

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HAWTHORN BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Crucial to the Company's community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.5 billion in assets at December 31, 2018, provides a broad range of commercial and personal banking services.  The Bank's specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration (SBA) loans, and personal banking services including real estate mortgage lending, installment and consumer  loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services. The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area.

The Company's primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company's business is commercial, commercial real estate development, and residential mortgage lending. The Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity.

The success of the Company's growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company's financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.

The Company's subsidiary bank is a full-service bank conducting a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, residential real estate loans, single payment personal loans, installment loans and credit card accounts. In addition, the Bank provides trust services.

The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination by the Board of Governors of the Federal Reserve System.

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for the Company as of and for each of the years in the five-years ended December 31, 2018. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company, including the related notes, presented elsewhere herein.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Statement Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, except per share data)

 

2018

2017

2016

2015

2014

Interest income

 

$

57,779

 

$

50,935

 

$

46,010

 

$

45,756

 

$

44,498

Interest expense

 

 

13,186

 

 

8,007

 

 

5,663

 

 

4,999

 

 

5,044

Net interest income

 

 

44,593

 

 

42,928

 

 

40,347

 

 

40,757

 

 

39,454

Provision for loan losses

 

 

1,475

 

 

1,765

 

 

1,425

 

 

250

 

 

 —

Net interest income after provision for loan losses

 

 

43,118

 

 

41,163

 

 

38,922

 

 

40,507

 

 

39,454

Non-interest income

 

 

9,341

 

 

8,950

 

 

8,315

 

 

9,158

 

 

8,729

Investment securities gains, net

 

 

255

 

 

 5

 

 

602

 

 

 8

 

 

20

Non-interest expense

 

 

40,332

 

 

38,802

 

 

36,807

 

 

36,494

 

 

36,507

Income before income taxes

 

 

12,382

 

 

11,316

 

 

11,032

 

 

13,179

 

 

11,696

Income tax expense

 

 

1,668

 

 

7,902

 

 

3,750

 

 

4,580

 

 

4,042

Net income

 

$

10,714

 

$

3,414

 

$

7,282

 

$

8,599

 

$

7,654

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Basic earnings per share

 

$

1.78

 

$

0.56

 

$

1.19

 

$

1.41

 

$

1.25

Diluted earnings per share

 

 

1.78

 

 

0.56

 

 

1.19

 

 

1.41

 

 

1.25

Cash dividends paid on common stock

 

 

1,993

 

 

1,474

 

 

1,097

 

 

1,058

 

 

1,017

Common stock dividend

 

 

5,014

 

 

4,166

 

 

3,149

 

 

2,847

 

 

2,697

Book value per share

 

 

16.49

 

 

15.08