What changed in this filing

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Item 1. Financial Statements

2022-05-10 compared with 2021-11-04 · 353 added, 385 removed, 689 unchanged (52% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30,

(In thousands, except per share data)

(In thousands, except per share data) March 31, 2022 December 31, 2021

Cash and due from banks $ 22,544 $ 17,287

Federal funds sold and other interest-bearing deposits

Federal funds sold 419 7,122

Other interest-bearing deposits 27,552 135,500

Cash and cash equivalents 50,515 159,909

5 unchanged sentences

Allowance for loan losses ( 14,279 ) ( 16,903 )

Net loans 1,319,644 1,285,230

Loans held for sale, at lower of cost or fair value 909 2,249

4 unchanged sentences

Cash surrender value - life insurance 2,524 2,509

Other assets 12,953 7,658

Total assets $ 1,735,683 $ 1,831,550

LIABILITIES AND STOCKHOLDERS' EQUITY

13 unchanged sentences

Common stock, $ 1.00 par value, authorized 15,000,000 shares;

issued 7,023,821 and 6,769,322 shares, respectively

issued 7,023,821 shares, respectively

Surplus 64,437 64,437

Retained earnings 87,919 82,300

2 unchanged sentences

430,382 , and 406,846 shares, at cost, respectively

( 8,704 ) ( 8,098 )

Total stockholders’ equity 134,387 148,956

4 unchanged sentences

Consolidated Statements of Income (unaudited)

Three Months Ended

Nine Months Ended

September 30,

(In thousands, except per share amounts)

Three Months Ended March 31,

(In thousands, except per share data) 2022 2021

INTEREST INCOME

2 unchanged sentences

Interest on investment securities:

Federal funds sold, other interest-bearing deposits, and certificates of deposit in other banks

Taxable 788 667

Nontaxable 577 246

Federal funds sold 1 4

Other interest-bearing deposits and certificates of deposit in other banks 60 98

Dividends on other investments 75 83

12 unchanged sentences

Net interest income 14,145 14,390

Provision for loan losses

Net interest income after provision for loan losses

(Release of) provision for loan losses ( 2,500 ) —

Net interest income after (release of) provision for loan losses 16,645 14,390

NON-INTEREST INCOME

4 unchanged sentences

Gain on sale of mortgage loans, net 888 2,469

Other 513 137

Total non-interest income 3,726 4,572

Investment securities gains, net

Investment securities (losses) gains, net ( 4 ) 14

NON-INTEREST EXPENSE

6 unchanged sentences

Postage, printing, and supplies 190 204

Loan expense 145 174

Other 1,590 1,087

Total non-interest expense 12,227 11,780

1 unchanged sentence

Income tax expense 1,531 1,357

Net income $ 6,609 $ 5,839

Basic earnings per share $ 1.00 $ 0.88

3 unchanged sentences

AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (unaudited)

Three Months Ended

Nine Months Ended

September 30,

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

Three Months Ended March 31,

(In thousands) 2022 2021

Net income $ 6,609 $ 5,839

Other comprehensive (loss) income, net of tax

Investment securities available-for-sale:

Change in unrealized (losses) gains on investment securities available-for-sale, net of tax

Change in unrealized losses on investment securities available-for-sale, net of tax ( 19,582 ) ( 2,778 )

Adjustment for gains on sale of investment securities, net of tax — ( 2 )

1 unchanged sentence

Amortization of prior service cost included in net periodic pension cost, net of tax 0 35

Total other comprehensive (loss) income

Total comprehensive income

Total other comprehensive loss ( 19,582 ) ( 2,745 )

Total comprehensive (loss) income $ ( 12,973 ) $ 3,094

See accompanying notes to the consolidated financial statements (unaudited) .

2 unchanged sentences

Consolidated Statements of Stockholders’ Equity (unaudited)

The three months ended September 30, 2021 and 2020

Comprehensive

(In thousands)

Income (Loss)

Balance, June 30, 2021

Other comprehensive loss

Stock dividend

Cash dividends declared, common stock ($ 0.15 per share)

Balance, September 30, 2021

Balance, June 30, 2020

Other comprehensive income

Purchase of treasury stock

Stock dividend

Cash dividends declared, common stock ($ 0.12 per share)

Balance, September 30, 2020

The nine months ended September 30, 2021 and 2020

Comprehensive

(In thousands)

Income (Loss)

Three Months Ended March 31, 2022 and 2021

(In thousands, except per share data) Common Stock Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity

Balance, December 31, 2021

$ 7,024 $ 64,437 $ 82,300 $ 3,293 $ ( 8,098 ) $ 148,956

Net income — — 6,609 — — 6,609

Other comprehensive loss — — — ( 19,582 ) — ( 19,582 )

Purchase of treasury stock — — — — ( 606 ) ( 606 )

Stock dividend

Cash dividends declared, common stock ($ 0.15 per share)

Balance, September 30, 2021

— — ( 990 ) — — ( 990 )

Balance, March 31, 2022

$ 7,024 $ 64,437 $ 87,919 $ ( 16,289 ) $ ( 8,704 ) $ 134,387

Balance, December 31, 2020

Other comprehensive income

$ 6,769 $ 59,307 $ 68,935 $ 1,528 $ ( 5,950 ) $ 130,589

Net income — — 5,839 — — 5,839

Other comprehensive loss — — — ( 2,745 ) — ( 2,745 )

Purchase of treasury stock — — — — ( 2,148 ) ( 2,148 )

Stock dividend

Cash dividends declared, common stock ($ 0.13 per share)

Balance, September 30, 2020

— — ( 827 ) — — ( 827 )

Balance, March 31, 2021

$ 6,769 $ 59,307 $ 73,947 $ ( 1,217 ) $ ( 8,098 ) $ 130,708

See accompanying notes to the consolidated financial statements (unaudited) .

2 unchanged sentences

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands) 2022 2021

Cash flows from operating activities:

Net income $ 6,609 $ 5,839

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

(Release of) provision for loan losses ( 2,500 ) —

Depreciation expense 545 578

1 unchanged sentence

Change in fair value of mortgage servicing rights 48 121

Investment securities gains, net

Losses (gains) on sales and dispositions of premises and equipment

Investment securities losses (gains), net 4 ( 14 )

Gain on sales and dispositions of premises and equipment — 4

Gain on sales and dispositions of other real estate ( 8 ) ( 15 )

Provision for other real estate owned — 88

Increase in accrued interest receivable

Decrease in accrued interest receivable 380 152

Increase in cash surrender value - life insurance ( 15 ) ( 14 )

Decrease in other assets

Decrease (increase) in other assets 329 ( 1,926 )

Decrease in operating lease liabilities ( 74 ) ( 79 )

Decrease in accrued interest payable

Increase in other liabilities

Increase (decrease) in accrued interest payable 16 ( 398 )

(Decrease) increase in other liabilities ( 2,567 ) 12

Origination of mortgage loans held for sale ( 26,935 ) ( 65,012 )

5 unchanged sentences

Proceeds from maturities of certificates of deposit in other banks 490 736

Net decrease (increase) in loans

Net (increase) decrease in loans ( 31,812 ) 11,000

Purchase of available-for-sale debt securities ( 14,581 ) ( 62,297 )

1 unchanged sentence

Proceeds from calls of available-for-sale debt securities 2,250 7,745

Proceeds from sales of available-for-sale debt securities

Purchases of FHLB stock ( 178 ) ( 327 )

5 unchanged sentences

Cash flows from financing activities:

Net increase in demand deposits

Net (decrease) increase in interest-bearing transaction accounts

Net decrease in time deposits

Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase

Net (decrease) increase in demand deposits ( 2,841 ) 48,543

Net decrease in interest-bearing transaction accounts ( 66,194 ) ( 15,193 )

Net increase (decrease) in time deposits 8,358 ( 22,974 )

Net decrease in federal funds purchased and securities sold under agreements to repurchase ( 18,315 ) ( 3,136 )

Repayment of FHLB advances and other borrowings ( 61 ) ( 9,060 )

FHLB advances

Purchase of treasury stock ( 606 ) ( 2148 )

Cash dividends paid - common stock ( 993 ) ( 842 )

Net cash (used in) provided by financing activities

Net (decrease) increase in cash and cash equivalents

Net cash used in financing activities ( 80,652 ) ( 4,810 )

Net decrease in cash and cash equivalents ( 109,394 ) ( 33,660 )

Cash and cash equivalents, beginning of period 159,909 180,363

Cash and cash equivalents, end of period $ 50,515 $ 146,703

See accompanying notes to the consolidated financial statements (unaudited).

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited) continued

Three Months Ended March 31,

(In thousands) 2022 2021

Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest $ 1,275 $ 2,109

Income taxes $ — $ —

Noncash investing and financing activities:

Other real estate and repossessed assets acquired in settlement of loans

Stock dividends

Other real estate and repossessed assets acquired in settlement of loans net of (charge-offs) $ ( 52 ) $ 30

See accompanying notes to the consolidated financial statements (unaudited).

20 unchanged sentences

For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Operating, Accounting and Reporting Considerations related to COVID-19

The COVID-19 pandemic has negatively impacted the global economy, including the United States.

In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law on March 27, 2020.

The CARES Act, along with subsequent relief programs, provided substantial funding to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief.

See Note 2 Loans and Leases and the Allowance for Credit Losses for more information.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(2) Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at September 30, 2021 and December 31, 2020 is as follows:

September 30,

(in thousands)

Major classifications within the Company’s held for investment loan portfolio at March 31, 2022 and December 31, 2021 is as follows:

(in thousands) March 31, 2022 December 31, 2021

Commercial, financial, and agricultural (a)

$ 221,015 $ 217,214

Real estate construction − residential 21,515 27,920

4 unchanged sentences

Total loans held for investment $ 1,333,923 $ 1,302,133

(a) Includes $ 26.0 million and $ 63.3 million of SBA PPP loans, net as of September 30, 2021 and December 31, 2020, respectively.

(a) Includes $ 2.3 million and $ 8.4 million of Small Business Administration Paycheck Protection (SBA PPP) loans, net as of March 31, 2022 and December 31, 2021, respectively.

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the Missouri communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St.

1 unchanged sentence

As such, the Bank is susceptible to changes in the economic environment in these communities.

The Bank does not have a concentration of credit in any one economic sector.

Installment and other consumer loans consist primarily of the financing of automotive vehicles.

At September 30, 2021, loans of $ 556.0 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit.

Allowance for Loan Losses

The following table illustrates the changes in the allowance for loan losses by portfolio segment:

Three Months Ended September 30, 2021

Construction -

(in thousands)

Balance at beginning of period

Provision for loan losses

Loans charged off

Less recoveries on loans

Net loan charge-offs (recoveries)

Balance at end of period

Three Months Ended September 30, 2020

Construction -

(in thousands)

Balance at beginning of period

Provision for loan losses

Loans charged off

Less recoveries on loans

Net loan charge-offs (recoveries)

Balance at end of period

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

Nine Months Ended September 30, 2021

Construction -

(in thousands)

Bank does not have a concentration of credit in any one economic sector.

Installment and other consumer loans consist primarily of the financing of automotive vehicles.

At March 31, 2022, loans of $ 567.4 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit.

Allowance for Loan Losses

The following table illustrates the changes in the allowance for loan losses by portfolio segment:

Three Months Ended March 31, 2022

(in thousands) Commercial, Financial, & Agricultural Real Estate Construction - Residential Real Estate Construction - Commercial Real Estate Mortgage - Residential Real Estate Mortgage - Commercial Installment and Other Consumer Un- allocated Total

Balance at beginning of period $ 2,717 $ 137 $ 588 $ 2,482 $ 10,662 $ 256 $ 61 $ 16,903

Provision for loan losses

(Release of ) provision for loan losses 128 ( 77 ) 76 93 ( 2,897 ) 56 121 ( 2,500 )

Loans charged off 35 — — — 75 56 — 166

2 unchanged sentences

Balance at end of period $ 2,830 $ 60 $ 664 $ 2,578 $ 7,692 $ 273 $ 182 $ 14,279

Nine Months Ended September 30, 2020

Construction -

(in thousands)

Three Months Ended March 31, 2021

Balance at beginning of period $ 5,121 $ 213 $ 475 $ 2,679 $ 9,354 $ 264 $ 7 $ 18,113

14 unchanged sentences

The Company’s methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates.

Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values,

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

assessment of changes in the quality of the Company’s internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

When the COVID-19 pandemic surfaced in the first quarter of 2020, management reassessed the calculation of the allowance for loan loss by increasing the economic qualitative factor in order to capture the impact on the credit risk present in the loan portfolio given the economic environment that existed at that time.

As of the fourth quarter of 2020, management reassessed the qualitative factor and economic indicators.

Enough time had passed so that data after the outbreak was available to provide a better interpretation of the impact of the virus on the economy.

Management determined that the local market and economy had been able to transition to a functional level while adapting to the new requirements aimed at stopping the spread of the virus and returned to calculating the qualitative adjustment according to the Company's methodology detailed above.

Additionally, the funding of $ 88.4 million and $ 47.5 million in SBA PPP loans during 2020 and 2021, respectively, required management to assess the methodology that would be adopted in regard to the allowance for loan losses applicable to these loans.

As the SBA PPP loans are expected to be mostly paid off in the next three to six months and carry a 100 % credit guarantee from the SBA, management determined that no allowance for loan losses was deemed necessary for these loans.

At September 30, 2021, the net balance of the PPP loans totaled $ 26.0 million.

of changes in the quality of the Company’s internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

The funding of $ 88.4 million and $ 47.5 million in SBA PPP loans during 2020 and 2021, respectively, required management to assess the methodology that would be adopted in regard to the allowance for loan losses applicable to these loans.

As the SBA PPP loans are expected to be mostly paid off within a year and carry a 100 % credit guarantee from the SBA, management determined that no allowance for loan losses was deemed necessary for these loans.

At March 31, 2022, the net balance of the PPP loans totaled $ 2.3 million.

All SBA PPP loans have a 1 % interest rate and the Company earns a fee that is based upon a tiered schedule corresponding with the amount of the loan to the borrower, which is deferred and recognized over the life of the loan.

The PPP loan may be forgiven by SBA if the borrower meets certain criteria as defined by the CARES Act.

The PPP loan may be forgiven by the SBA if the borrower meets certain criteria as defined by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The Company reports these loans at their principal amount outstanding, net of unearned income, unamortized deferred loan fee income and loan origination costs.

1 unchanged sentence

When a PPP loan is paid off or forgiven by the SBA, the remaining unaccreted or unamortized net origination fees or costs are immediately recognized into income.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The following table illustrates the allowance for loan losses and recorded investment by portfolio segment:

Financial, and

Construction -

(in thousands)

September 30, 2021

(in thousands) Commercial, Financial, and Agricultural Real Estate Construction - Residential Real Estate Construction - Commercial Real Estate Mortgage - Residential Real Estate Mortgage - Commercial Installment and Other Consumer Un- allocated Total

March 31, 2022

Allowance for loan losses:

1 unchanged sentence

Collectively evaluated for impairment 2,791 60 651 2,372 7,651 255 182 13,962

Total $ 2,830 $ 60 $ 664 $ 2,578 $ 7,692 $ 273 $ 182 $ 14,279

Loans outstanding:

1 unchanged sentence

Collectively evaluated for impairment 220,696 21,515 103,378 285,451 661,739 22,357 — 1,315,136

Total $ 221,015 $ 21,515 $ 103,478 $ 287,879 $ 677,539 $ 22,497 $ — $ 1,333,923

December 31, 2021

2 unchanged sentences

Collectively evaluated for impairment 2,675 137 575 2,316 7,847 248 61 13,859

Total $ 2,717 $ 137 $ 588 $ 2,482 $ 10,662 $ 256 $ 61 $ 16,903

Loans outstanding:

1 unchanged sentence

Collectively evaluated for impairment 216,873 27,920 91,264 276,955 638,899 22,968 — 1,274,879

Total $ 217,214 $ 27,920 $ 91,369 $ 279,346 $ 663,256 $ 23,028 $ — $ 1,302,133

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Impaired Loans

1 unchanged sentence

All other loans are collectively evaluated for impairment under ASC 450-20.

Impaired loans individually evaluated for impairment totaled $ 34.7 million and $ 37.3 million at September 30, 2021 and December 31, 2020, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructuring (TDRs).

Impaired loans individually evaluated for impairment totaled $ 18.8 million and $ 27.3 million at March 31, 2022 and December 31, 2021, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings (TDRs).

The net carrying value of impaired loans is based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows.

At September 30, 2021, $ 31.2 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans' collateral compared to $ 32.2 million at December 31, 2020.

At March 31, 2022, $ 15.4 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans' collateral compared to $ 24.2 million at December 31, 2021.

Once the impairment amount is calculated, a specific reserve allocation is recorded.

At September 30, 2021, $ 4.9 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $ 34.7 million compared to $ 5.1 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $ 37.3 million at December 31, 2020.

Management determined that $ 11.9 million, or 34 %, of total impaired loans required no reserve allocation at September 30, 2021 compared to $ 11.9 million, or 32 %, at December 31, 2020, primarily due to adequate collateral values , acceptable payment history and adequate cash flow ability.

The categories of impaired loans at September 30, 2021 and December 31, 2020 are as follows:

September 30,

(in thousands)

At March 31, 2022, $ 0.3 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $ 18.8 million compared to $ 3.0 million of the Company’s allowance for loan losses allocated to impaired loans totaling $ 27.3 million at December 31, 2021.

Management determined that $ 16.1 , or 86 %, of total impaired loans required no reserve allocation at March 31, 2022 compared to $ 16.6 million, or 61 %, at December 31, 2021, primarily due to adequate collateral values , acceptable payment history and adequate cash flow ability.

The categories of impaired loans at March 31, 2022 and December 31, 2021 are as follows:

(in thousands) March 31, 2022 December 31, 2021

Non-accrual loans $ 17,096 $ 25,459

1 unchanged sentence

Total impaired loans $ 18,787 $ 27,254

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The following tables provide additional information about impaired loans at September 30, 2021 and December 31, 2020, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

(in thousands)

September 30, 2021

The following tables provide additional information about impaired loans at March 31, 2022 and December 31, 2021, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

(in thousands) Recorded Investment Unpaid Principal Balance Specific Reserves

March 31, 2022

With no related allowance recorded:

Commercial, financial and agricultural

Real estate mortgage − residential $ 754 $ 754 $ —

Real estate mortgage − commercial 15,364 16,045 —

Installment and other consumer — 4 —

Total $ 16,118 $ 16,803 $ —

With an allowance recorded:

4 unchanged sentences

Installment and other consumer 140 140 18

Total $ 2,669 $ 3,300 $ 317

Total impaired loans $ 18,787 $ 20,103 $ 317

(in thousands)

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(in thousands) Recorded Investment Unpaid Principal Balance Specific Reserves

December 31, 2021

With no related allowance recorded:

Commercial, financial and agricultural

Real estate mortgage − residential $ 1,034 $ 1,152 $ —

Real estate mortgage − commercial 15,593 16,057 —

Total $ 16,627 $ 17,209 $ —

With an allowance recorded:

Commercial, financial and agricultural $ 341 $ 374 $ 42

Real estate construction − residential

Real estate construction − commercial 105 138 13

2 unchanged sentences

Installment and other consumer 60 61 8

Total $ 10,627 $ 11,445 $ 3,044

Total impaired loans $ 27,254 $ 28,654 $ 3,044

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans during the periods indicated.

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

Three Months Ended March 31,

(in thousands) Average Recorded Investment Interest Recognized For the Period Ended Average Recorded Investment Interest Recognized For the Period Ended

With no related allowance recorded:

Commercial, financial and agricultural $ — $ — $ 1,742 $ 8

Real estate construction − commercial

Real estate mortgage − residential 759 9 1,424 9

1 unchanged sentence

Installment and other consumer 2 — — —

Total $ 22,017 $ 9 $ 12,623 $ 17

With an allowance recorded:

5 unchanged sentences

Installment and other consumer 96 — 85 3

Total $ 2,619 $ 17 $ 24,323 $ 23

Total impaired loans $ 24,636 $ 26 $ 36,946 $ 40

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received.

The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to TDRs, was $ 46,000 and $ 121,000 for the three and nine months ended September 30, 2021, respectively, compared to $ 169,000 and $ 242,000 for the three and nine months ended September 30, 2020, respectively.

The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to TDRs, was $ 26 ,000 for the three months ended March 31, 2022 compared to $ 40 ,000 for the three months ended March 31, 2021.

The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes.

Borrowers are generally classified as delinquent once payments become 30 days or more past due.

Loans are generally classified as delinquent once payments become 30 days or more past due.

The Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, the ultimate collectability of interest or principal is no longer probable.

3 unchanged sentences

otherwise, such receipts are recorded as interest income on a cash basis.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months.

The following table provides aging information for the Company’s past due and non-accrual loans at September 30, 2021 and December 31, 2020.

(in thousands)

September 30, 2021

Non-accrual loans are returned to accrual status when, in the opinion of management, the financial condition of the borrower indicates that the timely collectability of interest and principal is probable and the borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months.

The following table provides aging information for the Company’s past due and non-accrual loans at March 31, 2022 and December 31, 2021.

(in thousands) Current or Less Than 30 Days Past Due 30 - 89 Days Past Due 90 Days Past Due And Still Accruing Non-Accrual Total

March 31, 2022

Commercial, Financial, and Agricultural $ 220,703 $ 176 $ — $ 136 $ 221,015

4 unchanged sentences

Installment and Other Consumer 22,273 96 3 125 22,497

Total $ 1,315,897 $ 927 $ 3 $ 17,096 $ 1,333,923

December 31, 2021

5 unchanged sentences

Installment and Other Consumer 22,848 137 — 43 23,028

The Company's past due and non-accrual loans at September 30, 2021 and December 31, 2020 do not include $ 11.3 million and $ 57.1 million of loans accepting forbearance under the CARES Act, respectively.

Their delinquency status will not change through the forbearance period as the borrowers are fulfilling the agreements they have made with the Company.

Total $ 1,275,604 $ 1,056 $ 14 $ 25,459 $ 1,302,133

Credit Quality

6 unchanged sentences

Loans classified as TDRs that are accruing interest are classified as performing TDRs.

Loans classified as TDRs that are not accruing interest are classified as non-performing TDRs and are included with all other

Loans classified as TDRs that are not accruing interest are classified as non-performing TDRs and are included with all other non-accrual loans for presentation purposes.

It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful.

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

non-accrual loans for presentation purposes.

It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful.

The following table presents the risk categories by class at September 30, 2021 and December 31, 2020.

Construction -

(in thousands)

At September 30, 2021

The following table presents the risk categories by class at March 31, 2022 and December 31, 2021.

At March 31, 2022

Watch $ 8,618 $ — $ 2,897 $ 12,061 $ 41,464 $ — $ 65,040

Substandard 6,143 — 2,673 537 10,893 — 20,246

Performing TDRs 183 — — 1,170 323 15 1,691

Non-accrual loans 136 — 100 1,258 15,477 125 17,096

Total $ 15,080 $ — $ 5,670 $ 15,026 $ 68,157 $ 140 $ 104,073

At December 31, 2021

Watch $ 9,219 $ — $ 4,304 $ 12,185 $ 43,348 $ — $ 69,056

Substandard 6,284 — 2,673 750 2,305 — 12,012

Performing TDRs 188 — — 1,262 328 17 1,795

Non-accrual loans 153 — 105 1,129 24,029 43 25,459

Total $ 15,844 $ — $ 7,082 $ 15,326 $ 70,010 $ 60 $ 108,322

Troubled Debt Restructurings

At September 30, 2021, loans classified as TDRs totaled $ 2.5 million, of which $ 0.6 million were classified as non-performing TDRs and $ 1.9 million were classified as performing TDRs.

At March 31, 2022, loans classified as TDRs totaled $ 2.2 million, of which $ 0.6 million were classified as non-performing TDRs and $ 1.7 million were classified as performing TDRs.

At December 31, 2021, loans classified as TDRs totaled $ 2.4 million, of which $ 0.6 million were classified as non-performing TDRs and $ 1.8 million were classified as performing TDRs.

1 unchanged sentence

When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs.

Accordingly, specific reserves of $ 133,000 and $ 214,000 related to TDRs were allocated to the allowance for loan losses at September 30, 2021 and December 31, 2020, respectively.

Beginning in 2020, the Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic.

These modifications generally meet the criteria of both Section 4013 of the CARES Act and the join interagency statement on loan modifications and reporting, and therefore, the Company does not account for such loan modifications as TDRs.

At September 30, 2021, $ 11.3 million, or 0.9 % of total loans, remained in some form of a modification.

These loan modifications include two remaining loans on interest only.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The following table summarizes loans that were modified as TDRs during the periods indicated.

Nine Months Ended September 30,

Recorded Investment (1)

(in thousands)

Troubled Debt Restructurings

Real estate mortgage - residential

Installment and other consumer

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven.

Loans modified as a TDR that were fully paid down, charged-off or foreclosed upon during the period ended are not reported.

Accordingly, specific reserves of $ 179 ,000 and $ 159 ,000 related to TDRs were allocated to the allowance for loan losses at March 31, 2022 and December 31, 2021, respectively.

The Company’s portfolio of loans classified as TDRs include concessions for the borrower given their financial condition such as applying interest rates below the current market rate, deferring principal payments, and extending maturity dates.

There were no loans meeting the TDR criteria that were modified during the three and nine months ended September 30, 2021, respectively, and no loans and two loans that were modified during the three and nine months ended September 30, 2020, respectively.

There were no loans meeting the TDR criteria that were modified during the three months ended March 31, 2022, and 2021, respectively.

The Company considers a TDR to be in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or it is in the process of foreclosure.

There were no loans modified as a TDR that defaulted during any of the three and nine months ended September 30, 2021, respectively, and no loans and one loan modified as a TDR that defaulted during the three and nine months ended September 30, 2020, respectively, and within twelve months of their modification date.

There were no loans modified as a TDR that defaulted during the three months ended March 31, 2022 and 2021, respectively, and within twelve months of their modification date.

See Lending and Credit Management section for further information.

Loans Held For Sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company carries them at the lower of cost or fair value.

The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and other various secondary market investors.

At September 30, 2021, the carrying amount of these loans was $ 4.6 million compared to $ 5.1 million and $ 7.9 million at December 31, 2020 and September 30, 2020, respectively.

The Company designates certain long-term fixed rate personal real estate loans as held for sale.

In the fourth quarter of 2021, the Company elected the fair value option for all newly originated long-term personal real estate loans held for sale.

As of December 31, 2021, all loans held for sale were carried at fair value.

The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and various other secondary market investors.

At March 31, 2022, the carrying amount of these loans was $ 0.9 million compared to $ 2.2 million at December 31, 2021.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(3) Other Real Estate Acquired in Settlement of Loans

September 30,

March 31, December 31,

(in thousands) 2022 2021

Commercial $ — $ 643

Real estate construction - commercial 10,094 10,166

1 unchanged sentence

Real estate mortgage - commercial 2,458 2,510

Total $ 12,669 $ 13,436

Less valuation allowance for other real estate owned ( 2,911 ) ( 2,911 )

Total other real estate owned $ 9,758 $ 10,525

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Changes in the net carrying amount of other real estate owned were as follows for the periods indicated:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021

Balance at beginning of period $ 13,436 $ 14,905

Additions net of (charge-offs) ( 52 ) 30

Proceeds from sales ( 723 ) ( 108 )

Charge-offs against the valuation allowance for other real estate owned, net

Net gain on sales 8 15

2 unchanged sentences

Balance at end of period $ 9,758 $ 12,140

At September 30, 2021, $ 209,000 of consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to $ 287,000 of consumer mortgage loans at December 31, 2020.

At March 31, 2022, $ 0.2 million of consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to $ 0.2 million of consumer mortgage loans at December 31, 2021.

Activity in the valuation allowance for other real estate owned was as follows for the periods indicated:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021

Balance, beginning of period $ 2,911 $ 2,614

Provision (release) for other real estate owned

Provision for other real estate owned — 88

Balance, end of period $ 2,911 $ 2,702

3 unchanged sentences

(4) Investment Securities

Available for sale securities

The amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2021 and December 31, 2020 were as follows:

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2022 and December 31, 2021 were as follows:

Gross Unrealized

( in thousands)

September 30, 2021

(in thousands) Total Amortized Cost Gains Losses Fair Value

March 31, 2022

Treasury $ 3,154 $ 3 $ ( 12 ) $ 3,145

government and federal agency obligations 1,015 — ( 40 ) 975

6 unchanged sentences

December 31, 2021

Treasury $ 3,909 $ 11 $ ( 3 ) $ 3,917

government and federal agency obligations 1,314 5 — 1,319

10 unchanged sentences

government-sponsored enterprises.

Debt securities with carrying values aggregating approximately $ 204.8 million and $ 153.9 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

Debt securities with carrying values aggregating approximately $ 189.5 million and $ 275.4 million at March 31, 2022 and December 31, 2021, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

The amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2021, by contractual maturity are shown below.

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2022, by contractual maturity are shown below.

Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

( in thousands)

(in thousands) Amortized Cost Fair Value

Due in one year or less $ 5,521 $ 5,517

2 unchanged sentences

Due after ten years 120,814 106,472

Total 178,860 162,906

Mortgage-backed securities 132,222 123,848

Total available-for-sale securities $ 311,082 $ 286,754

Other securities

Other Investment Securities

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values.

Investments in FHLB stock, and Midwest Independent Bank (MIB) bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations.

September 30,

(in thousands)

(in thousands) March 31, 2022 December 31, 2021

Other securities:

FHLB stock $ 5,283 $ 5,197

MIB stock 151 151

Equity securities with readily determinable fair values 56 60

3 unchanged sentences

Notes to the Consolidated Financial Statements

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2021 and December 31, 2020 were as follows:

Less than 12 months

12 months or more

(in thousands)

At September 30, 2021

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2022 and December 31, 2021 were as follows:

Less than 12 months 12 months or more

(in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Total Fair Value Total Unrealized Losses

At March 31, 2022

Treasury $ 2,145 $ ( 9 ) $ 248 $ ( 3 ) $ 2,393 $ ( 12 )

government and federal agency obligations 975 ( 40 ) — — 975 ( 40 )

government-sponsored enterprises 20,736 ( 763 ) 4,530 ( 470 ) 25,266 ( 1,233 )

1 unchanged sentence

Mortgage-backed securities 87,136 ( 5,018 ) 30,475 ( 3,437 ) 117,611 ( 8,455 )

Other debt securities 4,598 ( 226 ) — — 4,598 ( 226 )

Bank issued trust preferred securities — — 1,266 ( 220 ) 1,266 ( 220 )

Total $ 225,844 $ ( 19,128 ) $ 42,131 $ ( 5,516 ) $ 267,975 $ ( 24,644 )

(in thousands)

At December 31, 2021

Treasury $ 1,758 $ ( 3 ) $ — $ — $ 1,758 $ ( 3 )

government-sponsored enterprises 18,304 ( 196 ) — — 18,304 ( 196 )

Obligations of states and political subdivisions 39,221 ( 474 ) — — 39,221 ( 474 )

Mortgage-backed securities 89,520 ( 1,579 ) 1,864 ( 32 ) 91,384 ( 1,611 )

1 unchanged sentence

Bank issued trust preferred securities — — 1,288 ( 198 ) 1,288 ( 198 )

* Amounts less than $1,000 are not reported

The total available-for-sale portfolio consisted of approximately 417 securities at September 30, 2021.

The portfolio included 157 securities having an aggregate fair value of $ 140.8 million that were in a loss position at September 30, 2021.

Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 2.9 million at fair value at September 30, 2021.

The $ 3.0 million aggregate unrealized loss included in accumulated other comprehensive loss at September 30, 2021 was caused by interest rate fluctuations.

Total $ 152,605 $ ( 2,275 ) $ 3,152 $ ( 230 ) $ 155,757 $ ( 2,505 )

The total available-for-sale portfolio consisted of approximately 440 securities at March 31, 2022.

The portfolio included 393 securities having an aggregate fair value of $ 268.0 million that were in a loss position at March 31, 2022.

Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 42.1 million at fair value at March 31, 2022.

The $ 24.6 million aggregate unrealized loss included in accumulated other comprehensive loss at March 31, 2022 was caused by interest rate fluctuations.

The total available-for-sale portfolio consisted of approximately 435 securities at December 31, 2021.

1 unchanged sentence

Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 3.2 million at fair value at December 31, 2021.

The $ 325,000 aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2020 was caused by interest rate fluctuations.

Because the decline in fair value is attributable to changes in interest rates and not credit quality, these investments were not considered other-than-temporarily impaired at September 30, 2021 and December 31, 2020, respectively.

The $ 2.5 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2021 was caused by interest rate fluctuations.

Because the decline in fair value is attributable to changes in interest rates and not credit quality, these investments were not considered other-than-temporarily impaired at March 31, 2022 and December 31, 2021, respectively.

In the absence of changes in credit quality of these investments, the fair value is expected to recover on all debt securities as they approach their maturity date or re-pricing date, or if market yields for such investments decline.

4 unchanged sentences

The following table presents the gross realized gains and losses from sales and calls of available-for-sale securities, as well as gains and losses on equity securities from fair value adjustments which have been recognized in earnings:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021

Investment securities gains, net

Investment securities (losses) gains, net

Available-for-sale securities:

4 unchanged sentences

Fair value adjustments, net ( 4 ) 12

Investment securities gains, net

Investment securities (losses) gains, net $ ( 4 ) $ 14

(5) Intangible Assets

Mortgage Servicing Rights

At September 30, 2021, the Company was servicing approximately $ 277.1 million of loans sold to the secondary market compared to $ 292.7 million at December 31, 2020, and $ 289.3 million at September 30, 2020.

Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $ 195,000 and $ 581,000 for the three and nine months ended September 30, 2021, respectively, compared to $ 216,000 and $ 638,000 for the three and nine months ended September 30, 2020, respectively.

At March 31, 2022, the Company was servicing approximately $ 261.5 million of loans sold to the secondary market compared to $ 270.0 million at December 31, 2021, and $ 288.9 million at March 31, 2021.

Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $ 0.3 million for the three months ended March 31, 2022 compared to $ 0.2 million for the three months ended March 31, 2021.

The table below presents changes in mortgage servicing rights (MSRs) for the periods indicated.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021

8 unchanged sentences

(2) Other changes in fair value, reported in real estate servicing fees, net, reflect changes due to customer payments and passage of time.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The following key data and assumptions were used in estimating the fair value of the Company’s MSRs as of September 30, 2021 and 2020, respectively:

Nine Months Ended September 30,

The following key data and assumptions were used in estimating the fair value of the Company’s MSRs as of March 31, 2022 and 2021, respectively:

Three Months Ended March 31,

Weighted average constant prepayment rate 9.40 % 15.04 %

2 unchanged sentences

Weighted average expected life (in years) 6.2 5.0

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The table below represents the aggregate amount of time deposits with balances that met or exceeded the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 and brokered deposits for the periods indicated.

(aggregate amounts in thousands) March 31, 2022 December 31, 2021

Time deposits with balances > $250,000 $ 84,692 $ 69,075

Brokered deposits $ 20,209 $ 20,202

(7) Federal Funds Purchased and Securities Sold under Agreements to Repurchase

September 30,

(in thousands)

(in thousands) March 31, 2022 December 31, 2021

Federal funds purchased $ — $ —

Repurchase agreements 5,514 23,829

Total $ 5,514 $ 23,829

The Company offers a sweep account program whereby amounts in excess of an established limit are “swept” from the customer’s demand deposit account on a daily basis into retail repurchase agreements pursuant to individual repurchase agreements between the Company and its customers .

4 unchanged sentences

thus amounts of excess collateral are not shown.

Repurchase Agreements

Remaining Contractual Maturity of the Agreements

(in thousands)

At September 30, 2021

Repurchase Agreements Remaining Contractual Maturity of the Agreements

(in thousands) Overnight and continuous Less than 90 days Greater than 90 days Total

At March 31, 2022

government-sponsored enterprises $ 5,514 $ — $ — $ 5,514

Mortgage-backed securities

Total $ 5,514 $ — $ — $ 5,514

At December 31, 2021

government and federal agency obligations

government-sponsored enterprises $ 9,113 $ — $ — $ 9,113

Mortgage-backed securities 14,716 — — 14,716

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Total $ 23,829 $ — $ — $ 23,829

The Company's leases primarily consist of office space and bank branches with remaining lease terms of generally 1 to 10 years.

As of September 30, 2021, operating right of use (ROU) assets and liabilities were $ 1.9 million and $ 1.9 million, respectively.

As of September 30, 2021, the weighted-average remaining lease term on these operating leases is approximately 6.7 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4.0 %.

As of March 31, 2022, operating right of use (ROU) assets and liabilities were $ 1.7 million and $ 1.8 million, respectively.

As of March 31, 2022, the weighted-average remaining lease term on these operating leases is approximately 6.3 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4 %.

Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities.

2 unchanged sentences

Operating lease ROU assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease.

ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company's incremental borrowing rate at the lease commencement date.

ROU assets and

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company's incremental borrowing rate at the lease commencement date.

Operating lease cost, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the consolidated statements of income.

The operating lease cost was $ 93,000 and $ 289,000 for the three and nine months ended September 30, 2021, respectively, compared to $ 86,000 and $ 252,000 for the three and nine months ended September 30, 2020, respectively.

The operating lease cost was $ 94,000 for the three months ended March 31, 2022 compared to $ 100,000 for the three months ended March 31, 2021.

At adoption of Accounting Standards Update (ASU) 2016-02 on January 1, 2019, lease and non-lease components of new lease agreements are accounted for separately.

2 unchanged sentences

the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Operating lease expense for these leases was $ 24,000 and $ 56,000 for the three and nine months ended September 30, 2021, respectively, compared to $ 15,000 and $ 75,000 for the three and nine months ended September 30, 2020, respectively.

Operating lease expense for these leases was $ 24,000 for the three months ended March 31, 2022 compared to $ 13,000 for the three months ended March 31, 2021.

The table below summarizes the maturity of remaining operating lease liabilities:

Lease payments due in:

Operating Lease

(in thousands)

2021 (excluding 9 months ended September 30, 2021)

2022 (excluding 3 months ended March 31, 2022)

Thereafter 571

Total lease payments 1,988

1 unchanged sentence

Total lease liabilities, as reported $ 1,763

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(9) Income Taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 19.7 % and 19.4 % for the three and nine months ended September 30, 2021, respectively, compared to 18.9 % and 18.4 % for the three and nine months ended September 30, 2020, respectively.

The increase in the effective tax rate for each of the three and nine months ended September 30, 2021 compared to the three and nine months ended September 30, 2020 was primarily attributable to the increase in earnings and an increase in state taxes attributed to elevated earnings.

The effective tax rate for each of the three and nine months ended September 30, 2021 and 2020, respectively, is lower than the U.S.

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 18.8 % for the three months ended March 31, 2022 compared to 18.9 % for the three months ended March 31, 2021.

The decrease in the effective tax rate for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 was primarily attributable to the increase in earnings and an increase in state taxes attributed to elevated earnings partially offset by the benefit recorded pertaining to the historical tax credit.

The effective tax rate for each of the three months ended March 31, 2022 and 2021, respectively, is lower than the U.S.

federal statutory rate of 21% primarily due to tax-free revenues.

Included in the effective tax rate for the quarter ended March 31, 2022 is a $ 13,000 benefit associated with a historic tax credit investment.

The investment is expected to generate a $ 321,000 tax benefit over the life of the project and is being recognized under the deferral method of accounting.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the appropriate character during the periods in which those temporary differences become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning initiatives in making this assessment.

In management's opinion, the Company will more likely than not realize the benefits of its deferred tax assets and, therefore, has not established a valuation allowance against its deferred tax assets as of September 30, 2021.

Management arrived at this conclusion based upon the level of historical taxable income and projections for future taxable income of the appropriate character over the periods in which the deferred tax assets are deductible.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions .

For each of the three and nine months ended September 30, 2021 and 2020, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

For each of the three months ended March 31, 2022 and 2021, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(10) Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss)

The following details the change in the components of the Company’s accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020:

Nine Months Ended September 30, 2021

Unrecognized Net

Comprehensive

Gains (Losses)

Postretirement

(in thousands)

on Securities (1)

The following details the change in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2022 and 2021:

Three Months Ended March 31, 2022

(in thousands) Unrealized Gains (Losses) on Securities (1) Unrecognized Net Pension and Postretirement Costs (2) Accumulated Other Comprehensive Income (Loss)

Balance at beginning of period $ 362 $ 2,931 $ 3,293

Other comprehensive income (loss), before reclassifications

Other comprehensive loss, before reclassifications ( 24,787 ) — ( 24,787 )

Amounts reclassified from accumulated other comprehensive income (loss) — — —

Current period other comprehensive income (loss), before tax

Income tax benefit (expense)

Current period other comprehensive income (loss), net of tax

Current period other comprehensive loss, before tax ( 24,787 ) — ( 24,787 )

Income tax benefit 5,205 — 5,205

Current period other comprehensive loss, net of tax ( 19,582 ) — ( 19,582 )

Balance at end of period $ ( 19,220 ) $ 2,931 $ ( 16,289 )

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Nine Months Ended September 30, 2020

Unrecognized Net

Comprehensive

Gains (Losses)

Postretirement

(in thousands)

on Securities (1)

Three Months Ended March 31, 2021

(in thousands) Unrealized Gains (Losses) on Securities (1) Unrecognized Net Pension and Postretirement Costs (2) Accumulated Other Comprehensive Income (Loss)

Balance at beginning of period $ 3,353 $ ( 1,825 ) $ 1,528

Other comprehensive income, before reclassifications

Amounts reclassified from accumulated other comprehensive income (loss)

Current period other comprehensive income, before tax

Income tax expense

Current period other comprehensive income, net of tax

Other comprehensive (loss) income, before reclassifications ( 3,518 ) 45 ( 3,473 )

Amounts reclassified from accumulated other comprehensive (loss) income ( 2 ) — ( 2 )

Current period other comprehensive (loss) income, before tax ( 3,520 ) 45 ( 3,475 )

Income tax benefit (expense) 740 ( 10 ) 730

Current period other comprehensive (loss) income, net of tax ( 2,780 ) 35 ( 2,745 )

Balance at end of period $ 573 $ ( 1,790 ) $ ( 1,217 )

4 unchanged sentences

Employee benefits charged to operating expenses are summarized in the table below for the periods indicated.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021

5 unchanged sentences

The Company's profit-sharing plan includes a matching 401(k) portion, in which the Company matches the first 3 % of eligible employee contributions.

The Company makes annual contributions for the discretionary portion in an amount up to 6 % of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown.

On November 7, 2018, the Board of Directors of the Company adopted a supplemental executive retirement plan (SERP), effective as of January 1, 2018.

The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment or death.

The accrued liability relating to the SERP was $ 1.2 million as of September 30, 2021, and the expense for the three and nine months ended September 30, 2021 was $ 97,000 and $ 290,000 , respectively, compared to $ 80,000 and $ 240,000 for the three and nine months ended September 30, 2020, respectively, and is recognized over the required service period.

The Company made annual contributions for the discretionary portion in an amount up to 6 % of income before income taxes and before contributions to the profit-sharing and pension plans for all participants,

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown.

In addition, employees were able to make additional tax-deferred contributions.

On November 7, 2018, the Board of Directors of the Company adopted a supplemental executive retirement plan (SERP), effective as of January 1, 2018.

The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment or death.

The accrued liability relating to the SERP was $ 1.8 million as of March 31, 2022, and the expense for the three months ended March 31, 2022 was $ 93,000 compared to $ 97,000 for the three months ended March 31, 2021 and is recognized over the required service period.

The Company provides a noncontributory defined benefit pension plan for all full-time and eligible employees.

Beginning January 1, 2018 and for all retrospective periods presented, the Company adopted the guidance under ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost .

Under the new guidance, only the service cost component of the net periodic benefit cost is reported in the same income statement line item as salaries and benefits, and the remaining components are reported as other non-interest expense.

Under the guidance, only the service cost component of the net periodic benefit cost is reported in the same income statement line item as salaries and benefits, and the remaining components are reported as other non-interest expense.

An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income.

1 unchanged sentence

To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year.

The Company made a pension contribution of $ 1.0 million on March 22, 2021.

The Company made a pension contribution of $ 1.0 million on April 1, 2022.

Effective July 1, 2017, the Company amended the pension plan to effectuate a “soft freeze” such that no individual hired (or rehired in the case of a former employee) by the Company after September 30, 2017, whether or not such individual is or was a vested member in the plan, will be eligible to be an active member and be entitled to accrue any benefits under the plan.

Components of Net Pension Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income

Components of Net Pension Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income (Loss)

The following items are components of net pension cost for the periods indicated:

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021

11 unchanged sentences

The net actuarial gain or loss in excess of a 10% corridor is amortized in net periodic benefit cost over the average remaining service period of active participants in the pension plan.

The prior service credit is amortized over the average remaining service period to full

The prior service credit is amortized over the average remaining service period to full eligibility for participating employees expected to receive benefits.

Currently, there is no prior service cost or net transition (asset)/obligation to be amortized.

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

eligibility for participating employees expected to receive benefits.

Currently, there is no prior service cost or net transition (asset)/obligation to be amortized.

(12) Earnings per Share

2 unchanged sentences

For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Basic earnings per share is computed by dividing income available to shareholders by the weighted average number of shares outstanding during the year.

Diluted earnings per share gives effect to all dilutive potential shares that were outstanding during the year.

Basic earnings per share is computed by dividing income available to shareholders by the weighted average number of shares outstanding during the period.

Diluted earnings per share gives effect to all dilutive potential shares that were outstanding during the period.

Presented below is a summary of the components used to calculate basic and diluted earnings per common share, which have been restated for all stock dividends:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands, except per share data) 2022 2021

8 unchanged sentences

Repurchase Program

In 2019, the Company's Board of Directors authorized the purchase of up to $ 5.0 million market value of the Company's common stock.

The Company's 2019 Repurchase Plan was amended during the second quarter of 2021 to authorize the purchase of up to an additional $ 5.0 million in market value of the Company's common stock.

Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

The Company repurchased 117,632 shares at an average cost of $ 18.26 per share totaling $ 2.1 million during the first quarter of 2021.

During the second quarter of 2021, the Company's Board of Directors reauthorized the purchase of up to $ 5.0 million market value of the Company's common stock under the 2019 authorization.

There were no shares repurchased during the third quarter of 2021.

As of September 30, 2021, $ 5.0 million remained available for the repurchase of shares pursuant to the share repurchase authorization.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

During the first quarter 2022, the Company repurchased 23,536 common shares at an average cost of $ 25.75 per share totaling $ 0.6 million.

As of March 31, 2022, $ 4.4 million remained available for share repurchases pursuant to that authorization.

(13) Fair Value Measurements

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These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Level 3 – Inputs are unobservable inputs for the asset or liability and significant to the fair value.

8 unchanged sentences

The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness.

Other Investment Securities

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values.

Investments in Federal Home Loan Bank (FHLB) stock, and Midwest Independent Bank (MIB) bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations.

Equity securities that are not actively traded are classified in level 2.

Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings.

The Company uses level 1 inputs to value equity securities that are traded in active markets.

Equity securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment.

Equity securities that are not actively traded are classified in level 2.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The Company uses level 1 inputs to value equity securities that are traded in active markets.

Loans Held for Sale

The fair value of the committed in forward sale agreements loans is the price at which they could be sold in the principal market at the measurement date, therefore the Company classifies as level 2.

Derivative Assets and Liabilities

Derivative assets and liabilities include interest rate lock commitments (IRLCs) and forward sale commitments.

The fair values of IRLCs and forward sale commitments are determined using readily observable market data such as interest rates, prices, volatility factors, and customer credit-related adjustments.

For IRLCs, the fair value is subject to the anticipated loan funding probability (pull-through rate), which is considered an unobservable factor.

Factors that affect pull-through rates include origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage, stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires.

The Company classifies IRLCs as level 3 due to the unobservable input of pull-through rates.

Mortgage Servicing Rights

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Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income.

The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

rates, and other ancillary income, including late fees.

The valuation models estimate the present value of estimated future net servicing income.

1 unchanged sentence

Fair Value Measurements

Quoted Prices

(in thousands)

September 30, 2021

(in thousands) Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3)

March 31, 2022

Treasury $ 3,145 $ 3,145 $ — $ —

government and federal agency obligations 975 — 975 —

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Equity securities 56 56 — —

Interest rate lock commitments 64 — — 64

Forward sale commitments 21 — 21 —

Loans held for sale 909 — 909 —

Mortgage servicing rights 2,639 — — 2,639

Total $ 290,443 $ 3,201 $ 284,539 $ 2,703

Interest rate lock commitments $ 47 $ — $ — $ 47

Total $ 47 $ — $ — $ 47

December 31, 2021

Treasury $ 3,917 $ 3,917 $ — $ —

government and federal agency obligations 1,319 — 1,319 —

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Equity securities 60 60 — —

Interest rate lock commitments 312 — — 312

Forward sale commitments 12 — 12 —

Loans held for sale 2,249 — 2,249 —

Mortgage servicing rights 2,659 — — 2,659

Total $ 316,162 $ 3,977 $ 309,214 $ 2,971

Interest rate lock commitments $ 26 $ — $ — $ 26

Total $ 26 $ — $ — $ 26

HAWTHORN BANCSHARES, INC.

2 unchanged sentences

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

Fair Value Measurements Using

Mortgage Servicing Rights

Three Months Ended September 30,

Nine Months Ended September 30,

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Mortgage Servicing Rights Interest Rate Lock Commitments

Three Months Ended March 31,

(in thousands) 2022 2021 2022 2021

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Included in other comprehensive income — — — —

Purchases — — — —

Sales — — ( 286 ) —

Issues 28 170 25 —

Settlements — — — —

Balance at end of period $ 2,639 $ 2,494 $ 17 $ —

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Because many of these inputs are not observable, the measurements are classified as Level 3.

As of September 30, 2021, the Company identified $ 31.2 million in collateral dependent impaired loans that had specific allowances for losses aggregating $ 4.6 million.

Related to these loans, there were $ 33,000 and $ 69,000 in charge-offs recorded during the three and nine months ended September 30, 2021, respectively.

As of September 30, 2020, the Company identified $ 2.9 million in collateral dependent impaired loans that had specific allowances for losses aggregating $ 0.2 million.

Related to these loans, there were $ 36,000 and $ 129,000 in charge-offs recorded during the three and nine months ended September 30, 2020, respectively.

As of March 31, 2022, the Company identified $ 15.4 million in collateral dependent impaired loans that required no specific allowance for loan losses.

Related to these loans, there were $ 23,000 in charge-offs recorded during the three months ended March 31, 2022.

As of March 31, 2021, the Company identified $ 31.8 million in collateral dependent impaired loans that had specific allowances for losses aggregating $ 4.8 million.

Related to these loans, there were $ 23,000 in charge-offs recorded during the three months ended March 31, 2021.

Other Real Estate and Foreclosed Assets

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This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment.

Subsequent to foreclosure, these assets initially

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

are carried at fair value of the collateral less estimated selling costs.

Subsequent to foreclosure, these assets initially are carried at fair value of the collateral less estimated selling costs.

Fair value, when recorded, is generally based upon appraisals by approved, independent state-certified appraisers.

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Because many of these inputs are not observable, the measurements are classified as Level 3.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Fair Value Measurements Using

Quoted Prices

September 30,

(in thousands)

September 30, 2021

(in thousands) Total Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Three Months Ended March 31, Total Gains (Losses)*

March 31, 2022

Collateral dependent impaired loans:

Commercial, financial, & agricultural

Real estate mortgage - residential

Real estate mortgage - commercial $ 15,365 $ — $ — $ 15,365 $ ( 23 )

Installment and other consumer

Total $ 15,365 $ — $ — $ 15,365 $ ( 23 )

Other real estate and repossessed assets $ 9,758 $ — $ — $ 9,758 $ ( 45 )

September 30, 2020

March 31, 2021

Collateral dependent impaired loans:

Commercial, financial, & agricultural $ 4,188 $ — $ — $ 4,188 $ —

Real estate construction - commercial

Real estate mortgage - residential 403 — — 403 —

Real estate mortgage - commercial 22,484 — — 22,484 ( 23 )

Installment and other consumer

Total $ 27,075 $ — $ — $ 27,075 $ ( 23 )

Other real estate and repossessed assets $ 12,140 $ — $ — $ 12,140 $ ( 73 )

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Loans are segregated by type, such as commercial, real estate, and consumer.

Each loan category is further segmented into fixed and variable interest rate

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Each loan category is further segmented into fixed and variable interest rate categories.

The fair value of loans, or exit price, is estimated by using the future value of discounted cash flows using comparable market rates for similar types of loan products and adjusted for market factors.

The discount rates used are estimated using comparable market rates for similar types of loan products adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.

Loans Held for Sale

Loans originated and intended to be sold in the secondary market, generally 1-4 family residential mortgage loans, are carried, in aggregate, at the lower of cost or estimated fair value.

The estimated fair value measurements of loans held for sale are management's best estimate of fair value, which is primarily based on quoted market prices for similar loans in the secondary market.

Investment Securities

A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided in the Fair Value Measurement section above.

A schedule of investment securities by category and maturity is provided in the notes on Investment Securities .

Other Investment Securities

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values.

Investments in FHLB stock, and MIB bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations.

Equity securities that are not actively traded are classified in level 2.

Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings.

Equity securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment.

The Company uses level 1 inputs to value equity securities that are traded in active markets.

Federal Funds Sold, Cash, and Due from Banks

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For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments.

The fair value of deposits with no stated maturity, such as noninterest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand.

The fair value of deposits with no stated maturity, such as non-interest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand.

The fair value of time deposits is based on the discounted value of contractual cash flows.

8 unchanged sentences

Notes to the Consolidated Financial Statements

A summary of the carrying amounts and fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020 is as follows:

September 30, 2021

A summary of the carrying amounts and fair values of the Company’s financial instruments at March 31, 2022 and December 31, 2021 is as follows:

March 31, 2022

Fair Value Measurements

Quoted Prices

September 30, 2021

(in thousands)

March 31, 2022 Quoted Prices in Active Markets for Identical Assets Other Observable Inputs Net Significant Unobservable Inputs

(in thousands) Carrying amount Fair value (Level 1) (Level 2) (Level 3)

Cash and due from banks $ 22,544 $ 22,544 $ 22,544 $ — $ —

3 unchanged sentences

Other investment securities 5,490 5,490 56 5,434 —

Loans, net 1,319,644 1,326,968 — — 1,326,968

Loans held for sale 909 909 — 909 —

Cash surrender value - life insurance 2,524 2,524 — 2,524 —

Interest rate lock commitments 64 64 — — 64

Forward sale commitments 21 21 — 21 —

Accrued interest receivable 6,241 6,241 6,241 — —

Total $ 1,676,863 $ 1,684,187 $ 64,658 $ 292,497 $ 1,327,032

Non-interest bearing demand $ 450,225 $ 450,225 $ 450,225 $ — $ —

4 unchanged sentences

Subordinated notes 49,486 42,166 — 42,166 —

Interest rate lock commitments 47 47 — — 47

Accrued interest payable 298 298 298 — —

Total $ 1,588,845 $ 1,580,656 $ 1,208,201 $ 119,530 $ 252,925

HAWTHORN BANCSHARES, INC.

3 unchanged sentences

Fair Value Measurements

Quoted Prices

December 31, 2020

(in thousands)

December 31, 2021 Quoted Prices in Active Markets for Identical Assets Other Observable Inputs Net Significant Unobservable Inputs

(in thousands) Carrying amount Fair value (Level 1) (Level 2) (Level 3)

Cash and due from banks $ 17,287 $ 17,287 $ 17,287 $ — $ —

3 unchanged sentences

Other investment securities 5,408 5,408 60 5,348 —

Loans, net 1,285,230 1,308,539 — — 1,308,539

Loans held for sale 2,249 2,249 — 2,249 —

Cash surrender value - life insurance 2,509 2,509 — 2,509 —

Interest rate lock commitments 312 312 — — 312

Forward sale commitments 12 12 — 12 —

Accrued interest receivable 6,621 6,621 6,621 — —

Total $ 1,778,313 $ 1,801,622 $ 175,700 $ 317,071 $ 1,308,851

Non-interest bearing demand $ 453,066 $ 453,066 $ 453,066 $ — $ —

4 unchanged sentences

Subordinated notes 49,486 42,908 — 42,908 —

Interest rate lock commitments 26 26 — — 26

Accrued interest payable 282 282 282 — —

Total $ 1,667,861 $ 1,662,646 $ 1,295,535 $ 121,060 $ 246,051

Off-Balance Sheet Financial Instruments

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The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets.

At September 30, 2021, no amounts have been accrued for any estimated losses for these financial instruments.

At March 31, 2022, no amounts have been accrued for any estimated losses for these financial instruments.

The contractual amount of off-balance-sheet financial instruments were as follows as of the dates indicated:

September 30,

(in thousands)

(in thousands) March 31, 2022 December 31, 2021

Commitments to extend credit $ 398,543 $ 396,958

Commitments to originate residential first and second mortgage loans

Interest rate lock commitments 14,684 16,161

Forward sale commitments 909 2,199

Standby letters of credit 4,329 35,514

Total $ 418,465 $ 450,832

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

4 unchanged sentences

Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.

The Company has two types of commitments related to mortgage loans held for sale:

interest rate lock commitments and forward loan sale commitments.

Interest rate lock commitments are commitments to extend credit to a customer that has an interest rate lock and are considered derivative instruments.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party.

These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers.

The approximate remaining term of standby letters of credit range from one month to five years at September 30, 2021.

The approximate remaining term of standby letters of credit range from one month to five years at March 31, 2022.

Pending Litigation

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements