What changed in this filing

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Item 1. Financial Statements

2023-05-15 compared with 2022-11-10 · 385 added, 326 removed, 767 unchanged (48% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

(In thousands, except per share data) September 30, 2022 December 31, 2021

(In thousands, except per share data) March 31, 2023 December 31, 2022

Cash and due from banks $ 18,301 $ 18,661

7 unchanged sentences

Loans held for investment 1,542,074 1,521,252

Allowance for loan losses ( 15,505 ) ( 16,903 )

Allowance for credit losses (1) ( 21,979 ) ( 15,588 )

Net loans 1,520,095 1,505,664

18 unchanged sentences

Accrued interest payable 1,602 902

Liability for unfunded commitments (1) 1,302 —

Other liabilities 7,498 8,942

2 unchanged sentences

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

issued 7,284,151 and 7,023,821 shares, respectively

issued 7,284,151 shares, respectively

Surplus 71,042 71,042

Retained earnings 88,329 91,789

Accumulated other comprehensive (loss) income, net of tax ( 40,145 ) 3,293

Accumulated other comprehensive loss, net of tax ( 27,313 ) ( 31,714 )

Treasury stock;

515,570 , and 406,846 shares, at cost, respectively

515,570 shares, at cost, respectively

( 10,990 ) ( 10,990 )

1 unchanged sentence

Total liabilities and stockholders’ equity $ 1,895,821 $ 1,923,540

(1) March 31, 2023 amounts include the impacts of the January 1, 2023 adoption of ASU 2013-13.

See Note 2 for details.

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

2 unchanged sentences

Consolidated Statements of Income (unaudited)

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands, except per share data) 2023 2022

21 unchanged sentences

Net interest income 13,948 14,145

Provision for (release of) loan losses 300 300 ( 1,000 ) 700

Net interest income after provision for (release of) loan losses 14,767 15,080 44,773 42,742

Provision for (release of) credit losses on loans and unfunded commitments (1) 680 ( 2,500 )

Net interest income after provision for (release of) credit losses on loans and unfunded commitments 13,268 16,645

NON-INTEREST INCOME

23 unchanged sentences

Diluted earnings per share $ 0.48 $ 0.97

(1) Prior to adoption of ASU No 2016-13 on January 1, 2023, credit losses were estimated using the incurred loss approach.

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

1 unchanged sentence

AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

Three Months Ended September 30, Nine Months Ended September 30,

Consolidated Statements of Comprehensive Income (Loss) (unaudited)

Three Months Ended March 31,

(In thousands) 2023 2022

Net income $ 3,271 $ 6,609

Other comprehensive (loss) income, net of tax

Other comprehensive income (loss), net of tax

Investment securities available-for-sale:

Change in unrealized losses on investment securities available-for-sale, net of tax ( 12,430 ) ( 2,192 ) ( 43,438 ) ( 3,222 )

Adjustment for gains on sale of investment securities, net of tax — ( 93 ) — ( 95 )

Change in unrealized gains (losses) on investment securities available-for-sale, net of tax 4,513 ( 19,582 )

Defined benefit pension plans:

Amortization of prior service cost included in net periodic pension cost, net of tax — 72 — 217

Total other comprehensive loss ( 12,430 ) ( 2,213 ) ( 43,438 ) ( 3,100 )

Total comprehensive (loss) income $ ( 7,503 ) $ 3,583 $ ( 27,413 ) $ 13,427

Amortization of net gains included in net periodic pension cost, net of tax ( 112 ) —

Total other comprehensive income (loss) 4,401 ( 19,582 )

Total comprehensive income (loss) $ 7,672 $ ( 12,973 )

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

2 unchanged sentences

Consolidated Statements of Stockholders’ Equity (unaudited)

Three Months Ended September 30, 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, June 30, 2022

$ 7,024 $ 71,302 $ 84,437 $ ( 27,715 ) $ ( 10,990 ) $ 124,058

Net income — — 4,927 — — 4,927

Other comprehensive loss — — — ( 12,430 ) — ( 12,430 )

Purchase of treasury stock — — — — — —

Stock dividend 260 ( 260 ) — — — —

Cash dividends declared, common stock ($ 0.17 per share)

— — ( 1,150 ) — — ( 1,150 )

Balance, September 30, 2022

$ 7,284 $ 71,042 $ 88,214 $ ( 40,145 ) $ ( 10,990 ) $ 115,405

Balance, June 30, 2021

$ 6,769 $ 64,692 $ 72,499 $ 641 $ ( 8,098 ) $ 136,503

Net income — — 5,796 — — 5,796

Other comprehensive loss — — — ( 2,213 ) — ( 2,213 )

Stock dividend 255 ( 255 ) — —

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

( 992 ) ( 992 )

Balance, September 30, 2021

$ 7,024 $ 64,437 $ 77,303 $ ( 1,572 ) $ ( 8,098 ) $ 139,094

Nine Months Ended September 30, 2022 and 2021

Three Months Ended March 31, 2023 and 2022

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

1 unchanged sentence

$ 7,284 $ 71,042 $ 91,789 $ ( 31,714 ) $ ( 10,990 ) $ 127,411

Adoption of ASU 2016-13 — — ( 5,581 ) — — ( 5,581 )

Balance, January 01, 2023 7,284 71,042 86,208 ( 31,714 ) ( 10,990 ) 121,830

Net income — — 3,271 — — 3,271

Other comprehensive loss — — — ( 43,438 ) — ( 43,438 )

Purchase of treasury stock — — — — ( 2,892 ) ( 2,892 )

Stock dividend 260 6,605 ( 6,865 ) — — —

Other comprehensive income — — — 4,401 — 4,401

Cash dividends declared, common stock ($ 0.17 per share)

— — ( 1,150 ) — — ( 1,150 )

Balance, September 30, 2022

Balance, March 31, 2023

$ 7,284 $ 71,042 $ 88,329 $ ( 27,313 ) $ ( 10,990 ) $ 128,352

4 unchanged sentences

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

Stock dividend 255 5,130 ( 5,385 ) —

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

— — ( 990 ) — — ( 990 )

Balance, September 30, 2021

Balance, March 31, 2022

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

3 unchanged sentences

Consolidated Statements of Cash Flows (unaudited)

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands) 2023 2022

2 unchanged sentences

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

(Release of) provision for loan losses ( 1,000 ) 700

Provision for (release of) credit losses on loans and unfunded commitments 680 ( 2,500 )

Depreciation expense 540 545

2 unchanged sentences

Investment securities (gains) losses, net ( 8 ) 4

(Gain) losses on sales and dispositions of premises and equipment ( 147 ) 8

Gain on sales and dispositions of premises and equipment ( 132 ) —

Gain on sales and dispositions of other real estate ( 9 ) ( 8 )

(Release of) provision for other real estate owned ( 28 ) 97

Increase in accrued interest receivable ( 427 ) ( 928 )

Decrease in accrued interest receivable 665 380

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

1 unchanged sentence

Decrease in operating lease liabilities ( 79 ) ( 74 )

Increase (decrease) in accrued interest payable 283 ( 529 )

(Decrease) increase in other liabilities ( 4,185 ) 64

Increase in accrued interest payable 700 16

Decrease in other liabilities ( 1,398 ) ( 2,567 )

Origination of mortgage loans held for sale ( 20,910 ) ( 26,935 )

3 unchanged sentences

Cash flows from investing activities:

Purchase of certificates of deposit in other banks ( 245 ) ( 245 )

Proceeds from maturities of certificates of deposit in other banks 739 490

Net (increase) decrease in loans ( 190,215 ) 4,121

Net increase in loans ( 20,903 ) ( 31,812 )

Purchase of available-for-sale debt securities ( 8,505 ) ( 14,581 )

1 unchanged sentence

Proceeds from calls of available-for-sale debt securities 610 2,250

Proceeds from sales of available-for-sale debt securities — 5,420

Purchases of FHLB stock ( 137 ) ( 178 )

5 unchanged sentences

Cash flows from financing activities:

Net increase in demand deposits 45,587 79,134

Net increase (decrease) in interest-bearing transaction accounts 7,235 ( 30,743 )

Net increase (decrease) in time deposits 23,156 ( 20,938 )

Net decrease in demand deposits ( 9,006 ) ( 2,841 )

Net decrease in interest-bearing transaction accounts ( 106,419 ) ( 66,194 )

Net increase in time deposits 91,358 8,358

Net decrease in federal funds purchased and securities sold under agreements to repurchase ( 72 ) ( 18,315 )

3 unchanged sentences

Cash dividends paid - common stock ( 1,150 ) ( 993 )

Net cash provided by (used in) financing activities 47,641 ( 8,211 )

Net cash used in financing activities ( 30,289 ) ( 80,652 )

Net decrease in cash and cash equivalents ( 49,947 ) ( 109,394 )

5 unchanged sentences

Consolidated Statements of Cash Flows (unaudited) continued

Nine Months Ended September 30,

Three Months Ended March 31,

(In thousands) 2023 2022

13 unchanged sentences

Louis, and the greater Kansas City metropolitan area.

The Company is subject to competition from other financial and nonfinancial institutions providing financial products.

The Company is subject to competition from other financial and nonfinancial institutions that provide financial products.

Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with U.S.

generally accepted accounting principles (U.S.

The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with United States (U.S.) generally accepted accounting principles (U.S.

GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X.

2 unchanged sentences

The preparation of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading.

Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the novel coronavirus (COVID-19) pandemic or any resurgence thereof, including its potential effects on the economic environment, the Company's customers and operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic.

Management is required to make estimates and assumptions, including the determination of the allowance for credit losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

Stock Dividend On July 1, 2022, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2022.

The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements other than mentioned below.

Stock Dividend.

On July 1, 2022, the Company paid a special stock dividend of four percent (4%) to shareholders of record at the close of business on June 15, 2022.

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

(2) Loans and Allowance for Loan Losses

Major classifications within the Company’s held for investment loan portfolio at September 30, 2022 and December 31, 2021 is as follows:

(in thousands) September 30, 2022 December 31, 2021

Commercial, financial, and agricultural (a)

$ 248,913 $ 217,214

Recently Adopted Accounting Pronouncements

Trouble Debt Restructurings.

On January 1, 2023, the effective date of the guidance, the Company adopted Accounting Standards Update (ASU) 2022-02, “Financial Instruments - Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures”, on a prospective basis.

ASU 2022-02 eliminated the accounting guidance for troubled debt restructurings (TDRs), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty.

Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan.

For entities that have already adopted ASU 2016-13, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

Effective January 1, 2023, the Company adopted the amendments within ASU 2022-02, using the prospective transition method.

ASU 2022-02 did not have a material impact on the Company's consolidated financial statements.

On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology commonly referred to as the current expected credit losses (CECL) methodology.

The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities.

It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments.

In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities.

The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures.

Results for reporting periods beginning after January 1, 2023 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable U.S.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The Company recorded an after-tax decrease to retained earnings of $ 5.6 million as of January 1, 2023 for the cumulative effect of adopting this standard.

The following table illustrates the impact of adoption of ASU 2016-13:

(in thousands) December 31, 2022 Impact of Adoption January 1, 2023

Allowance for credit losses on loans $ 15,588 $ 5,793 $ 21,381

Deferred tax asset 3,267 1,483 4,750

Liability for unfunded commitments — 1,272 1,272

Shareholders' Equity

Retained Earnings 91,789 ( 5,581 ) 86,208

(2) Loans and Allowance for Credit Losses

Major classifications within the Company’s held for investment loan portfolio at March 31, 2023 and December 31, 2022 were as follows:

(in thousands) March 31, 2023 December 31, 2022

Commercial, financial, and agricultural $ 227,992 $ 244,549

Real estate construction − residential 44,467 32,095

4 unchanged sentences

Total loans held for investment $ 1,542,074 $ 1,521,252

(a) Includes $ 0.6 million and $ 8.4 million of Small Business Administration Paycheck Protection (PPP) loans, net as of September 30, 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.

2 unchanged sentences

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

Installment and other consumer loans consist

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

Accrued interest on loans totaled $ 5.9 million and $ 6.4 million at March 31, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company's Consolidated Balance Sheets.

The total amount of accrued interest is excluded from the amortized cost basis of loans presented above.

Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivable.

At March 31, 2023, loans of $ 598.1 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit.

Allowance for Credit Losses

The allowance for credit losses is measured using an average historical loss model which incorporates relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans.

The allowance for credit losses is measured on a collective (pool) basis.

Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns.

Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis.

The allowance for credit losses is a valuation account that is deducted from loans amortized cost basis to present the net amount expected to be collected on the instrument.

Expected recoveries are included in the allowance and do not exceed the

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

primarily of the financing of automotive vehicles.

At September 30, 2022, loans of $ 636.5 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, 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 $ 3,005 $ 66 $ 762 $ 2,747 $ 8,410 $ 312 $ 51 $ 15,353

Provision for (release of ) loan losses ( 124 ) 5 87 481 ( 414 ) 129 136 300

Loans charged off 46 — — — ( 1 ) 146 — 191

Less recoveries on loans ( 13 ) — — ( 4 ) ( 5 ) ( 21 ) ( 43 )

Net loan charge-offs (recoveries) 33 — — ( 4 ) ( 6 ) 125 — 148

Balance at end of period $ 2,848 $ 71 $ 849 $ 3,232 $ 8,002 $ 316 $ 187 $ 15,505

Three Months Ended September 30, 2021

aggregate of amounts previously charged-off and expected to be charged-off.

Loans are charged off against the allowance for credit losses when management believes the balance has become uncollectible.

For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using relevant peer historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and the Company's outstanding loan balances during a lookback period.

The Company chose to use relevant peer loan loss data due to statistical relevance concerns, low observation counts, historical data limitations, and the inability to secure loans through the cycle loan-level data.

Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life.

The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts.

These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of a single macroeconomic variable, which is the civilian unemployment rate.

The adjustments are based on results from various regression models projecting the impact of the selected macroeconomic variable to loss rates.

The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method.

The forecast adjusted loss rate is applied to the loans over the remaining contractual lives, adjusted for expected prepayments.

The contractual term excludes expected extensions, renewals and modifications.

Credit cards and certain similar consumer lines of credit do not have stated maturities and therefore, for these loan classes, remaining contractual lives are determined by estimating future cash flows expected to be received from customers until payments have been fully allocated to outstanding balances.

Agriculture loans also use the remaining life methodology for estimating life of loan losses.

Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures

The Company maintains a separate allowance for credit losses for off-balance-sheet credit exposures, including unfunded loan commitments, unless the associated obligation is unconditionally cancellable by the Company.

This allowance is included in other liabilities on the consolidated balance sheets with associated expense recognized as a component of the provision for credit losses on the consolidated statements of income.

The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded.

Sensitivity in the Allowance for Credit Loss Model

The allowance for credit losses is an estimate that requires significant judgment, including projections of the macroeconomic environment.

The forecasted macroeconomic environment continuously changes, which can cause fluctuations in estimated expected losses.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

Three Months Ended March 31, 2023

Balance at beginning of period $ 2,735 $ 157 $ 875 $ 3,329 $ 8,000 $ 326 $ 166 $ 15,588

Provision for (release of ) loan losses ( 609 ) ( 16 ) ( 70 ) 216 780 59 ( 60 ) 300

Adoption of ASU 2016-13 ( 649 ) 291 2,894 1,890 1,613 ( 80 ) ( 166 ) 5,793

Balance at January 1, 2023 2,086 448 3,769 5,219 9,613 246 — 21,381

Provision for (release of ) credit losses (1) ( 144 ) 183 695 41 ( 123 ) 6 ( 8 ) 650

Loans charged off 30 — — — 5 58 — 93

2 unchanged sentences

Balance at end of period $ 1,921 $ 631 $ 4,464 $ 5,262 $ 9,487 $ 222 $ ( 8 ) $ 21,979

Nine Months Ended September 30, 2022

Liability for Unfunded Commitments

Balance at beginning of period $ — $ — $ — $ — $ — $ — $ — $ —

Provision for (release of ) loan losses 188 ( 66 ) 261 723 ( 2,491 ) 259 126 ( 1,000 )

Loans charged off 106 — — — 178 262 — 546

Less recoveries on loans ( 49 ) — — ( 27 ) ( 9 ) ( 63 ) — ( 148 )

Net loan charge-offs (recoveries) 57 — — ( 27 ) 169 199 — 398

Adoption of ASU 2016-13 104 341 569 107 150 1 — 1,272

Balance at January 1, 2023 104 341 569 107 150 1 — 1,272

Provision for credit losses on unfunded commitments 20 48 ( 7 ) 3 ( 8 ) — ( 26 ) 30

Balance at end of period $ 124 $ 389 $ 562 $ 110 $ 142 $ 1 $ ( 26 ) $ 1,302

Nine Months Ended September 30, 2021

Allowance for credit losses on loans and liability for unfunded commitments $ 2,045 $ 1,020 $ 5,026 $ 5,372 $ 9,629 $ 223 $ ( 34 ) $ 23,281

Three Months Ended March 31, 2022

5 unchanged sentences

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed.

Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance.

If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired.

These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below.

Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration.

These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes.

The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss.

Management's look-back period began with loss history in the first quarter 2012 as the starting point through the current quarter and it will continue to include this starting point going forward.

The look-back period will continue to be evaluated and will be adjusted once a sustained loss producing downturn is recognized and found to be representative of historical losses expected for the current portfolio.

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

The 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.

Because 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 September 30, 2022, the net balance of the PPP loans totaled $ 0.6 million.

All SBA PPP loans have a 1 % interest rate and the Company earns a fee 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 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.

Interest is accrued as earned and loan origination fees and direct costs are deferred and accreted or amortized into interest income, as an adjustment to the yield, over the life of the loan using the level yield method.

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.

(1) Beginning January 1, 2023, calculation is based on CECL methodology.

Prior to January 1, 2023, calculation was based on probable incurred loss methodology.

On January 1, 2023, the Company's adoption of the CECL methodology resulted in an increase to the allowance for credit losses of $ 5.8 million and a liability for unfunded commitments totaling $ 1.3 million.

Under the CECL methodology, the Company recorded a $ 0.7 million provision for credit losses in the first quarter of 2023 compared to a $ 2.5 million release of provision for loan losses in the first quarter of 2022 under the incurred-loss method.

Collateral-Dependent loans

Collateral-dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty.

Under the CECL methodology, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance on the fair value of collateral.

The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and the loan’s amortized cost.

If the fair value of the collateral exceeds the loan’s amortized cost, no allowance is necessary.

The Company’s policy is to obtain appraisals on any significant pieces of collateral.

Higher discounts are applied in determining fair value for real estate collateral in industries that are undergoing significant stress, or for properties that are specialized use or have limited marketability.

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

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

(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

September 30, 2022

Allowance for loan losses:

Individually evaluated for impairment $ 43 $ — $ 11 $ 190 $ 57 $ 1 $ — $ 302

Collectively evaluated for impairment 2,805 71 838 3,042 7,945 315 187 15,203

Total $ 2,848 $ 71 $ 849 $ 3,232 $ 8,002 $ 316 $ 187 $ 15,505

Loans outstanding:

Individually evaluated for impairment $ 350 $ — $ 91 $ 2,181 $ 16,308 $ 6 $ — $ 18,936

Collectively evaluated for impairment 248,563 25,243 133,095 341,480 700,884 23,796 — 1,473,061

There have been no significant changes to the types of collateral securing the Company's collateral-dependent loans since December 31, 2022.

The amortized cost of collateral-dependent loans by class as of March 31, 2023 was as follows:

Collateral Type

(in thousands) Real Estate Other Allowance Allocated

March 31, 2023

Commercial, financial, and agricultural $ — $ 50 $ —

Real estate mortgage − residential 149 — 63

Real estate mortgage − commercial 18,228 — —

Total $ 18,377 $ 50 $ 63

Impaired Loans

The following impaired loans disclosures were superseded by ASU 2016-13.

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

December 31, 2022

7 unchanged sentences

Total $ 244,549 $ 32,095 $ 137,235 $ 361,025 $ 722,729 $ 23,619 $ — $ 1,521,252

Impaired Loans

Loans evaluated under Accounting Standards Codification (ASC) 310-10-35 include loans which are individually evaluated for impairment.

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

Impaired loans individually evaluated for impairment totaled $ 18.9 million and $ 27.3 million at September 30, 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, 2022, $ 15.9 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, 2022, $ 0.3 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $ 18.9 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 $ 15.9 million, or 84 %, of total impaired loans required no reserve allocation at September 30, 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.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The categories of impaired loans at September 30, 2022 and December 31, 2021 are as follows:

(in thousands) September 30, 2022 December 31, 2021

Impaired loans individually evaluated for impairment totaled $ 20.4 million at December 31, 2022, and were comprised of loans on non-accrual status and loans classified as TDRs.

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

At December 31, 2022, $ 17.7 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans' collateral.

The categories of impaired loans at December 31, 2022 were as follows:

(in thousands) December 31, 2022

Non-accrual loans $ 18,700

1 unchanged sentence

Total impaired loans $ 20,361

The following tables provide additional information about impaired loans at September 30, 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

September 30, 2022

With no related allowance recorded:

Real estate mortgage − commercial $ 15,898 $ 16,949 $ —

Total $ 15,898 $ 16,949 $ —

With an allowance recorded:

Commercial, financial and agricultural $ 350 $ 384 $ 43

Real estate construction − commercial 91 130 11

Real estate mortgage − residential 2,181 2,686 190

Real estate mortgage − commercial 410 496 57

Installment and other consumer 6 6 1

Total $ 3,038 $ 3,702 $ 302

Total impaired loans $ 18,936 $ 20,651 $ 302

(in thousands) Recorded Investment Unpaid Principal Balance Specific Reserves

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The following tables presents loans individually evaluated for impairment at December 31, 2022, segregated between loans for which an allowance was provided and loans for which no allowance was provided.

(in thousands) Recorded Investment Unpaid Principal Balance Specific Reserves Average Recorded Investment

December 31, 2022

11 unchanged sentences

Total impaired loans $ 20,361 $ 22,053 $ 258 $ 19,350

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment.

• Pass - loans which are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell in a timely manner, of any underlying collateral.

• Watch - loans which have one or more weaknesses identified that may result in the borrower being unable to meet repayment terms or when the Company’s credit position could deteriorate at some future date.

• Substandard - loans that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

Loans so classified may have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.

Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.

• Doubtful - loans which have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions, and values.

In the following tables, consumer loans are generally assigned a risk grade similar to the classifications described above;

however, upon reaching 90 days and 120 days past due, they are generally downgraded to non-accrual status, in accordance with the Federal Financial Institutions Examination Counsel's Retail Credit Classification Policy.

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

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,

2022 2021 2022 2021

(in thousands) Average Recorded Investment Interest Recognized For the Period Ended Average Recorded Investment Interest Recognized For the Period Ended 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 $ — $ — $ 1,517 $ 18 $ — $ — $ 1,703 $ 31

Real estate mortgage − residential — — 1,131 — 4 1 1,238 21

Real estate mortgage − commercial 15,937 — 9,376 — 15,752 — 9,411 —

The following table presents the recorded investment by risk categories at March 31, 2023:

Amortized Cost Basis by Origination Year and Risk Grades

(in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total

March 31, 2023

Commercial, Financial, & Agricultural

Pass $ 19,920 $ 58,909 $ 38,221 $ 34,975 $ 5,761 $ 6,911 $ 49,034 $ 220 $ 213,951

Watch — 2,744 82 724 123 348 3,567 — 7,588

Substandard 386 3,957 58 22 — — 1,864 — 6,287

Non-accrual (1) — 50 — — 21 95 — — 166

Total $ 20,306 $ 65,660 $ 38,361 $ 35,721 $ 5,905 $ 7,354 $ 54,465 $ 220 $ 227,992

With an allowance recorded:

Commercial, financial and agricultural $ 322 $ 3 $ 5,295 $ 5 $ 328 $ 8 $ 5,409 $ 19

Real Estate Construction - Residential

Pass $ 12,681 $ 28,902 $ 965 $ 760 $ 444 $ — $ 340 $ — $ 44,092

Watch 375 — — — — — — — 375

Substandard — — — — — — — — —

Non-accrual (1) — — — — — — — — —

Total $ 13,056 $ 28,902 $ 965 $ 760 $ 444 $ — $ 340 $ — $ 44,467

Real Estate Construction - Commercial

Pass $ 12,835 $ 64,556 $ 72,260 $ 1,922 $ 73 $ 1,185 $ 1,498 $ — $ 154,329

Watch 744 1,660 241 — — 14 103 — 2,762

Substandard 686 — — — — — — — 686

Non-accrual (1) — — — — — 83 — — 83

Total $ 14,265 $ 66,216 $ 72,501 $ 1,922 $ 73 $ 1,282 $ 1,601 $ — $ 157,860

Real Estate Mortgage - Residential

Pass $ 15,427 $ 141,707 $ 66,939 $ 52,760 $ 7,517 $ 30,034 $ 43,232 $ — $ 357,616

Watch — 212 425 1,294 137 2,292 224 — 4,584

Substandard — — — — — 520 — — 520

Non-accrual (1) — 56 — 241 — 357 260 — 914

Total $ 15,427 $ 141,975 $ 67,364 $ 54,295 $ 7,654 $ 33,203 $ 43,716 $ — $ 363,634

Real Estate Mortgage - Commercial

Pass $ 36,871 $ 234,139 $ 194,254 $ 96,532 $ 29,834 $ 53,122 $ 12,725 $ 501 $ 657,978

Watch 85 13,298 12,854 16,706 1,113 1,650 287 — 45,993

Substandard — 225 2,674 — 46 302 — — 3,247

Non-accrual (1) 1,789 2,775 13,522 233 — 36 — — 18,355

Total $ 38,745 $ 250,437 $ 223,304 $ 113,471 $ 30,993 $ 55,110 $ 13,012 $ 501 $ 725,573

Installment and other Consumer

Pass $ 2,116 $ 9,284 $ 4,512 $ 2,439 $ 1,709 $ 592 $ 1,816 $ — $ 22,468

Watch — — — — — — — — —

Substandard — — — — — — — — —

Non-accrual (1) — 76 4 — — — — — 80

Total $ 2,116 $ 9,360 $ 4,516 $ 2,439 $ 1,709 $ 592 $ 1,816 $ — $ 22,548

Total impaired loans $ 19,042 $ 24 $ 35,298 $ 46 $ 19,016 $ 77 $ 35,828 $ 121

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

The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to TDRs, was $ 24 ,000 and $ 77 ,000 for the three and nine months ended September 30, 2022, respectively, compared to $ 46 ,000 and $ 121 ,000 for the three and nine months ended September 30, 2021, respectively.

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

Total Portfolio

Pass $ 99,850 $ 537,497 $ 377,151 $ 189,388 $ 45,338 $ 91,844 $ 108,645 $ 721 $ 1,450,434

Watch 1,204 17,914 13,602 18,724 1,373 4,304 4,181 — 61,302

Substandard 1,072 4,182 2,732 22 46 822 1,864 — 10,740

Non-accrual (1) 1,789 2,957 13,526 474 21 571 260 — 19,598

Total $ 103,915 $ 562,550 $ 407,011 $ 208,608 $ 46,778 $ 97,541 $ 114,950 $ 721 $ 1,542,074

(1) The majority of non-accrual loans have a substandard risk grade

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

The following table presents the risk categories by class at December 31, 2022 ( superseded by ASU 2016-13)

(in thousands) Commercial,

Agricultural Real Estate

Construction -

Residential Real Estate

Construction -

Commercial Real Estate

Residential Real Estate

Commercial Installment

Consumer Total

At December 31, 2022

Pass $ 229,949 $ 32,095 $ 133,785 $ 353,121 $ 653,552 $ 23,613 $ 1,426,115

Watch 7,411 — 2,677 5,541 48,041 — 63,670

Substandard 6,894 — 686 500 3,026 — 11,106

Performing TDRs (1) 174 — — 1,178 309 — 1,661

Non-accrual loans (1) 121 — 87 685 17,801 6 18,700

Total $ 244,549 $ 32,095 $ 137,235 $ 361,025 $ 722,729 $ 23,619 $ 1,521,252

(1) The majority of non-accrual and performing TDRs loans have a substandard risk grade

Delinquent and Non-Accrual Loans

2 unchanged sentences

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

In general, loans are placed on non-accrual when they become 90 days or more past due.

In general, loans are placed on non-accrual status when they become 90 days or more past due.

However, management considers many factors before placing a loan on non-accrual status, including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral.

2 unchanged sentences

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 tables present the recorded investment in non-accrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2023 and December 31, 2022:

(in thousands) Non-accrual with no Allowance Non-accrual with Allowance Total Non-accrual (1) 90 Days Past Due And Still Accruing Total Non-performing Loans

March 31, 2023

Commercial, Financial, and Agricultural $ 50 $ 116 $ 166 $ — $ 166

Real estate construction − commercial — 83 83 — 83

Real estate mortgage − residential — 914 914 — 914

Real estate mortgage − commercial 18,226 129 18,355 — 18,355

Installment and Other Consumer — 80 80 1 81

Total $ 18,276 $ 1,322 $ 19,598 $ 1 $ 19,599

December 31, 2022

Commercial, Financial, and Agricultural $ — $ 121 $ 121 $ — $ 121

Real estate construction − commercial — 87 87 — 87

Real estate mortgage − residential — 685 685 — 685

Real estate mortgage − commercial 17,664 137 17,801 — 17,801

Installment and Other Consumer — 6 6 1 7

Total $ 17,664 $ 1,036 $ 18,700 $ 1 $ 18,701

(1) Includes $ 0.3 million of restructured loans as of both March 31, 2023 and December 31, 2022.

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

The following table provides aging information for the Company’s past due and non-accrual loans at September 30, 2022 and December 31, 2021.

No material amount of interest income was recognized on non-accrual loans during the three months ended March 31, 2023.

The following table provides aging information for the Company’s past due and non-accrual loans at March 31, 2023 and December 31, 2022:

(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

September 30, 2022

March 31, 2023

Commercial, Financial, and Agricultural $ 227,824 $ 2 $ — $ 166 $ 227,992

13 unchanged sentences

Total $ 1,501,738 $ 813 $ 1 $ 18,700 $ 1,521,252

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment.

Loans are placed on watch status when one or more weaknesses are identified that may result in the borrower being unable to meet repayment terms or when the Company’s credit position could deteriorate at some future date.

Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.

Loans so classified may have a well-defined weakness or weaknesses that jeopardize the repayment of the debt.

Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.

A loan is classified as a TDR when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider.

Loans classified as TDRs 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 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.

Loan Modifications for Borrowers Experiencing Financial Difficulty Subsequent to the Adoption of ASU 2022-02

In the normal course of business, the Company may execute loan modifications with borrowers.

These modifications are analyzed to determine whether the modification is considered concessionary, long-term and made to a borrower experiencing financial difficulty.

The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions.

If a loan modification is determined to be made to a borrower experiencing financial difficulty, the loan is considered collateral-dependent and evaluated as part of the allowance for credit losses as described above in the Allowance for Credit Losses section of this note.

For the three months ended March 31, 2023, the Company did not modify any loans made to borrowers experiencing financial difficulty.

The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default.

Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term.

For the three-month period ended March 31, 2023, the Company did not modify any loans made to borrowers experiencing financial difficulty.

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

The following table presents the risk categories by class at September 30, 2022 and December 31, 2021.

At September 30, 2022

Watch $ 8,035 $ — $ 2,269 $ 6,447 $ 47,953 $ — $ 64,704

Substandard 7,064 — 3,358 513 2,130 — 13,065

Performing TDRs 177 — — 1,098 313 — 1,588

Non-accrual loans 173 — 91 1,083 15,995 6 17,348

Total $ 15,449 $ — $ 5,718 $ 9,141 $ 66,391 $ 6 $ 96,705

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

The following table presents information regarding modifications to borrowers experiencing financial difficulty as of March 31, 2023:

March 31, 2023

(Dollars in thousands) Number of contracts Recorded Investment % to Total Loans

Commercial, financial and agricultural 2 $ 171 0.01 %

Real estate mortgage − residential

9 1,336 0.09 %

Real estate mortgage − commercial

Total 14 $ 1,834 0.12 %

Troubled Debt Restructurings

At September 30, 2022, loans classified as TDRs totaled $ 1.9 million, of which $ 0.3 million were classified as non-performing TDRs and $ 1.6 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.

Troubled Debt Restructurings (TDRs) Prior to Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR.

See “Note 1 Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for more information on our TDR policy, and “Note 1, Summary of Significant Accounting Policies” in this report for more information on the adoption of ASU 2022-02.

At March 31, 2022, loans classified as TDRs totaled $ 2.2 million, of which $ 0.5 million were classified as non-performing TDRs and $ 1.7 million were classified as performing TDRs.

Both performing and non-performing TDRs are considered impaired loans.

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

Accordingly, specific reserves of $ 171 ,000 and $ 159 ,000 related to TDRs were allocated to the allowance for loan losses at September 30, 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 was one loan meeting the TDR criteria that was modified during the three and nine months ended September 30, 2022, respectively, compared to no loans during the three and nine months ended September 30, 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 the three and nine months ended September 30, 2022 and 2021, respectively, and within twelve months of their modification date.

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

For the three months ended March 31, 2022, the Company had no new TDRs.

For the three months ended March 31, 2022, the Company had no TDRs for which there was a payment default within the 12 months following the restructure date.

Loans Held for Sale

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.

These loans are initially measured at fair value under the fair value option election with subsequent changes in fair value recognized in mortgage banking income.

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

At September 30, 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

At March 31, 2023, the carrying amount of these loans was $ 1.8 million compared to $ 0.6 million at December 31, 2022.

(3) Other Real Estate and Other Assets Acquired in Settlement of Loans

September 30, December 31,

March 31, December 31,

(in thousands) 2023 2022

Commercial $ — $ 643

Real estate construction - commercial $ 10,094 $ 10,094

1 unchanged sentence

Real estate mortgage - commercial 707 1,186

Repossessed assets 55 —

Total $ 10,911 $ 11,459

2 unchanged sentences

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

Three Months Ended September 30, Nine Months Ended September 30,

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Three Months Ended March 31,

(in thousands) 2023 2022

2 unchanged sentences

Proceeds from sales ( 557 ) ( 723 )

Charge-offs against the valuation allowance for other real estate owned, net — ( 470 ) ( 219 ) ( 554 )

Net gain on sales 9 8

2 unchanged sentences

Balance at end of period $ 8,247 $ 9,758

At September 30, 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.

At March 31, 2023, $ 0.1 million of consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to no such consumer mortgage loans at December 31, 2022.

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) 2023 2022

7 unchanged sentences

(4) Investment Securities

The amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2022 and December 31, 2021 were as follows:

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2023 and December 31, 2022 were as follows:

Gross Unrealized

(in thousands) Total Amortized Cost Gains Losses Fair Value

September 30, 2022

March 31, 2023

Treasury $ 5,125 $ 13 $ ( 34 ) $ 5,104

17 unchanged sentences

The Company’s investment securities are classified as available for sale.

Agency bonds and notes, SBA guaranteed loan certificates, residential and commercial agency mortgage-backed securities, and agency collateralized mortgage obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S.

government agency, and the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Federal Home Loan Bank (FHLB), which are U.S.

Agency bonds and notes, loan certificates guaranteed by the Small Business Administration, residential and commercial agency mortgage-backed securities, and agency collateralized mortgage obligations include securities issued by the Government National Mortgage Association, a U.S.

government agency, and the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the FHLB, which are U.S.

government-sponsored enterprises.

Debt securities with carrying values aggregating approximately $ 169.0 million and $ 275.4 million at September 30, 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.

Debt securities with carrying values aggregating approximately $ 205.3 million and $ 111.6 million at March 31, 2023 and December 31, 2022, 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, 2022, by contractual maturity are shown below.

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, 2023, by contractual maturity, are shown below.

Accrued interest on investments totaled $ 1.4 million and $ 1.5 million at March 31, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company's Consolidated Balance Sheets.

The total amount of accrued interest is excluded from the amortized cost basis of investments presented below.

Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivable.

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

9 unchanged sentences

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.

(in thousands) September 30, 2022 December 31, 2021

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

(in thousands) March 31, 2023 December 31, 2022

Other securities:

6 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, 2022 and December 31, 2021 were as follows:

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, 2023 and December 31, 2022 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

September 30, 2022

March 31, 2023

Treasury $ 468 $ ( 3 ) $ 1,391 $ ( 31 ) $ 1,859 $ ( 34 )

9 unchanged sentences

Treasury $ 1,908 $ ( 41 ) $ 244 $ ( 5 ) $ 2,152 $ ( 46 )

government and federal agency obligations 559 ( 32 ) — — 559 ( 32 )

government-sponsored enterprises 7,066 ( 933 ) 16,711 ( 1,789 ) 23,777 ( 2,722 )

4 unchanged sentences

Total $ 129,820 $ ( 19,994 ) $ 119,799 $ ( 26,415 ) $ 249,619 $ ( 46,409 )

The total available-for-sale portfolio consisted of approximately 444 securities at September 30, 2022.

The portfolio included 438 securities having an aggregate fair value of $ 244.6 million that were in a loss position at September 30, 2022.

Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 74.6 million at fair value at September 30, 2022.

The $ 54.5 million aggregate unrealized loss included in accumulated other comprehensive loss at September 30, 2022 was caused by interest rate fluctuations.

The total available-for-sale portfolio consisted of approximately 444 securities at March 31, 2023.

The portfolio included 426 securities having an aggregate fair value of $ 247.9 million that were in a loss position at March 31, 2023.

Securities identified as which had been in a loss position for 12 months or longer totaled $ 231.5 million at fair value at March 31, 2023.

The $ 40.8 million aggregate unrealized loss included in accumulated other comprehensive loss at March 31, 2023 was caused by interest rate fluctuations.

As of March 31, 2023, there was no allowance for credit loss related to the Company's available-for-sale securities as the decline in fair value did not result from credit issues.

The total available-for-sale portfolio consisted of approximately 439 securities at December 31, 2022.

2 unchanged sentences

The $ 46.4 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2022 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, 2022 and December 31, 2021, respectively.

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 and December 31, 2022.

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.

3 unchanged sentences

Notes to the Consolidated Financial Statements

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 for the periods indicated:

Three Months Ended June 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

9 unchanged sentences

Mortgage Servicing Rights

At September 30, 2022, the Company was servicing approximately $ 247.6 million of loans sold to the secondary market compared to $ 270.0 million at December 31, 2021, and $ 277.1 million at September 30, 2021.

Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $ 0.2 million and $ 0.7 million for the three and nine months ended September 30, 2022, respectively, compared to $ 0.2 million and $ 0.6 million for the three and nine months ended September 30, 2021, respectively.

At March 31, 2023, the Company was servicing approximately $ 235.2 million of loans sold to the secondary market compared to $ 240.5 million at December 31, 2022, and $ 261.5 million at March 31, 2022.

Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $ 0.2 million for the three months ended March 31, 2023 compared to $ 0.3 million for the three months ended March 31, 2022.

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) 2023 2022

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.

The following key data and assumptions were used in estimating the fair value of the Company’s MSRs as of September 30, 2022 and 2021, 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, 2023 and 2022, respectively:

Three Months Ended March 31,

Weighted average constant prepayment rate 6.51 % 9.40 %

6 unchanged sentences

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) September 30, 2022 December 31, 2021

(aggregate amounts in thousands) March 31, 2023 December 31, 2022

Time deposits with balances > $250,000 $ 175,251 $ 94,859

1 unchanged sentence

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

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Federal funds purchased $ — $ —

9 unchanged sentences

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

September 30, 2022

March 31, 2023

government-sponsored enterprises $ 5,115 $ — $ — $ 5,115

2 unchanged sentences

government-sponsored enterprises $ 5,187 $ — $ — $ 5,187

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

Total $ 5,187 $ — $ — $ 5,187

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, 2022, operating right of use (ROU) assets and liabilities were $ 1.6 million and $ 1.6 million, respectively.

As of September 30, 2022, the weighted-average remaining lease term on these operating leases is approximately 5.9 years and the weighted-average discount rate used to measure the lease liabilities was approximately 4.0 %.

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

As of March 31, 2023, operating right of use (ROU) assets and liabilities were $ 1.4 million and $ 1.5 million, respectively.

As of March 31, 2023, the weighted-average remaining lease term on these operating leases was approximately 5.6 years and the weighted-average discount rate used to measure the lease liabilities was approximately 4.0 %.

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

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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 $ 280,000 for the three and nine months ended September 30, 2022, respectively, compared to $ 93,000 and $ 289,000 for the three and nine months ended September 30, 2021, respectively.

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.

Lease components include fixed payments including rent, real estate taxes and insurance costs and non-lease components include common-area maintenance costs.

The operating lease cost was $ 93,000 for the three months ended March 31, 2023 compared to $ 94,000 for the three months ended March 31, 2022.

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

Lease components include fixed payments, such as rent, real estate taxes and insurance costs and non-lease components include common-area maintenance costs.

Leases with an initial term of 12 months or less are not recorded on the balance sheet;

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

Operating lease expense for these leases was $ 21,000 and $ 65,000 for the three and nine months ended September 30, 2022, respectively, compared to $ 24,000 and $ 56,000 for the three and nine months ended September 30, 2021, respectively.

Operating lease expense for these leases was $ 28,000 for the three months ended March 31, 2023 compared to $ 24,000 for the three months ended March 31, 2022.

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

2 unchanged sentences

(in thousands)

2022 (excluding 9 months ended September 30, 2022)

2023 (excluding 3 months ended March 31, 2023)

Thereafter 309

3 unchanged sentences

(9) Income Taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 18.7 % and 18.5 % for the three and nine months ended September 30, 2022, respectively, compared to 19.6 % and 19.4 % for the three and nine months ended September 30, 2021, respectively.

The decrease in the effective tax rate for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 was primarily attributable to the decrease in earnings and the benefit recorded pertaining to the historical tax credit.

The decrease in the effective tax rate for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was primarily attributable to the decrease in earnings and the benefit recorded pertaining to the historical tax credit.

The effective tax rate for each of the three and nine months ended September 30, 2022 and 2021, 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 17.8 % for the three months ended March 31, 2023 compared to 18.8 % for the three months ended March 31, 2022.

The effective tax rate for each of the three months ended March 31, 2023 and 2022, respectively, is lower than the U.S.

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

Included in the effective tax rate is a $ 13,000 and $ 40,000 benefit associated with a historic tax credit investment for the three and nine months ended September 30, 2022, respectively.

The investment is expected to generate a $ 331,000 tax benefit over the life of the project and is being recognized under the deferral method of accounting.

Included in the effective tax rate is a $ 13,000 benefit associated with a historic tax credit investment for the three months ended March 31, 2023.

The investment is expected to generate a $ 0.3 million 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, 2022.

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 months ended March 31, 2023 and 2022, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

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

For each of the nine months ended September 30, 2022 and 2021, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

(10) Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss)

The following table summarizes the change in the components of the Company’s accumulated other comprehensive income (loss) for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30, 2022

The following table summarizes the change in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, 2023 and 2022:

Three Months Ended March 31, 2023

(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 $ ( 36,657 ) $ 4,943 $ ( 31,714 )

Other comprehensive loss, before reclassifications ( 54,985 ) — ( 54,985 )

Other comprehensive income (loss), before reclassifications 5,713 ( 142 ) 5,571

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

Current period other comprehensive loss, before tax ( 54,985 ) — ( 54,985 )

Income tax benefit 11,547 — 11,547

Current period other comprehensive loss, net of tax ( 43,438 ) — ( 43,438 )

Current period other comprehensive income (loss), before tax 5,713 ( 142 ) 5,571

Income tax (expense) benefit ( 1,200 ) 30 ( 1,170 )

Current period other comprehensive income (loss), net of tax 4,513 ( 112 ) 4,401

Balance at end of period $ ( 32,144 ) $ 4,831 $ ( 27,313 )

Nine Months Ended September 30, 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 (loss) income, before reclassifications ( 4,105 ) 275 ( 3,830 )

Amounts reclassified from accumulated other comprehensive (loss) income ( 95 ) — ( 95 )

Current period other comprehensive (loss) income, before tax ( 4,200 ) 275 ( 3,925 )

Income tax benefit (expense) 883 ( 58 ) 825

Current period other comprehensive (loss) income, net of tax ( 3,317 ) 217 ( 3,100 )

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

Amounts reclassified from accumulated other comprehensive loss — — —

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 )

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) 2023 2022

3 unchanged sentences

Periodic pension cost 283 437

Other 20 3 32 10

Total employee benefits $ 1,519 $ 1,730

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

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

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

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.

1 unchanged sentence

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 $ 1.6 million as of September 30, 2022, and the expense for the three and nine months ended September 30, 2022 was $ 93,000 and $ 279,000 , respectively, compared to $ 97,000 and 290,000 , for the three and nine months ended September 30, 2021, respectively, and is recognized over the required service period.

The accrued liability relating to the SERP was $ 1.7 million as of March 31, 2023, and the expense was $ 93,000 for both the three months ended March 31, 2023 and 2022 and was recognized over the required service period.

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

4 unchanged sentences

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 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.

1 unchanged sentence

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

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022

4 unchanged sentences

Amortization of prior service cost (a) — —

Amortization of unrecognized net loss (a) — 92 — 275

Amortization of unrecognized net gain (a) ( 142 ) —

Net periodic pension cost $ ( 39 ) $ 175

3 unchanged sentences

Differences between expected and actual results in each year are included in the net actuarial gain or loss amount, which is recognized in other comprehensive income.

The net actuarial gain or loss in

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 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

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 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

4 unchanged sentences

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 for the periods indicated, which have been restated to reflect all stock dividends:

Three Months Ended September 30, Nine Months Ended September 30,

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 March 31,

(dollars in thousands, except per share data) 2023 2022

4 unchanged sentences

Diluted earnings per share $ 0.48 $ 0.97

Net income available to shareholders $ 4,927 $ 5,796 $ 16,025 $ 16,527

Average shares outstanding 6,768,581 6,877,305 6,800,309 6,877,435

Diluted earnings per share $ 0.73 0.84 $ 2.36 $ 2.40

Repurchase Program

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 108,724 common shares under the plan during the nine months ended September 30, 2022, at an average cost of $ 26.60 per share totaling $ 2.9 million.

As of September 30, 2022, $ 2.1 million remained available for share repurchases pursuant to the plan.

Pursuant to the Company's 2019 Repurchase Plan, management is 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 did not repurchase any shares during the current quarter.

As of March 31, 2023, $ 2.1 million remained available for share repurchases pursuant to the plan.

(13) Fair Value Measurements

5 unchanged sentences

The fair value hierarchy is as follows:

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

6 unchanged sentences

In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the Consolidated Financial Statements.

Nonfinancial assets measured at fair value on a non-recurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred.

Nonfinancial assets measured at fair value on a non-recurring basis would include foreclosed real estate,

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred.

Valuation Methods for Assets and Liabilities Measured at Fair Value on a Recurring Basis

3 unchanged sentences

Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

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

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

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.

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.

10 unchanged sentences

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Mortgage Servicing Rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors.

Mortgage Servicing Rights (MSRs)

The fair value of MSRs is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors.

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

1 unchanged sentence

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

The Company classifies its servicing rights as Level 3.

The Company classifies its MSRs as Level 3.

HAWTHORN BANCSHARES, INC.

3 unchanged sentences

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

September 30, 2022

March 31, 2023

Treasury $ 5,104 $ 5,104 $ — $ —

12 unchanged sentences

Interest rate lock commitments $ 1 $ — $ — $ 1

Forward sale commitments 10 — 10 —

Total $ 11 $ — $ 10 $ 1

14 unchanged sentences

Interest rate lock commitments $ 18 $ — $ — $ 18

Forward sale commitments 3 — 3 —

Total $ 21 $ — $ 3 $ 18

2 unchanged sentences

Notes to the Consolidated Financial Statements

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

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

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Mortgage Servicing Rights Interest Rate Lock Commitments

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022 2023 2022

12 unchanged sentences

While the overall loan portfolio is not carried at fair value, the Company periodically records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans.

Non-recurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses.

Non-recurring adjustments also include certain impairment amounts for collateral-dependent loans when establishing the allowance for credit losses.

Such amounts are generally based on the fair value of the underlying collateral supporting the loan.

4 unchanged sentences

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

As of September 30, 2022, the Company identified $ 15.9 million in collateral-dependent impaired loans that required no specific allowance for loan losses.

Related to these loans, there were $ 61,000 and $ 86,000 in charge-offs recorded during the three and nine months ended September 30, 2022, respectively.

As of September 30, 2021, the Company identified $ 31.2 million in collateral-dependent impaired loans that had specific allowances for losses aggregating $ 4.7 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 March 31, 2023, the Company identified $ 18.4 million in collateral-dependent loans that required $ 0.1 million allowance for credit losses.

Related to these loans, there were $ 5,000 in charge-offs recorded during the three months ended March 31, 2023.

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

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

Other Real Estate and Foreclosed Assets

1 unchanged sentence

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

Subsequent to foreclosure, these assets are initially 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.

6 unchanged sentences

Fair Value Measurements Using

(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 September 30, Total Gains (Losses)*

Nine Months Ended September 30, Total Gains (Losses)*

September 30, 2022

March 31, 2023

Collateral dependent impaired loans:

Commercial, financial, & agricultural $ 50 — — $ 50 $ —

Real estate mortgage - residential 86 — — 86 —

Real estate mortgage - commercial 18,228 — — 18,228 ( 5 )

Installment and other consumer — — — — ( 38 ) ( 38 )

Total $ 18,364 $ — $ — $ 18,364 $ ( 5 )

Other real estate and repossessed assets $ 8,247 $ — $ — $ 8,247 $ 9

September 30, 2021

March 31, 2022

Collateral dependent impaired loans:

Commercial, financial, & agricultural $ 3,960 $ — $ — $ 3,960 $ — $ —

Real estate mortgage - residential 324 — — 324 ( 18 ) ( 22 )

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

Installment and other consumer — — — — — ( 6 )

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

14 unchanged sentences

Cash Surrender Value - Life Insurance

The fair value of Bank-owned life insurance (BOLI) approximates the carrying amount.

The fair value of Bank-owned life insurance approximates the carrying amount.

Upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount.

15 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, 2022 and December 31, 2021 is as follows:

September 30, 2022

A summary of the carrying amounts and fair values of the Company’s financial instruments at March 31, 2023 and December 31, 2022 is as follows:

March 31, 2023

Fair Value Measurements

September 30, 2022 Quoted Prices in Active Markets for Identical Assets Other Observable Inputs Net Significant Unobservable Inputs

March 31, 2023 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)

18 unchanged sentences

Interest rate lock commitments 1 1 — — 1

Forward sale commitments 10 10 10

Accrued interest payable 1,602 1,602 1,602 — —

26 unchanged sentences

Interest rate lock commitments 18 18 — — 18

Forward sale commitments 3 3 — 3 —

Accrued interest payable 902 902 902 — —

16 unchanged sentences

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

At March 31, 2023, 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:

(in thousands) September 30, 2022 December 31, 2021

(in thousands) March 31, 2023 December 31, 2022

Commitments to extend credit $ 383,722 $ 388,264

14 unchanged sentences

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, 2022.

The approximate remaining term of standby letters of credit ranged from one month to five years at March 31, 2023.

Pending Litigation

4 unchanged sentences

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