What changed in this filing

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Item 1. Financial Statements

2023-11-09 compared with 2023-08-10 · 149 added, 138 removed, 1105 unchanged (21% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

(In thousands, except per share data) June 30, 2023 December 31, 2022

(In thousands, except per share data) September 30, 2023 December 31, 2022

Cash and due from banks $ 17,793 $ 18,661

33 unchanged sentences

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

issued 7,284,151 shares, respectively

issued 7,554,893 and 7,284,151 shares, respectively

Surplus 76,776 71,042

6 unchanged sentences

Total liabilities and stockholders’ equity $ 1,879,005 $ 1,923,540

(1) June 30, 2023 amounts include the impacts of the January 1, 2023 adoption of ASU 2016-13.

(1) September 30, 2023 amounts include the impacts of the January 1, 2023 adoption of ASU 2016-13.

See Note 2 for details.

3 unchanged sentences

Consolidated Statements of Income (unaudited)

Three Months Ended June 30, Six Months Ended June 30,

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

(In thousands, except per share data) 2023 2022 2023 2022

29 unchanged sentences

Gain on sale of mortgage loans, net 851 628 2,014 2,322

(Provision for) release of other real estate owned ( 1,831 ) 28 ( 1,831 ) 28

Losses (gains) on other real estate owned, net ( 2,809 ) — ( 4,592 ) 30

Other 367 464 1,501 1,346

22 unchanged sentences

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

Three Months Ended June 30, Six Months Ended June 30,

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

(In thousands) 2023 2022 2023 2022

Net income $ 2,579 $ 4,927 $ 8,399 $ 16,025

Other comprehensive (loss) income, net of tax

Other comprehensive loss, net of tax

Investment securities available-for-sale:

2 unchanged sentences

Amortization of net gains included in net periodic pension cost, net of tax ( 126 ) — ( 379 ) —

Total other comprehensive (loss) income ( 3,277 ) ( 11,426 ) 1,124 ( 31,008 )

Total other comprehensive loss ( 9,451 ) ( 12,430 ) ( 8,327 ) ( 43,438 )

Total comprehensive (loss) income $ ( 6,872 ) $ ( 7,503 ) $ 72 $ ( 27,413 )

3 unchanged sentences

Consolidated Statements of Stockholders’ Equity (unaudited)

Three Months Ended June 30, 2023 and 2022

Three Months Ended September 30, 2023 and 2022

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

Balance, March 31, 2023 $ 7,284 $ 71,042 $ 88,329 $ ( 27,313 ) $ ( 10,990 ) $ 128,352

Balance, June 30, 2023 $ 7,284 $ 77,047 $ 83,722 $ ( 30,590 ) $ ( 10,990 ) $ 126,473

Net income — — 2,579 — — 2,579

3 unchanged sentences

— — ( 1,197 ) — — ( 1,197 )

Balance, June 30, 2023

Balance, September 30, 2023

$ 7,555 $ 76,776 $ 85,104 $ ( 40,041 ) $ ( 10,990 ) $ 118,404

Balance, March 31, 2022 $ 7,024 $ 64,437 $ 87,919 $ ( 16,289 ) $ ( 8,704 ) $ 134,387

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 — — — — ( 2,286 ) ( 2,286 )

Stock dividend 260 ( 260 ) — — — —

1 unchanged sentence

— — ( 1,150 ) — — ( 1,150 )

Balance, June 30, 2022

Balance, September 30, 2022

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

Six Months Ended June 30, 2023 and 2022

Nine Months Ended September 30, 2023 and 2022

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

4 unchanged sentences

Net income — — 8,399 — — 8,399

Other comprehensive income — — — 1,124 — 1,124

Other comprehensive loss — — — ( 8,327 ) — ( 8,327 )

Stock dividend 271 5,734 ( 6,005 ) — — —

1 unchanged sentence

— — ( 3,498 ) — — ( 3,498 )

Balance, June 30, 2023

Balance, September 30, 2023

$ 7,555 $ 76,776 $ 85,104 $ ( 40,041 ) $ ( 10,990 ) $ 118,404

7 unchanged sentences

— — ( 3,246 ) — — ( 3,246 )

Balance, June 30, 2022

Balance, September 30, 2022

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

3 unchanged sentences

Consolidated Statements of Cash Flows (unaudited)

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands) 2023 2022

9 unchanged sentences

Gain on sales and dispositions of other real estate ( 49 ) ( 2 )

Provision for (release of) other real estate owned 1,831 ( 28 )

Decrease in accrued interest receivable 283 175

Provision for (release of) valuation allowance for other real estate owned 4,643 ( 28 )

Increase in accrued interest receivable ( 580 ) ( 427 )

Increase in cash surrender value - life insurance ( 43 ) ( 44 )

Decrease (increase) in other assets 282 ( 1,111 )

(Increase) decrease in other assets ( 554 ) 155

Decrease in operating lease liabilities ( 238 ) ( 227 )

6 unchanged sentences

Cash flows from investing activities:

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

Proceeds from maturities of certificates of deposit in other banks 2,219 1,237

10 unchanged sentences

Cash flows from financing activities:

Net decrease in demand deposits ( 15,673 ) 18,696

Net decrease in interest-bearing transaction accounts ( 111,338 ) ( 22,304 )

Net (decrease) increase in demand deposits ( 28,338 ) 45,587

Net (decrease) increase in interest-bearing transaction accounts ( 121,011 ) 7,235

Net increase in time deposits 97,635 23,156

4 unchanged sentences

Cash dividends paid - common stock ( 3,452 ) ( 3,088 )

Net cash used in financing activities ( 24,519 ) ( 17,199 )

Net cash (used in) provided for financing activities ( 40,157 ) 47,641

Net decrease in cash and cash equivalents ( 55,866 ) ( 118,523 )

5 unchanged sentences

Consolidated Statements of Cash Flows (unaudited) continued

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands) 2023 2022

4 unchanged sentences

Noncash investing and financing activities:

Other real estate and repossessed assets acquired in settlement of loans net of (charge-offs) $ 44 $ ( 52 )

Other real estate and repossessed assets acquired in settlement of loans $ 44 $ 3

Stock dividends $ 6,005 $ 6,865

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

48 unchanged sentences

(2) Loans and Allowance for Credit Losses

Major classifications within the Company’s held for investment loan portfolio at June 30, 2023 and December 31, 2022 were as follows:

(in thousands) June 30, 2023 December 31, 2022

Major classifications within the Company’s held for investment loan portfolio at September 30, 2023 and December 31, 2022 were as follows:

(in thousands) September 30, 2023 December 31, 2022

Commercial, financial, and agricultural $ 227,372 $ 244,549

10 unchanged sentences

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

Accrued interest on loans totaled $ 6.0 million and $ 6.4 million at June 30, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company's consolidated balance sheets.

Accrued interest on loans totaled $ 7.1 million and $ 6.4 million at September 30, 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 June 30, 2023, loans of $ 651.6 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit.

At September 30, 2023, loans of $ 719.9 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 using a lifetime expected loss model that 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.

27 unchanged sentences

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

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.

HAWTHORN BANCSHARES, INC.

2 unchanged sentences

The following tables illustrate the changes in the allowance for credit losses by portfolio segment:

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

(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

10 unchanged sentences

Allowance for credit losses on loans and liability for unfunded commitments $ 2,057 $ 1,160 $ 3,569 $ 5,418 $ 10,858 $ 245 $ 102 $ 23,409

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

8 unchanged sentences

Notes to the Consolidated Financial Statements

Six Months Ended June 30, 2023

The following tables illustrate the changes in the allowance for loan losses by portfolio segment:

Nine Months Ended September 30, 2023

14 unchanged sentences

Allowance for credit losses on loans and liability for unfunded commitments $ 2,057 $ 1,160 $ 3,569 $ 5,418 $ 10,858 $ 245 $ 102 $ 23,409

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

7 unchanged sentences

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

Collateral-Dependent loans

5 unchanged sentences

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.

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

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

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 June 30, 2023 was as follows:

The amortized cost of collateral-dependent loans by class as of September 30, 2023 was as follows:

Collateral Type

(in thousands) Real Estate Other Allowance Allocated

June 30, 2023

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

September 30, 2023

Real estate mortgage − residential $ 142 $ — $ 22

14 unchanged sentences

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

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

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

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

27 unchanged sentences

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.

• Pass - loans that 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 that 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.

3 unchanged sentences

(The majority of the Company's non-accrual loans have a substandard risk grade)

• 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.

• Doubtful - loans that 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;

3 unchanged sentences

Notes to the Consolidated Financial Statements

The following table presents the recorded investment by risk categories at June 30, 2023:

The following table presents the recorded investment by risk categories at September 30, 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

June 30, 2023

September 30, 2023

Commercial, Financial, & Agricultural

4 unchanged sentences

Total $ 38,908 $ 52,586 $ 34,772 $ 32,914 $ 5,108 $ 5,257 $ 57,224 $ 603 $ 227,372

Gross YTD charge-offs — — — — — 59 — — 59

Real Estate Construction - Residential

4 unchanged sentences

Total $ 35,074 $ 22,884 $ 638 $ 177 $ — $ — $ 1 $ — $ 58,774

Gross YTD charge-offs — — — — — — — — —

Real Estate Construction - Commercial

4 unchanged sentences

Total $ 42,485 $ 56,339 $ 29,252 $ 1,193 $ 63 $ 826 $ 414 $ — $ 130,572

Gross YTD charge-offs — — — — — — — — —

Real Estate Mortgage - Residential

4 unchanged sentences

Total $ 59,381 $ 126,907 $ 65,205 $ 50,668 $ 7,472 $ 25,223 $ 44,456 $ 202 $ 379,514

Gross YTD charge-offs — — — — — — — — —

Real Estate Mortgage - Commercial

4 unchanged sentences

Total $ 110,231 $ 226,792 $ 225,977 $ 87,748 $ 28,472 $ 43,735 $ 15,738 $ 720 $ 739,413

Gross YTD charge-offs — — — — — 28 — — 28

Installment and other Consumer

4 unchanged sentences

Total $ 6,434 $ 7,243 $ 3,218 $ 1,545 $ 1,202 $ 1,602 $ 80 $ — $ 21,324

Gross YTD charge-offs — 21 13 — — 169 1 — 204

Total Portfolio

4 unchanged sentences

Total $ 292,513 $ 492,751 $ 359,062 $ 174,245 $ 42,317 $ 76,643 $ 117,913 $ 1,525 $ 1,556,969

Total Gross YTD charge-offs $ — $ 21 $ 13 $ — $ — $ 256 $ 1 $ — $ 291

HAWTHORN BANCSHARES, INC.

11 unchanged sentences

Total $ 79,896 $ 41,035 $ 38,774 $ 6,655 $ 4,345 $ 2,969 $ 68,844 $ 2,031 $ 244,549

Gross YTD charge-offs 135 — — — — — — — 135

Real Estate Construction - Residential

4 unchanged sentences

Total $ 29,289 $ 1,248 $ 769 $ 449 $ — $ — $ 340 $ — $ 32,095

Gross YTD charge-offs — — — — — — — — —

Real Estate Construction - Commercial

4 unchanged sentences

Total $ 63,243 $ 68,298 $ 2,249 $ 78 $ 676 $ 757 $ 1,934 $ — $ 137,235

Gross YTD charge-offs — — — — — — — — —

Real Estate Mortgage - Residential

4 unchanged sentences

Total $ 148,415 $ 68,945 $ 55,797 $ 8,158 $ 5,206 $ 28,703 $ 45,278 $ 523 $ 361,025

Gross YTD charge-offs — — — — — — — — —

Real Estate Mortgage - Commercial

4 unchanged sentences

Total $ 267,459 $ 232,915 $ 116,852 $ 32,231 $ 22,251 $ 39,434 $ 11,017 $ 570 $ 722,729

Gross YTD charge-offs 101 — — — — 80 — — 181

Installment and other Consumer

4 unchanged sentences

Total $ 11,172 $ 5,186 $ 2,891 $ 2,017 $ 459 $ 88 $ 1,806 $ — $ 23,619

Gross YTD charge-offs 268 10 5 21 1 — 16 — 321

Total Portfolio

4 unchanged sentences

Total $ 599,474 $ 417,627 $ 217,332 $ 49,588 $ 32,937 $ 71,951 $ 129,219 $ 3,124 $ 1,521,252

Total Gross YTD charge-offs $ 504 $ 10 $ 5 $ 21 $ 1 $ 80 $ 16 $ — $ 637

HAWTHORN BANCSHARES, INC.

10 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 June 30, 2023 and December 31, 2022:

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 September 30, 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

June 30, 2023

September 30, 2023

Commercial, Financial, and Agricultural $ — $ 88 $ 88 $ — $ 88

Real estate construction − residential — 94 94 — 94

Real estate construction − commercial — 74 74 — 74

10 unchanged sentences

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

(1) Includes $ 0.3 million of restructured loans as of both June 30, 2023 and December 31, 2022.

No material amount of interest income was recognized on non-accrual loans during the three and six months ended June 30, 2023.

(1) Includes $ 0.3 million of restructured loans as of both September 30, 2023 and December 31, 2022.

No material amount of interest income was recognized on non-accrual loans during the three and nine months ended September 30, 2023.

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 June 30, 2023 and December 31, 2022.

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

June 30, 2023

September 30, 2023

Commercial, Financial, and Agricultural $ 227,106 $ 178 $ — $ 88 $ 227,372

18 unchanged sentences

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 and six months ended June 30, 2023, the Company did not modify any loans made to borrowers experiencing financial difficulty.

For both the three and nine months ended September 30, 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.

3 unchanged sentences

Notes to the Consolidated Financial Statements

The following table presents information regarding modifications to borrowers experiencing financial difficulty as of June 30, 2023:

June 30, 2023

The following table presents information regarding modifications to borrowers experiencing financial difficulty as of September 30, 2023:

September 30, 2023

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

6 unchanged sentences

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 June 30, 2022, loans classified as TDRs totaled $ 2.1 million, of which $ 0.5 million were classified as non-performing TDRs and $ 1.6 million were classified as performing TDRs.

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.

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 $ 167,000 related to TDRs were allocated to the allowance for loan losses at June 30, 2022.

For the three and six months ended June 30, 2022, the Company had one new loan meeting the TDR criteria.

For the three and six months ended June 30, 2022, the Company had no TDRs for which there was a payment default within the 12 months following the restructure date.

Accordingly, specific reserves of $ 171,000 related to TDRs were allocated to the allowance for loan losses at September 30, 2022.

For both the three and nine months ended September 30, 2022, the Company had one new loan meeting the TDR criteria.

For both the three and nine months ended September 30, 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

2 unchanged sentences

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

At June 30, 2023, the carrying amount of these loans was $ 2.1 million compared to $ 0.6 million at December 31, 2022.

At September 30, 2023, the carrying amount of these loans was $ 3.0 million compared to $ 0.6 million at December 31, 2022.

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

June 30, December 31,

September 30, December 31,

(in thousands) 2023 2022

2 unchanged sentences

Real estate mortgage - commercial 706 1,186

Repossessed assets 44 —

Total $ 10,831 $ 11,459

5 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 June 30, Six Months Ended June 30,

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

(in thousands) 2023 2022 2023 2022

4 unchanged sentences

Net gain on sales 1 — 49 2

Total other real estate owned and repossessed assets 10,924 11,819 $ 10,924 $ 11,819

Total other real estate owned 10,831 11,874 $ 10,831 $ 11,874

Less valuation allowance for other real estate owned ( 7,267 ) ( 2,664 ) ( 7,267 ) ( 2,664 )

Balance at end of period $ 3,564 $ 9,210 $ 3,564 $ 9,210

At June 30, 2023 and December 31, 2022, there were no consumer mortgage loans secured by residential real estate properties in the process of foreclosure.

At September 30, 2023, there were $ 72,000 in consumer mortgage loans secured by residential real estate properties 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 June 30, Six Months Ended June 30,

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

(in thousands) 2023 2022 2023 2022

Balance at beginning of period $ 4,495 $ 2,664 $ 2,664 $ 2,911

Provision for other real estate owned 1,831 ( 28 ) 1,831 ( 28 )

Provision for (release of) valuation allowance for other real estate owned

2,812 — 4,643 ( 28 )

Charge-offs ( 40 ) — ( 40 ) ( 219 )

4 unchanged sentences

(4) Investment Securities

The amortized cost and fair value of debt securities classified as available-for-sale at June 30, 2023 and December 31, 2022 were as follows:

The amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2023 and December 31, 2022 were as follows:

Gross Unrealized

(in thousands) Total Amortized Cost Gains Losses Fair Value

June 30, 2023

September 30, 2023

Treasury $ 4,908 $ — $ ( 40 ) $ 4,868

20 unchanged sentences

government-sponsored enterprises.

Debt securities with carrying values aggregating approximately $ 120.5 million and $ 111.6 million at June 30, 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.

Debt securities with carrying values aggregating approximately $ 117.4 million and $ 111.6 million at September 30, 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 June 30, 2023, by contractual maturity are shown below.

Accrued interest on investments totaled $ 1.6 million and $ 1.5 million at June 30, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company's consolidated balance sheets.

The amortized cost and fair value of debt securities classified as available-for-sale at September 30, 2023, by contractual maturity are shown below.

Accrued interest on investments totaled $ 1.3 million and $ 1.5 million at September 30, 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.

12 unchanged sentences

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) June 30, 2023 December 31, 2022

(in thousands) September 30, 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 June 30, 2023 and December 31, 2022 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 September 30, 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

June 30, 2023

September 30, 2023

Treasury $ 3,568 $ ( 10 ) $ 1,300 $ ( 30 ) $ 4,868 $ ( 40 )

16 unchanged sentences

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

The total available-for-sale portfolio consisted of approximately 442 securities at June 30, 2023.

The portfolio included 435 securities having an aggregate fair value of $ 247.5 million that were in a loss position at June 30, 2023.

Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 227.5 million at fair value at June 30, 2023.

The $ 44.7 million aggregate unrealized loss included in accumulated other comprehensive loss at June 30, 2023 was caused by interest rate fluctuations.

The total available-for-sale portfolio consisted of approximately 435 securities at September 30, 2023.

The portfolio included 434 securities having an aggregate fair value of $ 233.2 million that were in a loss position at September 30, 2023.

Securities identified as temporarily impaired that had been in a loss position for 12 months or longer totaled $ 219.5 million at fair value at September 30, 2023.

The $ 56.5 million aggregate unrealized loss included in accumulated other comprehensive loss at September 30, 2023 was caused by interest rate fluctuations.

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

The portfolio included 436 securities having an aggregate fair value of $ 249.6 million that were in a loss position at December 31, 2022.

Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 119.8 million at fair value at December 31, 2022.

Securities identified as temporarily impaired that had been in a loss position for 12 months or longer totaled $ 119.8 million at fair value at December 31, 2022.

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 June 30, 2023 and December 31, 2022, respectively.

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

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:

Three Months Ended June 30, Six Months Ended June 30,

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

(in thousands) 2023 2022 2023 2022

7 unchanged sentences

Mortgage Servicing Rights

At June 30, 2023, the Company was servicing approximately $ 231.1 million of loans sold to the secondary market compared to $ 240.5 million at December 31, 2022, and $ 252.3 million at June 30, 2022.

Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $ 0.2 million and $ 0.3 million for the three and six months ended June 30, 2023, respectively, compared to $ 0.2 million and $ 0.4 million for the three and six months ended June 30, 2022, respectively.

At September 30, 2023, the Company was servicing approximately $ 226.3 million of loans sold to the secondary market compared to $ 240.5 million at December 31, 2022, and $ 247.6 million at September 30, 2022.

Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $ 0.2 million and $ 0.5 million for the three and nine months ended September 30, 2023, respectively, compared to $ 0.2 million and $ 0.7 million for the three and nine months ended September 30, 2022, respectively.

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

Three Months Ended June 30, Six Months Ended June 30,

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

(in thousands) 2023 2022 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 June 30, 2023 and 2022, respectively:

Six Months Ended June 30,

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

Nine Months Ended September 30,

Weighted average constant prepayment rate 6.51 % 7.30 %

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) June 30, 2023 December 31, 2022

(aggregate amounts in thousands) September 30, 2023 December 31, 2022

Time deposits with balances > $250,000 $ 115,197 $ 94,859

1 unchanged sentence

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

(in thousands) June 30, 2023 December 31, 2022

(in thousands) September 30, 2023 December 31, 2022

Federal funds purchased $ — $ —

9 unchanged sentences

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

June 30, 2023

September 30, 2023

government-sponsored enterprises $ 6,196 $ — $ — $ 6,196

4 unchanged sentences

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

As of June 30, 2023, operating right of use (ROU) assets and liabilities were $ 1.3 million and $ 1.4 million, respectively.

As of June 30, 2023, the weighted-average remaining lease term on these operating leases was approximately 5.4 years and the weighted-average discount rate used to measure the lease liabilities was approximately 4.0 %.

As of September 30, 2023, operating right of use (ROU) assets and liabilities were $ 1.3 million and $ 1.3 million, respectively.

As of September 30, 2023, the weighted-average remaining lease term on these operating leases is approximately 5.3 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4.0 %.

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

7 unchanged sentences

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 $ 186,000 for the three and six months ended June 30, 2023, respectively, compared to $ 93,000 and $ 187,000 for the three and six months ended June 30, 2022, respectively.

The operating lease cost was $ 93,000 and $ 279,000 for the three and nine months ended September 30, 2023, respectively, compared to $ 93,000 and $ 280,000 for the three and nine months ended September 30, 2022, respectively.

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

2 unchanged sentences

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

Operating lease expense for these leases was $ 34,000 and $ 62,000 for the three and six months ended June 30, 2023, respectively, compared to $ 20,000 and $ 44,000 for the three and six months ended June 30, 2022, respectively.

Operating lease expense for these leases was $ 33,000 and $ 95,000 for the three and nine months ended September 30, 2023, respectively, compared to $ 21,000 and $ 65,000 for the three and nine months ended September 30, 2022, respectively.

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

2 unchanged sentences

(in thousands)

2023 (excluding 6 months ended June 30, 2023)

2023 (excluding 9 months ended September 30, 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 17.2 % and 17.6 % for the three and six months ended June 30, 2023, respectively, compared to 17.8 % and 18.4 % for the three and six months ended June 30, 2022, respectively.

The effective tax rate for each of the three and six months ended June 30, 2023 and 2022, 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 16.2 % and 17.1 % for the three and nine months ended September 30, 2023, respectively, compared to 18.7 % and 18.5 % for the three and nine months ended September 30, 2022, respectively.

The effective tax rate for each of the three and nine months ended September 30, 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 $ 26,000 benefit associated with a historic tax credit investment for the three and six months ended June 30, 2023, respectively.

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, 2023, respectively.

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.

1 unchanged sentence

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 June 30, 2023.

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 six months ended June 30, 2023 and 2022, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

For each of the nine months ended September 30, 2023 and 2022, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

HAWTHORN BANCSHARES, INC.

3 unchanged sentences

Equity-Based Compensation Plan

The following table summarizes the status of the Company's restricted share units (RSUs) for the six months ended June 30, 2023:

The following table summarizes the status of the Company's restricted share units (RSUs) for the nine months ended September 30, 2023:

(in thousands, except per share amounts) Quantity Weighted-Average Grant Date Fair Value Per share

2 unchanged sentences

Forfeited — —

Non-vested at June 30, 2023 12,277 $ 18.33

Non-vested at September 30, 2023 12,277 $ 18.33

Accumulated Other Comprehensive (Loss) Income

The following table summarizes the change in the components of the Company’s accumulated other comprehensive (loss) income for the six months ended June 30, 2023 and 2022:

Six Months Ended June 30, 2023

The following table summarizes the change in the components of the Company’s accumulated other comprehensive loss for the nine months ended September 30, 2023 and 2022:

Nine Months Ended September 30, 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 income (loss), before reclassifications 1,743 ( 320 ) 1,423

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

Current period other comprehensive income (loss), before tax 1,743 ( 320 ) 1,423

Income tax (expense) benefit ( 366 ) 67 ( 299 )

Current period other comprehensive income (loss), net of tax 1,377 ( 253 ) 1,124

Other comprehensive loss, before reclassifications ( 10,061 ) ( 480 ) ( 10,541 )

Amounts reclassified from accumulated other comprehensive loss — — —

Current period other comprehensive loss, before tax ( 10,061 ) ( 480 ) ( 10,541 )

Income tax benefit 2,113 101 2,214

Current period other comprehensive loss, net of tax ( 7,948 ) ( 379 ) ( 8,327 )

Balance at end of period $ ( 44,605 ) $ 4,564 $ ( 40,041 )

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

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

14 unchanged sentences

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

Three Months Ended June 30, Six Months Ended June 30,

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

(in thousands) 2023 2022 2023 2022

10 unchanged sentences

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 $ 1.7 million as of June 30, 2023, and the expense for the three and six months ended June 30, 2023 was $ 9,600 and $ 19,300 , respectively, compared to $ 93,000 and $ 186,000 for the three and six months ended June 30, 2022, respectively, and is recognized over the required service period.

The accrued liability relating to the SERP was $ 1.7 million as of September 30, 2023, and the expense for the three and nine months ended September 30, 2023 was $ 9,600 and $ 29,000 , respectively, compared to $ 93,000 and $ 279,000 for the three and nine months ended September 30, 2022, respectively, and is recognized over the required service period.

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

10 unchanged sentences

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

Three Months Ended June 30, Six Months Ended June 30,

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

(in thousands) 2023 2022 2023 2022

19 unchanged sentences

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 June 30, Six Months Ended June 30,

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

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

13 unchanged sentences

The Company did not repurchase any shares during the current quarter.

As of June 30, 2023, $ 2.1 million remained available for share repurchases pursuant to the plan.

As of September 30, 2023, $ 2.1 million remained available for share repurchases pursuant to the plan.

(13) Fair Value Measurements

17 unchanged sentences

Available-for-Sale Securities

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S.

The fair value measurements of the Company’s investment securities are determined by a third party pricing service that considers observable data that may include dealer quotes, market spreads, cash flows, the U.S.

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

29 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)

June 30, 2023

September 30, 2023

Treasury $ 4,868 $ 4,868 $ — $ —

12 unchanged sentences

Interest rate lock commitments $ 2 $ — $ — $ 2

Forward sale commitments 1 — 1 —

Total $ 2 $ — $ — $ 2

22 unchanged sentences

Mortgage Servicing Rights Interest Rate Lock Commitments

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2023 2022 2023 2022

19 unchanged sentences

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

As of June 30, 2023, the Company identified $ 2.9 million in collateral-dependent loans that required $ 25,000 specific allowance for credit losses.

Related to these loans, there were $ 36,000 and $ 41,000 in charge-offs recorded during the three and six months ended June 30, 2023, respectively.

As of June 30, 2022, the Company identified $ 16.0 million in collateral-dependent impaired loans that required no specific allowances for losses aggregating.

Related to these loans, there were $ 2,000 and $ 25,000 in charge-offs recorded during the three and six months ended June 30, 2022, respectively.

As of September 30, 2023, the Company identified $ 2.6 million in collateral-dependent loans that required $ 22,000 of specific allowances for credit losses.

Related to these loans, there were $ 13,800 and $ 54,800 in charge-offs recorded during the three and nine months ended September 30, 2023, respectively.

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

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.

Other Real Estate and Foreclosed Assets

10 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 June 30, Total Gains (Losses)*

Six Months Ended June 30, Total Gains (Losses)*

June 30, 2023

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

September 30, 2023

Collateral dependent impaired loans:

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

Real estate mortgage - residential $ 120 $ — $ — $ 120 $ — $ —

3 unchanged sentences

Other real estate and repossessed assets $ 3,564 $ — $ — $ 3,564 $ ( 2,811 ) $ ( 4,594 )

June 30, 2022

September 30, 2022

Collateral dependent impaired loans:

Real estate mortgage - commercial $ 15,898 $ — $ — $ 15,898 $ ( 23 ) $ ( 48 )

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

Total $ 15,898 $ — $ — $ 15,898 $ ( 61 ) $ ( 86 )

32 unchanged sentences

Notes to the Consolidated Financial Statements

A summary of the carrying amounts and fair values of the Company’s financial instruments at June 30, 2023 and December 31, 2022 is as follows:

June 30, 2023

A summary of the carrying amounts and fair values of the Company’s financial instruments at September 30, 2023 and December 31, 2022 is as follows:

September 30, 2023

Fair Value Measurements

June 30, 2023 Quoted Prices in Active Markets for Identical Assets Other Observable Inputs Net Significant Unobservable Inputs

September 30, 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 2 2 — — 2

Forward sale commitments 1 1 1

Accrued interest payable 1,851 1,851 1,851 — —

47 unchanged sentences

The allowance for credit losses associated with unfunded commitments and letters of credit is recorded within other liabilities on the consolidated balance sheets.

At June 30, 2023, the allowance for credit losses for unfunded commitments was $ 1.1 million.

At September 30, 2023, the allowance for credit losses for unfunded commitments was $ 0.9 million.

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

(in thousands) June 30, 2023 December 31, 2022

(in thousands) September 30, 2023 December 31, 2022

Commitments to extend credit $ 309,847 $ 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 ranged from one month to five years at June 30, 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