What changed in this filing

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Item 1. Business

2024-03-18 compared with 2023-03-29 · 43 added, 39 removed, 240 unchanged (25% of the section changed)

This report and the documents incorporated by reference herein contain forward-looking statements, which are inherently subject to risks and uncertainties.

See "Forward Looking Statements" under Item 7 of this report.

See "Forward Looking Statements" under Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this report.

Hawthorn Bancshares, Inc.

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in August 2007.

The Company owns all of the issued and outstanding capital stock of Union State Bancshares, Inc.

("Union"), which in turn owns all of the issued and outstanding capital stock of Hawthorn Bank.

The Company and Union each received approval from the Federal Reserve and elected to become a financial holding company on October 21, 2001.

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

The Company owns all of the issued and outstanding capital stock of Hawthorn Bank.

The Company received approval from the Federal Reserve and elected to become a financial holding company on October 21, 2001.

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

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

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This consolidation was completed in October 2007, and the subsidiary bank is now known as Hawthorn Bank (the "Bank").

Except as otherwise provided herein, references herein to the "Company" refer to Hawthorn Bancshares, Inc.

• On December 29, 2023, the Company dissolved its wholly-owned subsidiary, Union, which owned all of the outstanding capital stock of Hawthorn Bank, in order to streamline the Company's ownership of Hawthorn Bank.

Except as otherwise provided herein or to the extent the context otherwise requires, references herein to the "Company," "we," "us" or "our" refer to Hawthorn Bancshares, Inc.

and its consolidated subsidiaries, and references herein to the "Bank" refers to Hawthorn Bank and its constituent predecessors.

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The Company is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company.

The Company's activities currently are limited to ownership, indirectly through its subsidiary (Union), of the outstanding capital stock of the Bank.

The Company's activities currently are limited to ownership of the outstanding capital stock of the Bank and ownership of its other subsidiaries.

In addition to ownership of its subsidiaries, the Company may seek expansion through acquisition and may engage in those activities (such as investments in banks or operations that are financial in nature) in which it is permitted to engage under applicable law.

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

Union is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company.

Union's activities are currently limited to ownership of the outstanding capital stock of the Bank.

It is not currently anticipated that Union will engage in any business other than that directly related to its ownership of the Bank.

The Bank was founded in 1932 as a Missouri bank and converted to a Missouri trust company on August 16, 1989.

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Through its ownership of JCIHC, the Bank is, indirectly, the controlling member of HB Realty and is entitled to control the appointment of managers of HB Realty.

The Board of Managers of HB Realty, which is responsible for the management of the business and affairs of HB Realty, is currently comprised of David T.

Turner, Kathleen L.

The Board of Managers of HB Realty, which is responsible for the management of the business and affairs of HB Realty, is currently comprised of Brent M.

Giles, Kathleen L.

Bruegenhemke, Gregg A.

Bexten and Stephen E.

Hawthorn Risk Management, Inc.

Hawthorn Risk Management, Inc., a non-bank subsidiary of the Company formed on December 28, 2017, is a Missouri-based captive insurance company which provides property and casualty insurance coverage to the Company and the Bank for which insurance may not be currently available or economically feasible in today's insurance marketplace.

Hawthorn Risk Management, Inc.

pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

Bexten and Chris E.

Hawthorn Risk Management, Inc., a non-bank subsidiary of the Company, which was formed and began operations on December 28, 2017, was a Missouri-based captive insurance company which provided property and casualty insurance coverage to the Company and the Bank for which insurance was not then available or economically feasible in the insurance marketplace.

Hawthorn Risk Management, Inc.

is subject to the regulations of the State of Missouri and undergoes periodic examinations by the Missouri Division of Finance .

pooled resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

This subsidiary was dissolved as of December 1, 2023.

As of December 31, 2023, the Company and its subsidiaries had approximately 270 full-time and 14 part-time employees.

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The Bank's principal competition for deposits and loans comes from other banks within its primary service areas and, to an increasing extent, other banks located in its secondary service areas.

Based on publicly available information, management believes that the Bank is the second largest (in terms of deposits) of the 11 banks within Cole county, the ninth largest (in terms of deposits) of the 20 banks within Boone county, the largest (in terms of deposits) of the eight banks within Henry county, the third largest (in terms of deposits) of the 18 banks within Cass county, and the second largest (in terms of deposits) of the five banks within Benton county.

Based on publicly available information, management believes that the Bank is the second largest (in terms of deposits) of the 11 banks within Cole county, the eleventh largest (in terms of deposits) of the 21 banks within Boone county, the largest (in terms of deposits) of the 8 banks within Henry county, the third largest (in terms of deposits) of the 18 banks within Cass county, and the second largest (in terms of deposits) of the 5 banks within Benton county.

The main competition for Hawthorn Bank's trust services is from other commercial banks, including those of the Kansas City metropolitan area.

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In addition, under the FRB's merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company's controlled depository institutions.

If any subsidiary bank of a financial holding company ceases to be "well-capitalized" or "well-managed" and fails to correct its condition within the time period that the FRB specifies, the FRB has authority to order the financial holding company to divest its subsidiary banks.

Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company.

If any subsidiary bank of a financial holding company receives a rating under the Community Reinvestment Act of less than "satisfactory", then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations until the rating is raised to "satisfactory" or better.

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

"Financial in nature" activities include:

• securities underwriting, dealing and market making;

• sponsoring mutual funds and investment companies;

• insurance underwriting and insurance agency activities;

• merchant banking;

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

A financial holding company that desires to engage in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity.

Additionally, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system.

Limitation on Acquisitions .

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If a bank holding company's capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends and make acquisitions of new bank subsidiaries may be restricted or prohibited.

The risk-based capital guidelines that applied to us and our subsidiary bank prior to January 1, 2015 were based on the 1988 capital accord, referred to as Basel I, of the International Basel Committee on Banking Supervision (the "Basel Committee"), a committee of central banks and bank supervisors, as implemented by federal bank regulators.

In 2008, the bank regulatory agencies began to phase-in capital standards based on a second capital accord issued by the Basel Committee, referred to as Basel II, for large or "core" international banks (generally defined for U.S.

purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more).

Because we do not anticipate controlling any large or "core" international bank in the foreseeable future, Basel II presently does not apply to us.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III.

In July 2013, the federal banking agencies announced new risk-based capital and leverage ratios to conform to the Basel III framework and to address provisions of the Dodd-Frank Act (the "Basel III Rules").

With respect to the Company and the Bank, these requirements became effective on January 1, 2015.

In July 2013, the federal banking agencies announced new risk-based capital and leverage ratios that became applicable to us on January 1, 2015 (the "Basel III Rules").

The Basel III Rules established three components of regulatory capital:

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The risk-based capital ratios are calculated by dividing CET1 capital, Tier 1 capital and total capital by risk-weighted assets (including certain off-balance sheet activities).

Under the Basel III Rules, the minimum capital ratios effective as of January 1, 2015 are:

Under the Basel III Rules, the minimum capital ratios are:

• CET1 risk-based capital ratio equal to at least 4.5% of its risk-weighted assets;

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The capital conservation buffer requirement was phased in over four years beginning in 2016.

On January 1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and increased each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk weighted assets on January 1, 2019.

At December 31, 2019, the capital conservation buffer requirement of 2.5%, effectively raised the minimum required risk-based capital ratios to 7% CET1 capital, 8.5% Tier 1 capital and 10.5% total capital on a fully phased-in basis.

The capital conservation buffer requirement of 2.5%, effectively raised the minimum required risk-based capital ratios to 7% CET1 capital, 8.5% Tier 1 capital and 10.5% total capital on a fully phased-in basis as of December 31, 2019.

On December 31, 2023 the Company was in compliance with the FRB's capital adequacy guidelines.

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(min requirement plus buffer)

10.29 % 9.73 % 12.59 % 13.99 %

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the "EGRRCPA") directs the federal banking agencies to develop a specified community bank leverage ratio (the "CBLR") (that is, the ratio of a bank's equity capital to its consolidated assets) of not less than 8% and not more than 10%.

On November 4, 2019, federal regulators issued final rules that provide certain banks and their holding companies with the option to elect out of complying with the Basel III Rules.

On November 4, 2019, federal regulators issued final rules that provide certain banks and their holding companies with the option to elect out of complying with the

Basel III Rules.

Under this new rule, a qualifying community banking organization is eligible to elect the CBLR framework if it has a CBLR greater than 9% at the time of election.

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Bank Secrecy Act and USA PATRIOT Act .

The Company and the Bank must comply with the requirements of the Bank Secrecy Act, which was enacted to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, drug trafficking, money laundering, and other

Since its passage, the Bank Secrecy Act has been amended several times.

These amendments include the Money Laundering Control Act of 1986, which made money laundering a criminal act, as well as the Money Laundering Suppression Act of 1994, which required regulators to develop enhanced examination procedures and increased examiner training to improve the identification of money laundering schemes in financial institutions.

The USA PATRIOT Act, established in 2001, substantially broadened the scope of U.S.

The USA PATRIOT Act,

established in 2001, substantially broadened the scope of U.S.

anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the U.S.

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Based Capital Ratio (6.5%)

(min requirement) Tier 1 Risk-Based Capital

(min requirement)

Tier 1 Risk-Based Capital

(min requirement) Total Risk-Based

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(min requirement)

10.31 % 12.67 % 12.67 % 13.91 %

Limitations on Interest Rates and Loans to One Borrower.

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Federal and state laws impose additional restrictions on the lending activities of banks.

The maximum amount that a Missouri state-chartered bank may lend to any one person or entity is generally limited to 15% of the unimpaired capital of the bank located in a city having a population of 100,000 or more, 20% of the unimpaired capital of the bank located in a city having a population of less than 100,000 and over 7,000, and 25% of the unimpaired capital of the bank if located elsewhere in the state.

The maximum amount that a Missouri state-chartered bank may lend to any one person or entity is

generally limited to 15% of the unimpaired capital of the bank located in a city having a population of 100,000 or more, 20% of the unimpaired capital of the bank located in a city having a population of less than 100,000 and over 7,000, and 25% of the unimpaired capital of the bank if located elsewhere in the state.

In the case of Missouri state-chartered banks with a composite rating of 1 or 2 under the Capital, Assets, Management, Earnings, Liquidity and Sensitivity (CAMELS) rating system, the maximum amount is the greater of (i) the limits listed in the foregoing sentence or (ii) 25% of the unimpaired capital of the bank.

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Community Reinvestment Act ratings are taken into account by regulators in reviewing certain applications made by the Company and the Bank.

On October 24, 2023, the federal banking regulators issued a joint notice of final rulemaking to modernize the Community Reinvestment Act regulatory framework.

The final rule is intended, among other things, to adapt to changes in the banking industry, including the expanded role of mobile and online banking, and to tailor performance standards to account for differences in bank size and business models.

The final rule adjusts Community Reinvestment Act evaluations based on bank size and type, with many of the changes applying only to banks with over $2 billion in assets, and several applying only to banks with over $10 billion in assets.

The final rule takes effect April 1, 2024, with staggered compliance dates of January 1, 2026, and January 1, 2027.

The Company will evaluate the effects of the final rule on the Bank prior to the applicable compliance date and review its Community Reinvestment Act program in connection therewith.

Limitations on Transactions with Affiliates.

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(i) designating mortgages held in portfolio as "qualified mortgages" for banks with less than $10 billion in assets, subject to certain documentation and product limitations;

(ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to

proprietary trading;

(ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading;

(iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a CBLR of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements;

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

What changed 10-K

Item 1. Business