HAWTHORN BANCSHARES, INC. 10-Q

Item 1. Financial Statements HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data) June 30, 2024 December 31, 2023 (Unaudited) ASSETS Cash and due from banks $ 16,754 $ 15,675 Other interest-bearing deposits 59,088 77,775 Cash and cash equivalents 75,842 93,450 Certificates of deposit in other banks 1,000 — Available-for-sale debt securities, at fair value 185,325 188,742 Other investments 5,834 6,300 Loans held for investment 1,498,504 1,539,147 Allowance for credit losses ( 21,980 ) ( 23,744 ) Net loans 1,476,524 1,515,403 Loans held for sale, at lower of cost or fair value 1,368 3,884 Premises and equipment - net 31,922 32,047 Other real estate owned - net 3,625 1,744 Accrued interest receivable 7,981 8,661 Cash surrender value of bank-owned life insurance 38,109 2,624 Other assets 20,280 22,495 Total assets $ 1,847,810 $ 1,875,350 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing demand $ 401,618 $ 402,241 Savings, interest checking and money market 804,183 846,452 Time deposits $250,000 and over 101,025 108,147 Other time deposits 243,424 214,004 Total deposits 1,550,250 1,570,844 Federal Home Loan Bank advances and other borrowings 99,100 107,000 Subordinated notes 49,486 49,486 Operating lease liabilities 1,110 1,213 Accrued interest payable 2,113 1,772 Other liabilities 7,510 8,950 Total liabilities 1,709,569 1,739,265 Stockholders’ equity: Common stock, $ 1.00 par value, authorized 15,000,000 shares; issued 7,554,893 shares 7,555 7,555 Surplus 76,808 76,818 Retained earnings 83,026 76,464 Accumulated other comprehensive loss, net of tax ( 17,233 ) ( 13,762 ) Treasury stock; 563,170 and 515,570 shares, at cost, respectively ( 11,915 ) ( 10,990 ) Total stockholders’ equity 138,241 136,085 Total liabilities and stockholders’ equity $ 1,847,810 $ 1,875,350 See accompanying notes to the consolidated financial statements (unaudited) . 2 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands, except per share data) 2024 2023 2024 2023 INTEREST INCOME Interest and fees on loans $ 21,534 $ 20,168 $ 43,265 $ 38,971 Interest and fees on loans held for sale 36 33 66 60 Interest on investment securities: Taxable 788 883 1,539 1,730 Nontaxable 596 632 1,188 1,258 Federal funds sold — 1 — 1 Other interest-bearing deposits 452 102 1,263 640 Dividends on other investments 150 108 287 200 Total interest income 23,556 21,927 47,608 42,860 INTEREST EXPENSE Interest on deposits: Savings, interest checking and money market 4,493 3,642 9,123 7,495 Time deposit accounts $250,000 and over 765 1,525 1,534 2,676 Time deposits 2,310 810 4,376 1,358 Total interest expense on deposits 7,568 5,977 15,033 11,529 Interest on federal funds purchased and securities sold under agreements to repurchase — 24 — 45 Interest on Federal Home Loan Bank advances 831 815 1,680 1,355 Interest on subordinated notes 985 909 1,975 1,781 Total interest expense on borrowings 1,816 1,748 3,655 3,181 Total interest expense 9,384 7,725 18,688 14,710 Net interest income 14,172 14,202 28,920 28,150 Provision for credit losses on loans and unfunded commitments 457 — 227 680 Net interest income after provision for credit losses on loans and unfunded commitments 13,715 14,202 28,693 27,470 NON-INTEREST INCOME Service charges and other fees 777 737 1,594 1,420 Bank card income and fees 1,075 1,055 2,048 2,015 Earnings on bank-owned life insurance 505 14 641 29 Trust department income 317 266 619 538 Real estate servicing (costs) fees, net ( 51 ) 99 ( 48 ) 292 Gain on sale of mortgage loans, net 398 667 675 1,162 Gains (losses) on other real estate owned, net 454 ( 1,793 ) 488 ( 1,783 ) Other 521 551 998 1,105 Total non-interest income 3,996 1,596 7,015 4,778 Investment securities (losses) gains, net ( 15 ) 7 ( 15 ) 15 NON-INTEREST EXPENSE Salaries and employee benefits 6,724 6,850 13,454 13,854 Occupancy expense, net 708 801 1,521 1,595 Furniture and equipment expense 722 716 1,478 1,467 Processing, network, and bank card expense 1,362 1,320 2,732 2,477 Legal, examination, and professional fees 512 443 1,335 948 Advertising and promotion 256 353 513 709 Postage, printing, and supplies 190 179 357 373 Loan expense 216 239 389 624 Other 1,344 1,824 2,830 3,155 Total non-interest expense 12,034 12,725 24,609 25,202 Income before income taxes 5,662 3,080 11,084 7,061 Income tax expense 1,033 531 1,999 1,241 Net income $ 4,629 $ 2,549 $ 9,085 $ 5,820 Basic earnings per share $ 0.66 $ 0.36 $ 1.29 $ 0.83 Diluted earnings per share $ 0.66 $ 0.36 $ 1.29 $ 0.83 See accompanying notes to the consolidated financial statements (unaudited) . 3 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (unaudited) Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2024 2023 2024 2023 Net income $ 4,629 $ 2,549 $ 9,085 $ 5,820 Other comprehensive income (loss), net of tax Investment securities available-for-sale: Change in unrealized (losses) gains on investment securities available-for-sale, net of tax ( 983 ) ( 3,136 ) ( 3,198 ) 1,377 Defined benefit pension plans: Amortization of net gains included in net periodic pension cost, net of tax ( 147 ) ( 141 ) ( 273 ) ( 253 ) Total other comprehensive (loss) income ( 1,130 ) ( 3,277 ) ( 3,471 ) 1,124 Total comprehensive income (loss) $ 3,499 $ ( 728 ) $ 5,614 $ 6,944 See accompanying notes to the consolidated financial statements (unaudited) . 4 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (unaudited) Three Months Ended June 30, 2024 and 2023 (In thousands, except per share data) Common Stock Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Balance, March 31, 2024 $ 7,555 $ 76,847 $ 79,725 $ ( 16,103 ) $ ( 11,404 ) $ 136,620 Net income — — 4,629 — — 4,629 Other comprehensive loss — — — ( 1,130 ) — ( 1,130 ) Share-based compensation expense — 42 — — — 42 Purchase of treasury stock — — — — ( 592 ) ( 592 ) Restricted share unit vesting and taxes paid related to net share settlement — ( 81 ) — — 81 — Cash dividends declared, common stock ($ 0.19 per share) — — ( 1,328 ) — — ( 1,328 ) Balance, June 30, 2024 $ 7,555 $ 76,808 $ 83,026 $ ( 17,233 ) $ ( 11,915 ) $ 138,241 Balance, March 31, 2023 $ 7,284 $ 71,042 $ 88,329 $ ( 27,313 ) $ ( 10,990 ) $ 128,352 Net income — — 2,549 — — 2,549 Other comprehensive loss — — — ( 3,277 ) — ( 3,277 ) Stock dividend — 6,005 ( 6,005 ) — — — Cash dividends declared, common stock ($ 0.17 per share) — — ( 1,151 ) — — ( 1,151 ) Balance, June 30, 2023 $ 7,284 $ 77,047 $ 83,722 $ ( 30,590 ) $ ( 10,990 ) $ 126,473 Six Months Ended June 30, 2024 and 2023 (In thousands, except per share data) Common Stock Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stock - holders' Equity Balance, December 31, 2023 $ 7,555 $ 76,818 $ 76,464 $ ( 13,762 ) $ ( 10,990 ) $ 136,085 Net income — — 9,085 — — 9,085 Other comprehensive loss — — — ( 3,471 ) — ( 3,471 ) Share-based compensation expense — 71 — — — 71 Purchase of treasury stock — — — — ( 1,006 ) ( 1,006 ) Restricted share unit vesting and taxes paid related to net share settlement — ( 81 ) — — 81 — Cash dividends declared, common stock ($ 0.36 per share) — — ( 2,523 ) — — ( 2,523 ) Balance, June 30, 2024 $ 7,555 $ 76,808 $ 83,026 $ ( 17,233 ) $ ( 11,915 ) $ 138,241 Balance, December 31, 2022 $ 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 — — 5,820 — — 5,820 Other comprehensive income — — — 1,124 — 1,124 Stock dividend — 6,005 ( 6,005 ) — — — Cash dividends declared, common stock ($ 0.34 per share) — — ( 2,301 ) — — ( 2,301 ) Balance, June 30, 2023 $ 7,284 $ 77,047 $ 83,722 $ ( 30,590 ) $ ( 10,990 ) $ 126,473 See accompanying notes to the consolidated financial statements (unaudited) . 5 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) Six Months Ended June 30, (In thousands) 2024 2023 Cash flows from operating activities: Net income $ 9,085 $ 5,820 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses on loans and unfunded commitments 227 680 Depreciation expense 925 1,075 Net amortization of investment securities, premiums, and discounts 418 524 Change in fair value of mortgage servicing rights — 27 Investment securities losses (gains), net 15 ( 15 ) Gain on sales and dispositions of premises and equipment ( 6 ) ( 154 ) Gain on sales and dispositions of other real estate ( 94 ) ( 48 ) (Release of) provision for valuation allowance for other real estate owned ( 386 ) 1,831 Share-based compensation expense 71 — Decrease in accrued interest receivable 680 283 Increase in cash surrender value - life insurance ( 485 ) ( 29 ) Decrease in other assets 2,817 282 Decrease in operating lease liabilities ( 103 ) ( 159 ) Increase in accrued interest payable 341 577 Decrease in other liabilities ( 1,484 ) ( 1,333 ) Origination of mortgage loans held for sale ( 34,810 ) ( 47,593 ) Proceeds from the sale of mortgage loans held for sale 38,001 47,186 Gain on sale of mortgage loans, net ( 675 ) ( 1,162 ) Net cash provided by operating activities 14,537 7,792 Cash flows from investing activities: Purchase of certificates of deposit in other banks ( 1,000 ) — Proceeds from maturities of certificates of deposit in other banks — 1,974 Purchase of bank-owned life insurance ( 35,000 ) — Net decrease (increase) in loans 35,867 ( 41,822 ) Purchase of available-for-sale debt securities ( 18,965 ) ( 8,505 ) Proceeds from maturities of available-for-sale debt securities 5,660 8,241 Proceeds from calls of available-for-sale debt securities 12,256 615 Purchases of FHLB stock ( 767 ) ( 9,320 ) Proceeds from sales of FHLB stock 1,218 6,590 Purchases of premises and equipment ( 1,082 ) ( 905 ) Proceeds from sales of premises and equipment 11 161 Proceeds from sales of other real estate and repossessed assets 1,548 627 Net cash used in investing activities ( 254 ) ( 42,344 ) Cash flows from financing activities: Net decrease in demand deposits ( 623 ) ( 15,673 ) Net decrease in interest-bearing transaction accounts ( 42,269 ) ( 111,338 ) Net increase in time deposits 22,298 38,202 Net increase in federal funds purchased and securities sold under agreements to repurchase — 316 Repayment of FHLB advances and other borrowings ( 22,200 ) ( 163,800 ) FHLB advances 14,300 230,075 Purchase of treasury stock ( 1,006 ) — Cash dividends paid - common stock ( 2,391 ) ( 2,301 ) Net cash used in financing activities ( 31,891 ) ( 24,519 ) Net decrease in cash and cash equivalents ( 17,608 ) ( 59,071 ) Cash and cash equivalents, beginning of period 93,450 83,720 Cash and cash equivalents, end of period $ 75,842 $ 24,649 See accompanying notes to the consolidated financial statements (unaudited). 6 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) continued Six Months Ended June 30, (In thousands) 2024 2023 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 18,347 $ 14,133 Income taxes $ — $ 820 Non-cash investing and financing activities: Other real estate and repossessed assets acquired in settlement of loans $ 2,730 $ 44 Stock dividends $ — $ 6,005 Dividends declared not paid - common stock $ 1,329 $ 1,151 See accompanying notes to the consolidated financial statements (unaudited). 7 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (1) Summary of Significant Accounting Policies Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and corporate customers located within the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area. 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 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. Accordingly, the unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. 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 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 other than mentioned below. (2) Loans and Allowance for Credit Losses Loans Major classifications within the Company’s held for investment loan portfolio at June 30, 2024 and December 31, 2023 were as follows: (in thousands) June 30, 2024 December 31, 2023 Commercial, financial, and agricultural $ 217,098 $ 226,275 Real estate construction − residential 37,048 58,347 Real estate construction − commercial 55,515 130,296 Real estate mortgage − residential 374,074 372,391 Real estate mortgage − commercial 797,950 731,024 Installment and other consumer 16,819 20,814 Total loans held for investment $ 1,498,504 $ 1,539,147 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, and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of automotive vehicles. Accrued interest on loans totaled $ 6.4 million and $ 7.2 million at June 30, 2024 and December 31, 2023, 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, 2024, loans of $ 709.0 million were pledged to the Federal Home Loan Bank ("FHLB") as collateral for borrowings and letters of credit. 8 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) Allowance for Credit Losses 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. 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 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 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 qualitative or environmental factors, such as: lending policies and procedures; economic conditions; the nature, volume and terms of the portfolio; lending staff and management; past due loans; the loan review system; collateral values; concentrations of credit; and external factors. 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. 9 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The following tables illustrate the changes in the allowance for credit losses by portfolio segment: Three Months Ended June 30, 2024 (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 Allowance for Credit Losses on Loans Balance at beginning of period $ 3,374 $ 672 $ 1,297 $ 5,109 $ 12,857 $ 172 $ 194 $ 23,675 Charge-offs 1,857 — — 22 67 61 — 2,007 Recoveries 10 — — 4 — 16 — 30 Provision for (release of) credit losses 94 ( 74 ) 180 122 118 36 ( 194 ) 282 Balance at end of period $ 1,621 $ 598 $ 1,477 $ 5,213 $ 12,908 $ 163 $ — $ 21,980 Liability for Unfunded Commitments Balance at beginning of period $ 92 $ 114 $ 302 $ 103 $ 100 $ 1 $ 5 $ 717 Provision for credit losses on unfunded commitments ( 1 ) 12 149 7 12 — ( 4 ) 175 Balance at end of period $ 91 $ 126 $ 451 $ 110 $ 112 $ 1 $ 1 $ 892 Allowance for credit losses on loans and liability for unfunded commitments $ 1,712 $ 724 $ 1,928 $ 5,323 $ 13,020 $ 164 $ 1 $ 22,872 Six Months Ended June 30, 2024 (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 Allowance for Credit Losses on Loans Balance at beginning of period $ 3,208 $ 1,043 $ 3,273 $ 5,264 $ 10,537 $ 232 $ 187 $ 23,744 Charge-offs 1,888 — — 23 89 130 — 2,130 Recoveries 20 — — 5 — 59 — 84 Provision for (release of) credit losses 281 ( 445 ) ( 1,796 ) ( 33 ) 2,460 2 ( 187 ) 282 Balance at end of period $ 1,621 $ 598 $ 1,477 $ 5,213 $ 12,908 $ 163 $ — $ 21,980 Liability for Unfunded Commitments Balance at beginning of period $ 197 $ 273 $ 245 $ 103 $ 110 $ 1 $ 18 $ 947 Provision for (release of) credit losses on unfunded commitments ( 106 ) ( 147 ) 206 7 2 — ( 17 ) ( 55 ) Balance at end of period $ 91 $ 126 $ 451 $ 110 $ 112 $ 1 $ 1 $ 892 Allowance for credit losses on loans and liability for unfunded commitments $ 1,712 $ 724 $ 1,928 $ 5,323 $ 13,020 $ 164 $ 1 $ 22,872 10 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) Three Months Ended June 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 Allowance for Credit Losses on Loans Balance at beginning of period $ 1,921 $ 631 $ 4,464 $ 5,262 $ 9,487 $ 222 $ ( 8 ) $ 21,979 Charge-offs 14 — — — 20 69 — 103 Recoveries 164 — — 2 — 29 — 195 Provision for (release of) credit losses ( 227 ) 117 ( 1,042 ) 201 828 35 253 165 Balance at end of period $ 1,844 $ 748 $ 3,422 $ 5,465 $ 10,295 $ 217 $ 245 $ 22,236 Liability for Unfunded Commitments Balance at beginning of period $ 124 $ 389 $ 562 $ 110 $ 142 $ 1 $ ( 26 ) $ 1,302 Provision for credit losses on unfunded commitments ( 12 ) ( 34 ) ( 148 ) ( 2 ) ( 16 ) — 47 ( 165 ) Balance at end of period $ 112 $ 355 $ 414 $ 108 $ 126 $ 1 $ 21 $ 1,137 Allowance for credit losses on loans and liability for unfunded commitments $ 1,956 $ 1,103 $ 3,836 $ 5,573 $ 10,421 $ 218 $ 266 $ 23,373 Six Months Ended June 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 Allowance for Credit Losses on Loans Balance at beginning of period $ 2,735 $ 157 $ 875 $ 3,329 $ 8,000 $ 326 $ 166 $ 15,588 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 Charge-offs 43 — — — 25 128 — 196 Recoveries 174 — — 4 1 57 — 236 Provision for (release of) credit losses ( 373 ) 300 ( 347 ) 242 706 42 245 815 Balance at end of period $ 1,844 $ 748 $ 3,422 $ 5,465 $ 10,295 $ 217 $ 245 $ 22,236 Liability for Unfunded Commitments Balance at beginning of period $ — $ — $ — $ — $ — $ — $ — $ — 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 (release of) credit losses on unfunded commitments 8 14 ( 155 ) 1 ( 24 ) — 21 ( 135 ) Balance at end of period $ 112 $ 355 $ 414 $ 108 $ 126 $ 1 $ 21 $ 1,137 Allowance for credit losses on loans and liability for unfunded commitments $ 1,956 $ 1,103 $ 3,836 $ 5,573 $ 10,421 $ 218 $ 266 $ 23,373 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. 11 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) There have been no significant changes to the types of collateral securing the Company's collateral dependent loans since December 31, 2023. The amortized cost of collateral-dependent loans by class as of June 30, 2024 and December 31, 2023 was as follows: Collateral Type (in thousands) Real Estate Other Allowance Allocated June 30, 2024 Commercial, financial, and agricultural $ — $ 30 $ 17 Real estate construction − residential 454 — 194 Real estate mortgage − commercial 1,100 — 360 Total $ 1,554 $ 30 $ 571 December 31, 2023 Commercial, financial, and agricultural $ — $ 2,221 $ 1,300 Real estate construction − residential 432 — 164 Real estate mortgage − residential 46 — 19 Real estate mortgage − commercial 2,369 — — Total $ 2,847 $ 2,221 $ 1,483 Credit Quality The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. • 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. • Special Mention - loans that have negative financial trends, or other weaknesses that if left uncorrected, could threaten its capacity to meet its debt obligations. This is a transitional grade that is closely monitored by management for improvement or deterioration. • 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 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. These loans are also on non-accrual status. • Non-accrual - loans that are delinquent for 90 days or more and the ultimate collectability of interest or principal is no longer probable. Real estate loans secured by one-to-four family residential properties are exempt from these non-accrual guidelines. These loans are placed on non-accrual status after they become 120 days past due. (The majority of the Company's non-accrual loans have a substandard risk grade.) 12 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The following table presents the recorded investment by risk categories at June 30, 2024: Term Loans Amortized Cost Basis by Origination Year and Risk Grades (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans Amortized Cost Basis Total June 30, 2024 Commercial, Financial, & Agricultural Pass $ 15,962 $ 26,707 $ 34,785 $ 29,036 $ 28,822 $ 5,478 $ 60,528 $ 468 $ 201,786 Watch 523 205 3,414 — 332 272 4,899 — 9,645 Substandard 586 361 3,587 — 13 — 318 100 4,965 Doubtful — 200 — 14 — — — — 214 Non-accrual loans — 29 81 219 — — 159 — 488 Total $ 17,071 $ 27,502 $ 41,867 $ 29,269 $ 29,167 $ 5,750 $ 65,904 $ 568 $ 217,098 Gross YTD charge-offs — 31 — 88 2 51 1,716 — 1,888 Real Estate Construction - Residential Pass $ 9,360 $ 24,245 $ 2,193 $ 625 $ 171 $ — $ — $ — $ 36,594 Non-accrual loans — 454 — — — — — — 454 Total $ 9,360 $ 24,699 $ 2,193 $ 625 $ 171 $ — $ — $ — $ 37,048 Gross YTD charge-offs — — — — — — — — — Real Estate Construction - Commercial Pass $ 22,966 $ 13,552 $ 11,013 $ 4,086 $ 644 $ 722 $ 2,086 $ — $ 55,069 Watch — 269 15 — — — 103 — 387 Non-accrual loans — — — — — 59 — — 59 Total $ 22,966 $ 13,821 $ 11,028 $ 4,086 $ 644 $ 781 $ 2,189 $ — $ 55,515 Gross YTD charge-offs — — — — — — — — — Real Estate Mortgage - Residential Pass $ 16,252 $ 55,692 $ 121,170 $ 58,044 $ 45,455 $ 26,561 $ 45,134 $ 421 $ 368,729 Watch 1,451 103 244 401 369 1,432 280 — 4,280 Substandard 68 17 — — — 91 — — 176 Non-accrual loans — — 277 90 57 273 192 — 889 Total $ 17,771 $ 55,812 $ 121,691 $ 58,535 $ 45,881 $ 28,357 $ 45,606 $ 421 $ 374,074 Gross YTD charge-offs — — — — — 1 22 — 23 Real Estate Mortgage - Commercial Pass $ 16,427 $ 123,800 $ 231,085 $ 212,203 $ 78,877 $ 63,368 $ 19,339 $ 51 $ 745,150 Watch 3,031 5,253 4,982 2,742 279 357 76 — 16,720 Special Mention 25,981 — 5,811 — — — — 582 32,374 Substandard 47 710 210 1,155 — 279 — — 2,401 Non-accrual loans — 1,136 — — — 169 — — 1,305 Total $ 45,486 $ 130,899 $ 242,088 $ 216,100 $ 79,156 $ 64,173 $ 19,415 $ 633 $ 797,950 Gross YTD charge-offs — — — 65 — 24 — — 89 Installment and other Consumer Pass $ 1,703 $ 4,788 $ 5,009 $ 1,838 $ 860 $ 2,527 $ 76 $ 7 $ 16,808 Non-accrual loans — 2 9 — — — — — 11 Total $ 1,703 $ 4,790 $ 5,018 $ 1,838 $ 860 $ 2,527 $ 76 $ 7 $ 16,819 Gross YTD charge-offs — 3 7 3 — 117 — — 130 Total Portfolio Pass $ 82,670 $ 248,784 $ 405,255 $ 305,832 $ 154,829 $ 98,656 $ 127,163 $ 947 $ 1,424,136 Watch 5,005 5,830 8,655 3,143 980 2,061 5,358 — 31,032 Special Mention 25,981 — 5,811 — — — — 582 32,374 Substandard 701 1,088 3,797 1,155 13 370 318 100 7,542 Doubtful — 200 — 14 — — — — 214 Non-accrual loans — 1,621 367 309 57 501 351 — 3,206 Total $ 114,357 $ 257,523 $ 423,885 $ 310,453 $ 155,879 $ 101,588 $ 133,190 $ 1,629 $ 1,498,504 Total Gross YTD charge-offs $ — $ 34 $ 7 $ 156 $ 2 $ 193 $ 1,738 $ — $ 2,130 13 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The following table presents the recorded investment by risk categories at December 31, 2023: Term Loans 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 December 31, 2023 Commercial, Financial, & Agricultural Pass $ 40,103 $ 43,082 $ 32,812 $ 30,965 $ 4,774 $ 5,022 $ 55,379 $ 213 $ 212,350 Watch 1 2,505 32 586 3 282 2,502 — 5,911 Substandard 371 3,758 19 16 — — 323 1,299 5,786 Non-accrual loans 159 96 317 — 7 — 1,649 — 2,228 Total $ 40,634 $ 49,441 $ 33,180 $ 31,567 $ 4,784 $ 5,304 $ 59,853 $ 1,512 $ 226,275 Gross YTD charge-offs — 1 — — — 160 — — 161 Real Estate Construction - Residential Pass $ 39,847 $ 17,259 $ 634 $ 175 $ — $ — $ — $ — $ 57,915 Non-accrual loans 432 — — — — — — — 432 Total $ 40,279 $ 17,259 $ 634 $ 175 $ — $ — $ — $ — $ 58,347 Gross YTD charge-offs — — — — — — — — — Real Estate Construction - Commercial Pass $ 49,041 $ 53,058 $ 24,371 $ 1,040 $ 31 $ 735 $ 187 $ — $ 128,463 Watch 934 17 — — — — 103 — 1,054 Substandard 710 — — — — — — — 710 Non-accrual loans — — — — — 69 — — 69 Total $ 50,685 $ 53,075 $ 24,371 $ 1,040 $ 31 $ 804 $ 290 $ — $ 130,296 Gross YTD charge-offs — — — — — — — — — Real Estate Mortgage - Residential Pass $ 65,472 $ 121,430 $ 62,998 $ 47,884 $ 7,242 $ 19,193 $ 44,574 $ 202 $ 368,995 Watch 179 251 411 293 71 1,310 23 — 2,538 Substandard 16 — — 129 — 126 — — 271 Non-accrual loans — 23 93 135 — 246 90 — 587 Total $ 65,667 $ 121,704 $ 63,502 $ 48,441 $ 7,313 $ 20,875 $ 44,687 $ 202 $ 372,391 Gross YTD charge-offs — — — 75 — — 13 — 88 Real Estate Mortgage - Commercial Pass $ 99,081 $ 208,699 $ 204,789 $ 84,363 $ 27,085 $ 39,941 $ 16,059 $ 659 $ 680,676 Watch 15,759 10,978 2,737 91 345 897 70 — 30,877 Substandard — 215 15,944 — 45 289 — — 16,493 Non-accrual loans 1,817 54 712 212 83 — 100 — 2,978 Total $ 116,657 $ 219,946 $ 224,182 $ 84,666 $ 27,558 $ 41,127 $ 16,229 $ 659 $ 731,024 Gross YTD charge-offs — — — — — 32 — — 32 Installment and other Consumer Pass $ 7,430 $ 6,497 $ 2,720 $ 1,287 $ 987 $ 1,803 $ 90 $ — $ 20,814 Total $ 7,430 $ 6,497 $ 2,720 $ 1,287 $ 987 $ 1,803 $ 90 $ — $ 20,814 Gross YTD charge-offs 84 23 7 — — 232 1 — 347 Total Portfolio Pass $ 300,974 $ 450,025 $ 328,324 $ 165,714 $ 40,119 $ 66,694 $ 116,289 $ 1,074 $ 1,469,213 Watch 16,873 13,751 3,180 970 419 2,489 2,698 — 40,380 Substandard 1,097 3,973 15,963 145 45 415 323 1,299 23,260 Non-accrual loans 2,408 173 1,122 347 90 315 1,839 — 6,294 Total $ 321,352 $ 467,922 $ 348,589 $ 167,176 $ 40,673 $ 69,913 $ 121,149 $ 2,373 $ 1,539,147 Total Gross YTD charge-offs $ 84 $ 24 $ 7 $ 75 $ — $ 424 $ 14 $ — $ 628 14 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) Delinquent and Non-Accrual Loans The delinquency status of loans is determined based on the contractual terms of the notes. Loans are generally classified as delinquent once payments become 30 days or more past due. The Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, the ultimate collectability of interest or principal is no longer probable. 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. Subsequent interest payments received on non-accrual loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial condition of the borrower indicates that the timely collectability of interest and principal is probable and the borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months. The following table presents 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, 2024 and December 31, 2023: (in thousands) Non-accrual with no Allowance Non-accrual with Allowance Total Non-accrual 90 Days Past Due And Still Accruing Total Non-performing Loans June 30, 2024 Commercial, Financial, and Agricultural $ — $ 702 $ 702 $ — $ 702 Real estate construction − residential — 454 454 — 454 Real estate construction − commercial — 59 59 — 59 Real estate mortgage − residential — 889 889 293 1,182 Real estate mortgage − commercial — 1,305 1,305 709 2,014 Installment and Other Consumer — 11 11 15 26 Total $ — $ 3,420 $ 3,420 $ 1,017 $ 4,437 December 31, 2023 Commercial, Financial, and Agricultural $ — $ 2,228 $ 2,228 $ — $ 2,228 Real estate construction − residential — 432 432 — 432 Real estate construction − commercial — 69 69 — 69 Real estate mortgage − residential — 587 587 115 702 Real estate mortgage − commercial 2,368 610 2,978 — 2,978 Installment and Other Consumer — — — 4 4 Total $ 2,368 $ 3,926 $ 6,294 $ 119 $ 6,413 No material amount of interest income was recognized on non-accrual loans during the three and six months ended June 30, 2024. 15 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The following table provides aging information for the Company’s past due and non-accrual loans at June 30, 2024 and December 31, 2023. (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, 2024 Commercial, Financial, and Agricultural $ 215,363 $ 1,033 $ — $ 702 $ 217,098 Real estate construction − residential 36,594 — — 454 37,048 Real estate construction − commercial 55,456 — — 59 55,515 Real estate mortgage − residential 371,233 1,659 293 889 374,074 Real estate mortgage − commercial 795,857 79 709 1,305 797,950 Installment and Other Consumer 16,595 198 15 11 16,819 Total $ 1,491,098 $ 2,969 $ 1,017 $ 3,420 $ 1,498,504 December 31, 2023 Commercial, Financial, and Agricultural $ 223,845 $ 202 $ — $ 2,228 $ 226,275 Real estate construction − residential 57,568 347 — 432 58,347 Real estate construction − commercial 130,227 — — 69 130,296 Real estate mortgage − residential 368,956 2,733 115 587 372,391 Real estate mortgage − commercial 728,029 17 — 2,978 731,024 Installment and Other Consumer 20,607 203 4 — 20,814 Total $ 1,529,232 $ 3,502 $ 119 $ 6,294 $ 1,539,147 Loan Modifications for Borrowers Experiencing Financial Difficulty 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 and six months ended June 30, 2024, 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. Loans Held for Sale The Company designates certain long-term fixed rate personal real estate loans as held for sale. 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 June 30, 2024, the carrying amount of these loans was $ 1.4 million compared to $ 3.9 million at December 31, 2023. 16 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (3) Other Real Estate and Other Assets Acquired in Settlement of Loans June 30, December 31, (in thousands) 2024 2023 Commercial $ 98 $ — Real estate construction - commercial 2,549 7,668 Real estate mortgage - residential — 20 Real estate mortgage - commercial 2,722 — Repossessed assets — 6 Total $ 5,369 $ 7,694 Less valuation allowance for other real estate owned ( 1,744 ) ( 5,950 ) Total other real estate owned and repossessed assets $ 3,625 $ 1,744 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, (in thousands) 2024 2023 2024 2023 Balance at beginning of period $ 7,887 $ 10,911 $ 7,694 $ 11,459 Additions net of (charge-offs) 2,730 44 2,949 44 Proceeds from sales ( 1,488 ) ( 70 ) ( 1,548 ) ( 627 ) Charge-offs against the valuation allowance for other real estate owned, net ( 3,820 ) — ( 3,820 ) — Net gain on sales 60 39 94 48 Total other real estate owned 5,369 10,924 $ 5,369 $ 10,924 Less valuation allowance for other real estate owned ( 1,744 ) ( 4,495 ) ( 1,744 ) ( 4,495 ) Balance at end of period $ 3,625 $ 6,429 $ 3,625 $ 6,429 At June 30, 2024, there were $ 0.1 million of consumer mortgage loans secured by residential real estate properties in the process of foreclosure compared to $ 0.01 million at December 31, 2023. 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, (in thousands) 2024 2023 2024 2023 Balance at beginning of period $ 5,950 $ 2,664 $ 5,950 $ 2,664 Provision for valuation allowance for other real estate owned ( 386 ) 1,831 ( 386 ) 1,831 Charge-offs ( 3,820 ) — ( 3,820 ) — Balance at end of period $ 1,744 $ 4,495 $ 1,744 $ 4,495 17 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (4) Investment Securities The amortized cost and fair value of debt securities classified as available-for-sale at June 30, 2024 and December 31, 2023 were as follows: Gross Unrealized (in thousands) Total Amortized Cost Gains Losses Fair Value June 30, 2024 U.S. government and federal agency obligations $ 409 $ — $ ( 15 ) $ 394 U.S. government-sponsored enterprises 13,030 — ( 303 ) 12,727 Obligations of states and political subdivisions 125,943 19 ( 23,137 ) 102,825 Mortgage-backed securities 63,126 35 ( 6,519 ) 56,642 Other debt securities (a) 12,545 16 ( 1,036 ) 11,525 Bank issued trust preferred securities (a) 1,486 — ( 274 ) 1,212 Total available-for-sale securities $ 216,539 $ 70 $ ( 31,284 ) $ 185,325 December 31, 2023 U.S. Treasury $ 1,977 $ 1 $ — $ 1,978 U.S. government and federal agency obligations 446 — ( 19 ) 427 U.S. government-sponsored enterprises 22,042 16 ( 236 ) 21,822 Obligations of states and political subdivisions 126,396 55 ( 19,566 ) 106,885 Mortgage-backed securities 51,736 27 ( 6,123 ) 45,640 Other debt securities (a) 11,825 22 ( 1,026 ) 10,821 Bank issued trust preferred securities (a) 1,486 — ( 317 ) 1,169 Total available-for-sale securities $ 215,908 $ 121 $ ( 27,287 ) $ 188,742 (a) Certain hybrid instruments possessing characteristics typically associated with debt obligations. The Company’s investment securities are classified as available for sale. 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 $ 91.6 million and $ 89.2 million at June 30, 2024 and December 31, 2023, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. There were no proceeds from sales of available-for-sale securities for the three and six months ended June 30, 2024 and 2023. All gains and losses recognized on equity securities during the three and six months ended June 30, 2024 and 2023 were unrealized. 18 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The amortized cost and fair value of debt securities classified as available-for-sale at June 30, 2024, by contractual maturity are shown below. Accrued interest on investments totaled $ 1.5 million and $ 1.4 million at June 30, 2024 and December 31, 2023, 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. (in thousands) Amortized Cost Fair Value Due in one year or less $ 2,056 $ 2,036 Due after one year through five years 16,439 16,134 Due after five years through ten years 27,294 24,225 Due after ten years 107,624 86,288 Total $ 153,413 $ 128,683 Mortgage-backed securities 63,126 56,642 Total available-for-sale securities $ 216,539 $ 185,325 Other Investment Securities Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in FHLB stock, and Midwest Independent BankersBank ("MIB") stock, that do not have readily determinable fair values, are required for membership in those organizations. (in thousands) June 30, 2024 December 31, 2023 Other securities: FHLB stock $ 5,620 $ 6,071 MIB stock 151 151 Equity securities with readily determinable fair values 63 78 Total other investment securities $ 5,834 $ 6,300 19 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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, 2024 and December 31, 2023 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, 2024 U.S. government and federal agency obligations $ — $ — $ 394 $ ( 15 ) $ 394 $ ( 15 ) U.S. government-sponsored enterprises 10,968 ( 62 ) 1,759 ( 241 ) 12,727 ( 303 ) Obligations of states and political subdivisions 1,739 ( 171 ) 100,076 ( 22,966 ) 101,815 ( 23,137 ) Mortgage-backed securities 10,806 ( 39 ) 38,975 ( 6,480 ) 49,781 ( 6,519 ) Other debt securities 698 ( 22 ) 8,810 ( 1,014 ) 9,508 ( 1,036 ) Bank issued trust preferred securities — — 1,212 ( 274 ) 1,212 ( 274 ) Total $ 24,211 $ ( 294 ) $ 151,226 $ ( 30,990 ) $ 175,437 $ ( 31,284 ) (in thousands) December 31, 2023 U.S. Treasury $ 997 $ — $ — $ — $ 997 $ — U.S. government and federal agency obligations — — 427 ( 19 ) 427 ( 19 ) U.S. government-sponsored enterprises 11,995 ( 8 ) 1,772 ( 228 ) 13,767 ( 236 ) Obligations of states and political subdivisions 1,501 ( 158 ) 103,283 ( 19,408 ) 104,784 ( 19,566 ) Mortgage-backed securities 2,935 ( 40 ) 39,793 ( 6,083 ) 42,728 ( 6,123 ) Other debt securities — — 8,799 ( 1,026 ) 8,799 ( 1,026 ) Bank issued trust preferred securities — — 1,169 ( 317 ) 1,169 ( 317 ) Total $ 17,428 $ ( 206 ) $ 155,243 $ ( 27,081 ) $ 172,671 $ ( 27,287 ) The total available-for-sale portfolio consisted of approximately 389 securities at June 30, 2024. The portfolio included 376 securities having an aggregate fair value of $ 175.4 million that were in a loss position at June 30, 2024. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 151.2 million at fair value at June 30, 2024. The $ 31.3 million aggregate unrealized loss included in accumulated other comprehensive loss at June 30, 2024 was caused by interest rate fluctuations. The total available-for-sale portfolio consisted of approximately 385 securities at December 31, 2023. The portfolio included 370 securities having an aggregate fair value of $ 172.7 million that were in a loss position at December 31, 2023. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 155.2 million at fair value at December 31, 2023. The $ 27.3 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2023 was caused by interest rate fluctuations. The decline in fair value is attributable to changes in interest rates and not credit quality. 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. In addition, the Company does not have the intent to sell these investments over the period of recovery, and it is not more likely than not that the Company will be required to sell such investment securities. (5) Intangible Assets Mortgage Servicing Rights On January 31, 2024, the Company sold its mortgage servicing rights portfolio and all serviced loans transferred to the new servicer on April 30, 2024. The balance of the servicing portfolio for loans sold to the secondary market was approximately $ 220.7 million at December 31, 2023 and $ 231.1 million at June 30, 2023. Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $ 0.04 million and $ 0.1 million for the three and six months ended 20 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) June 30, 2024, respectively, compared to $ 0.2 million and $ 0.3 million for the three and six months ended June 30, 2023, respectively. The table below presents changes in mortgage servicing rights (MSRs) for the periods indicated. Six Months Ended June 30, (in thousands) 2024 2023 Balance at beginning of period $ 1,738 $ 2,899 Originated mortgage servicing rights — 30 Sale proceeds ( 1,589 ) — Changes in fair value: Due to changes in model inputs and assumptions (1) — 101 Other changes in fair value (2) ( 149 ) ( 128 ) Total changes in fair value ( 149 ) ( 27 ) Balance at end of period $ — $ 2,902 (1) The change in fair value resulting from changes in valuation inputs or assumptions, reported in real estate servicing fees, net, used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates. (2) Other changes in fair value, reported in real estate servicing fees, net, reflect changes due to customer payments and passage of time. Total changes in fair value are reported in real estate servicing fees, net, reported in non-interest income in the Company's consolidated statements of income. In the fourth quarter of 2023, the Company recognized a $ 1.1 million mortgage MSR valuation write-down upon accepting a letter of intent to sell the Company's servicing portfolio, which closed during the first quarter of 2024. Prior to the fourth quarter of 2023, valuation assumptions were reviewed with a third party specialist. The following key data and assumptions were used in estimating the fair value of the Company’s MSRs for the periods indicated/as of June 30, 2023: Six Months Ended June 30, 2024 2023 Weighted average constant prepayment rate NA 6.74 % Weighted average note rate NA 3.47 % Weighted average discount rate NA 11.00 % Weighted average expected life (in years) NA 7.12 (6) Deposits The table below presents 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, 2024 December 31, 2023 Time deposits with balances > $250,000 $ 101,025 $ 108,147 Brokered deposits $ 30,379 $ 161 (7) Leases 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, 2024, operating right of use (ROU) assets and liabilities were both $ 1.1 million. As of June 30, 2024, the weighted-average remaining lease term on these operating leases was approximately 4.7 years and the weighted-average discount rate used to measure the lease liabilities was approximately 4.0 %. 21 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities. Currently, the Company does not have any finance leases. The ROU assets are included in premises and equipment, net on the consolidated balance sheets. Operating lease ROU assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company's incremental borrowing rate at the lease commencement date. 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 $ 0.06 million and $ 0.1 million for the three and six months ended June 30, 2024, respectively, compared to $ 0.1 million and $ 0.2 million for the three and six months ended June 30, 2023, respectively. 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 $ 0.02 million and $ 0.04 million for the three and six months ended June 30, 2024, respectively, compared to $ 0.03 million and $ 0.06 million for the three and six months ended June 30, 2023, respectively. The table below summarizes the maturity of remaining operating lease liabilities: Lease payments due in: Operating Lease (in thousands) 2024 (excluding 6 months ended June 30, 2024) $ 127 2025 257 2026 259 2027 262 2028 265 Thereafter 44 Total lease payments $ 1,214 Less imputed interest ( 104 ) Total lease liabilities, as reported $ 1,110 (8) Income Taxes Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements was 18.2 % and 18.0 % for the three and six months ended June 30, 2024, respectively, compared to 17.2 % and 17.6 % for the three and six months ended June 30, 2023, respectively. The effective tax rate for each of the three and six months ended June 30, 2024 and 2023, respectively, is lower than the U.S. federal statutory rate of 21% primarily due to tax-free revenues. 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 June 30, 2024. 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. 22 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions . For each of the three and six months ended June 30, 2024 and 2023, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities. (9) Stockholders’ Equity and Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive (Loss) Income The following table summarizes the change in the components of the Company’s accumulated other comprehensive income (loss) for the six months ended June 30, 2024 and 2023: Six Months Ended June 30, 2024 (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 $ ( 21,461 ) $ 7,699 $ ( 13,762 ) Other comprehensive loss, before reclassifications ( 4,048 ) ( 345 ) ( 4,393 ) Amounts reclassified from accumulated other comprehensive income (loss) — — — Current period other comprehensive loss, before tax ( 4,048 ) ( 345 ) ( 4,393 ) Income tax benefit 850 72 922 Current period other comprehensive loss, net of tax ( 3,198 ) ( 273 ) ( 3,471 ) Balance at end of period $ ( 24,659 ) $ 7,426 $ ( 17,233 ) Six Months Ended June 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 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 Balance at end of period $ ( 35,280 ) $ 4,690 $ ( 30,590 ) (1) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in investment securities gains (losses), net in the consolidated statements of income. (2) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in the computation of net periodic pension cost. (10) Share-Based Compensation Equity-Based Compensation Plan At the 2023 Annual Meeting of Shareholders, held on June 6, 2023, the Company's shareholders approved the Hawthorn Bancshares, Inc. Equity Incentive Plan (the Equity Plan), which was previously approved by the Company's Board of Directors. The purpose of the Equity Plan is to allow eligible participants of the Company and its subsidiaries to acquire or increase a proprietary and vested interest in the growth and performance of the Company. The Equity Plan is also designed to assist the Company in attracting and retaining selected service providers by providing them with the opportunity to participate in the success and profitability of the Company. The terms of the Equity Plan provide for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, other equity-based awards and cash awards. Subject to certain adjustments, the maximum number of shares of the Company's common stock that may be delivered pursuant to awards under the Equity Plan is 203,000 shares. Eligible participants under the Equity Plan 23 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) include all employees, non-employee directors and consultants of the Company or its subsidiaries. The Equity Plan is currently administered by the Compensation Committee of the Board of Directors The Compensation Committee adopted a form of restricted stock unit award agreement (service-based vesting). The Company issues restricted share units ("RSUs") to provide additional incentives to key officers, employees, and non-employee directors. Awards are granted as determined by the Compensation Committee. The service-based RSUs vest, and shares of common stock are issued, in equal installments on the first, second, and third anniversaries of the date of grant. The following table summarizes the status of the Company's RSUs for the six months ended June 30, 2024: RSUs (in thousands, except per share amounts) Quantity Weighted-Average Grant Date Fair Value Per share Non-vested at January 1, 2024 18,277 $ 20.63 Granted 11,151 20.18 Vested ( 4,092 ) 19.80 Forfeited — — Non-vested at June 30, 2024 25,336 $ 20.20 The fair value of the RSUs units is determined using the Company’s stock price on the date of grant. Total share-based compensation expense recognized for the three and six months ended June 30, 2024 for these RSUs was $ 0.04 million and $ 0.1 million, respectively. No share-based compensation expense was recognized for the three and six months ended June 30, 2023. Forfeitures will be recognized as they occur. At June 30, 2024, there was $ 0.5 million of total unrecognized compensation expense related to RSUs that is expected to be recognized over a weighted-average period of 2.5 years. (11) Employee Benefit Plans Employee Benefits 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, (in thousands) 2024 2023 2024 2023 Payroll taxes $ 384 $ 387 $ 827 $ 854 Medical plans 408 427 836 894 401(k) match and profit sharing 295 221 620 511 Periodic pension cost 245 247 528 531 Other — 8 1 19 Total employee benefits $ 1,332 $ 1,290 $ 2,812 $ 2,809 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. In addition, employees were able to make additional tax-deferred contributions. 24 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) Other Plans On November 7, 2018, the Board of Directors of the Company adopted a supplemental executive retirement plan (SERP), effective as of January 1, 2018. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment or death. The accrued liability relating to the SERP was $ 1.8 million as of June 30, 2024, and the expense for the three and six months ended June 30, 2024 was $ 0.02 million and $ 0.05 million, respectively, compared to $ 0.01 million and $ 0.02 million for the three and six months ended June 30, 2023, respectively, and is recognized over the required service period. Pension The Company provides a noncontributory defined benefit pension plan for all full-time and eligible employees. Beginning January 1, 2018 and for all retrospective periods presented, the Company adopted the guidance under ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost . Under the guidance, only the service cost component of the net periodic benefit cost is reported in the same income statement line item as salaries and benefits, and the remaining components are reported as other non-interest expense. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. Effective July 1, 2017, the Company amended the pension plan to effectuate a “soft freeze” such that no individual hired (or rehired in the case of a former employee) by the Company after September 30, 2017, whether or not such individual is or was a vested member in the plan, will be eligible to be an active member and be entitled to accrue any benefits under the plan. Components of Net Pension Cost (Income) and Other Amounts Recognized in Accumulated Other Comprehensive Income (Loss) The following items are components of net pension cost (income) for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Service cost - benefits earned during the year $ 218 $ 219 $ 474 $ 473 Interest costs on projected benefit obligations (a) 366 349 738 714 Expected return on plan assets (a) ( 589 ) ( 544 ) ( 1,179 ) ( 1,089 ) Expected administrative expenses 27 28 54 58 Amortization of unrecognized net gain (a) ( 186 ) ( 178 ) ( 345 ) ( 320 ) Net periodic pension income $ ( 164 ) $ ( 126 ) $ ( 258 ) $ ( 164 ) (a) The components of net periodic pension cost (income) other than the service cost and expected administrative expenses are included in other non-interest income. Net periodic pension benefit costs (income) include interest costs based on an assumed discount rate, the expected return on plan assets based on actuarially derived market-related values, and the amortization of net actuarial (gains) losses. Net periodic postretirement benefit costs include service costs, interest costs based on an assumed discount rate, and the amortization of prior service credits and net actuarial gains. 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 (loss) income. 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. 25 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (12) Earnings per Share Basic earnings per share is computed by dividing income available to shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share gives effect to all dilutive potential shares that were outstanding during the period. Presented below is a summary of the components used to calculate basic and diluted earnings per common share, which have been restated for all stock dividends: Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands, except per share data) 2024 2023 2024 2023 Basic and Diluted Earnings Per Share: Net income available to shareholders $ 4,629 $ 2,549 $ 9,085 $ 5,820 Basic weighted-average shares outstanding 6,995,956 7,039,323 7,014,063 7,039,323 Effect of dilutive equity-based awards — — — — Diluted weighted-average shares outstanding 6,995,956 7,039,323 7,014,063 7,039,323 Basic earnings per share $ 0.66 $ 0.36 $ 1.29 $ 0.83 Diluted earnings per share $ 0.66 $ 0.36 $ 1.29 $ 0.83 The dilutive effect of RSUs is reflected in diluted earnings per share unless the impact is anti-dilutive, by application of the treasury stock method. Repurchase Program Pursuant to the Company's 2019 Repurchase Plan, management is given discretion to determine the number and pricing of the shares to be repurchased, as well as the timing of any such repurchases. The Company repurchased 51,692 common shares under the repurchase plan during the first six months of 2024 at an average cost of $ 19.46 per share totaling $ 1.0 million. As of June 30, 2024, $ 4.0 million remained available for share repurchases pursuant to the plan. (13) Fair Value Measurements Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under U.S. GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows. The fair value hierarchy is as follows: Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value. Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 – Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s best information and assumptions that a market participant would consider. 26 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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. Valuation Methods for Assets and Liabilities Measured at Fair Value on a Recurring Basis Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis: Available-for-Sale Securities 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. 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 FHLB stock and MIB stock, that do not have readily determinable fair values, are required for membership in those organizations. Equity securities that are not actively traded are classified in Level 2. Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings. Equity securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment. The Company uses Level 1 inputs to value equity securities that are traded in active markets. Loans Held for Sale The fair value of the commitment in forward sale agreements loans is the price at which they could be sold in the principal market at the measurement date, therefore the Company classifies these loans as Level 2. Derivative Assets and Liabilities Derivative assets and liabilities include interest rate lock commitments (IRLCs) and forward sale commitments. The fair values of IRLCs and forward sale commitments are determined using readily observable market data such as interest rates, prices, volatility factors, and customer credit-related adjustments. For IRLCs, the fair value is subject to the anticipated loan funding probability (pull-through rate), which is considered an unobservable factor. Factors that affect pull-through rates include origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage, stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. The Company classifies IRLCs as Level 3 due to the unobservable input of pull-through rates. Mortgage Servicing Rights (MSRs) The Company sold its servicing portfolio on January 31, 2024. In prior periods, 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. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including 27 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its MSRs as Level 3. Fair Value Measurements (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, 2024 Assets: U.S. government and federal agency obligations $ 394 $ — $ 394 $ — U.S. government-sponsored enterprises 12,727 — 12,727 — Obligations of states and political subdivisions 102,825 — 102,825 — Mortgage-backed securities 56,642 — 56,642 — Other debt securities 11,525 — 11,525 — Bank-issued trust preferred securities 1,212 — 1,212 — Equity securities 63 63 — — Interest rate lock commitments 11 — — 11 Forward sale commitments 1 — 1 — Loans held for sale 1,368 — 1,368 — Total $ 186,768 $ 63 $ 186,694 $ 11 Liabilities: Interest rate lock commitments $ 1 $ — $ — $ 1 Forward sale commitments 5 — 5 — Total $ 6 $ — $ 5 $ 1 December 31, 2023 Assets: U.S. Treasury $ 1,978 $ 1,978 $ — $ — U.S. government and federal agency obligations 427 — 427 — U.S. government-sponsored enterprises 21,822 — 21,822 — Obligations of states and political subdivisions 106,885 — 106,885 — Mortgage-backed securities 45,640 — 45,640 — Other debt securities 10,821 — 10,821 — Bank-issued trust preferred securities 1,169 — 1,169 — Equity securities 78 78 — — Interest rate lock commitments 43 — — 43 Loans held for sale 3,884 — 3,884 — Mortgage servicing rights 1,738 — — 1,738 Total $ 194,485 $ 2,056 $ 190,648 $ 1,781 Liabilities: Interest rate lock commitments $ 2 $ — $ — $ 2 Forward sale commitments 41 — 41 — Total $ 43 $ — $ 41 $ 2 28 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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 Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Balance at beginning of period $ 1,738 $ 2,899 $ 41 $ 2 Total gains or (losses) (realized/unrealized): Included in earnings ( 149 ) ( 27 ) ( 11 ) ( 18 ) Included in other comprehensive income — — — — Purchases — — — — Sales ( 1,589 ) — ( 76 ) ( 110 ) Issues — 30 56 141 Balance at end of period $ — $ 2,902 $ 10 $ 15 Valuation Methods for Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a non-recurring basis: Collateral Dependent Impaired Loans 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 credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains staff trained to perform in-house evaluations and also to review third-party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by a senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of June 30, 2024, the Company identified $ 1.6 million in collateral-dependent loans that required a $ 0.6 million specific allowance for credit losses. Related to these loans, there were $ 1.9 million in charge-offs recorded in each of the three and six months ended June 30, 2024. As of June 30, 2023, the Company identified $ 2.9 million in collateral-dependent loans that required a $ 0.03 million specific allowance for credit losses. Related to these loans, there were $ 0.02 million and $ 0.03 million in charge-offs recorded during the three and six months ended June 30, 2023, respectively. Other Real Estate and Foreclosed Assets Other real estate owned (OREO) and foreclosed assets consisted of loan collateral repossessed through foreclosure. 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 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. Like impaired loans, appraisals on OREO may be discounted based on the Company’s historical knowledge, changes in market conditions from the time of appraisal or other information available. During the holding period, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3. 29 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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, 2024 Assets: Collateral dependent impaired loans: Commercial, financial, & agricultural $ 13 — — $ 13 $ ( 1,835 ) $ ( 1,835 ) Real estate construction − residential 260 — — 260 — — Real estate mortgage - residential — — — — ( 22 ) ( 22 ) Real estate mortgage - commercial 740 — — 740 ( 66 ) ( 89 ) Total $ 1,013 $ — $ — $ 1,013 $ ( 1,923 ) $ ( 1,946 ) Other real estate and repossessed assets $ 3,625 $ — $ — $ 3,625 $ 446 $ 480 June 30, 2023 Assets: Collateral dependent impaired loans: Commercial, financial, & agricultural $ 50 $ — $ — $ 50 $ — $ — Real estate mortgage - residential 120 — — 120 — — Real estate mortgage - commercial 2,660 — — 2,660 ( 20 ) ( 25 ) Total $ 2,830 $ — $ — $ 2,830 $ ( 20 ) $ ( 25 ) Other real estate and repossessed assets $ 6,429 $ — $ — $ 6,429 $ ( 1,792 ) $ ( 1,783 ) * Total gains (losses) reported for other real estate and foreclosed assets include charge-offs, valuation write downs, and net losses taken during the periods reported. (14) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value: Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, and consumer. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans, or exit price, is estimated by using the future value of discounted cash flows using comparable market rates for similar types of loan products and adjusted for market factors. The discount rates used are estimated using comparable market rates for similar types of loan products adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments. Federal funds Sold, Cash, and Due from Banks The carrying amounts of short-term federal funds sold, interest-earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold classified as short-term generally mature in 90 days or less. Certificates of Deposit in Other Banks Certificates of deposit are other investments made by the Company with other financial institutions that are carried at cost; which is equal to fair value. Cash Surrender Value - Life Insurance 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. 30 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) Accrued Interest Receivable and Payable For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments. Deposits The fair value of deposits with no stated maturity, such as non-interest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Federal funds Purchased and Securities Sold Under Agreements to Repurchase For Federal funds purchased and securities sold under agreements to repurchase, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period. Subordinated Notes and Other Borrowings The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash-flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities. 31 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) A summary of the carrying amounts and fair values of the Company’s financial instruments at June 30, 2024 and December 31, 2023 is as follows: June 30, 2024 Fair Value Measurements June 30, 2024 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) Assets: Cash and due from banks $ 16,754 $ 16,754 $ 16,754 $ — $ — Federal funds sold and overnight interest-bearing deposits 59,088 59,088 59,088 — — Certificates of deposit in other banks 1,000 1,000 1,000 — — Available-for-sale securities 185,325 185,325 0 185,325 — Other investment securities 5,834 5,834 63 5,771 — Loans, net 1,476,524 1,383,371 — — 1,383,371 Loans held for sale 1,368 1,368 — 1,368 — Cash surrender value - life insurance 38,109 38,109 — 38,109 — Interest rate lock commitments 11 11 — — 11 Forward sale commitments 1 1 — 1 — Accrued interest receivable 7,981 7,981 7,981 — — Liabilities: Deposits: Non-interest bearing demand $ 401,618 $ 401,618 $ 401,618 $ — $ — Savings, interest checking and money market 804,183 804,183 804,183 — — Time deposits 344,449 342,279 — — 342,279 FHLB advances and other borrowings 99,100 99,100 100 99,000 — Subordinated notes 49,486 40,365 — 40,365 — Interest rate lock commitments 1 1 — — 1 Forward sale commitments 5 5 — 5 — Accrued interest payable 2,113 2,113 2,113 — — 32 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) December 31, 2023 Fair Value Measurements December 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) Assets: Cash and due from banks $ 15,675 $ 15,675 $ 15,675 $ — $ — Federal funds sold and overnight interest-bearing deposits 77,775 77,775 77,775 — — Available-for-sale securities 188,742 188,742 1,978 186,764 — Other investment securities 6,300 6,300 78 6,222 — Loans, net 1,515,403 1,364,533 — — 1,364,533 Loans held for sale 3,884 3,884 — 3,884 — Cash surrender value - life insurance 2,624 2,624 — 2,624 — Interest rate lock commitments 43 43 — — 43 Accrued interest receivable 8,661 8,661 8,661 — — Liabilities: Deposits: Non-interest bearing demand $ 402,241 $ 402,241 $ 402,241 $ — $ — Savings, interest checking and money market 846,452 846,452 846,452 — — Time deposits 322,151 319,929 — — 319,929 FHLB advances and other borrowings 107,000 107,245 — 107,245 — Subordinated notes 49,486 38,939 — 38,939 — Interest rate lock commitments 2 2 — — 2 Forward sale commitments 41 41 — 41 — Accrued interest payable 1,772 1,772 1,772 — — Off-Balance Sheet Financial Instruments The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates. Limitations The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates. (15) Commitments and Contingencies The Company issues financial instruments with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of 33 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company’s extent of involvement and maximum potential exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. 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. 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, 2024, the allowance for credit losses for unfunded commitments was $ 0.9 million. The contractual amounts of off-balance-sheet financial instruments were as follows as of the dates indicated: (in thousands) June 30, 2024 December 31, 2023 Commitments to extend credit $ 310,584 $ 286,939 Interest rate lock commitments 2,131 3,694 Forward sale commitments 1,341 3,779 Standby letters of credit 48,200 111,631 Total $ 362,256 $ 406,043 Commitments Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate. The Company has two types of commitments related to mortgage loans held for sale: interest rate lock commitments and forward loan sale commitments. Interest rate lock commitments are commitments to extend credit to a customer that has an interest rate lock and are considered derivative instruments. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby letters of credit ranged from one month to five years at June 30, 2024. Pending Litigation The Company and its subsidiaries are defendants in various legal actions incidental to the Company’s past and current business activities. Based on the Company’s analysis, and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably possible that these legal actions will materially adversely affect the Company’s consolidated financial condition or results of operations in the near term. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss is deemed probable or an amount can be estimated. 34