What changed in this filing

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Item 1. Financial Statements

2021-11-04 compared with 2021-08-06 · 152 added, 151 removed, 922 unchanged (25% of the section changed)

3 unchanged sentences

Consolidated Balance Sheets

September 30,

(In thousands, except per share data)

29 unchanged sentences

Common stock, $ 1 par value, authorized 15,000,000 shares;

issued 6,769,322

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

Retained earnings

Accumulated other comprehensive income, net of tax

Accumulated other comprehensive (loss) income, net of tax

Treasury stock;

7 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands, except per share amounts)

46 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(In thousands)

Other comprehensive income, net of tax

Other comprehensive (loss) income, net of tax

Investment securities available-for-sale:

Unrealized gains (losses) on investment securities available-for-sale, net of tax

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

Adjustment for gains on sale of investment securities, net of tax

1 unchanged sentence

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

Total other comprehensive income (loss)

Total other comprehensive (loss) income

Total comprehensive income

3 unchanged sentences

Consolidated Statements of Stockholders’ Equity (unaudited)

The three months ended June 30, 2021 and 2020

The three months ended September 30, 2021 and 2020

Comprehensive

1 unchanged sentence

Income (Loss)

Balance, March 31, 2021

Other comprehensive income

Balance, June 30, 2021

Other comprehensive loss

Stock dividend

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

Balance, September 30, 2021

Balance, June 30, 2020

Balance, March 31, 2020

Other comprehensive income

2 unchanged sentences

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

Balance, June 30, 2020

The six months ended June 30, 2021 and 2020

Balance, September 30, 2020

The nine months ended September 30, 2021 and 2020

Comprehensive

6 unchanged sentences

Cash dividends declared, common stock ($ 0.43 per share)

Balance, June 30, 2021

Balance, September 30, 2021

Balance, December 31, 2019

3 unchanged sentences

Cash dividends declared, common stock ($ 0.36 per share)

Balance, June 30, 2020

Balance, September 30, 2020

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

2 unchanged sentences

Consolidated Statements of Cash Flows (unaudited)

Six Months Ended June 30,

Nine Months Ended September 30,

(In thousands)

9 unchanged sentences

Provision for other real estate owned

Decrease in accrued interest receivable

Increase in accrued interest receivable

Increase in cash surrender value - life insurance

Decrease (increase) in other assets

Decrease in other assets

Decrease in operating lease liabilities

Decrease in accrued interest payable

(Decrease) increase in other liabilities

Increase in other liabilities

Origination of mortgage loans held for sale

5 unchanged sentences

Proceeds from maturities of certificates of deposit in other banks

Net increase in loans

Net decrease (increase) in loans

Purchase of available-for-sale debt securities

25 unchanged sentences

Other real estate and repossessed assets acquired in settlement of loans

Stock dividends

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

15 unchanged sentences

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

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

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

Actual results could differ from those estimates.

11 unchanged sentences

(2) Loans and Allowance for Loan Losses

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

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

September 30,

(in thousands)

6 unchanged sentences

Total loans held for investment

(a) Includes $ 49.6 million and $ 63.3 million of SBA PPP loans, net as of June 30, 2021 and December 31, 2020, respectively.

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

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

3 unchanged sentences

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

At June 30, 2021, loans of $ 537.1 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit.

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

Allowance for Loan Losses

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

Three Months Ended June 30, 2021

Three Months Ended September 30, 2021

Construction -

7 unchanged sentences

Balance at end of period

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Construction -

6 unchanged sentences

Net loan charge-offs (recoveries)

Balance at end of period

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

Balance at end of period

Six Months Ended June 30, 2021

Nine Months Ended September 30, 2021

Construction -

7 unchanged sentences

Balance at end of period

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Construction -

24 unchanged sentences

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

Enough time had passed so that data after the outbreak would be available and a better interpretation of the impact of the virus on the economy.

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

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

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

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

At June 30, 2021, the net balance of the PPP loans totaled $ 49.6 million.

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

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

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

3 unchanged sentences

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

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

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

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

Financial, and

2 unchanged sentences

(in thousands)

June 30, 2021

September 30, 2021

Allowance for loan losses:

14 unchanged sentences

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

Impaired loans individually evaluated for impairment totaled $ 36.1 million and $ 37.3 million at June 30, 2021 and December 31, 2020, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructuring (TDRs).

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

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

At June 30, 2021, $ 31.8 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans' collateral compared to $ 32.2 million at December 31, 2020.

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

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

At June 30, 2021, $ 5.4 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $ 36.1 million compared to $ 5.1 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately $ 37.3 million at December 31, 2020.

Management determined that $ 12.4 million, or 34 %, of total impaired loans required no reserve allocation at June 30, 2021 compared to $ 11.9 million, or 32 %, at December 31, 2020, primarily due to adequate collateral values , acceptable payment history and adequate cash flow ability.

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

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

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

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

September 30,

(in thousands)

5 unchanged sentences

Notes to the Consolidated Financial Statements

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

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

(in thousands)

June 30, 2021

September 30, 2021

With no related allowance recorded:

27 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

14 unchanged sentences

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

The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to TDRs, was $ 36,000 and $ 76,000 for the three and six months ended June 30, 2021, respectively, compared to $ 30,000 and $ 73,000 for the three and six months ended June 30, 2020, respectively.

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

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

12 unchanged sentences

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

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

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

(in thousands)

June 30, 2021

September 30, 2021

Commercial, Financial, and Agricultural

11 unchanged sentences

Installment and Other Consumer

The Company's past due and non-accrual loans at June 30, 2021 and December 31, 2020 do not include $ 19.2 million and $ 57.1 million of loans accepting forbearance under the CARES Act, respectively.

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

Of the total remaining $ 42.8 million loan modifications under the CARES Act, $ 23.5 million, are on non-accrual status at June 30, 2021.

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

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

Credit Quality

12 unchanged sentences

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

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

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

Construction -

1 unchanged sentence

(in thousands)

At June 30, 2021

At September 30, 2021

Performing TDRs

4 unchanged sentences

Troubled Debt Restructurings

At June 30, 2021, loans classified as TDRs totaled $ 3.1 million, of which $ 0.8 million were classified as non-performing TDRs and $ 2.3 million were classified as performing TDRs.

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

At December 31, 2020, loans classified as TDRs totaled $ 3.7 million, of which $ 0.9 million were classified as non-performing TDRs and $ 2.8 million were classified as performing TDRs.

1 unchanged sentence

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

Accordingly, specific reserves of $ 154,000 and $ 214,000 related to TDRs were allocated to the allowance for loan losses at June 30, 2021 and December 31, 2020, respectively.

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

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

At June 30, 2021, $ 42.8 million, or 3.3 % of total loans, remained in some form of a modification.

These loan modifications include $ 11.4 million on interest only, $ 26.4 million on full deferral and $ 5.0 million with extended amortization.

Of the $ 26.4 million loan modifications on full deferral, $ 23.5 million, or 55.0 % of the total remaining loan modifications, were determined to be on non-accrual status as of June 30, 2021.

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

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

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

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

These loan modifications include two remaining loans on interest only.

HAWTHORN BANCSHARES, INC.

2 unchanged sentences

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

Three Months Ended June 30,

Recorded Investment (1)

(in thousands)

Troubled Debt Restructurings

Real estate mortgage − residential

Six Months Ended June 30,

Nine Months Ended September 30,

Recorded Investment (1)

6 unchanged sentences

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

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

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

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

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

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

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

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

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

See Lending and Credit Management section for further information.

2 unchanged sentences

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

At June 30, 2021, the carrying amount of these loans was $ 2.5 million compared to $ 5.1 million and $ 9.0 million at December 31, 2020 and June 30, 2020, respectively.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

(3) Other Real Estate Acquired in Settlement of Loans

September 30,

(in thousands)

4 unchanged sentences

Total other real estate owned

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

6 unchanged sentences

Balance at end of period

At June 30, 2021, $ 214,000 of consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to $ 287,000 of consumer mortgage loans at December 31, 2020.

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

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

7 unchanged sentences

Available for sale securities

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

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

Gross Unrealized

( in thousands)

June 30, 2021

September 30, 2021

government and federal agency obligations

18 unchanged sentences

government-sponsored enterprises.

Debt securities with carrying values aggregating approximately $ 209.5 million and $ 153.9 million at June 30, 2021 and December 31, 2020, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

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

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

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

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

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

9 unchanged sentences

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

September 30,

(in thousands)

5 unchanged sentences

Notes to the Consolidated Financial Statements

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

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

Less than 12 months

1 unchanged sentence

(in thousands)

At June 30, 2021

At September 30, 2021

government-sponsored enterprises

8 unchanged sentences

* Amounts less than $1,000 are not reported

The total available-for-sale portfolio consisted of approximately 406 securities at June 30, 2021.

The portfolio included 78 securities having an aggregate fair value of $ 86.7 million that were in a loss position at June 30, 2021.

Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $ 1.2 million at fair value at June 30, 2021.

The $ 1.2 million aggregate unrealized loss included in accumulated other comprehensive loss at June 30, 2021 was caused by interest rate fluctuations.

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

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

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

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

The total available-for-sale portfolio consisted of approximately 308 securities at December 31, 2020.

2 unchanged sentences

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

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

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

4 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

9 unchanged sentences

Mortgage Servicing Rights

At June 30, 2021, the Company was servicing approximately $ 286.6 million of loans sold to the secondary market compared to $ 292.7 million at December 31, 2020, and $ 273.8 million at June 30, 2020.

Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $ 193,000 and $ 386,000 for the three and six months ended June 30, 2021, respectively, compared to $ 234,000 and $ 422,000 for the three and six months ended June 30, 2020, respectively.

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

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

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

11 unchanged sentences

Notes to the Consolidated Financial Statements

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

Six Months Ended June 30,

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

Nine Months Ended September 30,

Weighted average constant prepayment rate

3 unchanged sentences

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

September 30,

(in thousands)

10 unchanged sentences

(in thousands)

At June 30, 2021

At September 30, 2021

government-sponsored enterprises

4 unchanged sentences

Mortgage-backed securities

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, 2021, operating right of use (ROU) assets and liabilities were $ 2.0 million and $ 2.0 million,

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

respectively.

As of June 30, 2021, the weighted-average remaining lease term on these operating leases is approximately 6.9 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4.0 %.

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

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

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

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

4 unchanged sentences

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

The operating lease cost was $ 95,000 and $ 196,000 for the three and six months ended June 30, 2021, respectively, compared to $ 80,000 and $ 166,000 for the three and six months ended June 30, 2020, respectively.

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

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

2 unchanged sentences

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

Operating lease expense for these leases was $ 19,000 and $ 32,000 for the three and six months ended June 30, 2021, respectively, compared to $ 25,000 and $ 60,000 for the three and six months ended June 30, 2020, respectively.

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

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

1 unchanged sentence

(in thousands)

2021 (excluding 6 months ended June 30, 2021)

2021 (excluding 9 months ended September 30, 2021)

Total lease payments

1 unchanged sentence

Total lease liabilities, as reported

(8) Income Taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 19.7 % and 19.2 % for the three and six months ended June 30, 2021, respectively, compared to 18.6 % and 17.9 % for the three and six months ended June 30, 2020, respectively.

The increase in the effective tax rate for each of the three and six

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

months ended June 30, 2021 compared to the three and six months ended June 30, 2020 was primarily attributable to the increase in earnings and an increase in state taxes attributed to elevated earnings.

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

(8) Income Taxes

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

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

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

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

1 unchanged sentence

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

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

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

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

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

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

(9) Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss)

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

Six Months Ended June 30, 2021

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

Nine Months Ended September 30, 2021

Unrecognized Net

14 unchanged sentences

Notes to the Consolidated Financial Statements

Six Months Ended June 30, 2020

Nine Months Ended September 30, 2020

Unrecognized Net

16 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

6 unchanged sentences

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

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

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

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

The accrued liability relating to the SERP was $ 1.2 million as of June 30, 2021, and the expense for the three and six months ended June 30, 2021 was $ 97,000 and $ 193,000 , respectively, compared to $ 80,000 and $ 160,000 for the three and six months ended June 30, 2020, respectively, and is recognized over the required service period.

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

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

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

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 .

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

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands)

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

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

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

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

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.

eligibility for participating employees expected to receive benefits.

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

(11) Earnings per Share

5 unchanged sentences

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands, except per share data)

12 unchanged sentences

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

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

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

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

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

HAWTHORN BANCSHARES, INC.

36 unchanged sentences

The Company classifies its servicing rights as Level 3.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

Fair Value Measurements

1 unchanged sentence

(in thousands)

June 30, 2021

September 30, 2021

government and federal agency obligations

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Mortgage Servicing Rights

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

4 unchanged sentences

Balance at end of period

Valuation Methods for Assets and Liabilities Measured at Fair Value on a nonrecurring basis

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 nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans.

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

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

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

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

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

As of June 30, 2021, the Company identified $ 31.8 million in collateral dependent impaired loans that had specific allowances for losses aggregating $ 5.0 million.

Related to these loans, there were $ 11,000 and $ 34,000 in charge-offs recorded during the three and six months ended June 30, 2021, respectively.

As of June 30, 2020, the Company identified $ 7.0 million in collateral dependent impaired loans that had specific allowances for losses aggregating $ 0.4 million.

Related to these loans, there were $ 37,000 and $ 92,000 in charge-offs recorded during the three and six months ended June 30, 2020, respectively.

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

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

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

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

Other Real Estate and Foreclosed Assets

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Quoted Prices

September 30,

(in thousands)

June 30, 2021

September 30, 2021

Collateral dependent impaired loans:

4 unchanged sentences

Other real estate and repossessed assets

June 30, 2020

September 30, 2020

Collateral dependent impaired loans:

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

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

The fair value of loans, or exit price, is estimated by using the future value of discounted cash flows

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

HAWTHORN BANCSHARES, INC.

1 unchanged sentence

Notes to the Consolidated Financial Statements

using comparable market rates for similar types of loan products and adjusted for market factors.

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.

36 unchanged sentences

Notes to the Consolidated Financial Statements

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

June 30, 2021

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

September 30, 2021

Fair Value Measurements

Quoted Prices

June 30, 2021

September 30, 2021

(in thousands)

53 unchanged sentences

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

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

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

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

September 30,

(in thousands)

10 unchanged sentences

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

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

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

Pending Litigation

4 unchanged sentences

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

What changed 10-Q

Item 1. Financial Statements