HAWTHORN BANCSHARES, INC. 10-Q

Item 1. Financial Statements HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, (In thousands, except per share data) 2021 2020 ​ (Unaudited) ​ ASSETS ​ ​ ​ ​ ​ ​ Cash and due from banks ​ $ 19,004 ​ $ 19,235 Federal funds sold and other interest-bearing deposits ​ 94,262 ​ 161,128 Cash and cash equivalents ​ 113,266 ​ 180,363 Certificates of deposit in other banks ​ 6,673 ​ 9,376 Available-for-sale debt securities, at fair value ​ 278,528 ​ 198,030 Other investments ​ 6,015 ​ 6,353 Total investment securities ​ 284,543 ​ 204,383 Loans held for investment ​ 1,282,820 ​ 1,286,967 Allowance for loan losses ​ ( 18,929 ) ​ ( 18,113 ) Net loans ​ 1,263,891 ​ 1,268,854 Loans held for sale, at lower of cost or fair value ​ ​ 4,576 ​ ​ 5,099 Premises and equipment - net ​ 33,163 ​ 34,561 Mortgage servicing rights, at fair value ​ 2,718 ​ 2,445 Other real estate owned - net ​ 11,614 ​ 12,291 Accrued interest receivable ​ 7,568 ​ 6,640 Cash surrender value - life insurance ​ 2,495 ​ 2,451 Other assets ​ 8,145 ​ 7,268 Total assets ​ $ 1,738,652 ​ $ 1,733,731 LIABILITIES AND STOCKHOLDERS' EQUITY ​ ​ ​ ​ ​ ​ Deposits ​ ​ ​ ​ ​ ​ Non-interest bearing demand ​ $ 461,626 ​ $ 382,492 Savings, interest checking and money market ​ 693,065 ​ 723,808 Time deposits $250,000 and over ​ 77,113 ​ 91,263 Other time deposits ​ 179,255 ​ 186,043 Total deposits ​ 1,411,059 ​ 1,383,606 Federal funds purchased and securities sold under agreements to repurchase ​ 27,443 ​ 45,154 Federal Home Loan Bank advances and other borrowings ​ 93,493 ​ 106,674 Subordinated notes ​ 49,486 ​ 49,486 Operating lease liabilities ​ ​ 1,910 ​ ​ 2,137 Accrued interest payable ​ 308 ​ 837 Other liabilities ​ 15,859 ​ 15,248 Total liabilities ​ 1,599,558 ​ 1,603,142 Stockholders’ equity: ​ ​ ​ ​ ​ ​ Common stock, $ 1 par value, authorized 15,000,000 shares; issued 7,023,821 and 6,769,322 shares, respectively ​ 7,024 ​ 6,769 Surplus ​ 64,437 ​ 59,307 Retained earnings ​ 77,303 ​ 68,935 Accumulated other comprehensive (loss) income, net of tax ​ ( 1,572 ) ​ 1,528 Treasury stock; 406,846 , and 289,214 shares, at cost, respectively ​ ( 8,098 ) ​ ( 5,950 ) Total stockholders’ equity ​ 139,094 ​ 130,589 Total liabilities and stockholders’ equity ​ $ 1,738,652 ​ $ 1,733,731 ​ See accompanying notes to the consolidated financial statements (unaudited) . 2 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ (In thousands, except per share amounts) 2021 2020 2021 2020 ​ INTEREST INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest and fees on loans ​ $ 15,448 ​ $ 14,777 ​ $ 44,311 ​ $ 43,735 ​ Interest and fees on loans held for sale ​ ​ 24 ​ ​ 41 ​ ​ 79 ​ ​ 96 ​ Interest on investment securities: ​ ​ ​ ​ ​ Taxable ​ 680 ​ 781 ​ 2,058 ​ 2,367 ​ Nontaxable ​ 493 ​ 173 ​ 1,114 ​ 489 ​ Federal funds sold, other interest-bearing deposits, and certificates of deposit in other banks ​ 78 ​ 111 ​ 268 ​ 553 ​ Dividends on other investments ​ 81 ​ 75 ​ 246 ​ 247 ​ Total interest income ​ 16,804 ​ 15,958 ​ 48,076 ​ 47,487 ​ INTEREST EXPENSE ​ ​ ​ ​ ​ Interest on deposits: ​ ​ ​ ​ ​ Savings, interest checking and money market ​ 280 ​ 310 ​ 865 ​ 1,546 ​ Time deposit accounts $250,000 and over ​ 117 ​ 327 ​ 473 ​ 1,089 ​ Time deposits ​ ​ 320 ​ ​ 623 ​ ​ 1,139 ​ ​ 2,067 ​ Total interest expense on deposits ​ ​ 717 ​ ​ 1,260 ​ ​ 2,477 ​ ​ 4,702 ​ Interest on federal funds purchased and securities sold under agreements to repurchase ​ 19 ​ 25 ​ 72 ​ 121 ​ Interest on Federal Home Loan Bank advances ​ 383 ​ 505 ​ 1,164 ​ 1,749 ​ Interest on subordinated notes ​ 305 ​ 326 ​ 921 ​ 1,208 ​ Total interest expense on borrowings ​ ​ 707 ​ ​ 856 ​ ​ 2,157 ​ ​ 3,078 ​ Total interest expense ​ 1,424 ​ 2,116 ​ 4,634 ​ 7,780 ​ Net interest income ​ 15,380 ​ 13,842 ​ 43,442 ​ 39,707 ​ Provision for loan losses ​ 300 ​ 1,200 ​ 700 ​ 5,400 ​ Net interest income after provision for loan losses ​ 15,080 ​ 12,642 ​ 42,742 ​ 34,307 ​ NON-INTEREST INCOME ​ ​ ​ ​ ​ Service charges and other fees ​ 782 ​ 816 ​ 2,285 ​ 2,181 ​ Bank card income and fees ​ 1,043 ​ 846 ​ 2,925 ​ 2,351 ​ Trust department income ​ 308 ​ 263 ​ 910 ​ 920 ​ Real estate servicing fees, net ​ 71 ​ 54 ​ 495 ​ ( 48 ) ​ Gain on sale of mortgage loans, net ​ 1,369 ​ 3,026 ​ 5,881 ​ 4,369 ​ Other ​ 102 ​ 114 ​ 211 ​ 493 ​ Total non-interest income ​ 3,675 ​ 5,119 ​ 12,707 ​ 10,266 ​ Investment securities gains, net ​ 126 ​ 12 ​ 140 ​ 18 ​ NON-INTEREST EXPENSE ​ ​ ​ ​ ​ Salaries and employee benefits ​ 6,665 ​ 6,771 ​ 20,765 ​ 19,404 ​ Occupancy expense, net ​ 808 ​ 781 ​ 2,298 ​ 2,303 ​ Furniture and equipment expense ​ 787 ​ 745 ​ 2,284 ​ 2,259 ​ Processing, network, and bank card expense ​ 1,288 ​ 877 ​ 3,521 ​ 2,807 ​ Legal, examination, and professional fees ​ 357 ​ 381 ​ 1,146 ​ 1,155 ​ Advertising and promotion ​ 310 ​ 316 ​ 862 ​ 786 ​ Postage, printing, and supplies ​ 218 ​ 227 ​ 608 ​ 661 ​ Loan expense ​ 209 ​ 360 ​ 612 ​ 786 ​ Other ​ 1,026 ​ 1,202 ​ 2,992 ​ 3,260 ​ Total non-interest expense ​ 11,668 ​ 11,660 ​ 35,088 ​ 33,421 ​ Income before income taxes ​ 7,213 ​ 6,113 ​ 20,501 ​ 11,170 ​ Income tax expense ​ 1,417 ​ 1,153 ​ 3,974 ​ 2,060 ​ Net income ​ $ 5,796 ​ ​ 4,960 ​ $ 16,527 ​ $ 9,110 ​ Basic earnings per share ​ $ 0.88 ​ $ 0.74 ​ $ 2.50 ​ $ 1.35 ​ Diluted earnings per share ​ $ 0.88 ​ $ 0.74 ​ $ 2.50 ​ $ 1.35 ​ ​ See accompanying notes to the consolidated financial statements (unaudited) . ​ 3 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ Nine Months Ended ​ ​ September 30, ​ September 30, ​ (In thousands) 2021 2020 2021 2020 ​ Net income ​ $ 5,796 ​ $ 4,960 ​ $ 16,527 ​ $ 9,110 ​ Other comprehensive (loss) income, net of tax ​ ​ ​ ​ ​ Investment securities available-for-sale: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change in unrealized (losses) gains on investment securities available-for-sale, net of tax ​ ( 2,192 ) ​ 218 ​ ( 3,222 ) ​ 3,290 ​ Adjustment for gains on sale of investment securities, net of tax ​ ( 93 ) ​ ( 10 ) ​ ( 95 ) ​ ( 15 ) ​ Defined benefit pension plans: ​ ​ ​ ​ ​ Amortization of prior service cost included in net periodic pension cost, net of tax ​ 72 ​ 43 ​ 217 ​ 127 ​ Total other comprehensive (loss) income ​ ( 2,213 ) ​ 251 ​ ( 3,100 ) ​ 3,402 ​ Total comprehensive income ​ $ 3,583 ​ $ 5,211 ​ $ 13,427 ​ $ 12,512 ​ ​ See accompanying notes to the consolidated financial statements (unaudited) . ​ 4 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The three months ended September 30, 2021 and 2020 ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ Stock - ​ Common ​ ​ ​ Retained Comprehensive Treasury holders' (In thousands) Stock Surplus Earnings Income (Loss) Stock Equity Balance, June 30, 2021 ​ $ 6,769 ​ $ 64,692 ​ $ 72,499 ​ $ 641 ​ $ ( 8,098 ) ​ $ 136,503 Net income ​ — ​ — ​ 5,796 ​ — ​ — ​ 5,796 Other comprehensive loss ​ — ​ — ​ — ​ ( 2,213 ) ​ — ​ ( 2,213 ) Stock dividend ​ 255 ​ ​ ( 255 ) ​ ​ — ​ — ​ — ​ — Cash dividends declared, common stock ($ 0.15 per share) ​ — ​ — ​ ( 992 ) ​ — ​ — ​ ( 992 ) Balance, September 30, 2021 ​ $ 7,024 ​ $ 64,437 ​ $ 77,303 ​ $ ( 1,572 ) ​ $ ( 8,098 ) ​ $ 139,094 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance, June 30, 2020 ​ $ 6,520 ​ $ 59,556 ​ $ 60,412 ​ $ ( 604 ) ​ $ ( 5,853 ) ​ $ 120,031 Net income ​ — ​ — ​ 4,960 ​ — ​ — ​ 4,960 Other comprehensive income ​ — ​ — ​ — ​ 251 ​ — ​ 251 Purchase of treasury stock ​ — ​ — ​ — ​ — ​ ( 97 ) ​ ( 97 ) Stock dividend ​ 249 ​ ​ ( 249 ) ​ ​ — ​ — ​ — ​ — Cash dividends declared, common stock ($ 0.12 per share) ​ — ​ — ​ ( 778 ) ​ — ​ — ​ ( 778 ) Balance, September 30, 2020 ​ $ 6,769 ​ $ 59,307 ​ $ 64,594 ​ $ ( 353 ) ​ $ ( 5,950 ) ​ $ 124,367 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ The nine months ended September 30, 2021 and 2020 ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ Stock - ​ Common ​ ​ ​ Retained Comprehensive Treasury holders' (In thousands) Stock Surplus Earnings Income (Loss) Stock Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance, December 31, 2020 ​ $ 6,769 ​ $ 59,307 ​ $ 68,935 ​ $ 1,528 ​ $ ( 5,950 ) ​ $ 130,589 Net income ​ — ​ — ​ 16,527 ​ — ​ — ​ 16,527 Other comprehensive loss ​ — ​ — ​ — ​ ( 3,100 ) ​ — ​ ( 3,100 ) Purchase of treasury stock ​ — ​ — ​ — ​ — ​ ( 2,148 ) ​ ( 2,148 ) Stock dividend ​ 255 ​ ​ 5,130 ​ ​ ( 5,385 ) ​ — ​ — ​ — Cash dividends declared, common stock ($ 0.43 per share) ​ — ​ — ​ ( 2,774 ) ​ — ​ — ​ ( 2,774 ) Balance, September 30, 2021 ​ $ 7,024 ​ $ 64,437 ​ $ 77,303 ​ $ ( 1,572 ) ​ $ ( 8,098 ) ​ $ 139,094 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Balance, December 31, 2019 ​ $ 6,520 ​ $ 55,727 ​ $ 61,590 ​ $ ( 3,755 ) ​ $ ( 5,044 ) ​ $ 115,038 Net income ​ — ​ — ​ 9,110 ​ — ​ — ​ 9,110 Other comprehensive income ​ — ​ — ​ — ​ 3,402 ​ — ​ 3,402 Purchase of treasury stock ​ — ​ — ​ — ​ — ​ ( 906 ) ​ ( 906 ) Stock dividend ​ 249 ​ ​ 3,580 ​ ​ ( 3,829 ) ​ — ​ — ​ — Cash dividends declared, common stock ($ 0.36 per share) ​ — ​ — ​ ( 2,277 ) ​ — ​ — ​ ( 2,277 ) Balance, September 30, 2020 ​ $ 6,769 ​ $ 59,307 ​ $ 64,594 ​ $ ( 353 ) ​ $ ( 5,950 ) ​ $ 124,367 ​ See accompanying notes to the consolidated financial statements (unaudited) . 5 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, (In thousands) 2021 2020 Cash flows from operating activities: ​ ​ ​ ​ ​ ​ Net income ​ $ 16,527 ​ $ 9,110 Adjustments to reconcile net income to net cash provided by operating activities: ​ ​ ​ ​ ​ ​ Provision for loan losses ​ 700 ​ 5,400 Depreciation expense ​ 1,727 ​ 1,687 Net amortization of investment securities, premiums, and discounts ​ 1,337 ​ 1,089 Change in fair value of mortgage servicing rights ​ 86 ​ 686 Investment securities gains, net ​ ( 140 ) ​ ( 18 ) Losses (gains) on sales and dispositions of premises and equipment ​ 8 ​ ​ ( 87 ) Gain on sales and dispositions of other real estate ​ ( 25 ) ​ ( 219 ) Provision for other real estate owned ​ 97 ​ ( 3 ) Increase in accrued interest receivable ​ ( 928 ) ​ ( 1,760 ) Increase in cash surrender value - life insurance ​ ( 44 ) ​ ( 40 ) Decrease in other assets ​ 694 ​ ​ 475 Decrease in operating lease liabilities ​ ​ ( 227 ) ​ ​ ( 188 ) Decrease in accrued interest payable ​ ( 529 ) ​ ( 250 ) Increase in other liabilities ​ 64 ​ 1,986 Origination of mortgage loans held for sale ​ ( 161,244 ) ​ ( 136,249 ) Proceeds from the sale of mortgage loans held for sale ​ 167,648 ​ 133,160 Gain on sale of mortgage loans, net ​ ( 5,881 ) ​ ​ ( 4,369 ) Other, net ​ ( 359 ) ​ ( 531 ) Net cash provided by operating activities ​ 19,511 ​ 9,879 Cash flows from investing activities: ​ ​ ​ ​ ​ ​ Purchase of certificates of deposit in other banks ​ ( 245 ) ​ ( 735 ) Proceeds from maturities of certificates of deposit in other banks ​ 2,957 ​ 1,723 Net decrease (increase) in loans ​ 4,121 ​ ( 110,554 ) Purchase of available-for-sale debt securities ​ ( 136,686 ) ​ ( 72,050 ) Proceeds from maturities of available-for-sale debt securities ​ 30,658 ​ 40,096 Proceeds from calls of available-for-sale debt securities ​ 14,685 ​ 18,685 Proceeds from sales of available-for-sale debt securities ​ 5,420 ​ 4,715 Purchases of FHLB stock ​ ( 330 ) ​ ( 1,891 ) Proceeds from sales of FHLB stock ​ 688 ​ 1,246 Purchases of premises and equipment ​ ( 425 ) ​ ( 1,246 ) Proceeds from sales of premises and equipment ​ 13 ​ 162 Proceeds from sales of other real estate and repossessed assets ​ 747 ​ 209 Net cash used in investing activities ​ ( 78,397 ) ​ ( 119,640 ) Cash flows from financing activities: ​ ​ ​ ​ ​ ​ Net increase in demand deposits ​ 79,134 ​ 111,188 Net (decrease) increase in interest-bearing transaction accounts ​ ( 30,743 ) ​ 51,020 Net decrease in time deposits ​ ( 20,938 ) ​ ​ ( 21,977 ) Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase ​ ( 17,711 ) ​ 8,133 Repayment of FHLB advances and other borrowings ​ ( 13,181 ) ​ ( 53,176 ) FHLB advances ​ — ​ 69,000 Purchase of treasury stock ​ ( 2,148 ) ​ ( 906 ) Cash dividends paid - common stock ​ ( 2,624 ) ​ ( 2,252 ) Net cash (used in) provided by financing activities ​ ( 8,211 ) ​ 161,030 Net (decrease) increase in cash and cash equivalents ​ ( 67,097 ) ​ 51,269 Cash and cash equivalents, beginning of period ​ 180,363 ​ 78,121 Cash and cash equivalents, end of period ​ $ 113,266 ​ $ 129,390 Supplemental disclosures of cash flow information: ​ ​ ​ ​ ​ ​ Cash paid during the period for: ​ ​ ​ ​ ​ ​ Interest ​ $ 5,163 ​ $ 8,029 Income taxes ​ $ 4,729 ​ $ 797 Noncash investing and financing activities: ​ ​ ​ ​ ​ ​ Other real estate and repossessed assets acquired in settlement of loans ​ $ 142 ​ $ 73 Stock dividends ​ $ 5,385 ​ $ 3,829 See accompanying notes to the consolidated financial statements (unaudited). ​ 6 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, St. Louis, and the greater Kansas City metropolitan area. The Company is subject to competition from other financial and nonfinancial institutions providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies. The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. 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, 2020. The preparation of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the novel coronavirus (COVID-19) pandemic or any resurgence thereof, including its potential effects on the economic environment, the Company's customers and operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements. Stock Dividend On July 1, 2021 , the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2021 . For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change. Operating, Accounting and Reporting Considerations related to COVID-19 The COVID-19 pandemic has negatively impacted the global economy, including the United States. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act, along with subsequent relief programs, provided substantial funding to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. See Note 2 Loans and Leases and the Allowance for Credit Losses for more information. ​ ​ 7 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (2) Loans and Allowance for Loan Losses Loans Major classifications within the Company’s held for investment loan portfolio at September 30, 2021 and December 31, 2020 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, (in thousands) 2021 2020 Commercial, financial, and agricultural (a) ​ $ 232,532 ​ $ 272,918 Real estate construction − residential ​ 33,514 ​ 29,692 Real estate construction − commercial ​ 72,031 ​ 78,144 Real estate mortgage − residential ​ 273,768 ​ 262,339 Real estate mortgage − commercial ​ 647,043 ​ 617,133 Installment and other consumer ​ 23,932 ​ 26,741 Total loans held for investment ​ $ 1,282,820 ​ $ 1,286,967 (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. Louis, 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. 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 September 30, 2021 ​ ​ Commercial, ​ Real Estate ​ Real Estate ​ Real Estate ​ Real Estate ​ Installment ​ ​ ​ ​ ​ ​ ​ Financial, & ​ Construction - ​ Construction - ​ Mortgage - ​ Mortgage - ​ and Other ​ Un- ​ ​ (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total Balance at beginning of period ​ $ 5,336 ​ $ 251 ​ $ 495 ​ $ 2,467 ​ $ 9,915 ​ $ 252 ​ $ 19 ​ $ 18,735 Additions: ​ ​ ​ ​ ​ ​ ​ ​ Provision for loan losses ​ ( 609 ) ​ ( 16 ) ​ ( 70 ) ​ 216 ​ 780 ​ 59 ​ ( 60 ) ​ 300 Deductions: ​ ​ ​ ​ ​ ​ ​ ​ Loans charged off ​ 45 ​ — ​ — ​ 18 ​ 15 ​ 78 ​ — ​ 156 Less recoveries on loans ​ ( 19 ) ​ — ​ — ​ ( 8 ) ​ ( 1 ) ​ ( 22 ) ​ — ​ ( 50 ) Net loan charge-offs (recoveries) ​ 26 ​ — ​ — ​ 10 ​ 14 ​ 56 ​ — ​ 106 Balance at end of period ​ $ 4,701 ​ $ 235 ​ $ 425 ​ $ 2,673 ​ $ 10,681 ​ $ 255 ​ $ ( 41 ) ​ $ 18,929 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, 2020 ​ ​ Commercial, ​ Real Estate ​ Real Estate ​ Real Estate ​ Real Estate ​ Installment ​ ​ ​ ​ ​ ​ ​ Financial, & ​ Construction - ​ Construction - ​ Mortgage - ​ Mortgage - ​ and Other ​ Un- ​ ​ (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total Balance at beginning of period ​ $ 3,614 ​ $ 171 ​ $ 722 ​ $ 2,711 ​ $ 9,048 ​ $ 306 ​ $ 50 ​ $ 16,622 Additions: ​ ​ ​ ​ ​ ​ ​ ​ Provision for loan losses ​ 178 ​ 49 ​ 100 ​ 577 ​ 218 ​ 58 ​ 20 ​ 1,200 Deductions: ​ ​ ​ ​ ​ ​ ​ ​ Loans charged off ​ 46 ​ — ​ — ​ — ​ 13 ​ 42 ​ — ​ 101 Less recoveries on loans ​ ( 11 ) ​ ( 13 ) ​ — ​ ( 4 ) ​ — ​ ( 15 ) ​ — ​ ( 43 ) Net loan charge-offs (recoveries) ​ 35 ​ ( 13 ) ​ — ​ ( 4 ) ​ 13 ​ 27 ​ — ​ 58 Balance at end of period ​ $ 3,757 ​ $ 233 ​ $ 822 ​ $ 3,292 ​ $ 9,253 ​ $ 337 ​ $ 70 ​ $ 17,764 8 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2021 ​ ​ Commercial, ​ Real Estate ​ Real Estate ​ Real Estate ​ Real Estate ​ Installment ​ ​ ​ ​ ​ ​ ​ Financial, & ​ Construction - ​ Construction - ​ Mortgage - ​ Mortgage - ​ and Other ​ Un- ​ ​ (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total Balance at beginning of period ​ $ 5,121 ​ $ 213 ​ $ 475 ​ $ 2,679 ​ $ 9,354 ​ $ 264 ​ $ 7 ​ $ 18,113 Additions: ​ ​ ​ ​ ​ ​ ​ ​ Provision for loan losses ​ ( 522 ) ​ 9 ​ ( 50 ) ​ ( 167 ) ​ 1,368 ​ 110 ​ ( 48 ) ​ 700 Deductions: ​ ​ ​ ​ ​ ​ ​ ​ Loans charged off ​ 100 ​ — ​ — ​ 22 ​ 42 ​ 181 ​ — ​ 345 Less recoveries on loans ​ ( 202 ) ​ ( 13 ) ​ — ​ ( 183 ) ​ ( 1 ) ​ ( 62 ) ​ — ​ ( 461 ) Net loan charge-offs (recoveries) ​ ( 102 ) ​ ( 13 ) ​ — ​ ( 161 ) ​ 41 ​ 119 ​ — ​ ( 116 ) Balance at end of period ​ $ 4,701 ​ $ 235 ​ $ 425 ​ $ 2,673 ​ $ 10,681 ​ $ 255 ​ $ ( 41 ) ​ $ 18,929 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2020 ​ ​ Commercial, ​ Real Estate ​ Real Estate ​ Real Estate ​ Real Estate ​ Installment ​ ​ ​ ​ ​ ​ ​ Financial, & ​ Construction - ​ Construction - ​ Mortgage - ​ Mortgage - ​ and Other ​ Un- ​ ​ (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total Balance at beginning of period ​ $ 2,918 ​ $ 64 ​ $ 369 ​ $ 2,118 ​ $ 6,547 ​ $ 381 ​ $ 80 ​ $ 12,477 Additions: ​ ​ ​ ​ ​ ​ ​ ​ Provision for loan losses ​ 867 ​ 125 ​ 453 ​ 1,186 ​ 2,740 ​ 39 ​ ( 10 ) ​ 5,400 Deductions: ​ ​ ​ ​ ​ ​ ​ ​ Loans charged off ​ 130 ​ — ​ — ​ 52 ​ 37 ​ 133 ​ — ​ 352 Less recoveries on loans ​ ( 102 ) ​ ( 44 ) ​ — ​ ( 40 ) ​ ( 3 ) ​ ( 50 ) ​ — ​ ( 239 ) Net loan charge-offs (recoveries) ​ 28 ​ ( 44 ) ​ — ​ 12 ​ 34 ​ 83 ​ — ​ 113 Balance at end of period ​ $ 3,757 ​ $ 233 ​ $ 822 ​ $ 3,292 ​ $ 9,253 ​ $ 337 ​ $ 70 ​ $ 17,764 ​ Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss. Management's look-back period began with loss history in the first quarter 2012 as the starting point through the current quarter and it will continue to include this starting point going forward. The look-back period will continue to be evaluated and will be adjusted once a sustained loss producing downturn is recognized and found to be representative of historical losses expected for the current portfolio. The Company’s methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, 9 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) assessment of changes in the quality of the Company’s internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices. When the COVID-19 pandemic surfaced in the first quarter of 2020, management reassessed the calculation of the allowance for loan loss by increasing the economic qualitative factor in order to capture the impact on the credit risk present in the loan portfolio given the economic environment that existed at that time. 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 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 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. The PPP loan may be forgiven by SBA if the borrower meets certain criteria as defined by the CARES Act. The Company reports these loans at their principal amount outstanding, net of unearned income, unamortized deferred loan fee income and loan origination costs. Interest is accrued as earned and loan origination fees and direct costs are deferred and accreted or amortized into interest income, as an adjustment to the yield, over the life of the loan using the level yield method. When a PPP loan is paid off or forgiven by the SBA, the remaining unaccreted or unamortized net origination fees or costs are immediately recognized into income. ​ ​ 10 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The following table illustrates the allowance for loan losses and recorded investment by portfolio segment: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial, ​ Real Estate ​ Real Estate ​ Real Estate ​ Real Estate ​ Installment ​ ​ ​ ​ ​ ​ ​ Financial, and ​ Construction - ​ Construction - ​ Mortgage - ​ Mortgage - ​ and Other ​ Un- ​ ​ (in thousands) Agricultural Residential Commercial Residential Commercial Consumer allocated Total September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ Allowance for loan losses: ​ ​ ​ ​ ​ ​ ​ ​ Individually evaluated for impairment ​ $ 2,154 ​ $ — ​ $ 14 ​ $ 201 ​ $ 2,556 ​ $ 7 ​ $ — ​ $ 4,932 Collectively evaluated for impairment ​ 2,547 ​ 235 ​ 411 ​ 2,472 ​ 8,125 ​ 248 ​ ( 41 ) ​ 13,997 Total ​ $ 4,701 ​ $ 235 ​ $ 425 ​ $ 2,673 ​ $ 10,681 ​ $ 255 ​ $ ( 41 ) ​ $ 18,929 Loans outstanding: ​ ​ ​ ​ ​ ​ ​ ​ Individually evaluated for impairment ​ $ 6,565 ​ $ — ​ $ 108 ​ $ 2,743 ​ $ 25,272 ​ $ 58 ​ $ — ​ $ 34,746 Collectively evaluated for impairment ​ 225,967 ​ 33,514 ​ 71,923 ​ 271,025 ​ 621,771 ​ 23,874 ​ — ​ 1,248,074 Total ​ $ 232,532 ​ $ 33,514 ​ $ 72,031 ​ $ 273,768 ​ $ 647,043 ​ $ 23,932 ​ $ — ​ $ 1,282,820 ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020 ​ ​ ​ ​ ​ ​ ​ ​ Allowance for loan losses: ​ ​ ​ ​ ​ ​ ​ ​ Individually evaluated for impairment ​ $ 2,187 ​ $ 27 ​ $ 28 ​ $ 263 ​ $ 2,594 ​ $ 14 ​ $ — ​ $ 5,113 Collectively evaluated for impairment ​ 2,934 ​ 186 ​ 447 ​ 2,416 ​ 6,760 ​ 250 ​ 7 ​ 13,000 Total ​ $ 5,121 ​ $ 213 ​ $ 475 ​ $ 2,679 ​ $ 9,354 ​ $ 264 ​ $ 7 ​ $ 18,113 Loans outstanding: ​ ​ ​ ​ ​ ​ ​ ​ Individually evaluated for impairment ​ $ 7,552 ​ $ 192 ​ $ 200 ​ $ 3,626 ​ $ 25,657 ​ $ 108 ​ $ — ​ $ 37,335 Collectively evaluated for impairment ​ 265,366 ​ 29,500 ​ 77,944 ​ 258,713 ​ 591,476 ​ 26,633 ​ — ​ 1,249,632 Total ​ $ 272,918 ​ $ 29,692 ​ $ 78,144 ​ $ 262,339 ​ $ 617,133 ​ $ 26,741 ​ $ — ​ $ 1,286,967 ​ Impaired Loans Loans evaluated under Accounting Standards Codification (ASC) 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans individually evaluated for impairment totaled $ 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 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 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, ​ December 31, (in thousands) 2021 2020 Non-accrual loans ​ $ 32,835 ​ $ 34,559 Performing TDRs ​ 1,911 ​ 2,776 Total impaired loans ​ $ 34,746 ​ $ 37,335 ​ 11 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unpaid ​ ​ ​ ​ Recorded ​ Principal ​ Specific (in thousands) ​ Investment ​ Balance ​ Reserves September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ With no related allowance recorded: ​ ​ ​ Commercial, financial and agricultural ​ $ 1,451 ​ $ 1,500 ​ $ — Real estate mortgage − residential ​ 1,106 ​ 1,219 ​ — Real estate mortgage − commercial ​ ​ 9,311 ​ ​ 9,433 ​ ​ — Total ​ $ 11,868 ​ $ 12,152 ​ $ — With an allowance recorded: ​ ​ ​ Commercial, financial and agricultural ​ $ 5,114 ​ $ 5,324 ​ $ 2,154 Real estate construction − commercial ​ 108 ​ 140 ​ 14 Real estate mortgage − residential ​ 1,637 ​ 2,039 ​ 201 Real estate mortgage − commercial ​ 15,961 ​ 16,242 ​ 2,556 Installment and other consumer ​ 58 ​ 60 ​ 7 Total ​ $ 22,878 ​ $ 23,805 ​ $ 4,932 Total impaired loans ​ $ 34,746 ​ $ 35,957 ​ $ 4,932 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unpaid ​ ​ ​ ​ Recorded ​ Principal ​ Specific (in thousands) ​ Investment ​ Balance ​ Reserves December 31, 2020 ​ ​ ​ With no related allowance recorded: ​ ​ ​ Commercial, financial and agricultural ​ $ 1,703 ​ $ 1,731 ​ $ — Real estate mortgage − residential ​ 1,300 ​ 1,395 ​ — Real estate mortgage − commercial ​ ​ 8,943 ​ ​ 8,943 ​ ​ — Total ​ $ 11,946 ​ $ 12,069 ​ $ — With an allowance recorded: ​ ​ ​ Commercial, financial and agricultural ​ $ 5,849 ​ $ 6,180 ​ $ 2,187 Real estate construction − residential ​ ​ 192 ​ ​ 192 ​ ​ 27 Real estate construction − commercial ​ 200 ​ 251 ​ 28 Real estate mortgage − residential ​ 2,326 ​ 2,786 ​ 263 Real estate mortgage − commercial ​ 16,714 ​ 16,787 ​ 2,594 Installment and other consumer ​ 108 ​ 112 ​ 14 Total ​ $ 25,389 ​ $ 26,308 ​ $ 5,113 Total impaired loans ​ $ 37,335 ​ $ 38,377 ​ $ 5,113 ​ 12 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans during the periods indicated. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ ​ ​ 2021 ​ 2020 ​ 2021 ​ 2020 ​ ​ ​ ​ ​ ​ Interest ​ ​ ​ ​ Interest ​ ​ ​ ​ Interest ​ ​ ​ ​ Interest ​ ​ ​ Average ​ Recognized ​ Average ​ Recognized ​ Average ​ Recognized ​ Average ​ Recognized ​ ​ ​ Recorded ​ For the ​ Recorded ​ For the ​ Recorded ​ For the ​ Recorded ​ For the ​ (in thousands) Investment Period Ended Investment Period Ended Investment Period Ended Investment Period Ended ​ With no related allowance recorded: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial, financial and agricultural ​ $ 1,517 ​ $ 18 ​ $ 172 ​ $ 128 ​ $ 1,703 ​ $ 31 ​ $ 1,612 ​ $ 128 ​ Real estate construction − commercial ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 179 ​ ​ — ​ Real estate mortgage − residential ​ 1,131 ​ — ​ 1,414 ​ 17 ​ 1,238 ​ 21 ​ 2,101 ​ 17 ​ Real estate mortgage − commercial ​ 9,376 ​ — ​ 861 ​ — ​ 9,411 ​ — ​ 870 ​ 13 ​ Installment and other consumer ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 7 ​ ​ — ​ Total ​ $ 12,024 ​ $ 18 ​ $ 2,447 ​ $ 145 ​ $ 12,352 ​ $ 52 ​ $ 4,769 ​ $ 158 ​ With an allowance recorded: ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial, financial and agricultural ​ $ 5,295 ​ $ 5 ​ $ 1,359 ​ $ 8 ​ $ 5,409 ​ $ 19 ​ $ 1,237 ​ $ 27 ​ Real estate construction − residential ​ ​ — ​ ​ — ​ ​ — ​ ​ — ​ ​ 63 ​ ​ — ​ ​ — ​ ​ — ​ Real estate construction − commercial ​ 109 ​ — ​ 609 ​ — ​ 139 ​ — ​ 461 ​ — ​ Real estate mortgage − residential ​ 1,713 ​ 16 ​ 2,412 ​ — ​ 1,691 ​ 26 ​ 2,360 ​ 36 ​ Real estate mortgage − commercial ​ 16,102 ​ 7 ​ 1,133 ​ 8 ​ 16,111 ​ 21 ​ 984 ​ 14 ​ Installment and other consumer ​ 55 ​ — ​ 113 ​ 8 ​ 63 ​ 3 ​ 115 ​ 7 ​ Total ​ $ 23,274 ​ $ 28 ​ $ 5,626 ​ $ 24 ​ $ 23,476 ​ $ 69 ​ $ 5,157 ​ $ 84 ​ Total impaired loans ​ $ 35,298 ​ $ 46 ​ $ 8,073 ​ $ 169 ​ $ 35,828 ​ $ 121 ​ $ 9,926 ​ $ 242 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 $ 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. Delinquent and Non-Accrual Loans The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers 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 when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual, 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 13 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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 September 30, 2021 and December 31, 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Current or ​ ​ 90 Days ​ ​ ​ ​ ​ ​ Less Than ​ ​ ​ ​ Past Due ​ ​ ​ ​ ​ ​ ​ ​ 30 Days ​ 30 - 89 Days ​ And Still ​ ​ ​ ​ ​ ​ (in thousands) ​ Past Due ​ Past Due ​ Accruing ​ Non-Accrual ​ Total September 30, 2021 ​ ​ ​ ​ ​ Commercial, Financial, and Agricultural ​ $ 226,230 ​ $ 10 ​ $ — ​ $ 6,292 ​ $ 232,532 Real estate construction − residential ​ 33,154 ​ 360 ​ — ​ — ​ 33,514 Real estate construction − commercial ​ 71,923 ​ — ​ — ​ 108 ​ 72,031 Real estate mortgage − residential ​ 272,068 ​ 225 ​ — ​ 1,475 ​ 273,768 Real estate mortgage − commercial ​ 622,062 ​ 41 ​ — ​ 24,940 ​ 647,043 Installment and Other Consumer ​ 23,846 ​ 66 ​ — ​ 20 ​ 23,932 Total ​ $ 1,249,283 ​ $ 702 ​ $ — ​ $ 32,835 ​ $ 1,282,820 December 31, 2020 ​ ​ ​ ​ ​ Commercial, Financial, and Agricultural ​ $ 265,821 ​ $ 380 ​ $ — ​ $ 6,717 ​ $ 272,918 Real estate construction − residential ​ 29,500 ​ — ​ — ​ 192 ​ 29,692 Real estate construction − commercial ​ 77,944 ​ — ​ — ​ 200 ​ 78,144 Real estate mortgage − residential ​ 259,688 ​ 546 ​ — ​ 2,105 ​ 262,339 Real estate mortgage − commercial ​ 591,815 ​ 4 ​ — ​ 25,314 ​ 617,133 Installment and Other Consumer ​ 26,576 ​ 117 ​ 17 ​ 31 ​ 26,741 Total ​ $ 1,251,344 ​ $ 1,047 ​ $ 17 ​ $ 34,559 ​ $ 1,286,967 ​ 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 The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch status when one or more weaknesses are identified that may result in the borrower being unable to meet repayment terms or the Company’s credit position could deteriorate at some future date. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. A loan is classified as a TDR when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs that are accruing interest are classified as performing TDRs. Loans classified as TDRs that are not accruing interest are classified as non-performing TDRs and are included with all other 14 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) non-accrual loans for presentation purposes. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. The following table presents the risk categories by class at September 30, 2021 and December 31, 2020. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial, Real Estate Real Estate Real Estate Real Estate Installment ​ ​ ​ ​ Financial, & ​ Construction - ​ Construction - ​ Mortgage - ​ Mortgage - ​ and other ​ ​ ​ (in thousands) ​ Agricultural ​ Residential ​ Commercial ​ Residential ​ Commercial ​ Consumer ​ Total At September 30, 2021 ​ ​ ​ ​ ​ ​ ​ Watch ​ $ 9,169 ​ $ — ​ $ 3,796 ​ $ 13,096 ​ $ 46,805 ​ $ — ​ $ 72,866 Substandard ​ 101 ​ — ​ 2,671 ​ 766 ​ 547 ​ — ​ 4,085 Performing TDRs ​ 273 ​ — ​ — ​ 1,268 ​ 332 ​ 38 ​ 1,911 Non-accrual loans ​ 6,292 ​ — ​ 108 ​ 1,475 ​ 24,940 ​ 20 ​ 32,835 Total ​ $ 15,835 ​ $ — ​ $ 6,575 ​ $ 16,605 ​ $ 72,624 ​ $ 58 ​ $ 111,697 At December 31, 2020 ​ ​ ​ ​ ​ ​ ​ Watch ​ $ 9,649 ​ $ 545 ​ $ 10,806 ​ $ 15,835 ​ $ 66,936 ​ $ — ​ $ 103,771 Substandard ​ 598 ​ — ​ — ​ 1,002 ​ 1,662 ​ — ​ 3,262 Performing TDRs ​ 835 ​ — ​ — ​ 1,521 ​ 343 ​ 77 ​ 2,776 Non-accrual loans ​ 6,717 ​ 192 ​ 200 ​ 2,105 ​ 25,314 ​ 31 ​ 34,559 Total ​ $ 17,799 ​ $ 737 ​ $ 11,006 ​ $ 20,463 ​ $ 94,255 ​ $ 108 ​ $ 144,368 ​ Troubled Debt Restructurings 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. Both performing and non-performing TDRs are considered impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $ 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. ​ 15 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) The following table summarizes loans that were modified as TDRs during the periods indicated. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ ​ 2021 ​ 2020 ​ ​ Recorded Investment (1) ​ Recorded Investment (1) ​ ​ Number of ​ Pre- ​ Post- ​ Number of ​ Pre- ​ Post- (in thousands) Contracts Modification Modification Contracts Modification Modification Troubled Debt Restructurings ​ ​ ​ ​ ​ Real estate mortgage - residential — ​ $ — ​ $ — 1 ​ $ 111 ​ $ 117 Installment and other consumer ​ — ​ ​ — 　 ​ ​ — 1 ​ ​ 6 ​ 4 Total — ​ $ — ​ $ — 2 ​ $ 117 ​ $ 121 (1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. 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 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. Loans Held For Sale The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company carries them at the lower of cost or fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and other various secondary market investors. 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, ​ December 31, (in thousands) ​ 2021 2020 Commercial ​ $ 644 ​ $ 920 Real estate construction - commercial ​ 10,094 ​ 10,986 Real estate mortgage - residential ​ 235 ​ 201 Real estate mortgage - commercial ​ 2,798 ​ 2,798 Total ​ $ 13,771 ​ $ 14,905 Less valuation allowance for other real estate owned ​ ( 2,157 ) ​ ( 2,614 ) Total other real estate owned ​ $ 11,614 ​ $ 12,291 ​ 16 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) Changes in the net carrying amount of other real estate owned were as follows for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ (in thousands) 2021 2020 2021 2020 ​ Balance at beginning of period ​ $ 14,552 ​ $ 15,488 ​ $ 14,905 ​ $ 15,737 ​ Additions ​ ​ 112 ​ ​ 73 ​ ​ 142 ​ ​ 73 ​ Proceeds from sales ​ ​ ( 423 ) ​ ​ ( 15 ) ​ ​ ( 747 ) ​ ​ ( 209 ) ​ Charge-offs against the valuation allowance for other real estate owned, net ​ ​ ( 470 ) ​ ​ — ​ ​ ( 554 ) ​ ​ — ​ Donation ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 266 ) ​ Net gain on sales ​ ​ — ​ ​ 8 ​ ​ 25 ​ ​ 219 ​ Total other real estate owned ​ $ 13,771 ​ $ 15,554 ​ $ 13,771 ​ $ 15,554 ​ Less valuation allowance for other real estate owned ​ ​ ( 2,157 ) ​ ​ ( 2,953 ) ​ ​ ( 2,157 ) ​ ​ ( 2,953 ) ​ Balance at end of period ​ $ 11,614 ​ $ 12,601 ​ $ 11,614 ​ $ 12,601 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 September 30, ​ Nine Months Ended September 30, ​ (in thousands) 2021 2020 2021 2020 ​ Balance, beginning of period ​ $ 2,614 ​ $ 2,968 ​ $ 2,614 ​ $ 2,956 ​ Provision (release) for other real estate owned ​ 13 ​ ( 15 ) ​ 97 ​ ( 3 ) ​ Charge-offs ​ ( 470 ) ​ — ​ ( 554 ) ​ — ​ Balance, end of period ​ $ 2,157 ​ $ 2,953 ​ $ 2,157 ​ $ 2,953 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 17 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (4) Investment Securities Available for sale securities 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized ​ Gross Unrealized ​ Fair ( in thousands) Cost Gains Losses Value September 30, 2021 ​ ​ ​ ​ U.S. Treasury ​ $ 3,012 ​ $ 17 ​ $ — ​ $ 3,029 U.S. government and federal agency obligations ​ 1,316 ​ 17 ​ — ​ 1,333 U.S. government-sponsored enterprises ​ 17,497 ​ 177 ​ ( 108 ) ​ 17,566 Obligations of states and political subdivisions ​ 119,220 ​ 1,073 ​ ( 1,382 ) ​ 118,911 Mortgage-backed securities ​ ​ 125,126 ​ ​ 1,221 ​ ​ ( 1,334 ) ​ ​ 125,013 Other debt securities (a) ​ 10,825 ​ 570 ​ — ​ 11,395 Bank issued trust preferred securities (a) ​ 1,486 ​ — ​ ( 205 ) ​ 1,281 Total available-for-sale securities ​ $ 278,482 ​ $ 3,075 ​ $ ( 3,029 ) ​ $ 278,528 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020 ​ ​ ​ ​ U.S. Treasury ​ $ 2,772 ​ $ 26 ​ $ — ​ $ 2,798 U.S. government and federal agency obligations ​ 11,732 ​ 197 ​ — ​ 11,929 U.S. government-sponsored enterprises ​ 22,495 ​ 379 ​ — ​ 22,874 Obligations of states and political subdivisions ​ 56,943 ​ 1,801 ​ — ​ 58,744 Mortgage-backed securities ​ ​ 88,357 ​ ​ 1,809 ​ ​ ( 54 ) ​ 90,112 Other debt securities (a) ​ 10,000 ​ 358 ​ ( 14 ) ​ 10,344 Bank issued trust preferred securities (a) ​ 1,486 ​ — ​ ( 257 ) ​ 1,229 Total available-for-sale securities ​ $ 193,785 ​ $ 4,570 ​ $ ( 325 ) ​ $ 198,030 (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, SBA guaranteed loan certificates, residential and commercial agency mortgage-backed securities, and agency collateralized mortgage obligations (CMO) include securities issued by the Government National Mortgage Association (GNMA), a U.S. government agency, and the Federal National Mortgage Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the Federal Home Loan Bank (FHLB), which are U.S. government-sponsored enterprises. 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. 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 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ Amortized Fair ( in thousands) ​ Cost ​ Value Due in one year or less ​ $ 4,776 ​ $ 4,798 Due after one year through five years ​ 12,576 ​ 12,734 Due after five years through ten years ​ 34,073 ​ 34,890 Due after ten years ​ 101,931 ​ 101,093 Total ​ 153,356 ​ 153,515 Mortgage-backed securities ​ 125,126 ​ 125,013 Total available-for-sale securities ​ $ 278,482 ​ $ 278,528 ​ Other 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 Bank (MIB) bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, December 31, ​ (in thousands) 2021 2020 ​ Other securities: ​ ​ ​ FHLB stock ​ $ 5,812 ​ $ 6,170 ​ MIB stock ​ 151 ​ 151 ​ Equity securities with readily determinable fair values ​ 52 ​ 32 ​ Total other investment securities ​ $ 6,015 ​ $ 6,353 ​ ​ ​ 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 September 30, 2021 and December 31, 2020 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Less than 12 months ​ 12 months or more ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ Total ​ Fair Unrealized Fair Unrealized Fair Unrealized (in thousands) ​ Value ​ Losses * ​ Value ​ Losses ​ Value ​ Losses At September 30, 2021 ​ ​ ​ ​ ​ ​ U.S. Treasury ​ $ 508 ​ $ — ​ $ — ​ $ — ​ $ 508 ​ $ — U.S. government-sponsored enterprises ​ 4,892 ​ ( 108 ) ​ — ​ — ​ 4,892 ​ ( 108 ) Obligations of states and political subdivisions ​ 62,391 ​ ( 1,382 ) ​ — ​ — ​ 62,391 ​ ( 1,382 ) Mortgage-backed securities ​ ​ 70,027 ​ ​ ( 1,324 ) ​ ​ 1,667 ​ ​ ( 10 ) ​ ​ 71,694 ​ ​ ( 1,334 ) Bank issued trust preferred securities ​ — ​ — ​ 1,281 ​ ( 205 ) ​ 1,281 ​ ( 205 ) Total ​ $ 137,818 ​ $ ( 2,814 ) ​ $ 2,948 ​ $ ( 215 ) ​ $ 140,766 ​ $ ( 3,029 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) ​ ​ ​ ​ ​ ​ At December 31, 2020 ​ ​ ​ ​ ​ ​ U.S. Treasury ​ $ 1,015 ​ $ — ​ $ — ​ $ — ​ $ 1,015 ​ $ — Mortgage-backed securities ​ ​ 7,494 ​ ​ ( 54 ) ​ ​ — ​ ​ — ​ ​ 7,494 ​ ​ ( 54 ) Other debt securities ​ ​ 2,987 ​ ​ ( 14 ) ​ ​ — ​ ​ — ​ ​ 2,987 ​ ​ ( 14 ) Bank issued trust preferred securities ​ — ​ — ​ 1,229 ​ ( 257 ) ​ 1,229 ​ ​ ( 257 ) Total ​ $ 11,496 ​ $ ( 68 ) ​ $ 1,229 ​ $ ( 257 ) ​ $ 12,725 ​ $ ( 325 ) * Amounts less than $1,000 are not reported ​ 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. The portfolio included 10 securities having an aggregate fair value of $ 12.7 million that were in a loss position at December 31, 2020. 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 December 31, 2020. 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 September 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. 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. 20 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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 September 30, ​ Nine Months Ended September 30, ​ (in thousands) 2021 2020 2021 2020 ​ Investment securities gains, net ​ ​ ​ ​ ​ ​ Available-for-sale securities: ​ ​ ​ ​ ​ ​ Gross realized gains ​ $ 119 ​ $ 21 ​ $ 121 ​ $ 27 ​ Gross realized losses ​ — ​ ( 8 ) ​ — ​ ( 8 ) ​ Other-than-temporary impairment recognized ​ — ​ — ​ — ​ — ​ Other investment securities: ​ ​ ​ ​ ​ Fair value adjustments, net ​ 7 ​ ( 1 ) ​ 19 ​ ( 1 ) ​ Investment securities gains, net ​ $ 126 ​ $ 12 ​ $ 140 ​ $ 18 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (5) Intangible Assets Mortgage Servicing Rights 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 September 30, ​ Nine Months Ended September 30, ​ (in thousands) 2021 2020 2021 2020 ​ Balance at beginning of period ​ $ 2,775 ​ $ 2,145 ​ $ 2,445 ​ $ 2,482 ​ Originated mortgage servicing rights ​ 66 ​ 343 ​ 359 ​ 531 ​ Changes in fair value: ​ ​ ​ ​ ​ Due to changes in model inputs and assumptions (1) ​ ( 13 ) ​ ( 21 ) ​ 269 ​ ( 340 ) ​ Other changes in fair value (2) ​ ( 110 ) ​ ( 140 ) ​ ( 355 ) ​ ( 346 ) ​ Total changes in fair value ​ ​ ( 123 ) ​ ​ ( 161 ) ​ ​ ( 86 ) ​ ​ ( 686 ) ​ Balance at end of period ​ $ 2,718 ​ $ 2,327 ​ $ 2,718 ​ $ 2,327 ​ (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. 21 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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, ​ 2021 2020 Weighted average constant prepayment rate ​ 11.41 % 16.89 % Weighted average note rate ​ 3.38 % 3.67 % Weighted average discount rate ​ 8.00 % 7.75 % Weighted average expected life (in years) ​ 6.0 4.7 ​ ​ ​ (6) Federal Funds Purchased and Securities Sold under Agreements to Repurchase ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, ​ December 31, ​ (in thousands) ​ 2021 2020 Federal funds purchased ​ $ — ​ $ — ​ Repurchase agreements ​ 27,443 ​ 45,154 ​ Total ​ $ 27,443 ​ $ 45,154 ​ ​ The Company offers a sweep account program whereby amounts in excess of an established limit are “swept” from the customer’s demand deposit account on a daily basis into retail repurchase agreements pursuant to individual repurchase agreements between the Company and its customers . Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral pledged for the repurchase agreements with customers is maintained by a designated third-party custodian . The collateral amounts pledged to repurchase agreements by remaining maturity in the table below are limited to the outstanding balances of the related asset or liability; thus amounts of excess collateral are not shown. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Repurchase Agreements ​ Remaining Contractual Maturity of the Agreements ​ Overnight Less Greater ​ ​ ​ and ​ than ​ than ​ ​ (in thousands) ​ continuous ​ 90 days ​ 90 days ​ Total At September 30, 2021 ​ ​ ​ ​ U.S. government-sponsored enterprises ​ $ 1,927 ​ $ — ​ $ — ​ $ 1,927 Mortgage-backed securities ​ 25,516 ​ — ​ — ​ 25,516 Total ​ $ 27,443 ​ $ — ​ $ — ​ $ 27,443 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, 2020 ​ ​ ​ ​ U.S. government and federal agency obligations ​ $ 2,728 ​ $ — ​ $ — ​ $ 2,728 U.S. government-sponsored enterprises ​ ​ 15,533 ​ — ​ — ​ 15,533 Mortgage-backed securities ​ 26,893 ​ — ​ — ​ 26,893 Total ​ $ 45,154 ​ $ — ​ $ — ​ $ 45,154 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 22 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (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 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. 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 $ 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. Lease components include fixed payments including 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 $ 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: ​ ​ ​ ​ ​ ​ Operating Lease payments due in: ​ Lease (in thousands) ​ ​ ​ 2021 (excluding 9 months ended September 30, 2021) $ 91 2022 ​ 367 2023 ​ 366 2024 ​ 258 2025 ​ 257 Thereafter ​ ​ 830 Total lease payments ​ ​ 2,169 Less imputed interest ​ ​ ( 259 ) Total lease liabilities, as reported ​ $ 1,910 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 23 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the appropriate character during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning initiatives in making this assessment. In management's opinion, the Company will more likely than not realize the benefits of its deferred tax assets and, therefore, has not established a valuation allowance against its deferred tax assets as of September 30, 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 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 nine months ended September 30, 2021 and 2020: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ Unrecognized Net ​ Other ​ ​ Unrealized ​ Pension and ​ Comprehensive ​ ​ Gains (Losses) ​ Postretirement ​ Income (in thousands) on Securities (1) Costs (2) (Loss) Balance at beginning of period ​ $ 3,353 ​ $ ( 1,825 ) ​ $ 1,528 Other comprehensive income (loss), before reclassifications ​ ( 4,104 ) ​ 275 ​ ( 3,829 ) Amounts reclassified from accumulated other comprehensive income (loss) ​ ( 95 ) ​ — ​ ( 95 ) Current period other comprehensive income (loss), before tax ​ ( 4,199 ) ​ 275 ​ ( 3,924 ) Income tax benefit (expense) ​ 882 ​ ( 58 ) ​ 824 Current period other comprehensive income (loss), net of tax ​ ( 3,317 ) ​ 217 ​ ( 3,100 ) Balance at end of period ​ $ 36 ​ $ ( 1,608 ) ​ $ ( 1,572 ) ​ 24 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, 2020 ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ Unrecognized Net ​ Other ​ ​ Unrealized ​ Pension and ​ Comprehensive ​ ​ Gains (Losses) ​ Postretirement ​ Income (in thousands) on Securities (1) Costs (2) (Loss) Balance at beginning of period ​ $ ( 23 ) ​ $ ( 3,732 ) ​ $ ( 3,755 ) Other comprehensive income, before reclassifications ​ 4,165 ​ 160 ​ 4,325 Amounts reclassified from accumulated other comprehensive income (loss) ​ ( 19 ) ​ — ​ ( 19 ) Current period other comprehensive income, before tax ​ 4,146 ​ 160 ​ 4,306 Income tax expense ​ ( 871 ) ​ ( 33 ) ​ ( 904 ) Current period other comprehensive income, net of tax ​ 3,275 ​ 127 ​ 3,402 Balance at end of period ​ $ 3,252 ​ $ ( 3,605 ) ​ $ ( 353 ) (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) Employee Benefit Plans Employee Benefits Employee benefits charged to operating expenses are summarized in the table below for the periods indicated. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, ​ (in thousands) 2021 2020 2021 2020 ​ Payroll taxes ​ $ 310 ​ $ 305 ​ $ 1,101 ​ $ 1,030 ​ Medical plans ​ 436 ​ 446 ​ 1,405 ​ 1,370 ​ 401(k) match and profit sharing ​ ​ 513 ​ ​ 490 ​ ​ 1,456 ​ ​ 1,134 ​ Periodic pension cost ​ 449 ​ 404 ​ 1,347 ​ 1,211 ​ Other ​ 3 ​ 14 ​ 10 ​ 42 ​ Total employee benefits ​ $ 1,711 ​ $ 1,659 ​ $ 5,319 ​ $ 4,787 ​ ​ 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 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. 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 $ 1.2 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. 25 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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 new 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. The Company made a pension contribution of $ 1.0 million on March 22, 2021. 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 and Other Amounts Recognized in Accumulated Other Comprehensive Income The following items are components of net pension cost for the periods indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Nine Months Ended September 30, ​ (in thousands) 2021 2020 ​ Service cost - benefits earned during the year ​ $ 1,692 ​ $ 1,614 ​ Interest costs on projected benefit obligations (a) ​ 1,072 ​ 1,127 ​ Expected return on plan assets (a) ​ ( 1,843 ) ​ ( 1,598 ) ​ Expected administrative expenses ​ 104 ​ 110 ​ Amortization of prior service cost (a) ​ — ​ 50 ​ Amortization of unrecognized net loss (a) ​ 367 ​ 164 ​ Net periodic pension cost ​ $ 1,392 ​ $ 1,467 ​ ​ ​ ​ ​ ​ ​ ​ ​ (a) The components of net periodic pension cost other than the service cost component are included in other non-interest expense. Net periodic pension benefit costs 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 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 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 26 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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 Stock Dividend On July 1, 2021 , the Company paid a special stock dividend of 4 % to common shareholders of record at the close of business on June 15, 2021 . For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change. Basic earnings per share is computed by dividing income available to shareholders by the weighted average number of shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential shares that were outstanding during the year. 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 September 30, ​ Nine Months Ended September 30, ​ (dollars in thousands, except per share data) 2021 2020 2021 2020 ​ Basic earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income available to shareholders ​ $ 5,796 ​ $ 4,960 ​ $ 16,527 ​ $ 9,110 ​ Average shares outstanding ​ ​ 6,616,975 ​ ​ 6,737,928 ​ ​ 6,617,105 ​ ​ 6,747,553 ​ Basic earnings per share ​ $ 0.88 ​ $ 0.74 ​ $ 2.50 ​ $ 1.35 ​ Diluted earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net income available to shareholders ​ $ 5,796 ​ $ 4,960 ​ $ 16,527 ​ $ 9,110 ​ Average shares outstanding ​ 6,616,975 ​ 6,737,928 ​ 6,617,105 ​ 6,747,553 ​ Diluted earnings per share ​ $ 0.88 ​ ​ 0.74 ​ $ 2.50 ​ ​ 1.35 ​ ​ Repurchase Program In 2019, the Company's Board of Directors authorized the purchase of up to $ 5.0 million market value of the Company's common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases. The Company repurchased 117,632 shares at an average cost of $ 18.26 per share totaling $ 2.1 million during the first quarter of 2021. 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 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. 27 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (12) 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. 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 which 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 independent verification to another pricing source by management each quarter for reasonableness. Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings. The Company uses level 1 inputs to value equity securities that are traded in active markets. Equity securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment. Equity securities that are not actively traded are classified in level 2. 28 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) Mortgage Servicing Rights The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. 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 late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurements ​ ​ ​ ​ ​ Quoted Prices ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in Active ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Markets for ​ Other ​ Significant ​ ​ ​ ​ ​ Identical ​ Observable ​ Unobservable ​ ​ ​ ​ ​ Assets ​ Inputs ​ Inputs (in thousands) Fair Value (Level 1) (Level 2) (Level 3) September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Treasury ​ $ 3,029 ​ $ 3,029 $ — $ — U.S. government and federal agency obligations ​ 1,333 ​ — ​ 1,333 — U.S. government-sponsored enterprises ​ 17,566 ​ — ​ 17,566 — Obligations of states and political subdivisions ​ 118,911 ​ — ​ 118,911 — Mortgage-backed securities ​ 125,013 ​ — ​ 125,013 — Other debt securities ​ ​ 11,395 ​ ​ — ​ ​ 11,395 ​ ​ — Bank-issued trust preferred securities ​ ​ 1,281 ​ ​ — ​ ​ 1,281 ​ ​ — Equity securities ​ ​ 52 ​ ​ 52 ​ ​ — ​ ​ — Mortgage servicing rights ​ 2,718 ​ — ​ — 2,718 Total ​ $ 281,298 ​ $ 3,081 ​ $ 275,499 $ 2,718 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. Treasury ​ $ 2,798 ​ $ 2,798 $ — $ — U.S. government and federal agency obligations ​ 11,929 ​ — ​ 11,929 — U.S. government-sponsored enterprises ​ 22,874 ​ — ​ 22,874 — Obligations of states and political subdivisions ​ 58,744 ​ — ​ 58,744 — Mortgage-backed securities ​ 90,112 ​ — ​ 90,112 — Other debt securities ​ ​ 10,344 ​ ​ — ​ ​ 10,344 ​ ​ — Bank-issued trust preferred securities ​ ​ 1,229 ​ ​ — ​ ​ 1,229 ​ ​ — Equity securities ​ ​ 32 ​ ​ 32 ​ ​ — ​ ​ — Mortgage servicing rights ​ 2,445 ​ — ​ — 2,445 Total ​ $ 200,507 ​ $ 2,830 ​ $ 195,232 $ 2,445 ​ 29 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 ​ Fair Value Measurements Using ​ ​ (Level 3) ​ (Level 3) ​ ​ Mortgage Servicing Rights ​ Mortgage Servicing Rights ​ ​ Three Months Ended September 30, ​ Nine Months Ended September 30, (in thousands) 2021 2020 2021 2020 Balance at beginning of period ​ $ 2,775 ​ $ 2,145 ​ $ 2,445 ​ $ 2,482 Total gains or (losses) (realized/unrealized): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Included in earnings ​ ( 123 ) ​ ( 161 ) ​ ( 86 ) ​ ( 686 ) Included in other comprehensive income ​ — ​ — ​ — ​ — Purchases ​ — ​ — ​ — ​ — Sales ​ — ​ — ​ — ​ — Issues ​ 66 ​ 343 ​ 359 ​ 531 Settlements ​ — ​ — ​ — ​ — Balance at end of period ​ $ 2,718 ​ $ 2,327 ​ $ 2,718 ​ $ 2,327 ​ 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 loan 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 that is trained to perform in-house evaluations and also 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 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 Other real estate owned (OREO) and foreclosed assets consisted of loan collateral that has been 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 initially 30 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) are 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurements Using ​ ​ ​ ​ ​ Quoted Prices ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in Active ​ ​ ​ ​ ​ ​ ​ Three Months ​ Nine Months ​ ​ ​ ​ ​ Markets for ​ Other ​ Significant ​ Ended ​ Ended ​ ​ ​ ​ ​ Identical ​ Observable ​ Unobservable ​ September 30, ​ September 30, ​ ​ Total ​ Assets ​ Inputs ​ Inputs ​ Total Gains ​ Total Gains (in thousands) Fair Value (Level 1) (Level 2) (Level 3) (Losses)* (Losses)* September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Collateral dependent impaired loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial, financial, & agricultural ​ $ 3,960 ​ $ — ​ $ — ​ $ 3,960 $ — $ — Real estate mortgage - residential ​ 324 ​ — ​ — ​ 324 ( 18 ) ( 22 ) Real estate mortgage - commercial ​ 22,266 ​ — ​ — ​ 22,266 ( 15 ) ( 41 ) Installment and other consumer ​ — ​ — ​ — ​ — — ( 6 ) Total ​ $ 26,550 ​ $ — ​ $ — ​ $ 26,550 $ ( 33 ) $ ( 69 ) Other real estate and repossessed assets ​ $ 11,614 ​ $ — ​ $ — ​ $ 11,614 $ ( 12 ) $ ( 71 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Collateral dependent impaired loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial, financial, & agricultural ​ $ 308 ​ $ — ​ $ — ​ $ 308 $ ( 20 ) $ ( 20 ) Real estate construction - commercial ​ 360 ​ — ​ — ​ 360 — — Real estate mortgage - residential ​ 454 ​ — ​ — ​ 454 — ( 52 ) Real estate mortgage - commercial ​ 1,635 ​ — ​ — ​ 1,635 ( 13 ) ( 37 ) Installment and other consumer ​ — ​ — ​ — ​ — ( 3 ) ( 20 ) Total ​ $ 2,757 ​ $ — ​ $ — ​ $ 2,757 $ ( 36 ) $ ( 129 ) Other real estate and repossessed assets ​ $ 12,601 ​ $ — ​ $ — ​ $ 12,601 $ 23 $ 222 * Total losses reported for other real estate and foreclosed assets includes charge-offs, valuation write downs, and net losses taken during the periods reported. (13) 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 31 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) 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. Loans Held for Sale Loans originated and intended to be sold in the secondary market, generally 1-4 family residential mortgage loans, are carried, in aggregate, at the lower of cost or estimated fair value. The estimated fair value measurements of loans held for sale are management's best estimate of fair value, which is primarily based on quoted market prices for similar loans in the secondary market. Investment Securities A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities . 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 bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations. Equity securities that are not actively traded are classified in level 2. 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. 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 (BOLI) approximates the carrying amount. Upon liquidation of these investments, the Company would receive the cash surrender value which equals the carrying amount. 32 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 noninterest-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. ​ 33 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 September 30, 2021 and December 31, 2020 is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ September 30, 2021 ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurements ​ ​ ​ ​ ​ ​ ​ ​ ​ Quoted Prices ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in Active ​ ​ ​ Net ​ ​ ​ ​ ​ ​ ​ Markets for Other Significant ​ September 30, 2021 Identical Observable Unobservable ​ Carrying Fair Assets Inputs Inputs (in thousands) amount value (Level 1) (Level 2) (Level 3) Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and due from banks ​ $ 19,004 ​ $ 19,004 ​ $ 19,004 ​ $ — $ — Federal funds sold and overnight interest-bearing deposits ​ 94,262 ​ 94,262 ​ 94,262 ​ — ​ — Certificates of deposit in other banks ​ 6,673 ​ 6,673 ​ 6,673 ​ — ​ — Available-for-sale securities ​ 278,528 ​ 278,528 ​ 3,029 ​ 275,499 ​ — Other investment securities ​ 6,015 ​ 6,015 ​ 52 ​ 5,963 ​ — Loans, net ​ 1,263,891 ​ 1,273,797 ​ — ​ — ​ 1,273,797 Loans held for sale ​ ​ 4,576 ​ ​ 4,663 ​ ​ — ​ ​ — ​ ​ 4,663 Cash surrender value - life insurance ​ 2,495 ​ 2,495 ​ — ​ 2,495 ​ — Accrued interest receivable ​ 7,568 ​ 7,568 ​ 7,568 ​ — ​ — Total ​ $ 1,683,012 ​ $ 1,693,005 ​ $ 130,588 ​ $ 283,957 $ 1,278,460 Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-interest bearing demand ​ $ 461,626 ​ $ 461,626 ​ $ 461,626 ​ $ — $ — Savings, interest checking and money market ​ 693,065 ​ 693,065 ​ 693,065 ​ — ​ — Time deposits ​ 256,368 ​ 257,500 ​ — ​ — ​ 257,500 Federal funds purchased and securities sold under agreements to repurchase ​ 27,443 ​ 27,443 ​ 27,443 ​ — ​ — Federal Home Loan Bank advances and other borrowings ​ 93,493 ​ 94,941 ​ — ​ 94,941 ​ — Subordinated notes ​ 49,486 ​ 42,661 ​ — ​ 42,661 ​ — Accrued interest payable ​ 308 ​ 308 ​ 308 ​ — ​ — Total ​ $ 1,581,789 ​ $ 1,577,544 ​ $ 1,182,442 ​ $ 137,602 $ 257,500 ​ 34 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2020 ​ ​ ​ ​ ​ ​ ​ ​ Fair Value Measurements ​ ​ ​ ​ ​ ​ ​ ​ Quoted Prices ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ in Active ​ ​ ​ Net ​ ​ ​ ​ ​ ​ ​ Markets for Other Significant ​ ​ December 31, 2020 Identical Observable Unobservable ​ Carrying Fair Assets Inputs Inputs (in thousands) amount value (Level 1) (Level 2) (Level 3) Assets: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash and due from banks ​ $ 19,235 ​ $ 19,235 ​ $ 19,235 ​ $ — $ — Federal funds sold and overnight interest-bearing deposits ​ 161,128 ​ 161,128 ​ 161,128 ​ — ​ — Certificates of deposit in other banks ​ 9,376 ​ 9,376 ​ 9,376 ​ — ​ — Available-for-sale securities ​ 198,030 ​ 198,030 ​ 2,798 ​ 195,232 ​ — Other investment securities ​ 6,353 ​ 6,353 ​ 32 ​ 6,321 ​ — Loans, net ​ 1,268,854 ​ 1,288,677 ​ — ​ — ​ 1,288,677 Loans held for sale ​ ​ 5,099 ​ ​ 5,279 ​ ​ — ​ ​ — ​ ​ 5,279 Cash surrender value - life insurance ​ 2,451 ​ 2,451 ​ — ​ 2,451 ​ — Accrued interest receivable ​ 6,640 ​ 6,640 ​ 6,640 ​ — ​ — Total ​ $ 1,677,166 ​ $ 1,697,169 ​ $ 199,209 ​ $ 204,004 $ 1,293,956 Liabilities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Deposits: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-interest bearing demand ​ $ 382,492 ​ $ 382,492 ​ $ 382,492 ​ $ — $ — Savings, interest checking and money market ​ 723,808 ​ 723,808 ​ 723,808 ​ — ​ — Time deposits ​ 277,306 ​ 279,569 ​ — ​ — ​ 279,569 Federal funds purchased and securities sold under agreements to repurchase ​ 45,154 ​ 45,154 ​ 45,154 ​ — ​ — Federal Home Loan Bank advances and other borrowings ​ 106,674 ​ 110,121 ​ — ​ 110,121 ​ — Subordinated notes ​ 49,486 ​ 40,929 ​ — ​ 40,929 ​ — Accrued interest payable ​ 837 ​ 837 ​ 837 ​ — ​ — Total ​ $ 1,585,757 ​ $ 1,582,910 ​ $ 1,152,291 ​ $ 151,050 $ 279,569 ​ 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. 35 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (Unaudited) (14) 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 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. 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, ​ December 31, (in thousands) 2021 2020 Commitments to extend credit ​ $ 354,957 ​ $ 264,528 Commitments to originate residential first and second mortgage loans ​ 22,964 ​ 51,270 Standby letters of credit ​ 7,542 ​ 125,800 Total ​ $ 385,463 ​ $ 441,598 ​ 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. 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 range from one month to five years at September 30, 2021. 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. ​ 36 ​