UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2023

OR

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______________ to ______________

Commission file number: 0-23636

HAWTHORN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Missouri	43-1626350
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

132 East High Street, Box 688, Jefferson City, Missouri 65102

(Address of principal executive offices) (Zip Code)

(573) 761-6100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1.00 par value	HWBK	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐		Accelerated filer	☐	Non-accelerated filer	☒
Smaller reporting company	☒	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

As of November 9, 2023, the registrant had 7,039,323 shares of common stock, par value $1.00 per share, outstanding.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except per share data)	September 30, 2023		December 31, 2022
	(Unaudited)
ASSETS
Cash and due from banks	$	17,793	$	18,661
Federal funds sold	—		46
Other interest-bearing deposits	10,061		65,013
Cash and cash equivalents	27,854		83,720
Certificates of deposit in other banks	735		2,955
Available-for-sale debt securities, at fair value	233,516		250,747
Other investments	7,005		6,353
Total investment securities	240,521		257,100
Loans held for investment	1,556,969		1,521,252
Allowance for credit losses (1)	(22,462)		(15,588)
Net loans	1,534,507		1,505,664
Loans held for sale, at lower of cost or fair value	3,006		591
Premises and equipment - net	32,508		32,856
Mortgage servicing rights, at fair value	2,885		2,899
Other real estate owned - net	3,564		8,795
Accrued interest receivable	8,533		7,953
Cash surrender value - life insurance	2,610		2,567
Other assets (1)	22,282		18,440
Total assets	$	1,879,005	$	1,923,540
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand	$	425,105	$	453,443
Savings, interest checking and money market	802,591		923,602
Time deposits $250,000 and over	115,197		94,859
Other time deposits	237,472		160,175
Total deposits	1,580,365		1,632,079
Federal funds purchased and securities sold under agreements to repurchase	6,196		5,187
Federal Home Loan Bank advances and other borrowings	112,000		98,000
Subordinated notes	49,486		49,486
Operating lease liabilities	1,295		1,533
Accrued interest payable	1,851		902
Liability for unfunded commitments (1)	947		—
Other liabilities	8,461		8,942
Total liabilities	1,760,601		1,796,129
Stockholders’ equity:
Common stock, $1.00 par value, authorized 15,000,000 shares; issued 7,554,893 and 7,284,151 shares, respectively	7,555		7,284
Surplus	76,776		71,042
Retained earnings	85,104		91,789
Accumulated other comprehensive loss, net of tax	(40,041)		(31,714)
Treasury stock; 515,570 shares, at cost, respectively	(10,990)		(10,990)
Total stockholders’ equity	118,404		127,411
Total liabilities and stockholders’ equity	$	1,879,005	$	1,923,540

(1) September 30, 2023 amounts include the impacts of the January 1, 2023 adoption of ASU 2016-13. See Note 2 for details.

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

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2023		2022		2023		2022
INTEREST INCOME
Interest and fees on loans	$	22,134	$	16,328	$	61,105	$	44,831
Interest and fees on loans held for sale	59		23		119		69
Interest on investment securities:
Taxable	871		781		2,601		2,361
Nontaxable	618		621		1,876		1,822
Federal funds sold	—		—		2		5
Other interest-bearing deposits and certificates of deposit in other banks	85		76		724		179
Dividends on other investments	121		64		321		204
Total interest income	23,888		17,893		66,748		49,471
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market	4,466		1,382		11,961		2,275
Time deposit accounts $250,000 and over	816		345		3,493		588
Time deposits	1,357		239		2,715		709
Total interest expense on deposits	6,639		1,966		18,169		3,572
Interest on federal funds purchased and securities sold under agreements to repurchase	38		13		83		32
Interest on Federal Home Loan Bank advances	1,075		277		2,430		778
Interest on subordinated notes	989		570		2,769		1,316
Total interest expense on borrowings	2,102		860		5,282		2,126
Total interest expense	8,741		2,826		23,451		5,698
Net interest income	15,147		15,067		43,297		43,773
Provision for (release of) credit losses on loans and unfunded commitments (1)	110		300		790		(1,000)
Net interest income after provision for (release of) credit losses on loans and unfunded commitments	15,037		14,767		42,507		44,773
NON-INTEREST INCOME
Service charges and other fees	760		693		2,180		2,322
Bank card income and fees	1,029		1,030		3,044		3,054
Trust department income	283		287		820		924
Real estate servicing fees, net	125		383		417		861
Gain on sale of mortgage loans, net	851		628		2,014		2,322
Losses (gains) on other real estate owned, net	(2,809)		—		(4,592)		30
Other	367		464		1,501		1,346
Total non-interest income	606		3,485		5,384		10,859
Investment securities gains (losses), net	3		1		18		(12)
NON-INTEREST EXPENSE
Salaries and employee benefits	7,124		6,750		20,978		20,251
Occupancy expense, net	842		789		2,437		2,339
Furniture and equipment expense	768		774		2,236		2,301
Processing, network, and bank card expense	1,320		1,261		3,797		3,545
Legal, examination, and professional fees	499		395		1,447		1,210
Advertising and promotion	375		430		1,084		1,027
Postage, printing, and supplies	248		237		621		653
Loan expense	147		123		771		426
Other	1,246		1,436		4,401		4,210
Total non-interest expense	12,569		12,195		37,772		35,962
Income before income taxes	3,077		6,058		10,137		19,658
Income tax expense	498		1,131		1,738		3,633
Net income	$	2,579	$	4,927	$	8,399	$	16,025
Basic earnings per share	$	0.36	$	0.70	$	1.19	$	2.27
Diluted earnings per share	$	0.36	$	0.70	$	1.19	$	2.27

(1) Prior to adoption of ASU No 2016-13 on January 1, 2023, credit losses were estimated using the incurred loss approach.

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

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Net income	$	2,579	$	4,927	$	8,399	$	16,025
Other comprehensive loss, net of tax
Investment securities available-for-sale:
Change in unrealized (losses) gains on investment securities available-for-sale, net of tax	(9,325)		(12,430)		(7,948)		(43,438)
Defined benefit pension plans:
Amortization of net gains included in net periodic pension cost, net of tax	(126)		—		(379)		—
Total other comprehensive loss	(9,451)		(12,430)		(8,327)		(43,438)
Total comprehensive (loss) income	$	(6,872)	$	(7,503)	$	72	$	(27,413)

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

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (unaudited)

	Three Months Ended September 30, 2023 and 2022
(In thousands, except per share data)	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stockholders' Equity
Balance, June 30, 2023	$	7,284	$	77,047	$	83,722	$	(30,590)	$	(10,990)	$	126,473
Net income	—		—		2,579		—		—		2,579
Other comprehensive loss	—		—		—		(9,451)		—		(9,451)
Stock dividend	271		(271)		—		—		—		—
Cash dividends declared, common stock ($0.17 per share)	—		—		(1,197)		—		—		(1,197)
Balance, September 30, 2023	$	7,555	$	76,776	$	85,104	$	(40,041)	$	(10,990)	$	118,404
Balance, June 30, 2022	$	7,024	$	71,302	$	84,437	$	(27,715)	$	(10,990)	$	124,058
Net income	—		—		4,927		—		—		4,927
Other comprehensive loss	—		—		—		(12,430)		—		(12,430)
Stock dividend	260		(260)		—		—		—		—
Cash dividends declared, common stock ($0.17 per share)	—		—		(1,150)		—		—		(1,150)
Balance, September 30, 2022	$	7,284	$	71,042	$	88,214	$	(40,145)	$	(10,990)	$	115,405
	Nine Months Ended September 30, 2023 and 2022
(In thousands, except per share data)	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stock - holders' Equity
Balance, December 31, 2022	$	7,284	$	71,042	$	91,789	$	(31,714)	$	(10,990)	$	127,411
Adoption of ASU 2016-13	—		—		(5,581)		—		—		(5,581)
Balance, January 01, 2023	7,284		71,042		86,208		(31,714)		(10,990)		121,830
Net income	—		—		8,399		—		—		8,399
Other comprehensive loss	—		—		—		(8,327)		—		(8,327)
Stock dividend	271		5,734		(6,005)		—		—		—
Cash dividends declared, common stock ($0.51 per share)	—		—		(3,498)		—		—		(3,498)
Balance, September 30, 2023	$	7,555	$	76,776	$	85,104	$	(40,041)	$	(10,990)	$	118,404
Balance, December 31, 2021	$	7,024	$	64,437	$	82,300	$	3,293	$	(8,098)	$	148,956
Net income	—		—		16,025		—		—		16,025
Other comprehensive loss	—		—		—		(43,438)		—		(43,438)
Purchase of treasury stock	—		—		—		—		(2,892)		(2,892)
Stock dividend	260		6,605		(6,865)		—		—		—
Cash dividends declared, common stock ($0.49 per share)	—		—		(3,246)		—		—		(3,246)
Balance, September 30, 2022	$	7,284	$	71,042	$	88,214	$	(40,145)	$	(10,990)	$	115,405

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

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended September 30,
(In thousands)	2023		2022
Cash flows from operating activities:
Net income	$	8,399	$	16,025
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (release of) credit losses on loans and unfunded commitments	790		(1,000)
Depreciation expense	1,608		1,615
Net amortization of investment securities, premiums, and discounts	772		1,086
Change in fair value of mortgage servicing rights	52		(186)
Investment securities (gains) losses, net	(18)		12
Gain on sales and dispositions of premises and equipment	(154)		(147)
Gain on sales and dispositions of other real estate	(49)		(2)
Provision for (release of) valuation allowance for other real estate owned	4,643		(28)
Increase in accrued interest receivable	(580)		(427)
Increase in cash surrender value - life insurance	(43)		(44)
(Increase) decrease in other assets	(554)		155
Decrease in operating lease liabilities	(238)		(227)
Increase in accrued interest payable	949		283
Decrease in other liabilities	(803)		(4,185)
Origination of mortgage loans held for sale	(84,821)		(72,563)
Proceeds from the sale of mortgage loans held for sale	84,382		76,110
Gain on sale of mortgage loans, net	(2,014)		(2,322)
Net cash provided by operating activities	12,321		14,155
Cash flows from investing activities:
Purchase of certificates of deposit in other banks	—		(245)
Proceeds from maturities of certificates of deposit in other banks	2,219		1,237
Net increase in loans	(35,469)		(190,215)
Purchase of available-for-sale debt securities	(9,468)		(17,318)
Proceeds from maturities of available-for-sale debt securities	15,252		24,673
Proceeds from calls of available-for-sale debt securities	615		2,295
Purchases of FHLB stock	(13,838)		(8,103)
Proceeds from sales of FHLB stock	13,204		8,138
Purchases of premises and equipment	(1,384)		(2,433)
Proceeds from sales of premises and equipment	158		304
Proceeds from sales of other real estate and repossessed assets	681		1,348
Net cash used in investing activities	(28,030)		(180,319)
Cash flows from financing activities:
Net (decrease) increase in demand deposits	(28,338)		45,587
Net (decrease) increase in interest-bearing transaction accounts	(121,011)		7,235
Net increase in time deposits	97,635		23,156
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase	1,009		(17,939)
Repayment of FHLB advances and other borrowings	(328,890)		(195,962)
FHLB advances	342,890		191,544
Purchase of treasury stock	—		(2,892)
Cash dividends paid - common stock	(3,452)		(3,088)
Net cash (used in) provided for financing activities	(40,157)		47,641
Net decrease in cash and cash equivalents	(55,866)		(118,523)
Cash and cash equivalents, beginning of period	83,720		159,909
Cash and cash equivalents, end of period	$	27,854	$	41,386

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

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HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited) continued

	Nine Months Ended September 30,
(In thousands)	2023		2022
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	22,501	$	5,415
Income taxes	$	1,925	$	4,307
Noncash investing and financing activities:
Other real estate and repossessed assets acquired in settlement of loans	$	44	$	3
Stock dividends	$	6,005	$	6,865

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

7

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(1) Summary of Significant Accounting Policies

Hawthorn Bancshares, Inc. (the Company) through its subsidiary, Hawthorn Bank (the Bank), provides a broad range of banking services to individual and corporate customers located within the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St. Louis, and the greater Kansas City metropolitan area. The Company is subject to competition from other financial and nonfinancial institutions that provide financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with United States (U.S.) generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The preparation of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for credit losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements other than mentioned below.

Stock Dividend. On July 1, 2023, the Company paid a special stock dividend of four percent (4%) to shareholders of record at the close of business on June 15, 2023. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Recently Adopted Accounting Pronouncements

Trouble Debt Restructurings. On January 1, 2023, the effective date of the guidance, the Company adopted Accounting Standards Update (ASU) 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, on a prospective basis. ASU 2022-02 eliminated the accounting guidance for troubled debt restructurings (TDRs), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. For entities that have already adopted ASU 2016-13, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Effective January 1, 2023, the Company adopted the amendments within ASU 2022-02, using the prospective transition method. ASU 2022-02 did not have a material impact on the Company's consolidated financial statements.

ASU 2016-13. On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology commonly referred to as the current expected credit losses (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities.

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The Company recorded an after-tax decrease to retained earnings of $5.6 million as of January 1, 2023 for the cumulative effect of adopting this standard.

The following table illustrates the impact of adoption of ASU 2016-13:

(in thousands)	December 31, 2022		Impact of Adoption		January 1, 2023
Assets:
Allowance for credit losses on loans	$	15,588	$	5,793	$	21,381
Deferred tax asset	3,267		1,483		4,750
Liabilities:
Liability for unfunded commitments	—		1,272		1,272
Shareholders' Equity
Retained Earnings	91,789		(5,581)		86,208

(2) Loans and Allowance for Credit Losses

Loans

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

(in thousands)	September 30, 2023		December 31, 2022
Commercial, financial, and agricultural	$	227,372	$	244,549
Real estate construction − residential	58,774		32,095
Real estate construction − commercial	130,572		137,235
Real estate mortgage − residential	379,514		361,025
Real estate mortgage − commercial	739,413		722,729
Installment and other consumer	21,324		23,619
Total loans held for investment	$	1,556,969	$	1,521,252

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. Accrued interest on loans totaled $7.1 million and $6.4 million at September 30, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company's consolidated balance sheets. The total amount of accrued interest is excluded from the amortized cost basis of loans presented above. Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivable. At September 30, 2023, loans of $719.9 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit.

Allowance for Credit Losses

The allowance for credit losses is measured using a lifetime expected loss model that incorporates relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis. The allowance for credit losses is a valuation account that is deducted from loans amortized cost basis to present the net amount

9

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

expected to be collected on the instrument. Expected recoveries are included in the allowance and do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Loans are charged off against the allowance for credit losses when management believes the balance has become uncollectible.

For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using relevant peer historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and the Company's outstanding loan balances during a lookback period. The Company chose to use relevant peer loan loss data due to statistical relevance concerns, low observation counts, historical data limitations, and the inability to secure through the cycle loan-level data. Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of a single macroeconomic variable, which is the civilian unemployment rate. The adjustments are based on results from various regression models projecting the impact of the selected macroeconomic variable to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the loans over the remaining contractual lives, adjusted for expected prepayments. The contractual term excludes expected extensions, renewals and modifications. Credit cards and certain similar consumer lines of credit do not have stated maturities and therefore, for these loan classes, remaining contractual lives are determined by estimating future cash flows expected to be received from customers until payments have been fully allocated to outstanding balances. Agriculture loans also use the remaining life methodology for estimating life of loan losses. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions.

Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures

The Company maintains a separate allowance for credit losses for off-balance-sheet credit exposures, including unfunded loan commitments, unless the associated obligation is unconditionally cancellable by the Company. This allowance is included in other liabilities on the consolidated balance sheets with associated expense recognized as a component of the provision for credit losses on the consolidated statements of income. The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded.

Sensitivity in the Allowance for Credit Loss Model

The allowance for credit losses is an estimate that requires significant judgment including projections of the macroeconomic environment. The forecasted macroeconomic environment continuously changes, which can cause fluctuations in estimated expected losses.

On January 1, 2023, the Company's adoption of the CECL methodology resulted in an increase to the allowance for credit losses of $5.8 million and a liability for unfunded commitments totaling $1.3 million.

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

	Three Months Ended September 30, 2023
(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
Balance at beginning of period	$	1,844	$	748	$	3,422	$	5,465	$	10,295	$	217	$	245	$	22,236
Additions:
Provision for (release of ) credit losses (1)	99		125		(157)		(153)		440		94		(148)		300
Deductions:
Loans charged off	16		—		—		—		3		76		—		95
Less recoveries on loans	(9)		—		—		(2)		(1)		(9)		—		(21)
Net loan charge-offs (recoveries)	7		—		—		(2)		2		67		—		74
Balance at end of period	$	1,936	$	873	$	3,265	$	5,314	$	10,733	$	244	$	97	$	22,462
Liability for Unfunded Commitments
Balance at beginning of period	$	112	$	355	$	414	$	108	$	126	$	1	$	21	$	1,137
Provision for credit losses on unfunded commitments	9		(68)		(110)		(4)		(1)		—		(16)		(190)
Balance at end of period	$	121	$	287	$	304	$	104	$	125	$	1	$	5	$	947
Allowance for credit losses on loans and liability for unfunded commitments	$	2,057	$	1,160	$	3,569	$	5,418	$	10,858	$	245	$	102	$	23,409

	Three Months Ended September 30, 2022
(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
Balance at beginning of period	$	3,005	$	66	$	762	$	2,747	$	8,410	$	312	$	51	$	15,353
Additions:
Provision for (release of ) loan losses (1)	(124)		5		87		481		(414)		129		136		300
Deductions:
Loans charged off	46		—		—		—		(1)		146				191
Less recoveries on loans	(13)		—		—		(4)		(5)		(21)				(43)
Net loan charge-offs (recoveries)	33		—		—		(4)		(6)		125		—		148
Balance at end of period	$	2,848	$	71	$	849	$	3,232	$	8,002	$	316	$	187	$	15,505

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AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

	Nine Months Ended September 30, 2023
(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
Balance at beginning of period	$	2,735	$	157	$	875	$	3,329	$	8,000	$	326	$	166	$	15,588
Adoption of ASU 2016-13	(649)		291		2,894		1,890		1,613		(80)		(166)		5,793
Balance at January 1, 2023	2,086		448		3,769		5,219		9,613		246		—		21,381
Additions:
Provision for (release of ) credit losses (1)	(274)		425		(504)		89		1,145		137		97		1,115
Deductions:
Loans charged off	59		—		—		—		28		204		—		291
Less recoveries on loans	(183)		—		—		(6)		(3)		(65)		—		(257)
Net loan charge-offs (recoveries)	(124)		—		—		(6)		25		139		—		34
Balance at end of period	$	1,936	$	873	$	3,265	$	5,314	$	10,733	$	244	$	97	$	22,462
Liability for Unfunded Commitments
Balance at beginning of period	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Adoption of ASU 2016-13	104		341		569		107		150		1		—		1,272
Balance at January 1, 2023	104		341		569		107		150		1		—		1,272
Provision for credit losses on unfunded commitments	17		(54)		(265)		(3)		(25)		—		5		(325)
Balance at end of period	$	121	$	287	$	304	$	104	$	125	$	1	$	5	$	947
Allowance for credit losses on loans and liability for unfunded commitments	$	2,057	$	1,160	$	3,569	$	5,418	$	10,858	$	245	$	102	$	23,409

	Nine Months Ended September 30, 2022
(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
Balance at beginning of period	$	2,717	$	137	$	588	$	2,482	$	10,662	$	256	$	61	$	16,903
Additions:
Provision for (release of ) loan losses (1)	188		(66)		261		723		(2,491)		259		126		(1,000)
Deductions:
Loans charged off	106		—		—		—		178		262		—		546
Less recoveries on loans	(49)		—		—		(27)		(9)		(63)		—		(148)
Net loan charge-offs (recoveries)	57		—		—		(27)		169		199		—		398
Balance at end of period	$	2,848	$	71	$	849	$	3,232	$	8,002	$	316	$	187	$	15,505

(1) Beginning January 1, 2023, calculation is based on CECL methodology. Prior to January 1, 2023, calculation was based on probable incurred loss methodology.

Collateral-Dependent loans

Collateral-dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Under the CECL methodology, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance on the fair value of collateral.

The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and the loan’s amortized cost. If the fair value of the collateral exceeds the loan’s amortized cost, no allowance is necessary. The Company’s policy is to obtain appraisals on any significant pieces of collateral. Higher discounts are applied in determining fair value for real estate collateral in industries that are undergoing significant stress, or for properties that are specialized use or have limited marketability.

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

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AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

	Collateral Type
(in thousands)	Real Estate		Other		Allowance Allocated
September 30, 2023
Real estate mortgage − residential	$	142	$	—	$	22
Real estate mortgage − commercial	2,432		—		—
Total	$	2,574	$	—	$	22

Impaired Loans

The following impaired loans disclosures were superseded by ASU 2016-13.

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

(in thousands)	Commercial, Financial, and Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
December 31, 2022
Allowance for loan losses:
Individually evaluated for impairment	$	36	$	—	$	11	$	148	$	62	$	1	$	—	$	258
Collectively evaluated for impairment	2,699		157		864		3,181		7,938		325		166		15,330
Total	$	2,735	$	157	$	875	$	3,329	$	8,000	$	326	$	166	$	15,588
Loans outstanding:
Individually evaluated for impairment	$	295	$	—	$	87	$	1,863	$	18,110	$	6	$	—	$	20,361
Collectively evaluated for impairment	244,254		32,095		137,148		359,162		704,619		23,613		—		1,500,891
Total	$	244,549	$	32,095	$	137,235	$	361,025	$	722,729	$	23,619	$	—	$	1,521,252

Loans evaluated under Accounting Standards Codification (ASC) 310-10-35 include loans that are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans individually evaluated for impairment totaled $20.4 million at December 31, 2022, and were comprised of loans on non-accrual status and loans classified as TDRs.

The net carrying value of impaired loans is based on the fair values of collateral obtained through independent appraisals, internal evaluations, or by discounting the total expected future cash flows. At December 31, 2022, $17.7 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans' collateral.

The categories of impaired loans at December 31, 2022 were as follows:

(in thousands)	December 31, 2022
Non-accrual loans	$	18,700
Performing TDRs	1,661
Total impaired loans	$	20,361

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The following table presents loans individually evaluated for impairment at December 31, 2022, segregated between loans for which an allowance was provided and loans for which no allowance was provided.

(in thousands)	Recorded Investment		Unpaid Principal Balance		Specific Reserves		Average Recorded Investment
December 31, 2022
With no related allowance recorded:
Real estate mortgage − residential	$	—	$	—	$	—	$	1
Real estate mortgage − commercial	17,664		18,975		—		16,230
Total	$	17,664	$	18,975	$	—	$	16,231
With an allowance recorded:
Commercial, financial and agricultural	$	295	$	330	$	36	$	319
Real estate construction − commercial	87		127		11		93
Real estate mortgage − residential	1,863		2,080		148		2,189
Real estate mortgage − commercial	446		535		62		428
Installment and other consumer	6		6		1		90
Total	$	2,697	$	3,078	$	258	3,119
Total impaired loans	$	20,361	$	22,053	$	258	$	19,350

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment.

•Pass - loans that are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell in a timely manner, of any underlying collateral.

•Watch - loans that have one or more weaknesses identified that may result in the borrower being unable to meet repayment terms or when the Company’s credit position could deteriorate at some future date.

•Substandard - loans that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.

•Non-accrual - loans that are delinquent for 90 days or more and the ultimate collectability of interest or principal is no longer probable. (The majority of the Company's non-accrual loans have a substandard risk grade)

•Doubtful - loans that have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions, and values.

In the following tables, consumer loans are generally assigned a risk grade similar to the classifications described above; however, upon reaching 90 days and 120 days past due, they are generally downgraded to non-accrual status, in accordance with the Federal Financial Institutions Examination Counsel's Retail Credit Classification Policy.

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AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

	Term Loans
	Amortized Cost Basis by Origination Year and Risk Grades
(in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis		Total
September 30, 2023
Commercial, Financial, & Agricultural
Pass	$	38,345	$	46,113	$	34,333	$	32,286	$	5,094	$	4,851	$	51,245	$	603	$	212,870
Watch	181		2,630		381		610		3		331		4,159		—		8,295
Substandard	382		3,841		58		18		—		—		1,820		—		6,119
Non-accrual loans	—		2		—		—		11		75		—		—		88
Total	$	38,908	$	52,586	$	34,772	$	32,914	$	5,108	$	5,257	$	57,224	$	603	$	227,372
Gross YTD charge-offs	—		—		—		—		—		59		—		—		59
Real Estate Construction - Residential
Pass	$	35,074	$	22,884	$	638	$	177	$	—	$	—	$	1	$	—	$	58,774
Watch	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Non-accrual loans	—		—		—		—		—		—		—		—		—
Total	$	35,074	$	22,884	$	638	$	177	$	—	$	—	$	1	$	—	$	58,774
Gross YTD charge-offs	—		—		—		—		—		—		—		—		—
Real Estate Construction - Commercial
Pass	$	40,936	$	56,321	$	29,056	$	1,193	$	63	$	739	$	311	$	—	$	128,619
Watch	839		18		196		—		—		13		103		—		1,169
Substandard	710		—		—		—		—		—		—		—		710
Non-accrual loans	—		—		—		—		—		74		—		—		74
Total	$	42,485	$	56,339	$	29,252	$	1,193	$	63	$	826	$	414	$	—	$	130,572
Gross YTD charge-offs	—		—		—		—		—		—		—		—		—
Real Estate Mortgage - Residential
Pass	$	59,185	$	126,650	$	64,789	$	49,317	$	7,345	$	22,551	$	44,237	$	202	$	374,276
Watch	180		208		416		989		127		2,265		—		—		4,185
Substandard	16		—		—		130		—		134		—		—		280
Non-accrual loans	—		49		—		232		—		273		219		—		773
Total	$	59,381	$	126,907	$	65,205	$	50,668	$	7,472	$	25,223	$	44,456	$	202	$	379,514
Gross YTD charge-offs	—		—		—		—		—		—		—		—		—
Real Estate Mortgage - Commercial
Pass	$	89,802	$	214,581	$	205,323	$	86,113	$	27,954	$	42,089	$	15,563	$	662	$	682,087
Watch	16,073		11,881		4,405		1,417		390		1,352		75		—		35,593
Substandard	2,541		219		15,519		—		128		294		100		58		18,859
Non-accrual loans	1,815		111		730		218		—		—		—		—		2,874
Total	$	110,231	$	226,792	$	225,977	$	87,748	$	28,472	$	43,735	$	15,738	$	720	$	739,413
Gross YTD charge-offs	—		—		—		—		—		28		—		—		28
Installment and other Consumer
Pass	$	6,434	$	7,243	$	3,217	$	1,543	$	1,202	$	1,602	$	80	$	—	$	21,321
Watch	—		—		—		2		—		—		—		—		2
Substandard	—		—		—		—		—		—		—		—		—
Non-accrual loans	—		—		1		—		—		—		—		—		1
Total	$	6,434	$	7,243	$	3,218	$	1,545	$	1,202	$	1,602	$	80	$	—	$	21,324
Gross YTD charge-offs	—		21		13		—		—		169		1		—		204
Total Portfolio
Pass	$	269,776	$	473,792	$	337,356	$	170,629	$	41,658	$	71,832	$	111,437	$	1,467	$	1,477,947
Watch	17,273		14,737		5,398		3,018		520		3,961		4,337		—		49,244
Substandard	3,649		4,060		15,577		148		128		428		1,920		58		25,968
Non-accrual loans	1,815		162		731		450		11		422		219		—		3,810
Total	$	292,513	$	492,751	$	359,062	$	174,245	$	42,317	$	76,643	$	117,913	$	1,525	$	1,556,969
Total Gross YTD charge-offs	$	—	$	21	$	13	$	—	$	—	$	256	$	1	$	—	$	291

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AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The following table presents the recorded investment by risk categories at December 31, 2022:

	Term Loans
	Amortized Cost Basis by Origination Year and Risk Grades
(in thousands)	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted to Term Loans Amortized Cost Basis		Total
December 31, 2022
Commercial, Financial, & Agricultural
Pass	$	73,654	$	40,681	$	37,994	$	6,479	$	4,050	$	2,718	$	63,869	$	504	$	229,949
Watch	1,228		296		756		150		48		251		3,155		1,527		7,411
Substandard	5,014		58		24		—		152		—		1,820		—		7,068
Non-accrual loans	—		—		—		26		95		—		—		—		121
Total	$	79,896	$	41,035	$	38,774	$	6,655	$	4,345	$	2,969	$	68,844	$	2,031	$	244,549
Gross YTD charge-offs	135		—		—		—		—		—		—		—		135
Real Estate Construction - Residential
Pass	$	29,289	$	1,248	$	769	$	449	$	—	$	—	$	340	$	—	$	32,095
Watch	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Non-accrual loans	—		—		—		—		—		—		—		—		—
Total	$	29,289	$	1,248	$	769	$	449	$	—	$	—	$	340	$	—	$	32,095
Gross YTD charge-offs	—		—		—		—		—		—		—		—		—
Real Estate Construction - Commercial
Pass	$	60,318	$	67,977	$	2,249	$	78	$	676	$	656	$	1,831	$	—	$	133,785
Watch	2,239		321		—		—		—		14		103		—		2,677
Substandard	686		—		—		—		—		—		—		—		686
Non-accrual loans	—		—		—		—		—		87		—		—		87
Total	$	63,243	$	68,298	$	2,249	$	78	$	676	$	757	$	1,934	$	—	$	137,235
Gross YTD charge-offs	—		—		—		—		—		—		—		—		—
Real Estate Mortgage - Residential
Pass	$	147,130	$	68,380	$	53,322	$	8,013	$	4,981	$	25,590	$	45,182	$	523	$	353,121
Watch	1,226		429		1,511		145		215		2,015		—		—		5,541
Substandard	—		136		820		—		10		712		—		—		1,678
Non-accrual loans	59		—		144		—		—		386		96		—		685
Total	$	148,415	$	68,945	$	55,797	$	8,158	$	5,206	$	28,703	$	45,278	$	523	$	361,025
Gross YTD charge-offs	—		—		—		—		—		—		—		—		—
Real Estate Mortgage - Commercial
Pass	$	248,529	$	203,033	$	99,989	$	31,341	$	21,354	$	38,317	$	10,868	$	121	$	653,552
Watch	14,049		14,029		16,863		842		897		811		149		401		48,041
Substandard	260		2,673		—		48		—		306		—		48		3,335
Non-accrual loans	4,621		13,180		—		—		—		—		—		—		17,801
Total	$	267,459	$	232,915	$	116,852	$	32,231	$	22,251	$	39,434	$	11,017	$	570	$	722,729
Gross YTD charge-offs	101		—		—		—		—		80		—		—		181
Installment and other Consumer
Pass	$	11,170	$	5,183	$	2,891	$	2,016	$	459	$	88	$	1,806	$	—	$	23,613
Watch	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Non-accrual loans	2		3		—		1		—		—		—		—		6
Total	$	11,172	$	5,186	$	2,891	$	2,017	$	459	$	88	$	1,806	$	—	$	23,619
Gross YTD charge-offs	268		10		5		21		1		—		16		—		321
Total Portfolio
Pass	$	570,090	$	386,502	$	197,214	$	48,376	$	31,520	$	67,369	$	123,896	$	1,148	$	1,426,115
Watch	18,742		15,075		19,130		1,137		1,160		3,091		3,407		1,928		63,670
Substandard	5,960		2,867		844		48		162		1,018		1,820		48		12,767
Non-accrual loans	4,682		13,183		144		27		95		473		96		—		18,700
Total	$	599,474	$	417,627	$	217,332	$	49,588	$	32,937	$	71,951	$	129,219	$	3,124	$	1,521,252
Total Gross YTD charge-offs	$	504	$	10	$	5	$	21	$	1	$	80	$	16	$	—	$	637

16

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AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Loans are generally classified as delinquent once payments become 30 days or more past due. The Company’s policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, the ultimate collectability of interest or principal is no longer probable. In general, loans are placed on non-accrual status when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual status, including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. Subsequent interest payments received on non-accrual loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial condition of the borrower indicates that the timely collectability of interest and principal is probable and the borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months.

The following tables present the recorded investment in non-accrual loans and loans past due over 90 days still on accrual by class of loans as of September 30, 2023 and December 31, 2022:

(in thousands)	Non-accrual with no Allowance		Non-accrual with Allowance		Total Non-accrual (1)		90 Days Past Due And Still Accruing		Total Non-performing Loans
September 30, 2023
Commercial, Financial, and Agricultural	$	—	$	88	$	88	$	—	$	88
Real estate construction − commercial	—		74		74		—		74
Real estate mortgage − residential	95		678		773		31		804
Real estate mortgage − commercial	2,431		443		2,874		—		2,874
Installment and Other Consumer	—		1		1		6		7
Total	$	2,526	$	1,284	$	3,810	$	37	$	3,847
December 31, 2022
Commercial, Financial, and Agricultural	$	—	$	121	$	121	$	—	$	121
Real estate construction − commercial	—		87		87		—		87
Real estate mortgage − residential	—		685		685		—		685
Real estate mortgage − commercial	17,664		137		17,801		—		17,801
Installment and Other Consumer	—		6		6		1		7
Total	$	17,664	$	1,036	$	18,700	$	1	$	18,701

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

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

17

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The following table provides aging information for the Company’s past due and non-accrual loans at September 30, 2023 and December 31, 2022.

(in thousands)	Current or Less Than 30 Days Past Due		30 - 89 Days Past Due		90 Days Past Due And Still Accruing		Non-Accrual		Total
September 30, 2023
Commercial, Financial, and Agricultural	$	227,106	$	178	$	—	$	88	$	227,372
Real estate construction − residential	58,540		234		—		—		58,774
Real estate construction − commercial	130,498		—		—		74		130,572
Real estate mortgage − residential	378,362		348		31		773		379,514
Real estate mortgage − commercial	736,318		221		—		2,874		739,413
Installment and Other Consumer	21,156		161		6		1		21,324
Total	$	1,551,980	$	1,142	$	37	$	3,810	$	1,556,969
December 31, 2022
Commercial, Financial, and Agricultural	$	244,392	$	36	$	—	$	121	$	244,549
Real estate construction − residential	32,095		—		—		—		32,095
Real estate construction − commercial	137,148		—		—		87		137,235
Real estate mortgage − residential	359,672		668		—		685		361,025
Real estate mortgage − commercial	704,925		3		—		17,801		722,729
Installment and Other Consumer	23,506		106		1		6		23,619
Total	$	1,501,738	$	813	$	1	$	18,700	$	1,521,252

Loan Modifications for Borrowers Experiencing Financial Difficulty Subsequent to the Adoption of ASU 2022-02

In the normal course of business, the Company may execute loan modifications with borrowers. These modifications are analyzed to determine whether the modification is considered concessionary, long-term and made to a borrower experiencing financial difficulty. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. If a loan modification is determined to be made to a borrower experiencing financial difficulty, the loan is considered collateral-dependent and evaluated as part of the allowance for credit losses as described above in the Allowance for Credit Losses section of this note.

For both the three and nine months ended September 30, 2023, the Company did not modify any loans made to borrowers experiencing financial difficulty. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term.

18

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

	September 30, 2023
(Dollars in thousands)	Number of contracts	Recorded Investment		% to Total Loans
Commercial, financial and agricultural	2	$	164	0.01%
Real estate mortgage − residential	6	998		0.06%
Real estate mortgage − commercial	2	273		0.02%
Total	10	$	1,435	0.09	%

Troubled Debt Restructurings (TDRs) Prior to Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR. See “Note 1 Summary of Significant Accounting Policies” in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 for more information on our TDR policy, and “Note 1, Summary of Significant Accounting Policies” in this report for more information on the adoption of ASU 2022-02.

At September 30, 2022, loans classified as TDRs totaled $1.9 million, of which $0.3 million were classified as non-performing TDRs and $1.6 million were classified as performing TDRs. Both performing and non-performing TDRs are considered impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $171,000 related to TDRs were allocated to the allowance for loan losses at September 30, 2022.

For both the three and nine months ended September 30, 2022, the Company had one new loan meeting the TDR criteria. For both the three and nine months ended September 30, 2022, the Company had no TDRs for which there was a payment default within the 12 months following the restructure date.

Loans Held for Sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale. These loans are initially measured at fair value under the fair value option election with subsequent changes in fair value recognized in mortgage banking income. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and various other secondary market investors. At September 30, 2023, the carrying amount of these loans was $3.0 million compared to $0.6 million at December 31, 2022.

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

	September 30,		December 31,
(in thousands)	2023		2022
Real estate construction - commercial	$	10,054	$	10,094
Real estate mortgage - residential	71		179
Real estate mortgage - commercial	706		1,186
Total	$	10,831	$	11,459
Less valuation allowance for other real estate owned	(7,267)		(2,664)
Total other real estate owned and repossessed assets	$	3,564	$	8,795

19

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Balance at beginning of period	$	10,924	$	11,819	$	11,459	$	13,436
Additions net of (charge-offs)	—		55		44		3
Proceeds from sales	(54)		—		(681)		(1,348)
Charge-offs against the valuation allowance for other real estate owned, net	(40)		—		(40)		(219)
Net gain on sales	1		—		49		2
Total other real estate owned	10,831		11,874		$	10,831	$	11,874
Less valuation allowance for other real estate owned	(7,267)		(2,664)		(7,267)		(2,664)
Balance at end of period	$	3,564	$	9,210	$	3,564	$	9,210

At September 30, 2023, there were $72,000 in consumer mortgage loans secured by residential real estate properties in the process of foreclosure compared to no such consumer mortgage loans at December 31, 2022.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Balance at beginning of period	$	4,495	$	2,664	$	2,664	$	2,911
Provision for (release of) valuation allowance for other real estate owned	2,812		—		4,643		(28)
Charge-offs	(40)		—		(40)		(219)
Balance at end of period	$	7,267	$	2,664	$	7,267	$	2,664

20

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(4) Investment Securities

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

			Gross Unrealized
(in thousands)	Total Amortized Cost		Gains		Losses		Fair Value
September 30, 2023
U.S. Treasury	$	4,908	$	—	$	(40)	$	4,868
U.S. government and federal agency obligations	446		—		(26)		420
U.S. government-sponsored enterprises	27,499		—		(2,637)		24,862
Obligations of states and political subdivisions	131,697		—		(32,762)		98,935
Mortgage-backed securities	112,116		2		(19,375)		92,743
Other debt securities (a)	11,825		—		(1,291)		10,534
Bank issued trust preferred securities (a)	1,486		—		(332)		1,154
Total available-for-sale securities	$	289,977	$	2	$	(56,463)	$	233,516
December 31, 2022
U.S. Treasury	$	2,198	$	—	$	(46)	$	2,152
U.S. government and federal agency obligations	591		—		(32)		559
U.S. government-sponsored enterprises	26,499		—		(2,722)		23,777
Obligations of states and political subdivisions	134,994		—		(25,554)		109,440
Mortgage-backed securities	119,556		7		(16,864)		102,699
Other debt securities (a)	11,825		—		(882)		10,943
Bank issued trust preferred securities (a)	1,486		—		(309)		1,177
Total available-for-sale securities	$	297,149	$	7	$	(46,409)	$	250,747

(a) Certain hybrid instruments possessing characteristics typically associated with debt obligations.

The Company’s investment securities are classified as available for sale. Agency bonds and notes, loan certificates guaranteed by the Small Business Administration, residential and commercial agency mortgage-backed securities, and agency collateralized mortgage obligations include securities issued by the Government National Mortgage Association, a U.S. government agency, and the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the FHLB, which are U.S. government-sponsored enterprises.

Debt securities with carrying values aggregating approximately $117.4 million and $111.6 million at September 30, 2023 and December 31, 2022, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

21

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, 2023, by contractual maturity are shown below. Accrued interest on investments totaled $1.3 million and $1.5 million at September 30, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company's consolidated balance sheets. The total amount of accrued interest is excluded from the amortized cost basis of investments presented below. Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivable. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	9,120	$	9,064
Due after one year through five years	23,853		21,728
Due after five years through ten years	28,982		24,924
Due after ten years	115,906		85,057
Total	$	177,861	$	140,773
Mortgage-backed securities	112,116		92,743
Total available-for-sale securities	$	289,977	$	233,516

Other Investment Securities

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in FHLB stock, and Midwest Independent BankersBank (MIB) stock, that do not have readily determinable fair values, are required for membership in those organizations.

(in thousands)	September 30, 2023		December 31, 2022
Other securities:
FHLB stock	$	6,790	$	6,156
MIB stock	151		151
Equity securities with readily determinable fair values	64		46
Total other investment securities	$	7,005	$	6,353

22

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, 2023 and December 31, 2022 were as follows:

	Less than 12 months				12 months or more
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Total Fair Value		Total Unrealized Losses
September 30, 2023
U.S. Treasury	$	3,568	$	(10)	$	1,300	$	(30)	$	4,868	$	(40)
U.S. government and federal agency obligations	—		—		420		(26)		420		(26)
U.S. government-sponsored enterprises	985		(15)		23,877		(2,622)		24,862		(2,637)
Obligations of states and political subdivisions	3,326		(380)		95,609		(32,382)		98,935		(32,762)
Mortgage-backed securities	5,760		(296)		86,648		(19,079)		92,408		(19,375)
Other debt securities	—		—		10,534		(1,291)		10,534		(1,291)
Bank issued trust preferred securities	—		—		1,154		(332)		1,154		(332)
Total	$	13,639	$	(701)	$	219,542	$	(55,762)	$	233,181	$	(56,463)
(in thousands)
December 31, 2022
U.S. Treasury	$	1,908	$	(41)	$	244	$	(5)	$	2,152	$	(46)
U.S. government and federal agency obligations	559		(32)		—		—		559		(32)
U.S. government-sponsored enterprises	7,066		(933)		16,711		(1,789)		23,777		(2,722)
Obligations of states and political subdivisions	79,396		(15,421)		29,370		(10,133)		108,766		(25,554)
Mortgage-backed securities	33,334		(3,124)		68,911		(13,740)		102,245		(16,864)
Other debt securities	7,557		(443)		3,386		(439)		10,943		(882)
Bank issued trust preferred securities	—		—		1,177		(309)		1,177		(309)
Total	$	129,820	$	(19,994)	$	119,799	$	(26,415)	$	249,619	$	(46,409)

The total available-for-sale portfolio consisted of approximately 435 securities at September 30, 2023. The portfolio included 434 securities having an aggregate fair value of $233.2 million that were in a loss position at September 30, 2023. Securities identified as temporarily impaired that had been in a loss position for 12 months or longer totaled $219.5 million at fair value at September 30, 2023. The $56.5 million aggregate unrealized loss included in accumulated other comprehensive loss at September 30, 2023 was caused by interest rate fluctuations.

The total available-for-sale portfolio consisted of approximately 439 securities at December 31, 2022. The portfolio included 436 securities having an aggregate fair value of $249.6 million that were in a loss position at December 31, 2022. Securities identified as temporarily impaired that had been in a loss position for 12 months or longer totaled $119.8 million at fair value at December 31, 2022. The $46.4 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2022 was caused by interest rate fluctuations.

Because the decline in fair value is attributable to changes in interest rates and not credit quality, these investments were not considered other-than-temporarily impaired at September 30, 2023 and December 31, 2022, respectively. In the absence of changes in credit quality of these investments, the fair value is expected to recover on all debt securities as they approach their maturity date or re-pricing date, or if market yields for such investments decline. 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.

23

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 were recognized in earnings:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Gross realized gains	$	—	$	—	$	—	$	—
Gross realized losses	—		—		—		—
Other-than-temporary impairment recognized	—		—		—		—
Other investment securities:
Fair value adjustments, net	3		1		18		(12)
Investment securities gains (losses), net	$	3	$	1	$	18	$	(12)

(5) Intangible Assets

Mortgage Servicing Rights

At September 30, 2023, the Company was servicing approximately $226.3 million of loans sold to the secondary market compared to $240.5 million at December 31, 2022, and $247.6 million at September 30, 2022. Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were $0.2 million and $0.5 million for the three and nine months ended September 30, 2023, respectively, compared to $0.2 million and $0.7 million for the three and nine months ended September 30, 2022, respectively.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Balance at beginning of period	$	2,902	$	2,730	$	2,899	$	2,659
Originated mortgage servicing rights	8		21		38		61
Changes in fair value:
Due to changes in model inputs and assumptions (1)	45		228		145		418
Other changes in fair value (2)	(70)		(73)		(197)		(232)
Total changes in fair value	(25)		155		(52)		186
Balance at end of period	$	2,885	$	2,906	$	2,885	$	2,906

(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.

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

	Nine Months Ended September 30,
	2023		2022
Weighted average constant prepayment rate	6.51	%	7.30	%
Weighted average note rate	3.49	%	3.42	%
Weighted average discount rate	11.00	%	10.00	%
Weighted average expected life (in years)	7.14		6.98

24

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(6) Deposits

The table below represents the aggregate amount of time deposits with balances that met or exceeded the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 and brokered deposits for the periods indicated.

(aggregate amounts in thousands)	September 30, 2023		December 31, 2022
Time deposits with balances > $250,000	$	115,197	$	94,859
Brokered deposits	$	42,543	$	40,135

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

(in thousands)	September 30, 2023		December 31, 2022
Federal funds purchased	$	—	$	—
Repurchase agreements	6,196		5,187
Total	$	6,196	$	5,187

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
(in thousands)	Overnight and continuous		Less than 90 days		Greater than 90 days		Total
September 30, 2023
U.S. government-sponsored enterprises	$	6,196	$	—	$	—	$	6,196
Total	$	6,196	$	—	$	—	$	6,196
December 31, 2022
U.S. government-sponsored enterprises	$	5,187	$	—	$	—	$	5,187
Total	$	5,187	$	—	$	—	$	5,187

(8) 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, 2023, operating right of use (ROU) assets and liabilities were $1.3 million and $1.3 million, respectively. As of September 30, 2023, the weighted-average remaining lease term on these operating leases is approximately 5.3 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4.0%.

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

25

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

At adoption of ASU 2016-02 on January 1, 2019, lease and non-lease components of new lease agreements are accounted for separately. Lease components include fixed payments such as rent, real estate taxes and insurance costs and non-lease components include common-area maintenance costs. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Operating lease expense for these leases was $33,000 and $95,000 for the three and nine months ended September 30, 2023, respectively, compared to $21,000 and $65,000 for the three and nine months ended September 30, 2022, respectively.

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

Lease payments due in:	Operating Lease
(in thousands)
2023 (excluding 9 months ended September 30, 2023)	$	88
2024	258
2025	257
2026	259
2027	262
Thereafter	309
Total lease payments	$	1,433
Less imputed interest	(138)
Total lease liabilities, as reported	$	1,295

(9) Income Taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 16.2% and 17.1% for the three and nine months ended September 30, 2023, respectively, compared to 18.7% and 18.5% for the three and nine months ended September 30, 2022, respectively. The effective tax rate for each of the three and nine months ended September 30, 2023 and 2022, respectively, is lower than the U.S. federal statutory rate of 21% primarily due to tax-free revenues.

Included in the effective tax rate is a $13,000 and $40,000 benefit associated with a historic tax credit investment for the three and nine months ended September 30, 2023, respectively. The investment is expected to generate a $0.3 million tax benefit over the life of the project and is being recognized under the deferral method of accounting.

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, 2023. Management arrived at this conclusion based upon the level of historical taxable income and projections for future taxable income of the appropriate character over the periods in which the deferred tax assets are deductible.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. For each of the nine months ended September 30, 2023 and 2022, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

26

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(10) Stockholders’ Equity and Accumulated Other Comprehensive (Loss) Income

Equity-Based Compensation Plan

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

	RSUs
(in thousands, except per share amounts)	Quantity	Weighted-Average Grant Date Fair Value Per share
Non-vested at January 1, 2023	—	$	—
Granted	12,277	18.33
Vested	—	—
Forfeited	—	—
Non-vested at September 30, 2023	12,277	$	18.33

Accumulated Other Comprehensive (Loss) Income

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

	Nine Months Ended September 30, 2023
(in thousands)	Unrealized Gains (Losses) on Securities (1)		Unrecognized Net Pension and Postretirement Costs (2)		Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	$	(36,657)	$	4,943	$	(31,714)
Other comprehensive loss, before reclassifications	(10,061)		(480)		(10,541)
Amounts reclassified from accumulated other comprehensive loss	—		—		—
Current period other comprehensive loss, before tax	(10,061)		(480)		(10,541)
Income tax benefit	2,113		101		2,214
Current period other comprehensive loss, net of tax	(7,948)		(379)		(8,327)
Balance at end of period	$	(44,605)	$	4,564	$	(40,041)

	Nine Months Ended September 30, 2022
(in thousands)	Unrealized Gains (Losses) on Securities (1)		Unrecognized Net Pension and Postretirement Costs (2)		Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	$	362	$	2,931	$	3,293
Other comprehensive loss, before reclassifications	(54,985)		—		(54,985)
Amounts reclassified from accumulated other comprehensive loss	—		—		—
Current period other comprehensive loss, before tax	(54,985)		—		(54,985)
Income tax benefit	11,547		—		11,547
Current period other comprehensive loss, net of tax	(43,438)		—		(43,438)
Balance at end of period	$	(43,076)	$	2,931	$	(40,145)

(1)The pre-tax amounts reclassified from accumulated other comprehensive (loss) income are included in investment securities gains (losses), net in the consolidated statements of income.

(2)The pre-tax amounts reclassified from accumulated other comprehensive (loss) income are included in the computation of net periodic pension cost.

27

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(11) Employee Benefit Plans

Employee Benefits

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Payroll taxes	$	374	$	338	$	1,228	$	1,123
Medical plans	505		426		1,400		1,368
401(k) match and profit sharing	250		411		761		1,207
Periodic pension cost	265		402		796		1,206
Other	11		20		30		32
Total employee benefits	$	1,405	$	1,597	$	4,215	$	4,936

The Company's profit-sharing plan includes a matching 401(k) portion, in which the Company matches the first 3% of eligible employee contributions. The Company made annual contributions for the discretionary portion in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown. In addition, employees were able to make additional tax-deferred contributions.

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

Pension

The Company provides a noncontributory defined benefit pension plan for all full-time and eligible employees. Beginning January 1, 2018 and for all retrospective periods presented, the Company adopted the guidance under ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under the guidance, only the service cost component of the net periodic benefit cost is reported in the same income statement line item as salaries and benefits, and the remaining components are reported as other non-interest expense. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year.

Effective July 1, 2017, the Company amended the pension plan to effectuate a “soft freeze” such that no individual hired (or rehired in the case of a former employee) by the Company after September 30, 2017, whether or not such individual is or was a vested member in the plan, will be eligible to be an active member and be entitled to accrue any benefits under the plan.

28

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Components of Net Pension Cost and Other Amounts Recognized in Accumulated Other Comprehensive (Loss) Income

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Service cost - benefits earned during the year	$	237	$	373	$	710	$	1,118
Interest costs on projected benefit obligations (a)	357		293		1,071		881
Expected return on plan assets (a)	(544)		(570)		(1,634)		(1,711)
Expected administrative expenses	28		29		86		88
Amortization of unrecognized net loss (a)	(160)		—		(480)		—
Net periodic pension cost	$	(82)	$	125	$	(247)	$	376

(a)The components of net periodic pension cost other than the service cost and expected administrative expenses 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 (loss) income. The net actuarial gain or loss in excess of a 10% corridor is amortized in net periodic benefit cost over the average remaining service period of active participants in the pension plan. The prior service credit is amortized over the average remaining service period to full eligibility for participating employees expected to receive benefits. Currently, there is no prior service cost or net transition (asset)/obligation to be amortized.

(12) Earnings per Share

Stock Dividend

On July 1, 2023, the Company paid a special stock dividend of 4.0% to common shareholders of record at the close of business on June 15, 2023. 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 period. Diluted earnings per share gives effect to all dilutive potential shares that were outstanding during the period.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except per share data)	2023		2022		2023		2022
Basic and Diluted Earnings Per Share:
Net income available to shareholders	$	2,579	$	4,927	$	8,399	$	16,025
Basic weighted-average shares outstanding	7,039,323		7,039,323		7,039,323		7,071,051
Effect of dilutive equity-based awards	—		—		—		—
Diluted weighted-average shares outstanding	7,039,323		7,039,323		7,039,323		7,071,051
Basic earnings per share	$	0.36	$	0.70	$	1.19	$	2.27
Diluted earnings per share	$	0.36	$	0.70	$	1.19	$	2.27

The dilutive effect of restricted share units is reflected in diluted earnings per share unless the impact is anti-dilutive, by application of the treasury stock method.

29

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Repurchase Program

Pursuant to the Company's 2019 Repurchase Plan, management is given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases. The Company did not repurchase any shares during the current quarter. As of September 30, 2023, $2.1 million remained available for share repurchases pursuant to the plan.

(13) Fair Value Measurements

Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date.

Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under U.S. GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows.

The fair value hierarchy is as follows:

Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available. A contractually binding sales price also provides reliable evidence of fair value.

Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 – Inputs are unobservable inputs for the asset or liability and significant to the fair value. These may be internally developed using the Company’s best information and assumptions that a market participant would consider.

In accordance with fair value accounting guidance, the Company measures, records, and reports various types of assets and liabilities at fair value on either a recurring or non-recurring basis in the consolidated financial statements. Nonfinancial assets measured at fair value on a non-recurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred.

Valuation Methods for Assets and Liabilities Measured at Fair Value on a Recurring Basis

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis:

Available-for-Sale Securities

The fair value measurements of the Company’s investment securities are determined by a third party pricing service that considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to management's independent verification to another pricing source for reasonableness each quarter.

Other Investment Securities

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in FHLB stock and MIB 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.

30

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Equity securities with readily determinable fair values are recorded at fair value, with changes in fair value reflected in earnings. Equity securities that do not have readily determinable fair values are carried at cost and are periodically assessed for impairment. The Company uses Level 1 inputs to value equity securities that are traded in active markets.

Loans Held for Sale

The fair value of the committed in forward sale agreements loans is the price at which they could be sold in the principal market at the measurement date, therefore the Company classifies as Level 2.

Derivative Assets and Liabilities

Derivative assets and liabilities include interest rate lock commitments (IRLCs) and forward sale commitments. The fair values of IRLCs and forward sale commitments are determined using readily observable market data such as interest rates, prices, volatility factors, and customer credit-related adjustments. For IRLCs, the fair value is subject to the anticipated loan funding probability (pull-through rate), which is considered an unobservable factor. Factors that affect pull-through rates include origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage, stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. The Company classifies IRLCs as Level 3 due to the unobservable input of pull-through rates.

Mortgage Servicing Rights (MSRs)

The fair value of MSRs is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its MSRs as Level 3.

31

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

			Fair Value Measurements
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2023
Assets:
U.S. Treasury	$	4,868	$	4,868	$	—	$	—
U.S. government and federal agency obligations	420		—		420		—
U.S. government-sponsored enterprises	24,862		—		24,862		—
Obligations of states and political subdivisions	98,935		—		98,935		—
Mortgage-backed securities	92,743		—		92,743		—
Other debt securities	10,534		—		10,534		—
Bank-issued trust preferred securities	1,154		—		1,154		—
Equity securities	64		64		—		—
Interest rate lock commitments	45		—		—		45
Forward sale commitments	18		—		18		—
Loans held for sale	3,006		—		3,006		—
Mortgage servicing rights	2,885		—		—		2,885
Total	$	239,534	$	4,932	$	231,672	$	2,930
Liabilities:
Interest rate lock commitments	$	2	$	—	$	—	$	2
Total	$	2	$	—	$	—	$	2
December 31, 2022
Assets:
U.S. Treasury	$	2,152	$	2,152	$	—	$	—
U.S. government and federal agency obligations	559		—		559		—
U.S. government-sponsored enterprises	23,777		—		23,777		—
Obligations of states and political subdivisions	109,440		—		109,440		—
Mortgage-backed securities	102,699		—		102,699		—
Other debt securities	10,943		—		10,943		—
Bank-issued trust preferred securities	1,177		—		1,177		—
Equity securities	46		46		—		—
Interest rate lock commitments	20		—		—		20
Forward sale commitments	3		—		3		—
Loans held for sale	591		—		591		—
Mortgage servicing rights	2,899		—		—		2,899
Total	$	254,306	$	2,198	$	249,189	$	2,919
Liabilities:
Interest rate lock commitments	$	18	$	—	$	—	$	18
Forward sale commitments	3		—		3		—
Total	$	21	$	—	$	3	$	18

32

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Mortgage Servicing Rights				Interest Rate Lock Commitments
	Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Balance at beginning of period	$	2,899	$	2,659	$	2	$	286
Total gains or (losses) (realized/unrealized):
Included in earnings	(52)		186		(31)		(22)
Included in other comprehensive income	—		—		—		—
Purchases	—		—		—		—
Sales	—		—		(125)		(474)
Issues	38		61		197		144
Settlements	—		—		—		—
Balance at end of period	$	2,885	$	2,906	$	43	$	(66)

Valuation Methods for Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a non-recurring basis:

Collateral Dependent Impaired Loans

While the overall loan portfolio is not carried at fair value, the Company periodically records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Non-recurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains staff trained to perform in-house evaluations and also to review third-party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by a senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of September 30, 2023, the Company identified $2.6 million in collateral-dependent loans that required $22,000 of specific allowances for credit losses. Related to these loans, there were $13,800 and $54,800 in charge-offs recorded during the three and nine months ended September 30, 2023, respectively. As of September 30, 2022, the Company identified $15.9 million in collateral-dependent impaired loans that required no specific allowances for losses aggregating. Related to these loans, there were $61,000 and $86,000 in charge-offs recorded during the three and nine months ended September 30, 2022, respectively.

Other Real Estate and Foreclosed Assets

Other real estate owned (OREO) and foreclosed assets consisted of loan collateral repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Subsequent to foreclosure, these assets are initially carried at fair value of the collateral less estimated selling costs. Fair value, when recorded, is generally based upon appraisals by approved, independent state-certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on the Company’s historical knowledge, changes in market conditions from the time of appraisal or other information available. During the holding period, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

33

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

			Fair Value Measurements Using
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Three Months Ended September 30, Total Gains (Losses)*		Nine Months Ended September 30, Total Gains (Losses)*
September 30, 2023
Assets:
Collateral dependent impaired loans:
Real estate mortgage - residential	$	120	$	—	$	—	$	120	$	—	$	—
Real estate mortgage - commercial	2,432		—		—		2,432		(2)		(26)
Installment and other consumer	—		—		—		—		(12)		(29)
Total	$	2,552	$	—	$	—	$	2,552	$	(14)	$	(55)
Other real estate and repossessed assets	$	3,564	$	—	$	—	$	3,564	$	(2,811)	$	(4,594)
September 30, 2022
Assets:
Collateral dependent impaired loans:
Real estate mortgage - commercial	$	15,898	$	—	$	—	$	15,898	$	(23)	$	(48)
Installment and other consumer	—		—		—		—		(38)		(38)
Total	$	15,898	$	—	$	—	$	15,898	$	(61)	$	(86)
Other real estate and repossessed assets	$	9,210	$	—	$	—	$	9,210	$	—	$	(22)

*Total losses reported for other real estate and foreclosed assets includes charge-offs, valuation write downs, and net losses taken during the periods reported.

(14) Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value:

Loans

Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, and consumer. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans, or exit price, is estimated by using the future value of discounted cash flows using comparable market rates for similar types of loan products and adjusted for market factors. The discount rates used are estimated using comparable market rates for similar types of loan products adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.

Federal Funds Sold, Cash, and Due from Banks

The carrying amounts of short-term federal funds sold, interest-earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold classified as short-term generally mature in 90 days or less.

Certificates of Deposit in Other Banks

Certificates of deposit are other investments made by the Company with other financial institutions that are carried at cost, which is equal to fair value.

Cash Surrender Value - Life Insurance

The fair value of Bank-owned life insurance approximates the carrying amount. Upon liquidation of these investments, the Company would receive the cash surrender value, which equals the carrying amount.

34

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Accrued Interest Receivable and Payable

For accrued interest receivable and payable, the carrying amount is a reasonable estimate of fair value because of the short maturity for these financial instruments.

Deposits

The fair value of deposits with no stated maturity, such as non-interest-bearing demand, NOW accounts, savings, and money market, is equal to the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Federal funds Purchased and Securities Sold Under Agreements to Repurchase

For Federal funds purchased and securities sold under agreements to repurchase, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

Subordinated Notes and Other Borrowings

The fair value of subordinated notes and other borrowings is based on the discounted value of contractual cash-flows. The discount rate is estimated using the rates currently offered for other borrowed money of similar remaining maturities.

35

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, 2023 and December 31, 2022 is as follows:

					September 30, 2023
					Fair Value Measurements
	September 30, 2023				Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Net Significant Unobservable Inputs
(in thousands)	Carrying amount		Fair value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	17,793	$	17,793	$	17,793	$	—	$	—
Federal funds sold and overnight interest-bearing deposits	10,061		10,061		10,061		—		—
Certificates of deposit in other banks	735		735		735		—		—
Available-for-sale securities	233,516		233,516		4,868		228,648		—
Other investment securities	7,005		7,005		64		6,941		—
Loans, net	1,534,507		1,369,455		—		—		1,369,455
Loans held for sale	3,006		3,006		—		3,006		—
Cash surrender value - life insurance	2,610		2,610		—		2,610		—
Interest rate lock commitments	45		45		—		—		45
Forward sale commitments	18		18		—		18		—
Accrued interest receivable	8,533		8,533		8,533		—		—
Total	$	1,817,829	$	1,652,777	$	42,054	$	241,223	$	1,369,500
Liabilities:
Deposits:
Non-interest bearing demand	$	425,105	$	425,105	$	425,105	$	—	$	—
Savings, interest checking and money market	802,591		802,591		802,591		—		—
Time deposits	352,669		349,641		—		—		349,641
Federal funds purchased and securities sold under agreements to repurchase	6,196		6,196		6,196		—		—
Federal Home Loan Bank advances and other borrowings	112,000		112,000		—		112,000		—
Subordinated notes	49,486		38,444		—		38,444		—
Interest rate lock commitments	2		2		—		—		2
Accrued interest payable	1,851		1,851		1,851		—		—
Total	$	1,749,900	$	1,735,830	$	1,235,743	$	150,444	$	349,643

36

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

					December 31, 2022
					Fair Value Measurements
	December 31, 2022				Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Net Significant Unobservable Inputs
(in thousands)	Carrying amount		Fair value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	18,661	$	18,661	$	18,661	$	—	$	—
Federal funds sold and overnight interest-bearing deposits	65,059		65,059		65,059		—		—
Certificates of deposit in other banks	2,955		2,955		2,955		—		—
Available-for-sale securities	250,747		250,747		2,152		248,595		—
Other investment securities	6,353		6,353		46		6,307		—
Loans, net	1,505,664		1,389,018		—		—		1,389,018
Loans held for sale	591		591		—		591		—
Cash surrender value - life insurance	2,567		2,567		—		2,567		—
Interest rate lock commitments	20		20		—		—		20
Forward sale commitments	3		3		—		3		—
Accrued interest receivable	7,953		7,953		7,953		—		—
Total	$	1,860,573	$	1,743,927	$	96,826	$	258,063	$	1,389,038
Liabilities:
Deposits:
Non-interest bearing demand	$	453,443	$	453,443	$	453,443	$	—	$	—
Savings, interest checking and money market	923,602		923,602		923,602		—		—
Time deposits	255,034		250,433		—		—		250,433
Federal funds purchased and securities sold under agreements to repurchase	5,187		5,187		5,187		—		—
Federal Home Loan Bank advances and other borrowings	98,000		98,000		—		98,000		—
Subordinated notes	49,486		39,197		—		39,197		—
Interest rate lock commitments	18		18		—		—		18
Forward sale commitments	3		3		—		3		—
Accrued interest payable	902		902		902		—		—
Total	$	1,785,675	$	1,770,785	$	1,383,134	$	137,200	$	250,451

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.

37

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(15) Commitments and Contingencies

The Company issues financial instruments with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of 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.

On January 1, 2023, the Company's adoption of the CECL methodology resulted in an increase to the allowance for credit losses of $5.8 million and a liability for unfunded commitments totaling $1.3 million. The allowance for credit losses associated with unfunded commitments and letters of credit is recorded within other liabilities on the consolidated balance sheets. At September 30, 2023, the allowance for credit losses for unfunded commitments was $0.9 million.

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

(in thousands)	September 30, 2023		December 31, 2022
Commitments to extend credit	$	309,847	$	388,264
Interest rate lock commitments	8,956		6,331
Forward sale commitments	2,977		576
Standby letters of credit	17,991		49,740
Total	$	339,771	$	444,911

Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.

The Company has two types of commitments related to mortgage loans held for sale: interest rate lock commitments and forward loan sale commitments. Interest rate lock commitments are commitments to extend credit to a customer that has an interest rate lock and are considered derivative instruments.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers.

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.

38

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Hawthorn Bancshares, Inc., and its subsidiaries (collectively, the Company, we, our, or us), including, without limitation:

•statements that are not historical in nature, and

•statements preceded by, followed by or that include the words believes, expects, may, will, should, could, anticipates, estimates, intends, plans, hopes or similar expressions.

Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

•competitive pressures among financial services companies may increase significantly,

•changes in the interest rate environment may reduce interest margins,

•general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets,

•increases in non-performing assets in the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for credit losses,

•costs or difficulties related to any integration of any business of the Company and its acquisition targets may be greater than expected,

•legislative, regulatory or tax law changes may adversely affect the business in which the Company and its subsidiaries are engaged,

•credit and market risks relating to increasing inflation,

•economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine conflict, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate changes or other catastrophic events,

•changes may occur in the securities markets,

•changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses, including after implementation of the credit impairment model for Current Expected Credit Losses (CECL),

•technological changes, including potential cyber-security incidents and other disruptions, or innovations to the financial services industry, including as a result of the increased telework environment,

•the continued use, availability, and reliability of the London Interbank Offered Rate (LIBOR) and the risks related to the transition from LIBOR to any alternate reference rate we may use, and

•our ability to maintain sufficient liquidity, primarily through deposits, in light of recent events in the banking industry.

We have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and in other reports filed with the Securities and Exchange Commission (SEC) from time to time. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made. Except as required by law, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in its business, results of operations or financial condition over time.

39

Overview

Crucial to the Company’s community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.9 billion in assets at September 30, 2023, provides a broad range of commercial and personal banking services. The Bank’s specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services. The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St. Louis, and the greater Kansas City metropolitan area.

The Company’s primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company’s business is commercial, commercial real estate development, and residential mortgage lending. The Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity.

The success of the Company’s growth strategy depends primarily on the ability of the Bank to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company’s financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company’s growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.

The Bank is a full-service bank that conducts a general banking business, offering its customers checking and savings accounts, debit cards, certificates of deposit, safety deposit boxes and a wide range of lending services, including commercial, financial and agricultural loans, residential real estate loans, single-payment personal loans, installment loans and credit card accounts. In addition, the Bank provides trust services.

The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (FDIC) to the extent provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination by the Board of Governors of the Federal Reserve System.

40

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies require management’s most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The impact and any associated risks related to the critical accounting policies on the business operations are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, where such policies affect the reported and expected financial results.

Allowance for Credit Losses

Management has identified the accounting policy related to the allowance for credit losses as critical to the understanding of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology used in establishing the allowance for credit losses and the impact of any associated risks related to these policies and estimates on the Company’s business operations is provided in Note 1 - Summary of Significant Accounting Policies and is also discussed in the Lending and Credit Management section below. Many of the loans are deemed collateral-dependent for purposes of the measurement of expected losses, thus the fair value of the underlying collateral and sensitivity of such fair values due to changing market conditions, supply and demand, condition of the collateral and other factors can be volatile over periods of time. Such volatility can have an impact on the financial performance of the Company.

41

Executive Summary

The Company has prepared all of the consolidated financial information in this report in accordance with United States (U.S.) generally accepted accounting principles (U.S. GAAP) and the rules of the SEC. In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.

	The Three Months Ended
(In thousands, except per share data)	September 30, 2023		June 30, 2023		September 30, 2022
Net interest income	$	15,147	$	14,202	$	15,067
Provision for credit losses on loans & unfunded commitments	110		—		300
Non-interest income	606		1,596		3,485
Investment securities gains, net	3		7		1
Non-interest expense	12,569		12,725		12,195
Income before income taxes	3,077		3,080		6,058
Income tax expense	498		531		1,131
Net income	$	2,579	$	2,549	$	4,927
Basic earnings per share	$	0.36	$	0.36	$	0.70
Diluted earnings per share	$	0.36	$	0.36	$	0.70
Efficiency ratio (1)	79.79%		80.55%		65.73%
Net interest margin	3.35%		3.19%		3.56%
			Nine Months Ended
			September 30,
(Dollars in thousands, except per share data)			2023		2022
Net interest income			$	43,297	$	43,773
Provision for (release of) credit losses on loans & unfunded commitments			790		(1,000)
Non-interest income			5,384		10,859
Investment securities (losses) gains, net			18		(12)
Non-interest expense			37,772		35,962
Income before income taxes			10,137		19,658
Income tax expense			1,738		3,633
Net income			$	8,399	$	16,025
Basic earnings per share			$	1.19	$	2.27
Diluted earnings per share			$	1.19	$	2.27
Efficiency ratio (1)			77.59%		65.83%
Net interest margin			3.23%		3.57%

(1)Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue is calculated as net interest income plus non-interest income.

42

	As of and for the Three Months Ended						For the Nine Months Ended
(Dollars in thousands, except per share data)	September 30, 2023		June 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Key financial ratios
Book value per share	$	16.82	$	17.97	$	16.32
Market price per share	$	16.25	$	17.95	$	20.50
Cash dividends paid on common stock	$	1,151	$	1,151	$	1,105	$	3,452	$	3,088
Return on total assets	0.54%		0.54%		1.08%		0.59%		1.21%
Return on stockholders' equity	8.05%		7.99%		15.30%		8.73%		16.00%
Average stockholders' equity to total assets	6.73%		6.75%		7.06%		6.78%		7.55%
Capital Ratios
Stockholders' equity to assets	6.30%		6.65%		6.25%
Total risk-based capital ratio	14.20%		13.99%		13.84%
Tier 1 risk-based capital ratio	12.54%		12.51%		12.25%
Common equity Tier 1 capital	10.09%		9.92%		9.82%
Tier 1 leverage ratio (1)	10.43%		10.46%		10.60%
Asset Quality
Net-charge-offs (recoveries)	$	74	$	(92)	$	148	$	34	$	398
Non-performing loans	$	3,847	$	3,847	$	17,348
Classified assets	$	79,022	$	88,488	$	96,705
Non-performing loans to total loans	0.25%		0.25%		1.16%
Non-performing assets to total assets	0.39%		0.54%		1.44%
Allowance for loan losses to total loans	1.44%		1.42%		1.04%

(1)Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets

Results of Operations Highlights:

Consolidated net income of $2.6 million for the third quarter 2023 increased $0.03 million, or 1.2%, compared to the second quarter 2023 ("linked quarter") and decreased $2.3 million, or 47.7%, from the third quarter 2022 (the "prior year quarter"). Earnings per diluted share was consistent at $0.36 for each of the third quarter 2023 and linked quarter compared to $0.70 for the prior year quarter. For the third quarter 2023, the return on average assets was 0.54%, the return on average stockholders’ equity was 8.05%, and the efficiency ratio was 79.8%.

Consolidated net income of $8.4 million, or $1.19 per diluted share, for the nine months ended September 30, 2023 decreased $7.6 million, or 47.6%, compared to $16.0 million, or $2.27 per diluted share, for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, the return on average assets was 0.59%, the return on average stockholders’ equity was 8.73%, and the efficiency ratio was 77.6%.

Net interest income of $15.1 million for the third quarter 2023, increased $0.9 million from the linked quarter, and increased $0.1 million from the prior year quarter. Net interest margin, on a fully taxable equivalent ("FTE") basis, was 3.35% for the third quarter compared to 3.19% and 3.56% for the linked quarter and the prior year quarter, respectively.

Net interest income of $43.3 million for the nine months ended September 30, 2023 decreased $0.5 million compared to $43.8 million for the nine months ended September 30, 2022. Net interest margin, on a fully taxable equivalent basis, was 3.23% for the nine months ended September 30, 2023, a decrease from 3.57% for the nine months ended September 30, 2022. The change to net interest margin on a fully taxable equivalent basis is discussed in greater detail under the Average Balance Sheet Data and Rate and Volume Analysis sections below.

43

Non-interest income for the third quarter 2023 was $0.6 million, a decrease of $1.0 million, or 62.0%, from the linked quarter, and a decrease of $2.9 million, or 82.6%, from the prior year quarter. The change in the current quarter compared to the prior year quarter is primarily due to the recognition of a $2.8 million valuation allowance on property in other real estate owned.

Non-interest income of $5.4 million for the nine months ended September 30, 2023 decreased $5.5 million, or 50.4%, compared to $10.9 million for the nine months ended September 30, 2022. The decrease is primarily due to the recognition of a $4.6 million valuation allowance in the second and third quarter 2023 on property in other real estate owned, a decrease in real estate servicing fees, and the gains on sales of real estate mortgages. These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Non-interest expense for the third quarter 2023 was $12.6 million, a decrease of $0.2 million, or 1.2%, from the linked quarter, and an increase of $0.4 million, or 3.1%, from the prior year quarter.

Non-interest expense for the nine months ended September 30, 2023 was $37.8 million, an increase of $1.8 million, or 5.0%, from the nine months ended September 30, 2022. These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Balance Sheet Highlights:

Cash and cash equivalents – Cash and cash equivalents increased $3.2 million, or 13.0%, to $27.9 million at the end of the current quarter compared to the end of the linked quarter. Year-over-year, cash and cash equivalents decreased $13.5 million, or 32.7%, from $41.4 million at the end of the prior-year quarter. See the Liquidity Management section for further discussion.

Loans – Loans held for investment decreased by $6.2 million, or 0.4%, to $1.6 billion as of September 30, 2023 compared to the end of the linked quarter. Year-over-year, loans held for investment increased $65.0 million, or 4.4%, from $1.5 billion as of September 30, 2022. The yield earned on average loans held for investment was 5.67%, on an FTE basis, for the third quarter 2023 compared to 5.23% for the linked quarter and 4.51% for the prior year quarter.

Asset quality – Non-performing loans remained steady at $3.8 million at September 30, 2023 and at the end of the linked quarter, compared to $17.3 million at the end of the prior year quarter. The decrease in non-performing loans in the current quarter as compared to the prior year quarter was primarily due to three large non-accrual loan relationships returning to accruing status. The allowance for credit losses to total loans was 1.44% at September 30, 2023, compared to the allowance for loan losses to total loans of 1.02% at December 31, 2022 and 1.04% at September 30, 2022. These changes are discussed in greater detail under the Lending and Credit Management section below.

Deposits – Total deposits increased $37.1 million, or 2.4%, to $1.6 billion as of September 30, 2023 compared to the end of the linked quarter. Year-over-year deposits decreased $12.4 million, or 0.8%, from $1.6 billion as of September 30, 2022. The yield earned on average deposits was 2.32%, on an FTE basis, for the third quarter 2023 compared to 2.07% for the linked quarter and 0.73% for the prior year quarter.

Federal Home Loan Bank advances and other borrowings – FHLB advances and other borrowings decreased $52.3 million, or 31.8%, to $112.0 million as of September 30, 2023 compared to the end of the linked quarter. Year-over-year FHLB advances and other borrowing increased $39.0 million, or 53.4%, from $73.0 million as of September 30, 2022. The Company utilized funding capacity with the FHLB to meet its short-term liquidity needs.

Capital – On January 1, 2023, the Company adopted Accounting Standard Update (ASU) 2016-13 and recorded a one-time cumulative effect adjustment to retained earnings totaling $5.6 million. Total stockholders' equity was $118.4 million and the common equity to assets ratio was 6.30% at September 30, 2023 compared to 6.65% and 6.25% at the end of the linked quarter and the prior year quarter, respectively. Regulatory capital ratios remain “well-capitalized”, with a tier 1 leverage ratio of 10.43% and a total risk-based capital ratio of 14.20% at September 30, 2023.

44

Average Balance Sheet Data

Net interest income is the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected both by changes in the level of interest rates and changes in the amounts and mix of interest-earning assets and interest-bearing liabilities. The following table presents average balance sheet data, net interest income, average yields of earning assets, average costs of interest-bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three and nine month periods ended September 30, 2023 and 2022, respectively. The average balances used in this table and other statistical data were calculated using average daily balances.

45

	Three Months Ended September 30,
	2023					2022
(Dollars in thousands)	Average Balance		Interest Income/ Expense(1)		Rate Earned/ Paid(1)	Average Balance		Interest Income/ Expense(1)		Rate Earned/ Paid(1)
ASSETS
Loans: (2)
Commercial	$	232,516	$	3,761	6.42%	$	245,877	$	3,211	5.18%
Real estate construction - residential	55,289		1,028		7.38	24,249		333		5.45
Real estate construction - commercial	129,284		1,899		5.83	127,594		1,522		4.73
Real estate mortgage - residential	376,209		5,185		5.47	323,158		3,570		4.38
Real estate mortgage - commercial	739,225		10,054		5.40	702,139		7,608		4.30
Installment and other consumer	22,176		279		4.99	23,738		206		3.44
Total loans	$	1,554,699	$	22,206	5.67%	$	1,446,755	$	16,450	4.51%
Loans held for sale	6,351		59		3.69	1,560		23		5.85
Investment securities:
U.S. Treasury	4,861		52		4.24	3,586		12		1.33
U.S. government and federal agency obligations	25,498		103		1.60	25,440		87		1.36
Obligations of states and political subdivisions	108,022		814		2.99	113,003		1,040		3.65
Mortgage-backed securities	97,274		514		2.10	111,616		493		1.75
Other debt securities	11,566		176		6.04	12,781		163		5.06
Total investment securities	247,221		1,659		2.66	266,426		1,795		2.67
Other investment securities	7,713		121		6.22	5,431		64		4.68
Federal funds sold	42		—		—	46		—		—
Interest bearing deposits in other financial institutions	7,029		85		4.80	15,462		76		1.95
Total interest earning assets	$	1,823,055	$	24,130	5.25%	$	1,735,680	$	18,408	4.21%
All other assets	89,159					88,350
Allowance for loan losses	(22,356)					(15,431)
Total assets	$	1,889,858				$	1,808,599
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings	$	178,564	$	229	0.51%	$	182,364	$	16	0.03%
NOW accounts	182,487		464		1.01	268,780		646		0.95
Interest checking	187,732		2,252		4.76	47,788		264		2.19
Money market	273,655		1,521		2.21	302,773		456		0.60
Time deposits	315,332		2,173		2.73	273,550		584		0.85
Total interest bearing deposits	$	1,137,770	$	6,639	2.32%	$	1,075,255	$	1,966	0.73%
Federal funds purchased and securities sold under agreements to repurchase	6,137		38		2.46	6,181		13		0.83
Federal Home Loan Bank advances and other borrowings	129,758		1,075		3.29	75,262		277		1.46
Subordinated notes	49,486		989		7.93	49,486		570		4.57
Total borrowings	185,381		2,102		4.50	130,929		860		2.61
Total interest bearing liabilities	$	1,323,151	$	8,741	2.62%	$	1,206,184	$	2,826	0.93%
Demand deposits	426,052					464,377
Other liabilities	13,502					10,291
Total liabilities	$	1,762,705				$	1,680,852
Stockholders' equity	127,153					127,747
Total liabilities and stockholders' equity	$	1,889,858				$	1,808,599
Net interest income (FTE)			$	15,389				$	15,582
Net interest spread					2.63%					3.28%
Net interest margin					3.35%					3.56%

(1)Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for both the three months ended September 30, 2023 and 2022. Such adjustments totaled $0.2 million and $0.5 million for the three months ended September 30, 2023 and 2022, respectively.

(2)Non-accruing loans are included in the average amounts outstanding.

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	Nine Months Ended September 30, 2023
	2023					2022
(Dollars in thousands)	Average Balance		Interest Income/ Expense (1)		Rate Earned/ Paid (1)	Average Balance		Interest Income/ Expense (1)		Rate Earned/ Paid (1)
ASSETS
Loans: (2)
Commercial	$	231,691	$	10,702	6.18%	$	233,076	$	8,860	5.08%
Real estate construction - residential	47,265		2,514		7.11	23,627		865		4.89
Real estate construction - commercial	137,776		5,586		5.42	110,540		3,683		4.45
Real estate mortgage - residential	368,702		14,524		5.27	300,518		9,461		4.21
Real estate mortgage - commercial	735,539		27,257		4.95	685,041		21,743		4.24
Installment and other consumer	22,622		763		4.51	22,987		614		3.57
Total loans	$	1,543,595	$	61,346	5.31%	$	1,375,789	$	45,226	4.40%
Loans held for sale	3,837		119		4.15	1,841		69		5.01
Investment securities:
U.S. Treasury	4,391		133		4.05	3,909		29		0.99
U.S. government and federal agency obligations	25,406		305		1.61	26,235		271		1.38
Obligations of states and political subdivisions	109,994		2,587		3.14	118,845		3,152		3.55
Mortgage-backed securities	101,126		1,565		2.07	120,806		1,503		1.66
Other debt securities	11,826		520		5.88	13,080		476		4.87
Total investment securities	252,743		5,110		2.70	282,875		5,431		2.57
Other investment securities	7,015		321		6.12	5,430		204		5.02
Federal funds sold	51		2		5.24	2,285		5		0.29
Interest bearing deposits in other financial institutions	20,551		724		4.71	34,210		179		0.70
Total interest earning assets	$	1,827,792	$	67,622	4.95%	$	1,702,430	$	51,114	4.01%
All other assets	89,524					86,062
Allowance for loan losses	(20,124)					(15,575)
Total assets	$	1,897,192				$	1,772,917
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings	$	172,639	$	259	0.20%	$	179,952	$	45	0.03%
NOW accounts	196,084		1,485		1.01	267,266		1,196		0.60
Interest checking	170,057		5,741		4.51	34,404		346		1.34
Money market	293,842		4,476		2.04	295,105		688		0.31
Time deposits	325,002		6,208		2.55	260,610		1,297		0.67
Total interest bearing deposits	$	1,157,624	$	18,169	2.10%	$	1,037,337	$	3,572	0.46%
Federal funds purchased and securities sold under agreements to repurchase	5,525		83		2.01	8,812		32		0.49
Federal Home Loan Bank advances and other borrowings	113,167		2,430		2.87	76,278		778		1.36
Subordinated notes	49,486		2,769		7.48	49,486		1,316		3.56
Total borrowings	168,178		5,282		4.20	134,576		2,126		2.11
Total interest bearing liabilities	$	1,325,802	$	23,451	2.36%	$	1,171,913	$	5,698	0.65%
Demand deposits	429,859					455,689
Other liabilities	12,911					11,408
Total liabilities	$	1,768,572				$	1,639,010
Stockholders' equity	128,620					133,907
Total liabilities and stockholders' equity	$	1,897,192				$	1,772,917
Net interest income (FTE)			$	44,171				$	45,416
Net interest spread					2.59%					3.36%
Net interest margin					3.23%					3.57%

(1)Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the nine months ended September 30, 2023 and 2022. Such adjustments totaled $0.9 million and $1.6 million for the nine months ended September 30, 2023 and 2022, respectively.

(2)Non-accruing loans are included in the average amounts outstanding.

47

Rate and Volume Analysis

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest-bearing liabilities, identifying changes related to volumes and rates for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022, respectively. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2023 vs. 2022						2023 vs. 2022
			Change due to						Change due to
(in thousands)	Total Change		Average Volume		Average Rate		Total Change		Average Volume		Average Rate
Interest income on a fully taxable equivalent basis: (1)
Loans: (2)
Commercial	$	550	$	(182)	$	732	$	1,842	$	(53)	$	1,895
Real estate construction - residential	695		544		151		1,649		1,135		514
Real estate construction - commercial	377		20		357		1,903		1,012		891
Real estate mortgage - residential	1,615		644		971		5,063		2,403		2,660
Real estate mortgage - commercial	2,446		419		2,027		5,514		1,685		3,829
Installment and other consumer	73		(14)		87		149		(10)		159
Loans held for sale	36		47		(11)		50		64		(14)
Investment securities:
U.S. Treasury	40		6		34		104		4		100
U.S. government and federal agency obligations	16		—		16		34		(9)		43
Obligations of states and political subdivisions	(226)		(44)		(182)		(565)		(224)		(341)
Mortgage-backed securities	21		(68)		89		62		(269)		331
Other debt securities	13		(16)		29		44		(49)		93
Other investment securities	57		32		25		117		67		50
Federal funds sold	—		—		—		(3)		(9)		6
Interest bearing deposits in other financial institutions	9		(58)		67		545		(98)		643
Total interest income	$	5,722	$	1,330	$	4,392	$	16,508	$	5,649	$	10,859
Interest expense:
Savings	$	213	$	—	$	213	$	214	$	(2)	$	216
NOW accounts	(182)		(218)		36		289		(380)		669
Interest checking	1,988		1,420		568		5,395		3,377		2,018
Money market	1,065		(48)		1,113		3,788		(3)		3,791
Time deposits	1,589		102		1,487		4,911		393		4,518
Federal funds purchased and securities sold under agreements to repurchase	25		—		25		51		(16)		67
Federal Home Loan Bank advances and other borrowings	798		293		505		1,652		503		1,149
Subordinated notes	419		—		419		1,453		—		1,453
Total interest expense	$	5,915	$	1,549	$	4,366	$	17,753	$	3,872	$	13,881
Net interest income on a fully taxable equivalent basis	$	(193)	$	(219)	$	26	$	(1,245)	$	1,777	$	(3,022)

(1)Interest income and yields are presented on a FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three and nine months ended September 30, 2023 and 2022, respectively. Such adjustments totaled $0.2 million and $0.9 million for the three and nine months ended September 30, 2023, respectively, compared to $0.5 million and $1.6 million for the three and nine months ended September 30, 2022, respectively.

(2)Non-accruing loans are included in the average amounts outstanding.

48

Financial results for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 reflected a decrease in net interest income, on a fully taxable equivalent basis, of $0.2 million, or 1.2%, and financial results for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 reflected a decrease of $1.2 million, or 2.7%. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.35% for the quarter ended September 30, 2023 compared to 3.56% for the quarter ended September 30, 2022, and decreased to 3.23% for the nine months ended September 30, 2023 compared to 3.57% for the nine months ended September 30, 2022. The increase in margin for the third quarter of 2023 compared to the linked quarter was due to $0.6 million of interest accreted into income on three loans returning to accruing status in June 2023, representing approximately 14 basis points.

Interest income on a fully taxable equivalent basis increased $5.7 million in the current quarter compared to the prior year quarter, and increased $16.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, while interest expense increased $5.9 million and $17.8 million for the three and nine months ended September 30, 2023, respectively, resulting in a decrease in net interest income on an FTE basis.

Average interest-earning assets increased $87.4 million, or 5.0%, to $1.82 billion for the quarter ended September 30, 2023 compared to $1.74 billion for the quarter ended September 30, 2022, and average interest-bearing liabilities increased $117.0 million, or 9.7%, to $1.32 billion for the quarter ended September 30, 2023 compared to $1.21 billion for the quarter ended September 30, 2022.

Average interest-earning assets increased $125.4 million, or 7.4%, to $1.83 billion for the nine months ended September 30, 2023 compared to $1.70 billion for the nine months ended September 30, 2022, and average interest-bearing liabilities increased $153.9 million, or 13.1%, to $1.33 billion for the nine months ended September 30, 2023 compared to $1.17 billion for the nine months ended September 30, 2022.

Total interest income (expressed on a fully taxable equivalent basis) was $24.1 million and $67.6 million for the three and nine months ended September 30, 2023, respectively, compared to $18.4 million and $51.1 million for the three and nine months ended September 30, 2022, respectively. The Company’s rates earned on interest earning assets were 5.25% and 4.95% for the three and nine months ended September 30, 2023, respectively, compared to 4.21% and 4.01% for the three and nine months ended September 30, 2022, respectively.

Interest income on loans held for investment was $22.2 million and $61.3 million for the three and nine months ended September 30, 2023, respectively, compared to $16.5 million and $45.2 million for the three and nine months ended September 30, 2022, respectively.

Average loans outstanding increased $107.9 million, or 7.5%, to $1.55 billion for the quarter ended September 30, 2023 compared to $1.45 billion for the quarter ended September 30, 2022. The average yield on loans increased to 5.67% for the quarter ended September 30, 2023 compared to 4.51% for the quarter ended September 30, 2022. The increase in yield was due to $0.6 million of interest accreted into income on three loans returning to accruing status in June 2023, representing approximately 16 basis points.

Average loans outstanding increased $167.8 million, or 12.2%, to $1.54 billion for the nine months ended September 30, 2023 compared to $1.38 billion for the nine months ended September 30, 2022. The average yield on loans increased to 5.31% for the nine months ended September 30, 2023 compared to 4.40% for the nine months ended September 30, 2022. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio.

Interest income on available-for-sale securities was $1.7 million and $5.1 million for the three and nine months ended September 30, 2023, respectively, compared to $1.8 million and $5.4 million for the three and nine months ended September 30, 2022, respectively.

Average securities decreased $19.2 million, or 7.2%, to $247.2 million for the quarter ended September 30, 2023 compared to $266.4 million for the quarter ended September 30, 2022. The average yield on securities decreased to 2.66% for the quarter ended September 30, 2023 compared to 2.67% for the quarter ended September 30, 2022.

Average securities decreased $30.1 million, or 10.7%, to $252.7 million for the nine months ended September 30, 2023 compared to $282.8 million for the nine months ended September 30, 2022. The average yield on securities increased to

49

2.70% for the nine months ended September 30, 2023 compared to 2.57% for the nine months ended September 30, 2022. See the Liquidity Management section for further discussion.

Total interest expense increased to $8.7 million and $23.5 million for the three and nine months ended September 30, 2023, respectively, compared to $2.8 million and $5.7 million for the three and nine months ended September 30, 2022, respectively. The Company’s rates paid on interest bearing liabilities were 2.62% and 2.36% for the three and nine months ended September 30, 2023, respectively, compared to 0.93% and 0.65% for the three and nine months ended September 30, 2022, respectively. See the Liquidity Management section for further discussion.

Interest expense on deposits increased to $6.6 million and $18.2 million for the three and nine months ended September 30, 2023, respectively, compared to $2.0 million and $3.6 million for the three and nine months ended September 30, 2022, respectively.

Average interest-bearing deposits increased $62.5 million, or 5.8%, to $1.14 billion for the quarter ended September 30, 2023 compared to $1.08 billion for the quarter ended September 30, 2022. The average cost of deposits increased to 2.32% for the quarter ended September 30, 2023 compared to 0.73% for the quarter ended September 30, 2022.

Average interest-bearing deposits increased $120.3 million, or 11.6%, to $1.16 billion for the nine months ended September 30, 2023 compared to $1.04 billion for the nine months ended September 30, 2022. The average cost of deposits increased to 2.10% for the nine months ended September 30, 2023 compared to 0.46% for the nine months ended September 30, 2022.

Interest expense on borrowings increased to $2.1 million and $5.3 million for the three and nine months ended September 30, 2023, respectively, compared to $0.9 million and $2.1 million for the three and nine months ended September 30, 2022, respectively.

Average borrowings increased $54.5 million, or 41.6%, to $185.4 million for the quarter ended September 30, 2023 compared to $130.9 million for the quarter ended September 30, 2022. The average cost of borrowings increased to 4.50% for the quarter ended September 30, 2023 compared to 2.61% for the quarter ended September 30, 2022.

Average borrowings increased $33.6 million, or 25.0%, to $168.2 million for the nine months ended September 30, 2023 compared to $134.6 million for the nine months ended September 30, 2022. The Company utilized funding capacity with the FHLB to meet its short-term liquidity needs. The average cost of borrowings increased to 4.20% for the nine months ended September 30, 2023 compared to 2.11% for the nine months ended September 30, 2022. The increase in cost of funds primarily resulted from higher market interest rates.

Non-interest Income and Expense

Non-interest income for the periods indicated was as follows:

	Three Months Ended September 30,										Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change		2023			2022			$ Change		% Change
Service charges and other fees	$	760		$	693		$	67	9.7	%	$	2,180		$	2,322		$	(142)	(6.1)	%
Bank card income and fees	1,029			1,030			(1)		(0.1)	%	3,044			3,054			(10)		(0.3)	%
Trust department income	283			287			(4)		(1.4)	%	820			924			(104)		(11.3)	%
Real estate servicing fees, net	125			383			(258)		(67.4)	%	417			861			(444)		(51.6)	%
Gain on sales of mortgage loans, net	851			628			223		35.5	%	2,014			2,322			(308)		(13.3)	%
Losses (gains) on other real estate owned, net	(2,809)			—			(2,809)		NM		(4,592)			30			(4,622)		NM
Other	367			464			(97)		(20.9)	%	1,501			1,346			155		11.5	%
Total non-interest income	$	606		$	3,485		$	(2,879)	(82.6)	%	$	5,384		$	10,859		$	(5,475)	(50.4)	%
Non-interest income as a % of total revenue *	3.8		%	18.8		%					11.1		%	19.9		%

*Total revenue is calculated as net interest income plus non-interest income.

NM = not meaningful

50

Total non-interest income decreased $2.9 million, or 82.6%, to $0.6 million for the third quarter ended September 30, 2023 compared to $3.5 million for the third quarter ended September 30, 2022, and decreased $5.5 million, or 50.4%, to $5.4 million for the nine months ended September 30, 2023 compared to $10.9 million for the nine months ended September 30, 2022. The Company recognized a $2.8 million and $4.6 million valuation allowance for other real estate owned in the quarter and nine months ended September 30, 2023, respectively.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) decreased to $0.1 million for the quarter ended September 30, 2023 compared to $0.4 million for the quarter ended September 30, 2022, and decreased to $0.4 million for the nine months ended September 30, 2023 compared to $0.9 million for the nine months ended September 30, 2022.

The Company was servicing $226.3 million of mortgage loans at September 30, 2023 compared to $240.5 million and $247.6 million at December 31, 2022 and September 30, 2022, respectively.

Gain on sales of mortgage loans increased to $0.9 million for the third quarter ended September 30, 2023 compared to $0.6 million for the third quarter ended September 30, 2022, and decreased to $2.0 million for the nine months ended September 30, 2023 compared to $2.3 million for the nine months ended September 30, 2022.

The Company sold $37.2 million and $84.4 million of loans for the three and nine months ended September 30, 2023, respectively, compared to $21.4 million and $76.1 million for the three and nine months ended September 30, 2022, respectively.

Investment Security Gains (Losses)

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 were recognized in earnings:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2023		2022		2023		2022
Gross realized gains	$	—	$	—	$	—	$	—
Gross realized losses	—		—		—		—
Other-than-temporary impairment recognized	—		—		—		—
Other investment securities:
Fair value adjustments, net	3		1		18		(12)
Investment securities gains (losses), net	$	3	$	1	$	18	$	(12)

51

Non-interest expense for the periods indicated was as follows:

	Three Months Ended September 30,									Nine Months Ended September 30,
(Dollars in thousands)	2023			2022			$ Change		% Change	2023			2022			$ Change		% Change
Salaries	$	5,719		$	5,153		$	566	11.0%	$	16,763		$	15,315		$	1,448	9.5%
Employee benefits	1,405			1,597			(192)		(12.0)	4,215			4,936			(721)		(14.6)
Occupancy expense, net	842			789			53		6.7	2,437			2,339			98		4.2
Furniture and equipment expense	768			774			(6)		(0.8)	2,236			2,301			(65)		(2.8)
Processing, network and bank card expense	1,320			1,261			59		4.7	3,797			3,545			252		7.1
Legal, examination, and professional fees	499			395			104		26.3	1,447			1,210			237		19.6
Advertising and promotion	375			430			(55)		(12.8)	1,084			1,027			57		5.6
Postage, printing, and supplies	248			237			11		4.6	621			653			(32)		(4.9)
Loan expense	147			123			24		19.5	771			426			345		81.0
Other	1,246			1,436			(190)		(13.2)	4,401			4,210			191		4.5
Total non-interest expense	$	12,569		$	12,195		$	374	3.1%	$	37,772		$	35,962		$	1,810	5.0%
Efficiency ratio*	79.8		%	65.7		%				77.6		%	65.8		%
Number of full-time equivalent employees	312			299						312			299

*Efficiency ratio is calculated as non-interest expense as a percent of revenue. Total revenue is calculated as net interest income plus non-interest income.

Total non-interest expense increased $0.4 million to $12.6 million for the quarter ended September 30, 2023 compared to $12.2 million for the quarter ended September 30, 2022 and increased $1.8 million to $37.8 million for the nine months ended September 30, 2023 compared to $36.0 million for the nine months ended September 30, 2022.

Salaries increased $0.5 million, or 11.0%, to $5.7 million for the quarter ended September 30, 2023 compared to $5.2 million for the quarter ended September 30, 2022, and increased $1.5 million, or 9.5%, to $16.8 million for the nine months ended September 30, 2023 compared to $15.3 million for the nine months ended September 30, 2022. The increase was primarily due to annual merit increases and an increase in full-time equivalent employees.

Employee benefits decreased $0.2 million, or 12.0%, to $1.4 million for the quarter ended September 30, 2023 compared to $1.6 million for the quarter ended September 30, 2022, and decreased $0.7 million, or 14.6%, to $4.2 million for the nine months ended September 30, 2023 compared to $4.9 million for the nine months ended September 30, 2022. The decrease was primarily due to a decrease in 401(k) plan contributions and pension cost due to higher annual discount rate assumptions compared to the prior year's annual assumptions.

Loan expense increased $0.02 million, or 19.5%, to $0.1 million for the quarter ended September 30, 2023 compared to $0.1 million for the quarter ended September 30, 2022, and increased $0.4 million, or 81.0%, to $0.8 million for the nine months ended September 30, 2023 compared to $0.4 million for the nine months ended September 30, 2022. The increase was primarily due to recognition of an adjustment to an unearned dealers reserve related to prior years' activity in the first quarter of 2023.

Income Taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 16.2% and 17.1% for the three and nine months ended September 30, 2023, respectively, compared to 18.7% and 18.5% for the three and nine months ended September 30, 2022, respectively.

The decrease in the effective tax rate for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily attributable to the decrease in earnings, an increase in tax-exempt income and a return to provision adjustment resulting in a net benefit related to the 2022 tax return. The effective tax rate for each of the three and nine months ended September 30, 2023 and 2022, respectively, is lower than the U.S. federal statutory rate of 21% primarily due to tax-free revenues.

Included in the effective tax rate is a $13,000 and $40,000 benefit associated with a historic tax credit investment for the three and nine months ended September 30, 2023, respectively. The investment is expected to generate a $0.3 million tax benefit over the life of the project and is being recognized under the deferral method of accounting.

52

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 81.7% of total assets as of September 30, 2023 compared to 78.3% as of December 31, 2022.

Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors. The Bank’s credit review process is overseen by regional loan committees with established loan approval limits. In addition, a senior loan committee reviews all credit relationships in aggregate over an established dollar amount. The senior loan committee meets weekly and is comprised of senior managers of the Bank.

Major classifications within the Company’s held-for-investment loan portfolio as of the dates indicated is as follows:

	September 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		% of Loans		Amount		% of Loans
Commercial, financial, and agricultural	$	227,372	14.6	%	$	244,549	16.1	%
Real estate construction − residential	58,774		3.7		32,095		2.1
Real estate construction − commercial	130,572		8.4		137,235		9.0
Real estate mortgage − residential	379,514		24.4		361,025		23.7
Real estate mortgage − commercial	739,413		47.5		722,729		47.5
Installment and other consumer	21,324		1.4		23,619		1.6
Total loans held for investment	$	1,556,969	100.0	%	$	1,521,252	100.0	%

The Company extends credit to its local community markets through traditional real estate mortgage products. The Company does not participate in credit extension to sub-prime residential real estate markets. The Company does not lend funds for transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets that would have been included in non-accrual, past due, or restructured loans if such assets were loans.

The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. During the nine months ended September 30, 2023, the Company sold approximately $84.4 million of loans to investors compared to $76.1 million for the nine months ended September 30, 2022. At September 30, 2023, the Company was servicing approximately $226.3 million of loans sold to the secondary market compared to $240.5 million at December 31, 2022, and $247.6 million at September 30, 2022.

Risk Elements of the Loan Portfolio

Management, internal loan review and the senior loan committee formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Loans in excess of $2.0 million in the aggregate and all adversely classified credits identified by management are reviewed by the senior loan committee. In addition, all other loans are reviewed on a risk weighted selection process. The senior loan committee reviews and reports to the Board of Directors, at scheduled meetings: past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. Management follows the guidance provided in the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) Topic 326-20-30-2. 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 individually analyzed and in conjunction with current economic conditions and loss experience, reserves are estimated as further discussed below.

Loans not individually evaluated are aggregated and collectively analyzed. Under ASC 326-20-30-2 and ASC 326-20-55-5, the Company should aggregate financial assets based on similar risk characteristics. Management determined that segmenting loans not individually analyzed by the federal call report codes represents the most prudent way to consolidate loans by their associated risk qualities.

53

General reserves are recorded for collectively analyzed loans using a consistent methodology. Two different models are used for calculating the general reserve. The Discounted Cash Flow model considers quantitative peer group historic loss experience, forecasts over the estimated life of the loan pools, industry data, and qualitative or environmental factors, such as: lending policies and procedures; economic conditions; the nature, volume and terms of the portfolio; lending staff and management; past due loans; the loan review system; collateral values; concentrations of credit; and external factors. The Remaining Life model applies a long-term average loss rate calculated using peer data that is adjusted for qualitative or environmental factors such as those previously noted. The model used depends on the loan portfolio segment.

Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these procedures, both the allowance and provision for credit losses are adjusted to maintain the allowance at a level considered necessary by management to provide for expected losses inherent in the loan portfolio.

Non-Performing Assets

The following table summarizes non-performing assets at the dates indicated:

	September 30,			December 31,
(Dollars in thousands)	2023			2022
Non-accrual loans (c):
Commercial, financial, and agricultural	$	88		$	121
Real estate construction − commercial	74			87
Real estate mortgage − residential	773			685
Real estate mortgage − commercial	2,874			17,801
Installment and other consumer	1			6
Total	$	3,810		$	18,700
Loans contractually past - due 90 days or more and still accruing:
Real estate mortgage − residential	$	31		$	—
Installment and other consumer	6			1
Total	$	37		$	1
Total non-performing loans (a)	3,847			18,701
Other real estate owned and repossessed assets	3,564			8,795
Total non-performing assets	$	7,411		$	27,496
Loans held for investment	$	1,556,969		$	1,521,252
Allowance for credit losses on loans	22,462			15,588
Restructured loans accruing	1,435			1,661
Allowance for credit and loan losses to loans, respectively	1.44		%	1.02		%
Non-accrual loans to total loans	0.24		%	1.23		%
Non-performing loans to loans (a)	0.25		%	1.23		%
Non-performing assets to loans (b)	0.48		%	1.81		%
Non-performing assets to assets (b)	0.39		%	1.43		%
Allowance for credit and loan losses to non-accrual loans, respectively	589.55		%	83.36		%
Allowance for credit and loan losses to non-performing loans, respectively	583.88		%	83.35		%

(a)Non-performing loans include loans 90 days past due and accruing, non-accrual loans, and non-performing TDRs included in non-accrual loans and 90 days past due.

(b)Non-performing assets include non-performing loans and other real estate owned and repossessed assets.

(c)Non-accrual loans include $0.3 million of restructured loans as of both September 30, 2023 and December 31, 2022.

Total non-performing assets were $7.4 million, or 0.48% of total loans, at September 30, 2023 compared to $27.5 million, or 1.81% of total loans, at December 31, 2022.

Total non-accrual loans at September 30, 2023 decreased $14.9 million, or 79.6%, to $3.8 million compared to $18.7 million at December 31, 2022 primarily due to three large non-accrual loan relationships returning to accruing status. There

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were $37,000 in loans past due 90 days and still accruing interest at September 30, 2023 compared to $1,000 at December 31, 2022. Other real estate and repossessed assets were $3.6 million and $8.8 million at September 30, 2023 and December 31, 2022, respectively. During the nine months ended September 30, 2023, there were $44,000 of non-accrual loans, net of charge-offs taken, added to other real estate owned and repossessed assets compared to $3,000 during the nine months ended September 30, 2022.

Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Commitments

Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which provides for the CECL credit loss model. The adoption of the standard resulted in an increase to the allowance for credit losses of $5.8 million and a liability for unfunded commitments totaling $1.3 million. These one-time cumulative adjustments resulted in a $5.6 million tax-effected decrease to retained earnings.

The following table is a summary of the allocation of the allowance for credit losses:

	September 30, 2023				December 31, 2022
(Dollars in thousands)	Amount		% of loans in each category to total loans		Amount		% of loans in each category to total loans
Allocation of allowance for credit losses at end of period:
Commercial, financial, and agricultural	$	1,936	14.6	%	$	2,735	16.1	%
Real estate construction − residential	873		3.7		157		2.1
Real estate construction − commercial	3,265		8.4		875		9.0
Real estate mortgage − residential	5,314		24.4		3,329		23.7
Real estate mortgage − commercial	10,733		47.5		8,000		47.5
Installment and other consumer	244		1.4		326		1.6
Unallocated	97		—		166		—
Total	$	22,462	100.0	%	$	15,588	100.0	%

The allowance for credit losses was $22.5 million, or 1.44%, of loans outstanding at September 30, 2023 compared to $15.6 million, or 1.02%, of loans outstanding at December 31, 2022. The ratio of the allowance for credit losses to non-performing loans was 583.88% at September 30, 2023, compared to the allowance for loan losses of 83.35% at December 31, 2022.

Provision for (Release of) Credit Losses / Loan Losses

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2023		2022		2023		2022
Provision for (release of) credit / loan losses on loans, respectively	$	300	$	300	$	1,115	$	(1,000)
Provision for available-for-sale securities	—		—		—		—
Provision for (release of) credit losses for off-balance sheet commitments	(190)		—		(325)		—
Total Provision for (release of) credit losses	$	110	$	300	$	790	$	(1,000)

The Company recognized a provision for credit losses of $0.1 million and $0.8 million for the three and nine months ended September 30, 2023, respectively, compared to a $0.3 million provision and a $1.0 million release of provision for loan losses for the three and nine months ended September 30, 2022, respectively. The release of provision expense primarily resulted from the release of specific reserves totaling $2.8 million in the first quarter of 2022 due to returning the balances related to one loan relationship to accrual status from non-accrual status.

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The following table summarizes credit loss experience for the periods indicated:

	Three Months Ended September 30,
	2023						2022
(Dollars in thousands)	Net Charge-offs (Recoveries)		Average Loans		Net (Recoveries) Charge-offs / Average Loans		Net Charge-offs (Recoveries)		Average Loans		Net (Recoveries) Charge-offs / Average Loans
Commercial, financial, and agricultural	$	7	$	232,516	—	%	$	33	$	245,877	0.01	%
Real estate construction − residential	—		55,289		—		—		24,249		—
Real estate construction − commercial	—		129,284		—		—		127,594		—
Real estate mortgage − residential	(2)		376,209		—		(4)		323,158		—
Real estate mortgage − commercial	2		739,225		—		(6)		702,139		—
Installment and other consumer	67		22,176		0.30		125		23,738		0.53
Total	$	74	$	1,554,699	—	%	$	148	$	1,446,755	0.01	%

	Nine Months Ended September 30,
	2023						2022
(Dollars in thousands)	Net Charge-offs (Recoveries)		Average Loans		Net (Recoveries) Charge-offs / Average Loans		Net Charge-offs (Recoveries)		Average Loans		Net (Recoveries) Charge-offs / Average Loans
Commercial, financial, and agricultural	$	(124)	$	231,691	(0.05)	%	$	57	$	233,076	0.02	%
Real estate construction − residential	—		47,265		—		—		23,627		—
Real estate construction − commercial	—		137,776		—		—		110,540		—
Real estate mortgage − residential	(6)		368,702		—		(27)		300,518		(0.01)
Real estate mortgage − commercial	25		735,539		—		169		685,041		0.02
Installment and other consumer	139		22,622		0.61		199		22,987		0.87
Total	$	34	$	1,543,595	—	%	$	398	$	1,375,789	0.03	%

Net Loan Charge-Offs (Recoveries)

The Company’s net charge-offs were $0.1 million and $34,000 for the three and nine months ended September 30, 2023, respectively, compared to net charge-offs of $0.1 million and $0.4 million for the three and nine months ended September 30, 2022, respectively.

Loans Held for Sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale. These loans are initially measured at fair value under the fair value option election with subsequent changes in fair value recognized in mortgage banking income. The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and other various secondary market investors. At September 30, 2023, the carrying amount of these loans was $3.0 million compared to $0.6 million at December 31, 2022.

Liquidity and Capital Resources

Liquidity Management

The role of liquidity management is to ensure that funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet these demands is provided by maturing assets, short-term

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liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full-service relationships with customers as the primary sources of funding.

The Company’s Asset/Liability Committee (ALCO), primarily made up of senior management, has direct oversight responsibility for the Company’s liquidity position and profile. A combination of daily, weekly, and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company’s liquidity.

The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company’s most liquid assets are comprised of available-for-sale investment securities, not including other debt securities, federal funds sold, and excess reserves held at the Federal Reserve.

(in thousands)	September 30, 2023		December 31, 2022
Federal funds sold	$	—	$	46
Other interest-bearing deposits	10,061		65,013
Certificates of deposit in other banks	735		2,955
Available-for-sale investment securities	233,516		250,747
Total	$	244,312	$	318,761

Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $233.5 million at September 30, 2023 and included an unrealized net loss of $56.5 million. The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $9.1 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s borrowings.

The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes as required or permitted by law. At September 30, 2023 and December 31, 2022, the Company’s unpledged securities in the available-for-sale portfolio totaled approximately $116.1 million and $139.2 million, respectively.

Total investment securities pledged for these purposes were as follows:

(in thousands)	September 30, 2023		December 31, 2022
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	8,035	$	8,563
Federal funds purchased and securities sold under agreements to repurchase	8,505		8,601
Other deposits	100,887		94,432
Total pledged, at fair value	$	117,427	$	111,596

Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and time deposits less than $250,000, less all brokered deposits under $250,000. At September 30, 2023, such deposits totaled $1.4 billion and represented 90.0% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships.

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Core deposits at September 30, 2023 and December 31, 2022 were as follows:

(in thousands)	September 30, 2023		December 31, 2022
Core deposit base:
Non-interest bearing demand	$	425,105	$	453,443
Interest checking	348,840		440,611
Savings and money market	451,235		442,856
Other time deposits	197,445		160,175
Total	$	1,422,625	$	1,497,085

Estimated uninsured deposits totaled $358.7 million, including $115.2 million of certificates of deposit, at September 30, 2023, compared to $420.3 million, including $94.9 million of certificates of deposit, at December 31, 2022. The Company had brokered deposits totaling $42.5 million and $40.1 million at September 30, 2023 and December 31, 2022, respectively.

Included in the uninsured deposits at September 30, 2023 and December 31, 2022 are public fund deposits greater than $250,000, which are collateralized by the Company totaling $96.6 million and $111.6 million, respectively. The estimated uninsured and uncollateralized deposits ratio to total deposits at September 30, 2023 and December 31, 2022 was 17% and 19%, respectively.

Other components of liquidity are the level of borrowings from third-party sources and the availability of future credit. The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, advances from the Federal Home Loan Bank (FHLB), and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As of September 30, 2023, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $7.5 million on a secured basis. There were no federal funds purchased outstanding at September 30, 2023. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio. At September 30, 2023, there were $6.2 million in repurchase agreements. The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window, although no such borrowings were outstanding at September 30, 2023.

The Bank is a member of the FHLB and has access to credit products of the FHLB. As of September 30, 2023, the Bank had $112.0 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

Borrowings outstanding at September 30, 2023 and December 31, 2022 were as follows:

(in thousands)	September 30, 2023		December 31, 2022
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	$	6,196	$	5,187
Federal Home Loan Bank advances	112,000		98,000
Subordinated notes	49,486		49,486
Total	$	167,682	$	152,673

The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and to borrow from these entities. Based on the type and value of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against this collateral. This collateral is also used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window.

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The following table reflects collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as follows:

	September 30, 2023								December 31, 2022
(in thousands)	FHLB		Federal Reserve Bank		Federal Funds Purchased Lines		Total		FHLB		Federal Reserve Bank		Federal Funds Purchased Lines		Total
Advance equivalent	$	431,021	$	7,532	$	35,000	$	473,553	$	355,391	$	8,058	$	60,000	$	423,449
Letters of credit	(14,500)		—		—		(14,500)		(47,500)		—		—		(47,500)
Advances outstanding	(112,000)		—		—		(112,000)		(98,000)		—		—		(98,000)
Total available	$	304,521	$	7,532	$	35,000	$	347,053	$	209,891	$	8,058	$	60,000	$	277,949

At September 30, 2023, loans of $719.9 million were pledged to the FHLB as collateral for borrowings and letters of credit. At September 30, 2023, investments with a market value of $8.0 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Based upon the above, management believes the Company has more than adequate liquidity, both on balance sheet and through the additional funding capacity with the FHLB, the Federal Reserve Bank and Federal funds purchased lines to meet future anticipated liquidity needs in both the short and long-term.

Sources and Uses of Funds

Cash and cash equivalents were $27.9 million at September 30, 2023 compared to $83.7 million at December 31, 2022. The $55.8 million decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the nine months ended September 30, 2023. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $12.3 million for the nine months ended September 30, 2023.

Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, used total cash of $28.0 million during the nine months ended September 30, 2023. The cash outflow primarily consisted of a net increase in loans held for investment of $35.5 million and $9.5 million in purchases of investment securities, partially offset by $15.9 million from maturities and calls of investment securities.

Financing activities used total cash of $40.2 million during the nine months ended September 30, 2023, resulting primarily from a $149.3 million decrease in demand deposits and interest-bearing transaction accounts. These decreases were partially offset by a $97.6 million increase in time deposits. The Company utilized funding capacity with the FHLB by drawing advances of $342.9 million and repaying $328.9 million to meet its short-term liquidity needs during the year.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company had $339.8 million in unused loan commitments and standby letters of credit as of September 30, 2023. Although the Company’s current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low.

The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing liquidity needs primarily include funding its operating expenses, paying cash dividends to its shareholders and, to a lesser extent, repurchasing its shares of common stock. The Company paid cash dividends to its shareholders totaling approximately $3.5 million and $3.1 million for the nine months ended September 30, 2023 and 2022, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $9.0 million in dividends to the Company during each of the nine months ended September 30, 2023 and 2022, respectively. At September 30, 2023 and December 31, 2022, the Company had cash and cash equivalents totaling $5.9 million and $2.5 million, respectively. Subject to declaration by the Company's Board of Directors, the Company expects to continue paying quarterly cash dividends as a part of its current capital allocation

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strategy. Future dividends will be subject to the determination, declaration and discretion of the Company's Board of Directors and compliance with applicable regulatory capital requirements.

Pursuant to the Company's 2019 Repurchase Plan, management is 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 did not repurchase any shares during the three months ended September 30, 2023. As of September 30, 2023, $2.1 million remained available for share repurchases pursuant to the plan. Repurchases under the plan may be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof. No time limit was set for completion of share repurchases under the plan.

Capital Management

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act (the "Basel III Rules"). The phase-in period for the Company began on January 1, 2015. The Federal Reserve System's capital adequacy guidelines require that bank holding companies maintain a common equity Tier 1 risk-based capital ratio equal to at least 4.5% of its risk-weighted assets, a Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets and a total risk-based capital ratio equal to at least 8% of its risk-weighted assets. In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%.

In addition to the higher requirements, the Basel III Rules established that bank holding companies are required to maintain a common equity Tier 1 capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements. Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management. The capital conservation buffer requirement was phased in over four years beginning in 2016. On January 1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and increased each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5% of risk-weighted assets on January 1, 2019. At December 31, 2019, the capital conservation buffer requirement of 2.5% effectively raised the minimum required risk-based capital ratios to 7% common equity Tier 1 capital, 8.5% Tier 1 capital and 10.5% total capital on a fully phased-in basis.

Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

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Under the Basel III Rules, at September 30, 2023 and December 31, 2022, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of periods indicated:

	Actual				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well- Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2023
Total Capital (to risk-weighted assets):
Company	$	228,901	14.20	%	$	169,202	10.50	%	$	—	N.A%
Bank	223,912		13.92	%	168,842		10.50	%	160,802		10.00	%
Tier 1 Capital (to risk-weighted assets):
Company	$	201,998	12.54	%	$	136,973	8.50	%	$	—	N.A%
Bank	205,641		12.79	%	136,682		8.50	%	128,642		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets):
Company	$	162,630	10.09	%	$	112,802	7.00	%	$	—	N.A%
Bank	205,641		12.79	%	112,562		7.00	%	104,521		6.50	%
Tier 1 leverage ratio (to adjusted average assets):
Company	$	201,998	10.43	%	$	77,435	4.00	%	$	—	N.A%
Bank	205,641		10.63	%	77,366		4.00	%	96,708		5.00	%
December 31, 2022
Total Capital (to risk-weighted assets):
Company	$	222,873	13.85	%	$	169,025	10.50	%	$	—	N.A%
Bank	221,066		13.78	%	168,431		10.50	%	160,410		10.00	%
Tier 1 Capital (to risk-weighted assets):
Company	$	201,595	12.52	%	$	136,830	8.50	%	$	—	N.A%
Bank	205,318		12.80	%	136,349		8.50	%	128,328		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets):
Company	$	159,125	9.89	%	$	112,684	7.00	%	$	—	N.A%
Bank	205,318		12.80	%	112,287		7.00	%	104,267		6.50	%
Tier 1 leverage ratio:
Company	$	201,595	10.76	%	$	74,936	4.00	%	$	—	N.A%
Bank	205,318		10.85	%	75,678		4.00	%	94,598		5.00	%

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability and Interest Rate Risk

Management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit this exposure. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, and reinvestment/replacement of asset and liability cash flows.

The principal objective of the Company’s asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the ALCO with direction from the Board of Directors. The ALCO meets monthly to review, the sensitivity of the Company’s assets and liabilities to interest rate changes and to discuss local and national market conditions. The ALCO also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.

Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.

Management analyzes the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.

The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 200 and 100 basis point decrease in interest rates on net interest income based on the interest rate risk model at September 30, 2023 and December 31, 2022.

	% Change in projected net interest income
Hypothetical shift in interest rates	September 30,		December 31,
(bps)	2023		2022
200	6.57%		3.01%
100	6.83%		3.78%
(100)	6.28	%	5.20	%
(200)	4.65	%	5.80	%

The change in the Company’s interest rate risk exposure from December 31, 2022 to September 30, 2023 was due to higher rates on interest bearing assets projected to reprice in the next 12 months and projected repricing speeds on interest bearing assets and liabilities. In an immediate and sustained shock, interest bearing assets and liabilities are projected to reprice at relatively the same pace. In down rate scenarios, interest bearing assets are projected to reprice faster than interest bearing liabilities causing increased balance sheet exposure in a falling rate market. Management believes the change in projected net interest income from interest rate shifts of up 200 bps and down 200 bps is an acceptable level of interest rate risk.

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.

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Effects of Inflation

The effects of inflation on financial institutions are different from the effects on other commercial enterprises since financial institutions make few significant capital or inventory expenditures, which are directly affected by changing prices. Because bank assets and liabilities are virtually all monetary in nature, inflation does not affect a financial institution as much as do changes in interest rates. The general level of inflation does underlie the general level of most interest rates, but interest rates do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy.

Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on the Company’s operations for the three months ended September 30, 2023.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Company’s management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as defined in Rules 13a – 15(e) or 15d – 15(e) of the Securities Exchange Act of 1934 as of September 30, 2023. Based upon and as of the date of that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were designed, and were effective, to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all circumstances.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Securities Exchange Act of 1934) that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Impact of New Accounting Standards

Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The amendments in this update were effective for all entities from March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” which was effective upon issuance and deferred the sunset date in Topic 848 from December 31, 2022 to December 31, 2024. The Company continues to evaluate its LIBOR exposure. The trust-preferred subordinated debentures will transition to an adjusted Secured Overnight Financing Rate (SOFR) index in accordance with the Federal Reserve's final rule implementing the Adjustable Interest Rate Act. The Company has identified its products that utilize LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates, such as SOFR. The Company has evaluated its systems and is offering alternative rates and is no longer offering LIBOR-indexed rates on newly originated loans. The Company continues to evaluate the impact of the reference rate reform with regulatory guidelines regarding the cessation of LIBOR.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this Item is set forth in Note 15 - Commitments and Contingencies, Pending Litigation, in our Company’s Notes to Consolidated Financial Statements (unaudited).

Item 1A. Risk Factors

The disclosure below supplements the risk factors previously disclosed under Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

•The impact of larger or similar-sized financial institutions encountering financial difficulties may adversely affect the Company's business, earnings and financial condition.

The Company is exposed to the risk that when a peer financial institution experiences financial difficulties, there could be an adverse impact on the regional banking industry and the business environment in which it operates. The recent bank failures of Silicon Valley Bank in California, Signature Bank in New York, and First Republic Bank in California during the first and second quarters of 2023 have caused a degree of panic and uncertainty in the investor community and among bank customers generally. While the Company does not believe that the circumstances of these three banks' failures are indicators of broader issues with the banking system, the failures may reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have a negative reputational ramification for the banking industry, including Hawthorn. The Company will continue to monitor the ongoing events concerning these three banks as well as any future potential bank failures and volatility within the banking industry generally, together with any responsive measures taken by the banking regulators to mitigate or manage potential turmoil in the banking industry.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit No.	Description
3.1	Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's current report on Form 8-K on August 9, 2007 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company's current report on Form 8-K on January 27, 2021 and incorporated herein by reference).
4.1	Specimen certificate representing shares of the Company's $1.00 par value Common Stock (filed as Exhibit 4.1 to the Company's current report on Form 8-K/A on June 23, 2017 and incorporated herein by reference).
31.1	Certificate of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certificate of the Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certificate of the Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	HAWTHORN BANCSHARES, INC.
Date
	/s/ Brent M. Giles
November 9, 2023	Brent M. Giles, Chief Executive Officer (Principal Executive Officer)
	/s/ Chris E. Hafner
November 9, 2023	Chris E. Hafner, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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