10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

(Mark One)

☒           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

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)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class	Name of Each Exchange on Which Registered
None	N/A

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

Common Stock, par value $1.00 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No ☒

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 232.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☐

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 Act). Yes ☐   No ☒

The aggregate market value of the 4,721,742 shares of voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the $21.90 closing price of such common equity on June 29,  2018, the last business day of the registrant's most recently completed second fiscal quarter, was $103,406,154.  Aggregate market value excludes an aggregate of 1,299,173 shares of common stock held by officers and directors and by each person known by the registrant to own 5% or more of the outstanding common stock on such date.  Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. As of March 14, 2019, the registrant had 6,278,481 shares of common stock, par value $1.00 per share, issued and 6,034,843 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference into the indicated parts of this report:  (1) 2018 Annual Report to Shareholders - Part II and (2) definitive Proxy Statement for the 2019 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A - Part III.

PART I

Item 1.  Business.

This report and the documents incorporated by reference herein contain forward-looking statements, which are inherently subject to risks and uncertainties.  See "Forward Looking Statements" under Item 7 of this report.

General

The Company, Hawthorn Bancshares, Inc., is a bank holding company registered under the Bank Holding Company Act of 1956, as amended.  Hawthorn Bancshares, Inc. was incorporated under the laws of the State of Missouri on October 23, 1992 as Exchange National Bancshares, Inc. and changed its name to Hawthorn Bancshares, Inc. in August 2007.  The Company owns all of the issued and outstanding capital stock of Union State Bancshares, Inc., which in turn owns all of the issued and outstanding capital stock of Hawthorn Bank.  The Company and Union State Bancshares each received approval from the Federal Reserve and elected to become a financial holding company on October 21, 2001.

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

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

· On November 3, 1997, the Company acquired Union State Bancshares, Inc., and Union's wholly-owned subsidiary, Union State Bank and Trust of Clinton;

· On January 3, 2000, the Company acquired Osage Valley Bank;

· Following the May 4, 2000 acquisition of Citizens State Bank of Calhoun by Union State Bank, Citizens State Bank merged into Union State Bank to form Citizens Union State Bank & Trust;

· On June 16, 2000,  the Company acquired City National Savings Bank, FSB, which was then merged into Exchange National Bank; and

· On May 2, 2005, the Company acquired all of the issued and outstanding capital stock of Bank 10, a Missouri state bank.

On December 1, 2006, the Company announced its development of a strategic plan in which, among other things, Exchange National Bank, Citizens Union State Bank, Osage Valley Bank and Bank 10 would be consolidated into a single bank under a Missouri state trust charter.  This consolidation was completed in October 2007, and the subsidiary bank is now known as Hawthorn Bank.

Except as otherwise provided herein, references herein to the "Company" or "Hawthorn" include Hawthorn Bancshares, Inc. and its consolidated subsidiaries, and references herein to the "Bank" refers to Hawthorn Bank and its constituent predecessors.

Description of Business

Company.  The Company is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company.  The Company's activities currently are limited to ownership, indirectly through its subsidiary (Union State Bancshares, Inc.), of the outstanding capital stock of Hawthorn Bank.  In addition to ownership of its subsidiaries, the Company may seek expansion through acquisition and may engage in those activities (such as investments in banks or operations that are financial in nature) in which it is permitted to engage under applicable

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

Union.  Union State Bancshares, Inc. is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company.  Union's activities currently are limited to ownership of the outstanding capital stock of Hawthorn Bank.  It is not currently anticipated that Union will engage in any business other than that directly related to its ownership of Hawthorn Bank.

Hawthorn Bank.  Hawthorn Bank was founded in 1932 as a Missouri bank and converted to a Missouri trust company on August 16, 1989.  However, its predecessors trace their lineage back to the founding of Exchange National Bank in 1865.  Hawthorn Bank has 23 banking offices, including its principal office at 132 East High Street in Jefferson City's central business district.  See "Item 2. Properties".

Hawthorn Bank is a full service bank conducting a general banking and trust business, offering its customers checking and savings accounts, internet banking, debit cards, certificates of deposit, trust services, brokerage services, safety deposit boxes and a wide range of lending services, including commercial and industrial loans, single payment personal loans, installment loans and commercial and residential real estate loans.

Hawthorn Bank's deposit accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law.  Hawthorn Bank's operations are supervised and regulated by the FDIC and the Missouri Division of Finance.  Periodic examinations of Hawthorn 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 the holders of Hawthorn Bank's common stock.  See "Regulation Applicable to Bank Holding Companies" and "Regulation Applicable to the Bank".

Hawthorn Real Estate.  Hawthorn Real Estate, LLC, a non-bank subsidiary of the Company, was formed in December 2008 in order to purchase and hold various nonperforming assets of Hawthorn Bank.  The purpose for holding these nonperforming assets in Hawthorn Real Estate is to allow for the orderly disposition of these assets and strengthen Hawthorn Bank's financial position.

HB Realty, LLC. HB Realty, LLC, a Missouri limited liability company ("HB Realty"), was formed in February 2018 and commenced operations in April 2018. HB Realty is intended to qualify as a "real estate investment trust" under the Internal Revenue Code of 1986, as amended (the "IRC"). HB Realty was formed in order to hold certain mortgage loans and participation interests contributed to it by Hawthorn Bank. HB Realty was initially capitalized with mortgage loans and participation interests having an approximate aggregate book value of $404,665,296. As of December 31, 2018, the approximate aggregate book value of the mortgage loans and participation interests held by HB Realty was $445,350,930. 

Initially, Hawthorn Bank was the sole common member and the sole preferred member of HB Realty, owning

all 1,000 common shares and all 1,000 preferred shares. On April 1, 2018, Hawthorn Bank contributed all 1,000 common shares and 850 preferred shares to Jefferson City IHC, LLC, a Missouri limited liability company that is wholly owned by Hawthorn Bank ("JCIHC"). Under the IRC, a real estate investment trust must have at least one hundred (100) owners. Pursuant to a newly established Hawthorn Bank Real Estate Investment Trust Ownership Plan, Hawthorn Bank will make available to certain employees of Hawthorn Bank, as an employee benefit, up to a total of 150 preferred shares of HB Realty. Each selected employee will have the opportunity to own one preferred share of HB Realty. It is anticipated that these preferred shares will be transferred to employees beginning in January 2019. Each preferred share is generally entitled to an annual dividend of thirty dollars ($30) and a liquidation amount of $500. Although dividends are not guaranteed, it is expected that HB Realty will pay dividends in December of each year. By virtue of its ownership of JCIHC, Hawthorn Bank indirectly owns the remaining economic interest associated with membership interests in HB Realty.

Through its ownership of JCIHC, Hawthorn Bank is, indirectly, the controlling member of HB Realty and is entitled to control the appointment of managers of HB Realty. The initial Board of Managers of HB Realty, which is

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responsible for the management of the business and affairs of HB Realty, is comprised of David T. Turner, Kathleen L. Bruegenhemke, Gregg A. Bexten and W. Bruce Phelps.

Hawthorn Risk Management, Inc., a non-bank subsidiary of the Company, which was formed and began operations on December 28, 2017, is a Missouri-based captive insurance company which provides property and casualty insurance coverage to the Company and the Bank for which insurance may not be currently available or economically feasible in today's insurance marketplace. Hawthorn Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. Hawthorn Risk Management, Inc. is subject to the regulations of the State of Missouri and undergoes periodic examinations by the Missouri Division of Insurance.

Employees

As of December 31, 2018, Hawthorn and its subsidiaries had approximately 273 full-time and 28 part-time employees.  None of its employees is presently represented by any union or collective bargaining group, and the Company considers its employee relations to be satisfactory.

Competition

Bank holding companies and their subsidiaries and affiliates encounter intense competition from nonbanking as well as banking sources in all of their activities.  The Bank's competitors include other commercial banks, thrifts, savings banks, credit unions, and money market mutual funds.  Thrifts and credit unions now have the authority to offer checking accounts and to make corporate and agricultural loans and were granted expanded investment authority by recent federal regulations.  In addition, large national and multinational corporations have in recent years become increasingly visible in offering a broad range of financial services to all types of commercial and consumer customers.  In the Bank's service areas, new competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on the Bank's market share of deposits and loans in such service areas.

The Bank experiences substantial competition for deposits and loans within both its primary service areas of Jefferson City, Columbia, Clinton, Lee's Summit, Warsaw, Springfield, and Branson, Missouri and its secondary service area of the nearby communities in Cole, Boone, Henry, Cass, Benton, and Greene counties of Missouri.  Hawthorn Bank's principal competition for deposits and loans comes from other banks within its primary service areas and, to an increasing extent, other banks in nearby communities.  Based on publicly available information, management believes that Hawthorn Bank is the third largest (in terms of deposits) of the twelve banks within Cole county, the eleventh largest (in terms of deposits) of thirty-one banks within Boone county, the largest (in terms of deposits) of the eight banks within Henry county, the third largest (in terms of deposits) of the eighteen banks within Cass county, and the second largest (in terms of deposits) of the five banks within Benton county. The main competition for Hawthorn Bank's trust services is from other commercial banks, including those of the Kansas City metropolitan area.

Regulation Applicable to Bank Holding Companies

General.  As a registered bank holding company and a financial holding company under the Bank Holding Company Act (the "BHC Act") and the Gramm-Leach-Bliley Act (the "GLB Act"), Hawthorn is subject to supervision and examination by the Board of Governors of the Federal Reserve System (the "FRB").  The FRB has authority to issue cease and desist orders against bank holding companies if it determines that their actions represent unsafe and unsound practices or violations of law.  In addition, the FRB is empowered to impose civil money penalties for violations of banking statutes and regulations.  Regulation by the FRB is intended to protect depositors of the Bank, not the shareholders of Hawthorn. Hawthorn also is subject to a number of restrictions and requirements imposed by the Sarbanes-Oxley Act of 2002 relating to internal controls over financial reporting, disclosure controls and procedures, loans to directors or executive officers of the Hawthorn and its subsidiaries, the preparation and certification of Hawthorn's consolidated financial statements, the duties of Hawthorn's audit committee, relations with and functions performed by Hawthorn's independent registered public accounting firm, and various accounting and corporate governance matters.

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Limitation on Activities.  The activities of bank holding companies are generally limited to the business of banking, managing or controlling banks, and other activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  In addition, under the GLB Act, a bank holding company, all of whose controlled depository institutions are "well capitalized" and "well managed" (as defined in federal banking regulations) with "satisfactory" Community Reinvestment Act ratings, may declare itself to be a "financial holding company" and engage in a broader range of activities.  As noted above, Hawthorn is registered as a financial holding company.

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

· securities underwriting, dealing and market making;

· sponsoring mutual funds and investment companies;

· insurance underwriting and insurance agency activities;

· merchant banking; and

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

A financial holding company that desires to engage in activities that are financial in nature or incidental to a financial activity but not previously authorized by the FRB must obtain approval from the FRB before engaging in such activity.  Also, a financial holding company may seek FRB approval to engage in an activity that is complementary to a financial activity, if it shows, among other things, that the activity does not pose a substantial risk to the safety and soundness of its insured depository institutions or the financial system.

A financial holding company generally may acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature without prior approval from the FRB.  Prior FRB approval is required, however, before the financial holding company may acquire control of more than 5% of the voting shares or substantially all of the assets of a bank holding company, bank or savings association.  In addition, under the FRB's merchant banking regulations, a financial holding company is authorized to invest in companies that engage in activities that are not financial in nature, as long as the financial holding company makes its investment with the intention of limiting the duration of the investment, does not manage the company on a day-to-day basis, and the company does not cross-market its products or services with any of the financial holding company's controlled depository institutions.

If any subsidiary bank of a financial holding company ceases to be "well-capitalized" or "well-managed" and fails to correct its condition within the time period that the FRB specifies, the FRB has authority to order the financial holding company to divest its subsidiary banks.  Alternatively, the financial holding company may elect to limit its activities and the activities of its subsidiaries to those permissible for a bank holding company that is not a financial holding company.  If any subsidiary bank of a financial holding company receives a rating under the Community Reinvestment Act (the "CRA") of less than "satisfactory", then the financial holding company is prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations until the rating is raised to "satisfactory" or better.

Limitation on Acquisitions.  The BHC Act requires a bank holding company to obtain prior approval of the FRB before:

· taking any action that causes a bank to become a controlled subsidiary of the bank holding company;

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· acquiring direct or indirect ownership or control of voting shares of any bank or bank holding company, if the acquisition results in the acquiring bank holding company having control of more than 5% of the outstanding shares of any class of voting securities of such bank or bank holding company, and such bank or bank holding company is not majority-owned by the acquiring bank holding company prior to the acquisition;

· acquiring substantially all of the assets of a bank; or

· merging or consolidating with another bank holding company.

Regulatory Capital Requirements.  The FRB has issued risk-based and leverage capital guidelines applicable to United States banking organizations.  If a bank holding company's capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends and make acquisitions of new bank subsidiaries may be restricted or prohibited.  The risk-based capital guidelines that applied to us and our subsidiary bank prior to January 1, 2015 were based on the 1988 capital accord, referred to as Basel I, of the International Basel Committee on Banking Supervision (which we refer to as the "Basel Committee"), a committee of central banks and bank supervisors, as implemented by federal bank regulators. In 2008, the bank regulatory agencies began to phase-in capital standards based on a second capital accord issued by the Basel Committee, referred to as Basel II, for large or "core" international banks (generally defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more). Because we do not anticipate controlling any large or "core" international bank in the foreseeable future, Basel II presently does not apply to us.  On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III.  In July 2013, the federal banking agencies announced new risk-based capital and leverage ratios to conform to the Basel III framework and address provisions of the Dodd-Frank Act.  With respect to the Company and the Bank, these requirements become effective on January 1, 2015.

The FRB's risk-based guidelines generally define a three-tier capital framework.  Common Equity Tier 1 Capital generally includes common stock instruments and related surplus (net of treasury stock), retained earnings, and, subject to certain adjustments, minority common equity interests in subsidiaries, less goodwill and certain other adjustments.  The rules require accumulated other comprehensive income to flow through to regulatory capital unless a one-time, irrevocable opt-out election is made. We did not make the opt-out election. Banking organizations are required to deduct goodwill and other intangible assets (other than certain mortgage servicing assets), net of associated deferred tax liabilities, from Common Equity Tier 1 Capital.  Deferred tax assets arising from temporary timing differences that cannot be realized through net operating loss (NOL) carrybacks are also deducted.  Deferred tax assets that can be realized through NOL carrybacks are not deducted but are subject to 100% risk weighting.  Defined benefit pension fund assets, net of any associated deferred tax liability, are deducted from Common Equity Tier 1 Capital unless the banking organization has unrestricted and unfettered access to such assets.  Reciprocal cross-holdings of capital instruments in any other financial institutions are deducted from capital, not just holdings in other depository institutions.  For this purpose, financial institutions are broadly defined to include securities and commodities firms, hedge and private equity funds and non-depository lenders.  Banking organizations are required to deduct non-significant investments (less than 10% of outstanding stock) in the capital of other financial institutions (including investments in trust preferred securities) to the extent these exceed 10% of Common Equity Tier 1 Capital subject to a 15% of Common Equity Tier 1 Capital cap.  Greater than 10% investments must be deducted if they exceed 10% of Common Equity Tier 1 Capital.  If the aggregate amount of certain items excluded from capital deduction due to a 10% threshold exceeds 17.65% of Common Equity Tier 1 Capital, the excess must be deducted.  The federal banking agencies did not adopt a proposed rule as part of the new regulations that would have significantly changed the risk-weighting for residential mortgages.  Instead, the amended regulations continue to follow the capital rules that historically have applied to us, which assign a 50% risk-weighting to "qualifying mortgage loans" which generally consist of residential first mortgages with an 80% loan-to-value ratio (or which carry mortgage insurance that reduces the bank's exposure to 80%) that are not more than 90 days past due.  All other mortgage loans have a 100% risk weight.  The revised regulations apply a 250% risk-weighting to mortgage servicing rights, deferred tax assets that cannot be realized through NOL carrybacks and investments in the capital instruments of other financial institutions that are not deducted from capital.  The revised regulations also create a new 150% risk-weighting category for "high volatility commercial real estate loans" which are credit facilities for the acquisition, construction or development of real property other than for certain community development projects, agricultural land and one- to four-family residential

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properties or commercial real projects where: (i) the loan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate's "as completed" value before the loan is made.

Tier 1 Capital generally includes Common Equity Tier 1 Capital plus Additional Tier 1 Capital elements, such as non-cumulative perpetual preferred stock and similar instruments meeting specified criteria and minority interests in subsidiaries that do not satisfy the requirements for Common Equity Tier 1 Capital treatment.  Cumulative preferred stock (other than cumulative preferred stock issued to the U.S. Treasury under the Capital Purchase Program or the Small Business Lending Fund) does not qualify as Additional Tier 1 Capital.  Trust preferred securities and other non-qualifying capital instruments issued prior to May 19, 2010 by bank and savings and loan holding companies with less than $15 billion in assets as of December 31, 2009 or by mutual holding companies may continue to be included in Tier 1 Capital but will be phased out over 10 years beginning in 2016 for all other banking organizations.  These non-qualifying capital instruments, however, may be included in Tier 2 Capital. Tier 2 Capital may also include certain qualifying debt and the allowance for credit losses up to 1.25% of risk-weighted assets and other adjustments.

The sum of the three tiers of capital less investments in unconsolidated subsidiaries represents the total capital. The risk-based capital ratios are calculated by dividing Common Equity Tier 1, Tier 1 and total capital by risk-weighted assets (including certain off-balance sheet activities).  The FRB'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%.

On December 31, 2018, Hawthorn was in compliance with the FRB's capital adequacy guidelines.  Hawthorn's capital ratios on December 31, 2018 and the minimum requirements as of that date are shown below:

Tier 1 Leverage Ratio		Common Equity Tier 1 Risk-		Tier 1 Risk-Based Capital
(4% minimum		Based Capital Ratio (4.5%		Ratio (6% minimum		Total Risk-Based
requirement)		minimum requirement)		requirement)		Capital Ratio (8%)
9.55	%	8.48	%	11.21	%	13.28	%

In addition to higher capital requirements, 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 will be 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 the requirement will increase 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. Once fully phased in, the capital conservation buffer requirement effectively raises 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.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the "EGRRCPA") directs the federal

banking agencies to develop a specified Community Bank Leverage Ratio, or CBLR, (that is, the ratio of a bank's equity capital to its consolidated assets) of not less than 8% and not more than 10%. On November 21, 2018, federal regulators released a proposed rulemaking that would, if enacted, provide certain banks and their holding companies with the option to elect out of complying with the Basel III Capital Rules. Under the proposal, a qualifying community banking organization would be eligible to elect the community bank leverage ratio framework if it has a community bank leverage ratio, or CBLR, greater than 9% at the time of election.

A qualifying community banking organization, or QCBO, is defined as a bank, a savings association, a bank holding company or a savings and loan holding company with:

· total consolidated assets of less than $10 billion;

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· total off-balance sheet exposures (excluding derivatives other than credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets;

· total trading assets and trading liabilities of 5% or less of total consolidated assets;

· mortgage servicing assets of 25% or less of CBLR tangible equity; and

· temporary difference deferred tax assets of 25% or less of CBLR tangible equity.

A QCBO may elect out of complying with the Basel III Capital Rules if, at the time of the election, the QCBO has a CBLR above 9%. The numerator of the CBLR is referred to as "CBLR tangible equity" and is calculated as the QCBO's total capital as reported in compliance with Call Report and FR Y-9C instructions ("Reporting Instructions") (prior to including non-controlling interests in consolidated subsidiaries) less:

· accumulated other comprehensive income (referred to in the industry as AOCI);

· intangible assets, calculate in accordance with Reporting Instructions, other than mortgage servicing assets; and

· deferred tax assets that arise from net operating loss and tax credit carry forwards net of any related valuations allowances.

The denominator of the CBLR is the QCBO's average total consolidated assets, calculated in accordance with

Reporting Instructions and less intangible assets and deferred tax assets deducted from CBLR tangible equity.

As of December 31, 2018, the Company and the Bank each qualified to elect the community bank leverage ratio framework because they had a CBLR of greater than 9%. The Company will continue to monitor this rulemaking. If and when the rulemaking goes into effect, the Company and the Bank will consider whether it would be possible and advantageous at that time to elect to comply with the community bank leverage ratio framework.

Interstate Banking and Branching.  Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), a bank holding company is permitted to acquire the stock or substantially all of the assets of banks located in any state regardless of whether such transaction is prohibited under the laws of any state.  The FRB will not approve an interstate acquisition if, as a result of the acquisition, the bank holding company would control more than 10% of the total amount of insured deposits in the United States or would control more than 30% of the insured deposits in the home state of the acquired bank.  The 30% of insured deposits state limit does not apply if the acquisition is the initial entry into a state by a bank holding company or if the home state waives such limit.  The Riegle-Neal Act also authorizes banks to merge across state lines, thereby creating interstate branches.  The Bank and Savings Association Holding Company and Depository Institution Regulatory Improvements Act of 2010, a subset of the Dodd-Frank Act discussed below, permits banks to acquire and establish de novo branches in other states if a state bank in that other state would be permitted to establish the branch.

Under the Riegle-Neal Act, individual states may restrict interstate acquisitions in two ways.  A state may prohibit an out-of-state bank holding company from acquiring a bank located in the state unless the target bank has been in existence for a specified minimum period of time (not to exceed five years).  A state may also establish limits on the total amount of insured deposits within the state which are controlled by a single bank holding company, provided that such deposit limit does not discriminate against out-of-state bank holding companies.

Source of Strength.  Bank holding companies, such as the Company, are required by statute to serve as a source of financial strength for their subsidiary depository institutions, by providing financial assistance to their insured depository institution subsidiaries in the event of financial distress.  Under the source of strength requirement, the Company could be required to provide financial assistance to the Bank should it experience financial distress.  Furthermore, the FRB has the right to order a bank holding company to terminate any activity that the FRB believes is a serious risk to the financial safety, soundness or stability of any subsidiary bank.  The regulators may require these and other actions in support of controlled banks even if such action is not in the best interests of the bank holding company or its stockholders.

Liability of Commonly Controlled Institutions.  Under cross-guaranty provisions of the Federal Deposit Insurance Act (the "FDIA"), bank subsidiaries of a bank holding company are liable for any loss incurred by the Deposit Insurance Fund (the "DIF"), the federal deposit insurance fund for banks, in connection with the failure of any other bank subsidiary of the bank holding company.

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Bank Secrecy Act and USA PATRIOT Act.  The Company and the Bank must comply with the requirements of the Bank Secrecy Act (the "BSA").  The BSA was enacted to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, drug trafficking, money laundering, and other crimes.  Since its passage, the BSA has been amended several times.  These amendments include the Money Laundering Control Act of 1986, which made money laundering a criminal act, as well as the Money Laundering Suppression Act of 1994, which required regulators to develop enhanced examination procedures and increased examiner training to improve the identification of money laundering schemes in financial institutions.  The USA PATRIOT Act, established in 2001, substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States.  The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent, and report money laundering and terrorist financing.  The regulations include significant penalties for non-compliance.

Missouri Bank Holding Company Regulation.  Missouri prohibits any bank holding company from acquiring ownership or control of any bank or Missouri depository trust company that has Missouri deposits if, after such acquisition, the bank holding company would hold or control more than 13% of total Missouri deposits.  Because of this restriction, among others, a bank holding company, prior to acquiring control of a bank or depository trust company that has deposits in Missouri, must receive the approval of the Missouri Division of Finance.

Regulation Applicable to the Bank

General.  Hawthorn Bank, a Missouri state non-member depository trust company, is subject to the regulation of the Missouri Division of Finance and the FDIC.  The FDIC is empowered to issue cease and desist orders against the Bank if it determines that any activities of the Bank represent unsafe and unsound banking practices or violations of law.  In addition, the FDIC has the power to impose civil money penalties for violations of banking statutes and regulations.  Regulation by these agencies is designed to protect the depositors of the Bank; not shareholders of Hawthorn.

Bank Regulatory Capital Requirements.  The FDIC has adopted minimum capital requirements applicable to state non-member banks, which are similar to the capital adequacy guidelines established by the FRB for bank holding companies.  Federal banking laws classified an insured financial institution in one of the following five categories, depending upon the amount of its regulatory capital:

· "well-capitalized" if it has a total Tier 1 leverage ratio of 5% or greater, a Common Equity Tier 1 risk-based capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8% or greater and a total risk-based capital ratio of 10% or greater (and is not subject to any order or written directive requiring the bank to adhere to a higher capital ratio);

· "adequately capitalized" if it has a total Tier 1 leverage ratio of 4% or greater, a Common Equity Tier 1 risk-based capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a total risk-based capital ratio of 8% or greater;

· "undercapitalized" if it has a total Tier 1 leverage ratio that is less than 4%, a Common Equity Tier 1 risk-based capital ratio that is less than 4.5%, a Tier 1 risk-based capital ratio that is less than 6% or a total risk-based capital ratio that is less than 8%;

· "significantly undercapitalized" if it has a total Tier 1 leverage ratio that is less than 3%, a Common Equity Tier 1 risk-based capital ratio that is less than 3%, a Tier 1 risk-based capital ratio that is less than 4% or a total risk-based ratio that is less than 6%; and

· "critically undercapitalized" if it has a Tier 1 leverage ratio that is equal to or less than 2%.

Federal regulatory agencies are required to take prompt corrective action against undercapitalized financial institutions.  On December 31, 2018, the Bank was classified as "well-capitalized," which is required for Hawthorn to

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remain a financial holding company.  The capital ratios and classifications of the Bank as of December 31, 2018 and the minimum requirements as of such date are shown on the following chart.

		Common Equity Tier 1
Tier 1 Leverage Ratio		Risk-Based Capital Ratio		Tier 1 Risk-Based Capital
(5% minimum		(6.5% minimum		Ratio (8% minimum		Total Risk-Based Capital
requirement)		requirement		requirement)		Ratio (10%)
10.43	%	12.24	%	12.24	%	13.19	%

Limitations on Interest Rates and Loans to One Borrower.  The rate of interest a bank may charge on certain classes of loans is limited by state and federal law.  At certain times in the past, these limitations have resulted in reductions of net interest margins on certain classes of loans.  Federal and state laws impose additional restrictions on the lending activities of banks. The maximum amount that a Missouri state-chartered bank may lend to any one person or entity is generally limited to 15% of the unimpaired capital of the bank located in a city having a population of 100,000 or more, 20% of the unimpaired capital of the bank located in a city having a population of less than 100,000 and over 7,000, and 25% of the unimpaired capital of the bank if located elsewhere in the state.  In the case of Missouri state-chartered banks with a composite rating of 1 or 2 under the Capital, Assets, Management, Earnings, Liquidity and Sensitivity (CAMELS) rating system, the maximum amount is the greater of (i) the limits listed in the foregoing sentence or (ii) 25% of the unimpaired capital of the bank.

Payment of Dividends.  The Company's primary source of funds is dividends from the Bank, and the Bank is subject to federal and state laws limiting the payment of dividends.  Under the FDIA, an FDIC-insured institution may not pay dividends while it is undercapitalized or if payment would cause it to become undercapitalized.  The National Bank Act and Missouri banking law also prohibit the declaration of a dividend out of the capital and surplus of the bank.

Community Reinvestment Act.  The Bank is subject to the CRA and implementing regulations. The CRA regulations establish the framework and criteria by which the bank regulatory agencies assess an institution's record of helping to meet the credit needs of its community, including low- and moderate-income neighborhoods.  CRA ratings are taken into account by regulators in reviewing certain applications made by Hawthorn and its banking subsidiary.

Limitations on Transactions with Affiliates.  Hawthorn and its non-bank subsidiaries are "affiliates" within the meaning of the Federal Reserve Act.  The amount of loans or extensions of credit which the Bank may make to non-bank affiliates, or to third parties secured by securities or obligations of the non-bank affiliates, are substantially limited by the Federal Reserve Act and the FDIA.  Such acts further restrict the range of permissible transactions between a bank and an affiliated company.  A bank and its subsidiaries may engage in certain transactions, including loans and purchases of assets, with an affiliated company only if the terms and conditions of the transaction, including credit standards, are substantially the same as, or at least as favorable to the bank as, those prevailing at the time for comparable transactions with non-affiliated companies or, in the absence of comparable transactions, on terms and conditions that would be offered to non-affiliated companies.

Other Banking Activities.  The investments and activities of the Bank are also subject to regulation by federal and state banking agencies regarding, among other things, investments in subsidiaries, investments for their own account (including limitations on investments in junk bonds and equity securities), loans to officers, directors and their affiliates, security requirements, anti-tying limitations, anti-money laundering, financial privacy and customer identity verification requirements, truth-in-lending, the types of interest bearing deposit accounts which it can offer, trust department operations, brokered deposits, audit requirements, issuance of securities, branching and mergers and acquisitions.

Changes in Laws and Monetary Policies

Recent Legislation.  Various pieces of legislation, including proposals to change substantially the financial institution regulatory system, are from time to time introduced and considered by the Missouri state legislature and the United States Congress.  In July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which enacted substantial changes to the legal framework of the entire financial services industry.  The Dodd-Frank Act mandates the passage of numerous rules and regulations by various regulatory agencies over the next few years. It also creates the Consumer Financial Protection Bureau, which will overtake

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supervision of most providers of consumer financial products and services, and will be empowered to declare acts or practices related to the delivery of a consumer financial product or service to be "unfair, deceptive or abusive."  This law will continue to change banking regulation and the operating environment of Hawthorn in substantial and unpredictable ways.  These changes could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions.  Hawthorn cannot predict the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its business.

Key provisions of the EGRRCPA as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as "qualified mortgages" for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high-volatility commercial real estate, which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.

Fiscal Monetary Policies.  Hawthorn's business and earnings are affected significantly by the fiscal and monetary policies of the federal government and its agencies.  Hawthorn is particularly affected by the policies of the FRB, which regulates the supply of money and credit in the United States.  Among the instruments of monetary policy available to the FRB are:

· conducting open market operations in United States government securities;

· changing the discount rates of borrowings of depository institutions;

· imposing or changing reserve requirements against depository institutions' deposits; and

· imposing or changing reserve requirements against certain borrowings by bank and their affiliates.

These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits.  The policies of the FRB have a material effect on Hawthorn's business, results of operations and financial condition.

The references in the foregoing discussion to various aspects of statutes and regulation are merely summaries, which do not purport to be complete and which are qualified in their entirety by reference to the actual statutes and regulations.

Available Information

The address of the Company's principal executive offices is 132 East High Street, Jefferson City, Missouri 65101 and the telephone number at this location is (573)761‑6100.  The Company's common stock trades on the Nasdaq Global Select Market under the symbol "HWBK".

We electronically file certain documents with the Securities and Exchange Commission (SEC).  We file annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K (as appropriate), along with any related amendments and supplements.  From time-to-time, we also may file registration and related statements pertaining to equity or debt offerings.  You may read and download the Company's SEC filings over the internet from several commercial document retrieval services as well as at the SEC's internet website (www.sec.gov).  You may also read and copy the Company's SEC filings at the SEC's public reference room located at 100 F Street, NE., Washington, DC 20549.  

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Please call the SEC 1‑800‑SEC‑0330 for further information concerning the public reference room and any applicable copy charges.

The Company's internet website address is www.hawthornbancshares.com.  Under the "Documents" menu tab of the Company's website (www.hawthornbancshares.com), we make available, without charge, the Company's public filings with the SEC, including the Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, or any amendments to those reports filed or furnished to the SEC pursuant to Section 13(a) of the Securities Exchange Act of 1934.  Please note that any internet addresses provided in this report are for information purposes only and are not intended to be hyperlinks.  Accordingly, no information found and/or provided at such internet addresses is intended or deemed to be incorporated by reference herein.

Item 1A.  Risk Factors.

Risk Factors

We are identifying important risks and uncertainties that could affect the Company's results of operations, financial condition or business and that could cause them to differ materially from the Company's historical results of operations, financial condition or business, or those contemplated by forward-looking statements made herein or elsewhere, by, or on behalf of, the Company.  Factors that could cause or contribute to such differences include, but are not limited to, those factors described below.  The risk factors highlighted below are not necessarily the only ones that the Company faces.

Because We Primarily Serve Central And West Central Missouri, A Decline In The Local Economic Conditions Could Lower The Company's Profitability.  The profitability of Hawthorn is dependent on the profitability of its banking subsidiary, which operates out of central and west central Missouri.  The financial condition of this bank is affected by fluctuations in the economic conditions prevailing in the portion of Missouri in which its operations are located.  Accordingly, the financial conditions of both Hawthorn and its banking subsidiary would be adversely affected by deterioration in the general economic and real estate climate in Missouri.

An increase in unemployment, a decrease in profitability of regional businesses or real estate values or an increase in interest rates are among the factors that could weaken the local economy.  With a weaker local economy:

· customers may not want or need the products and services of the Bank,

· borrowers may be unable to repay their loans,

· the value of the collateral security of the Bank's loans to borrowers may decline,

· the number of loan delinquencies and foreclosures may increase, and

· the overall quality of the Bank's loan portfolio may decline.

Originating mortgage loans and consumer loans is a significant source of profits for Hawthorn's banking subsidiary.  If individual customers in the local area do not want or need these loans, profits may decrease.  Although the Bank could make other investments, the Bank may earn less revenue on these investments than on loans.  Also, the Bank's losses on loans may increase if borrowers are unable to make payments on their loans.

Interest Rate Changes May Reduce The Profitability Of The Company And Of The Bank.  The primary source of earnings for Hawthorn's banking subsidiary is net interest income.  To be profitable, the Bank has to earn more money in interest and fees on loans and other interest-earning assets than it pays as interest on deposits and other interest-bearing liabilities and as other expenses.  If prevailing interest rates decrease, the amount of interest the Bank earn on loans and investment securities may decrease more rapidly than the amount of interest the Bank has to pay on deposits and other interest-bearing liabilities.  This would result in a decrease in the profitability of Hawthorn and its banking subsidiary.

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Changes in the level or structure of interest rates also affect:

· the Bank's ability to originate loans,

· the value of the Bank's loan and securities portfolios,

· the Bank's ability to realize gains from the sale of loans and securities,

· the average life of the Bank's deposits, and

· the Bank's ability to obtain deposits.

Fluctuations in interest rates will ultimately affect both the level of income and expense recorded on a large portion of the Bank's assets and liabilities, and the fair value of all interest-earning assets, other than interest-earning assets that mature in the short term.  The Bank's interest rate management strategy is designed to stabilize net interest income and preserve capital over a broad range of interest rate movements by matching the interest rate sensitivity of assets and liabilities.  Although Hawthorn believes that its Bank's current mix of loans, mortgage-backed securities, investment securities and deposits is reasonable, significant fluctuations in interest rates may have a negative effect on the profitability of the Bank.

Our Business Depends On Our Ability To Successfully Manage Credit Risk.  The operation of our business requires us to manage credit risk.  As a lender, our banking subsidiary is exposed to the risk that borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment.  In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers.  In order to successfully manage credit risk, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our loan officers follow those standards.  The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net income.  As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition or results of operations.

The Company's Profitability Depends On The Bank's Asset Quality And Lending Risks.  Success in the banking industry largely depends on the quality of loans and other assets.  The loan officers of Hawthorn's banking subsidiary are actively encouraged to identify deteriorating loans.  Loans are also monitored and categorized through an analysis of their payment status. The Bank's failure to timely and accurately monitor the quality of its loans and other assets could have a materially adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.  There is a degree of credit risk associated with any lending activity.  The Bank attempts to minimize its credit risk through loan diversification.  Although the Bank's loan portfolio is varied, with no undue concentration in any one industry, substantially all of the loans in the portfolio have been made to borrowers in central, west central, and southwest Missouri.  Therefore, the loan portfolio is susceptible to factors affecting the central, west central, and southwest Missouri area and the level of non-performing assets is heavily dependent upon local conditions.  There can be no assurance that the level of the Bank's non-performing assets will not increase above current levels.  High levels of non-performing assets could have a materially adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.

The Provision For Probable Loan Losses May Need To Be Increased.  Hawthorn's banking subsidiary makes a provision for loan losses based upon management's estimate of probable losses in the loan portfolio and its consideration of prevailing economic and environmental conditions.  The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond the Company's  control, and these losses may exceed current estimates.  We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future.  The Bank may need to increase the provision for loan losses through additional

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provisions in the future if, among other things, the financial condition of any of its borrowers deteriorates, if its borrower fails to perform its obligations to it, or if real estate values decline.  Furthermore, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's loan portfolio, provision for loan losses, and real estate acquired by foreclosure.  Such agencies may require the Bank to recognize additions to the provision for loan losses based on their judgments of information available to them at the time of the examination.  Any additional provision for probable loan losses, whether required as a result of regulatory review or initiated by Hawthorn itself, may materially alter the financial outlook of Hawthorn and its banking subsidiary and may have a material adverse effect on the Company's  financial condition and results of operations.

In June of 2016, the Financial Accounting Standards Board, or FASB, decided to review how banks estimate losses in the allowance calculation, and it issued the final current expected credit loss standard, or CECL.  Currently, the impairment model is based on incurred losses, and investments are recognized as impaired when there is no longer an assumption that future cash flows will be collected in full under the originally contracted terms.  This model will be replaced by the new CECL model that will become effective for us for the first interim and annual reporting periods beginning after December 15, 2019. Under the new CECL model promulgated under ASU 2016-13 "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", we will be required to use historical information, current conditions and reasonable forecasts to estimate the expected loss over the life of the loan and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. The ASU will require new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.  The transition to the CECL model will bring with it significantly greater data requirements and changes to methodologies to accurately account for expected losses under the new parameters.

Management is currently evaluating the impact of these changes to our financial position and results of operations. We anticipate a significant change in the processes and procedures to calculate the allowance, including changes in assumptions and estimates to consider expected credit losses over the life of the loan versus the current accounting practice that utilizes the incurred loss model. We expect to continue developing and implementing processes and procedures to ensure we are fully compliant with the CECL requirements at its adoption date. The allowance is a material estimate of ours, and given the change from an incurred loss model to a methodology that considers the credit loss over the life of the loan, there is the potential for an increase in the allowance at adoption date. At this time, an estimate of the impact to the Company's financial statements is not known, but the impact could be significantly impacted by the composition, characteristics and quality of the underlying loan portfolio at the time of adoption.

Adverse Market Conditions In The U.S. Economy And The Markets In Which We Operate Could Adversely Impact The Company's Business.  General downward economic trends, reduced availability of commercial credit, and increasing unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting in additional write-downs.  Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other.  This market turmoil and tightening of credit has led to increased commercial and consumer deficiencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity.  Competition among depository institutions for deposits has increased significantly.  Financial institutions have experienced decreased access to deposits or borrowings.

Although there has been a modest recovery in the domestic economy, there can be no assurance that the economy will not enter into another recession, whether in the near or long term future.  Furthermore, real estate values and the demand for commercial real estate loans have not fully recovered, and reduced availability of commercial credit and continuing unemployment have negatively impacted the credit performance of commercial and consumer credit.  Additional market developments such as a relapse or worsening of economic conditions in other parts of the world would likely exacerbate the lingering effects of the difficult market conditions experienced by us and others in the financial services industry and could further slow, stall or reverse the slow recovery in the U.S.  A  further deterioration of overall market conditions, a continuation of the economic downturn or prolonged economic stagnation in the Company's  markets may have a negative impact on its business, financial condition, results of operations and the trading price of its common stock.  If the strength of the U.S. economy in general and the strength of the economy in areas where we lend were to

14

stagnate or decline, this could result in, among other things, a deterioration in credit quality or a reduced demand for credit, including a resultant adverse effect on the Company's  loan portfolio and provision for losses on loans.  This may exacerbate the Company's  exposure to credit risk, impair the Company's  ability to assess the creditworthiness of its customers or to estimate the values of its assets and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us.  Negative conditions in the real estate markets where we operate could adversely affect borrowers' ability to repay their loans and the value of the underlying collateral.  Real estate values are affected by various factors, including general economic conditions, governmental rules or policies and natural disasters.  These factors may adversely impact borrowers' ability to make required payments, which in turn, may negatively impact the Company's  financial results.  As a result of the difficult market and economic conditions referred to above, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and for bank regulatory agencies to be very aggressive in responding to concerns and trends identified in examinations.  This increased government action may increase costs and limit the Company's  ability to pursue certain business opportunities.

We cannot predict whether the difficult market and economic conditions will improve in the near future.  A worsening of these conditions would likely exacerbate the adverse effects of these difficult conditions on the Company,  its customers and the other financial institutions in its market.  As a result, we may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds, and the Company's  business, financial condition, results of operations and stock price may be adversely affected.

The Soundness Of Other Financial Institutions Could Adversely Affect Us.  The Company's  ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.  We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients.  As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions.  Many of these transactions expose us to credit risk in the event of default of a counterparty or client.  In addition, the Company's  credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us.  There is no assurance that any such losses would not materially and adversely affect the Company's  results of operations.

Deterioration In The Housing Market Could Cause Further Increases In Delinquencies And Non-Performing Assets, Including Loan Charge-Offs, And Depress The Company's Income And Growth.  The volume of one-to-four family residential mortgages and home equity lines of credit may decrease during economic downturns as a result of, among other things, a decrease in real estate values, an increase in unemployment, a slowdown in housing price appreciation or increases in interest rates.  These factors could reduce earnings and consequently the Company's  financial condition because:

· borrowers may not be able to repay their loans;

· the value of the collateral securing loans may decline further;

· the quality of the Company's  loan portfolio may decline further; and

· customers may not want or need the Company's  products and services.

Any of these scenarios could cause an increase in delinquencies and non-performing assets, require us to charge-off a higher percentage of loans, increase substantially the provision for losses on loans, or make fewer loans, which would reduce income.

The FDIC's Changes in the Calculation of Deposit Insurance Premiums and Ability to Levy Special Assessments Could Increase The Company's Non-Interest Expense And May Reduce Its Profitability.  The range of base assessment rates historically varies from 12 to 45 basis points depending on an institution's risk category, with newly

15

added financial measures resulting in increased assessment rates for institutions heavily relying on brokered deposits to support rapid asset growth.  However, the Dodd-Frank Act requires the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments.  On February 9, 2011, the FDIC adopted a final rule that defines the assessment base as the average consolidated total assets during the assessment period minus the average tangible equity of the insured depository institution during the assessment period. The FDIC also imposed a new assessment rate scale (which was revised further in 2016). Under the new system, banks will pay assessments at a rate between 3 and 30 basis points per assets minus tangible equity, depending upon an institution's risk category (the final rule also includes progressively lower assessment rate schedules when the FDIC's reserve ratio reaches certain levels).  The rulemaking changes the current assessment rate schedule so the schedule will result in the collection of assessment revenue that is approximately the same as generated under the current rate schedule and current assessment base.  Nearly all banks with assets less than $10 billion will pay smaller deposit insurance assessments as a result of the new rule.  The majority of the changes in the FDIC's final rule became effective on April 1, 2011.  The FDIC has the statutory authority to impose special assessments on insured depository institutions in an amount, and for such purposes, as the FDIC may deem necessary.  The change in the calculation methodology for deposit insurance premiums and the possible emergency special assessments could increase non-interest expense and may adversely affect the Company's  profitability.

We May Elect Or Be Compelled To Seek Additional Capital In The Future, But That Capital May Not Be Available When It Is Needed.  We are required by regulatory authorities to maintain adequate levels of capital to support operations.  In addition, we may elect to raise additional capital to support the growth of the Company's  business or to finance acquisitions, if any, or we may elect to raise additional capital for other reasons.  In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors.  Should we elect or be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, common stock or securities convertible into common stock, which could dilute your ownership interest in the Company.  Although we remain "well-capitalized" and have not had a deterioration in liquidity, the future cost and availability of capital may be adversely affected by illiquid credit markets, economic conditions and a number of other factors, many of which are outside of the Company's  control.  Accordingly, we cannot assure you of the ability to raise additional capital if needed or on terms acceptable to us.  If we cannot raise additional capital when needed or on terms acceptable to us, it may have a material adverse effect on the Company's  financial condition and results of operations.

If We Are Unable To Successfully Compete For Customers In The Company's Market Area, The Company's Financial Condition And Results Of Operations Could Be Adversely Affected.  Hawthorn's banking subsidiary faces substantial competition in making loans, attracting deposits and providing other financial products and services.  The Bank has numerous competitors for customers in its market area. 

Such competition for loans comes principally from:

	other commercial banks		mortgage banking companies
	savings banks		finance companies
	savings and loan associations		credit unions

Competition for deposits comes principally from:

	other commercial banks		brokerage firms
	savings banks		insurance companies
	savings and loan associations		money market mutual funds
	credit unions		mutual funds (such as corporate and government securities funds)

Many of these competitors have greater financial resources and name recognition, more locations, more advanced technology and more financial products to offer than the Bank.  Competition from larger institutions may increase due to an acceleration of bank mergers and consolidations in Missouri and the rest of the nation.  In addition, the Gramm-Leach-Bliley Act removes many of the remaining restrictions in federal banking law against cross-ownership between banks and

16

other financial institutions, such as insurance companies and securities firms.  The law will likely increase the number and financial strength of companies that compete directly with the Bank.  The profitability of the Bank depends of its continued ability to attract new customers and compete in Missouri.  New competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on the Bank's market share of deposits and loans in the Bank's service areas.  If the Bank is unable to successfully compete, its financial condition and results of operations will be adversely affected.

We May Experience Difficulties In Managing Growth And In Effectively Integrating Newly Acquired Companies.  As part of the Company's  general strategy, it may continue to acquire banks and businesses that it believes provide a strategic fit with its business.  To the extent that the Company does grow, there can be no assurances that we will be able to adequately and profitably manage such growth.  Acquiring other banks and businesses will involve risks commonly associated with acquisitions, including:

· potential exposure to liabilities of the banks and businesses acquired;

· difficulty and expense of integrating the operations and personnel of the banks and businesses acquired;

· difficulty and expense of instituting the necessary systems and procedures, including accounting and financial reporting systems, to manage the combined enterprises on a profitable basis;

· potential disruption to existing business and operations;

· potential diversion of the time and attention of management; and

· impairment of relationships with and the possible loss of key employees and customers of the banks and businesses acquired.

The success of the Company's  internal growth strategy will depend 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.  There is no assurance that we will be successful in implementing the Company's  internal growth strategy.

We May Be Adversely Affected By Changes In Laws And Regulations Affecting The Financial Services Industry.  Banks and bank holding companies such as Hawthorn are subject to regulation by both federal and state bank regulatory agencies.  The regulations, which are designed to protect borrowers and promote certain social policies, include limitations on the operations of banks and bank holding companies, such as minimum capital requirements and restrictions on dividend payments.  The regulatory authorities have extensive discretion in connection with their supervision and enforcement activities and their examination policies, including the imposition of restrictions on the operation of a bank, the classification of assets by an institution and requiring an increase in a bank's allowance for loan losses. These regulations are not necessarily designed to maximize the profitability of banking institutions.

In July 2010, President Barack Obama signed into law the Dodd-Frank Act, which enacted substantial changes to the legal framework of the entire financial services industry.  The Dodd-Frank Act mandates the passage of numerous rules and regulations by various regulatory agencies over the next few years. This legislation will change banking regulation and the operating environment of Hawthorn in substantial and unpredictable ways.  It could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions.  Hawthorn cannot predict the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its business.

These, and other future changes in the banking laws and regulations and tax and accounting rules applicable to financial institutions, could have a material adverse effect on the operations and financial condition of Hawthorn and its banking subsidiary.

The Short-Term And Long-Term Impact Of The Changing Regulatory Capital Requirements And New Capital Rules Is Uncertain.  The federal banking agencies have substantially amended the regulatory capital rules applicable to us and the Bank. The amendments implement the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act.  The amended rules include new minimum risk-based capital and leverage ratios, which became effective in January 2015, with certain requirements to be phased in beginning in 2016, and refined the definition of what constitutes "capital" for purposes of calculating those ratios.

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The application of more stringent capital requirements to us and the Bank could, among other things, result in lower returns on invested capital, require the raising of additional capital, and result in regulatory actions if we were to be unable to comply with such requirements.  Implementation of changes to asset risk weightings for risk based capital calculations, items included or deducted in calculating regulatory capital and/or additional capital conservation buffers could result in management modifying its business strategy and could further limit the Company's  ability to make distributions, including paying out dividends or buying back shares.

The EGRRCPA directs the federal banking agencies to develop a specified Community Bank Leverage Ratio (that is, the ratio of a bank's equity capital to its consolidated assets) of not less than 8% and not more than 10%. On November 21, 2018, federal regulators released a proposed rulemaking that would, if enacted, provide certain banks and their holding companies with the option to elect out of complying with the Basel III Capital Rules. Under the proposal, a qualifying community banking organization would be eligible to elect the community bank leverage ratio framework if it has a community bank leverage ratio, or CBLR, greater than 9% at the time of election. The proposal is described in more detail above under the section entitled "Regulatory Capital Requirements."  The Company will continue to monitor this rulemaking. If and when the rulemaking goes into effect, the Company and the Bank will determine whether they are qualified under the community bank leverage ratio framework and, if so, whether it would be possible and advantageous at that time to elect to comply with the community bank leverage ratio framework.

Non-Compliance with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Community Reinvestment Act, Fair Lending Laws Or Other Laws And Regulations Could Result In Fines Or Sanctions, And Curtail Expansion Opportunities.  Financial institutions are required under the USA PATRIOT and Bank Secrecy Acts to develop programs to prevent financial institutions from being used for money-laundering and terrorist activities.  Financial institutions are also obligated to file suspicious activity reports with the U.S. Treasury Department's Office of Financial Crimes Enforcement Network if such activities are detected.  These rules also require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts.  Failure or the inability to comply with the USA PATRIOT Act and Bank Secrecy Act statutes and regulations could result in fines or penalties, curtailment of expansion opportunities, enforcement actions, intervention or sanctions by regulators and costly litigation or expensive additional controls and systems.  During the last few years, several banking institutions have received large fines for non-compliance with these laws and regulations.  In addition, the U.S. Government imposed and will continue to expand laws and regulations relating to residential and consumer lending activities that create significant new compliance burdens and financial risks.

The Bank Is A Community Bank And Our Ability To Maintain The Bank's Reputation Is Critical To The Success Of Our Business And The Failure To Do So Could Materially Adversely Affect Our Performance.  The Bank is a community bank, and its reputation is one of the most valuable components of our business.  As such, we strive to conduct our business in a manner that enhances our reputation.  This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.  If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results could be materially adversely affected.

The Company's Success Largely Depends On The Efforts Of Its Executive Officers.  The success of Hawthorn and its banking subsidiary has been largely dependent on the efforts of David Turner, Chairman, CEO, and President and the other executive officers.  These individuals are expected to continue to perform their services.  However, the loss of the services of Mr. Turner, or any of the other key executive officers could have a materially adverse effect on Hawthorn and its subsidiary bank.

If We Fail To Maintain An Effective System Of Internal Control Over Financial Reporting, We May Not Be Able To Accurately Report Our Financial Results Or Prevent Fraud, And, As A Result, Investors And Depositors Could Lose Confidence In Our Financial Reporting, Which Could Adversely Affect Our Business, The Trading Price Of Our Stock, And Our Ability To Attract Additional Deposits.  We are required to include in our annual reports filed with the SEC a report from our management regarding internal control over financial reporting.  As a result, we documented and evaluated our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and SEC rules and regulations, which require an annual management report on our internal control over financial reporting, including, among other matters, management's assessment of the effectiveness of

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internal control over financial reporting.  Failure or circumvention of our system of internal control could have an adverse effect on our business, profitability, and financial condition, and could result in regulatory actions and loss of investor confidence.  Additionally, if we fail to identify and correct any significant deficiencies or material weaknesses in the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current and potential stockholders and depositors could lose confidence in our financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock and our ability to attract additional deposits.

We Are Subject To Security And Operational Risks Relating To Our Use Of Technology That Could Damage Our Reputation And Our Business.  We rely heavily on communications and information systems to conduct our business.  Furthermore, we have access to large amounts of confidential financial information and control substantial financial assets, including those belonging to our customers, to whom we offer remote access, and we regularly transfer substantial financial assets by electronic means.  Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers.  Any failure, interruption or breach in security of our systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.  Although we intend to continue to implement security technology and establish operational procedures to prevent such damage, our security measures may not be successful.

In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data.  A failure of such security measures could have a material adverse effect on our financial condition and results of operations.  We also face the risk of operational disruption, failure, termination or capacity constraints caused by third parties that facilitate our business activities by providing technology such as software applications, as well as financial intermediaries.  Such parties could also be the source of an attack on, or breach of, our operational systems, data or infrastructure.

We also face the potential risk of loss due to fraud, including commercial checking account fraud, automated teller machine ("ATM") skimming and trapping, write-offs necessitated by debit card fraud, and other forms of online banking fraud, which are becoming more sophisticated and present new challenges as mobile banking increases, as well as employee fraud.  Employee errors could also subject us to financial claims for negligence.  We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud.  Should our internal controls fail to prevent or detect an occurrence, and if any resulting loss is not insured or exceeds applicable insurance limits, such failure could have a material adverse effect on our business, financial condition and results of operations.

The Operation Of Our Business, Including Our Interaction With Customers, Are Increasingly Done Via Electronic Means, And This Has Increased Our Risks Related To Cybersecurity.  We rely on the successful and uninterrupted functioning of our information technology and telecommunications systems to conduct our business. This includes internally developed systems, the systems of third-party service providers, and digital and mobile technologies.  Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems, and could damage our reputation, result in loss of customer business, subject us to regulatory scrutiny, or expose us to civil litigation and possible financial liability.  We are exposed to the risk of cyber-attacks in the normal course of business, which can result from deliberate attacks or unintentional events.  We have observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption.  Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites.  Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access.  The objectives of cyber-attacks vary widely and can include theft of financial assets, intellectual property, or other sensitive information, including the information belonging to our banking customers.  Cyber-attacks may also be directed at disrupting our operations.

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We may incur substantial costs and suffer other negative consequences if we fall victim to successful cyber-attacks.  Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; increased cybersecurity protection costs that may include organizational changes, deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.

We Continually Encounter Technological Change, And We Cannot Predict How Changes In Technology Will Affect Our Business.  The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology driven by products and services, which include developments in:

	telecommunications		internet-based banking
	data processing		telebanking
	automation		debit cards and so-called "smart cards"

The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs.  Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.  Many of our competitors have substantially greater resources to invest in technological improvements.  We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers.  Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.

We Rely On Others To Provide Key Components Of Our Business Infrastructure.  Third party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing.  While we have selected these third party vendors carefully, we do not control their actions.  Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively.  Replacing these third party vendors could also entail significant delay and expense.

The Price Of Our Common Stock Could Fluctuate Significantly, And This Could Make It Difficult For You To Resell Shares Of Our Common Stock At Times Or At Prices You Find Attractive. The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility during the recent economic downturn.  In some cases, the markets have produced downward pressure on stock prices for certain issuers without regard to those issuers' underlying financial strength.  As a result, the trading volume in our common stock could fluctuate more than usual and cause significant price variations to occur.  This could make it difficult for you to resell shares of our common stock at times or at prices you find attractive.

The trading price of the shares of our common stock will depend on many factors that could change from time to time and could be beyond our control.  Among the factors that could affect our stock price are those identified under the heading "Forward-Looking Statements" in Item 7 of this report and as follows:

· actual or anticipated quarterly fluctuations in our operating results and financial condition;

· changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to our common stock or those of other financial institutions;

· failure to meet analysts' revenue or earnings estimates;

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· speculation in the press or investment community generally or relating to our reputation, our market area, our competitors or the financial services industry in general;

· strategic actions by us or our competitors, such as acquisitions, restructurings, dispositions or financings;

· actions by our current stockholders, including sales of common stock by existing stockholders and/or directors and executive officers;

· fluctuations in the stock price and operating results of our competitors;

· future sales of our equity, equity-related or debt securities;

· changes in the frequency or amount of dividends or share repurchases;

· proposed or adopted regulatory changes or developments;

· investigations, proceedings or litigation that involve or affect us;

· trading activities in our common stock, including short-selling;

· domestic and local economic factors unrelated to our performance; and

· general market conditions and, in particular, developments related to market conditions for the financial services industry.

A significant decline in our stock price could result in substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.

The Trading Volume In Our Common Stock Has Been Low, And The Sale Of A Substantial Number Of Shares Of Our Common Stock In The Public Market Could Depress The Price Of Our Common Stock And Make It Difficult For You To Sell Your Shares.  Our common stock is listed to trade on the NASDAQ Global Select Market, but is thinly traded.  As a result, you may not be able to sell your shares of common stock on short notice.  Additionally, thinly traded stock can be more volatile than stock trading in an active public market.  The sale of a substantial number of shares of our common stock at one time could temporarily depress the market price of our common stock, making it difficult for you to sell your shares and impairing our ability to raise capital.

Our Common Stock Is Not Insured By Any Governmental Entity.  Our common stock is not a deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental entity.

Additional Factors.  Additional risks and uncertainties that may affect the future results of operations, financial condition or business of the Company and its banking subsidiary include, but are not limited to: (i) adverse publicity, news coverage by the media, or negative reports by brokerage firms, industry and financial analysts regarding the Bank or the Company; and (ii) changes in accounting policies and practices.

Item 1B.  Unresolved Staff Comments.

None.

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Item 2.  Properties.

Neither the Company nor Union State Bancshares owns or leases any property.  The Company's principal offices are located at 132 East High Street,  Jefferson City, Missouri 65101.  The table below provides a list of the Bank's facilities.

					Net Book
					Value at
	Approximate		Owned or		12/31/2018
Location	Square Footage		Leased		(in thousands)
8127 East 171st Street, Belton, MO	13,000		Owned		$	1,629
4675 Gretna Road, Branson, MO	11,000	(1)	Owned		$	1,246
1000 West Buchanan Street, California, MO	2,270		Owned		$	324
102 North Second Street, Clinton, MO	11,524		Owned		$	1,277
1400 East Ohio Street, Clinton, MO	13,551		Owned		$	2,665
1712 East Ohio Street, Clinton, MO (inside a Wal-Mart store)	540		Leased	(2)	$	42
1110 Club Village Drive, Columbia, MO	5,000		Owned		$	1,331
29 S. Ninth St., Suites 201-202, Columbia, MO	1,500		Leased	(3)		N/A
115 South 2nd Street, Drexel, MO	4,000		Owned		$	131
100 Plaza Drive, Harrisonville, MO	4,000		Owned		$	458
17430 East 39th Street, Independence, MO	4,070		Owned		$	553
220 West White Oak, Independence, MO	1,800		Owned		$	43
132 East High Street, Jefferson City, MO	34,800		Owned		$	2,676
3701 West Truman Blvd, Jefferson City, MO	21,000		Owned		$	376
211 West Dunklin Street, Jefferson City, MO	2,500		Owned		$	1,514
800 Eastland Drive, Jefferson City, MO	4,100		Owned		$	668
3600 Amazonas Drive, Jefferson City, MO	26,000		Owned		$	2,294
300 S.W. Longview Blvd, Lee's Summit, MO	11,700		Owned		$	1,887
5 Victory lane, Suite 203, Liberty, MO	1,667		Leased	(4)		N/A
335 Chestnut, Osceola, MO	1,580		Owned		$	81
595 VFW Memorial Drive, St. Robert, MO	2,236		Owned		$	58
321 West Battlefield, Springfield, MO	12,500	(5)	Owned		$	660
200 West Main Street, Warsaw, MO	8,900		Owned		$	88
1891 Commercial Drive, Warsaw, MO	11,000		Owned		$	1,465

(1) Of the 11,000 square feet of space, 2,384 square feet of space is leased to a non-affiliate.

(2) The term of this lease began in February 2019 and ends in January 2024.

(3) The term of this lease began in April 2018 and ends in April 2019.

(4) The term of this lease began in May 2016 and ends in April 2019.

(5) Of the 12,500 square feet of space, 5,873 square feet of space is available to be leased to a non-affiliate.

Management believes that the condition of each of the Bank's facilities presently is adequate for its business and that such facilities are adequately covered by insurance.

Item 3.  Legal Proceedings.

The information required by this Item is set forth in Note 18,  Commitments and Contingencies, in the Company's consolidated financial statements.

Item 4.  Mine Safety Disclosures.

Not applicable

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EXECUTIVE OFFICERS OF THE REGISTRANT

Executive officers of the Company are appointed by the board of directors and serve at the discretion of the board.  The following table sets forth certain information with respect to all executive officers of the Company.

Name	Age	Position
David T. Turner	62	Chairman, Chief Executive Officer, President and Director
W. Bruce Phelps	68	Senior Vice President and Chief Financial Officer
Kathleen L. Bruegenhemke	53	Senior Vice President, Secretary and Director

The business experience of the executive officers of the Company for the last five years is as follows:

David T. Turner has served as a director of the Company and of Hawthorn Bank (or of its constituent predecessors) since January 1997.  He has served as president of the Company since March 2002 and as chairman and chief executive officer of the Company since January 2011.  He also currently serves as chairman, chief executive officer and president of Hawthorn Bank. Mr. Turner has served as vice chairman of the Company from June 1998 through March 2002 and as senior vice president of the Company from 1993 until June 1998.  He served as president of a predecessor to Hawthorn Bank from January 1997 through March 2002 when he assumed the position of chairman, chief executive officer and president.  He served as senior vice president of that same predecessor from June 1992 through December 1996 and as its vice president from 1985 until June 1992. 

W. Bruce Phelps has served as Senior Vice President and Chief Financial Officer of the Company since January 2012 and Senior Vice President and Chief Financial Officer of Hawthorn Bank since January 2012. Prior to joining the Company, he served as Controller of Pulaski Bank from 2009 until January 2012.  Previously Mr. Phelps served as Principal of WBP Consulting in providing financial consulting and support services for clients in the St. Louis area, and as Chief Financial Officer for Champion Bank, St. Louis, Missouri.

Kathleen L. Bruegenhemke has served as a director of our Company and of Hawthorn Bank since March 2017 and as Chief Operating Officer of Hawthorn Bank since January 2017.  From October 2014 until December 2016 she served as Columbia Market President of Hawthorn Bank. She has served as Senior Vice President and Secretary of the Company since November 1997 and as Chief Risk Officer of the Company since June 2006.  From January 1992 until November 1997, she served as Internal Auditor of Hawthorn Bank (or of one of its constituent predecessors).   Prior to joining the Bank, Ms. Bruegenhemke served as a Commissioned Bank Examiner for the Federal Deposit Insurance Corporation. Ms. Bruegenhemke is a certified public accountant and possesses considerable expertise in overseeing various finance, regulatory compliance and risk management aspects of community banking, which she attained through over 30 years of service, first as a bank regulator and then as a dedicated employee of Hawthorn Bank.

There is no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was selected as an officer.

PART II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Pursuant to General Instruction G(2) to Form 10‑K, the information required by this Item, other than that referred to below, is incorporated herein by reference to the information under the caption "Market Price of and Dividends on Equity Securities and Related Matters" in the Company's  2018 Annual Report to Shareholders.

We refer you to Item 12 of this report under the caption "Securities Authorized For Issuance Under Equity Compensation Plans" for certain equity plan information.

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The Company's  Purchases of Equity Securities

There were no purchases made by or on behalf of the Company or any "affiliated purchaser" (as defined by applicable rules of the SEC) of shares the Company's common stock during the fourth quarter of the year ended December 31, 2018: The authorization previously provided by the Board of Directors for the repurchase of the Company's common stock, in which management was given discretion to determine the number and pricing of the shares to be purchased as well as the timing of any such purchases, expired on September 8, 2018.

Recent Issuance of Securities

None.

Item 6.  Selected Financial Data.

Pursuant to General Instruction G(2) to Form 10‑K, the information required by this Item is incorporated herein by reference to the information under the caption "Selected Consolidated Financial Data" in the Company's  2018 Annual Report to Shareholders.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operation.

Pursuant to General Instruction G(2) to Form 10‑K, the information required by this Item is incorporated herein by reference to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's  2018 Annual Report to Shareholders.

Forward-Looking Statements

This report, including information included or incorporated by reference in this report, contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, strategy, future performance and business of the Company and its subsidiaries, 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" 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 the Company's  loans and other assets,

· increases in non-performing assets in the Company's  loan portfolios and adverse economic conditions may necessitate increases to the provisions for loan losses,

· costs or difficulties related to the integration of the business of Hawthorn and its acquisition targets may be greater than expected,

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

· changes may occur in the securities markets.

We have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements, which factors are identified in Item 1A of this report under the heading "Risk Factors."  Other factors that we have not 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 such statement is made.  Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

The Company's exposure to market risk is reviewed on a regular basis by our Bank's asset/liability committee and board of directors.  Interest rate risk is the potential of economic losses due to future interest rate changes.  These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values.  The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.  Management realizes certain risks are inherent and that the goal is to identify and minimize those risks.

Tools used by the Bank's management include modeling the effects on net interest income under different rate shock scenarios.  At December 31, 2018, the Company's rate shock scenario models indicated that annual net interest income could change by as much as 0.26% or 4.17% should interest rates rise or fall, respectively, 200 basis points from their current level over a one-year period. These levels of interest rate risk are within limits set by the board in the Company's  Funds Management, Investment Asset Liability Policy and Management believes this is an acceptable level of interest rate risk. However, there are no assurances that the change will not be more or less than this estimate.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item, other than that provided above, is incorporated herein by reference to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures About Market Risk" in the Company's  2018 Annual Report to Shareholders.

Item 8.  Financial Statements and Supplementary Data.

Pursuant to General Instruction G(2) to Form 10‑K, the information required by this Item is incorporated herein by reference to the report of the independent registered public accounting firm and the information under the caption "Consolidated Financial Statements" in the Company's  2018 Annual Report to Shareholders.

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9A.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a‑15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2018. Based on that evaluation, the Company's management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2018, the Company's disclosure controls and procedures were effective.

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Internal Controls Over Financial Reporting.

Management's Report on Internal Control Over Financial Reporting.

The Company's management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a‑15(f).  Under the supervision and with the participation of the Company's  management, including the Company's  principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting, as of December 31, 2018, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).  Based upon its assessment, management has concluded that, as of December 31, 2018, the Company's internal control over financial reporting, is effective based on the criteria established in Internal Control-Integrated Framework (2013).

Management's assessment of the effectiveness of internal control over financial reporting, as of December 31, 2018, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Controls.

There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors 

Hawthorn Bancshares, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Hawthorn Bancshares, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated March 14, 2019 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

	/s / KPMG LLP
St. Louis, Missouri
March 14, 2019

Item 9B.  Other Information.

None.

PART III

Item 10.  Directors, Executive Officers and Corporate Governance.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item, other than that referred to below, is incorporated herein by reference to:

(i) the information under the caption "Item 1: Election of Directors--What is the structure of our board and how often are directors elected?" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii) the information under the caption "Item 1: Election of Directors--Who are this year's nominees?" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(iii) the information under the caption "Item 1: Election of Directors--What is the business experience of the nominees and of our continuing board members?" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(iv) the information under the caption "Executive Officers of the Registrant" in Part I of this report;

27

(v) the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(vi) the information under the caption "Corporate Governance and Board Matters--Consideration of Director Nominees" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and

(vii) the information under the caption "Corporate Governance and Board Matters--Committees of the Board--Audit Committee" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

New Director Appointment

On March 13, 2019, the board of directors of the Company voted unanimously to increase its size from six to seven directors, effective March 13, 2019, and to fill the resulting vacancy with the appointment of Jonathan Holtaway.  Mr. Holtaway will be a Class I director of the Company and will have a term expiring at the time of the annual meeting of shareholders in 2020.  Concurrent with this appointment, he is also being added as a member of the board of directors of Hawthorn Bank.

Mr. Holtaway is President of Ategra Capital Management, LLC, a registered investment advisor founded by Mr. Holtaway in 2005 and based in Vienna, Virginia.  He serves as managing member of Ategra GP, LLC, the general partner of Ategra Community Financial Institution Fund, LP., a fund which invests primarily in the securities of companies in the bank and thrift industry.  From July 1992 until September 2001, Mr. Holtaway served as Managing Director and Partner of Danielson Associates, an investment banking company which provided advisory services to community financial institutions.  It is anticipated that Board discussions and decisions will benefit from his understanding of the fundamentals of community banking derived from his over 25 years of experience as an analyst of, advisor to, and investor in, community banks and other financial institutions.

Our board of directors has determined that Mr. Holtaway satisfies the independence requirements of the NASDAQ Stock Market.  It is anticipated that he will be appointed to serve on one or more committees of the board, although the specifics of any such appointment have not yet been determined.

There is no arrangement or understanding between Mr. Holtaway and any other person pursuant to which was selected as a director of the Company or of the Bank, and there are no transactions between Mr. Holtaway and the Company that would be reportable under Item 404 of SEC Regulation S-K.  Consistent with the compensation provided for other outside (non-employee) members of the Company's board of directors, Mr. Holtaway will receive a monthly retainer of $1,500 and $600 for each board and committee meeting attended, respectively.  For his service to Hawthorn Bank as an outside (non-employee) director, he will be paid $600 for each meeting of the board attended.

Code of Ethics

The Company has adopted a Code of Business Conduct and Ethics for directors, officers and employees including, the its principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions.  This Code of Business Conduct and Ethics is posted on the Company's internet website (www.hawthornbancshares.com) under the "Governance Documents" menu tab and is available for your examination.  A copy of this Code will be furnished without charge upon written request to Corporate Secretary, Hawthorn Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101.  Any substantive amendment to, or waiver from, a provision of this Code that applies to the Company's principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions will be disclosed in a report on Form 8‑K.

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Item 11.  Executive Compensation.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item is incorporated herein by reference to:

(i) the information under the caption "Executive Compensation and Related Matters" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii) the information under the caption "Corporate Governance and Board Matters--Director Compensation" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item, other than that presented below, is incorporated herein by reference to the information under the caption "Ownership of Common Stock" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Securities Authorized For Issuance Under Equity Compensation Plans

The Company has no equity compensation plan for its employees pursuant to which options, rights, warrants or other equity awards may be granted. As of December 31, 2018 the Company had no outstanding options, rights or warrants granted under any equity compensation plan.

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item is incorporated herein by reference to:

(i) the information under the caption "Related Party Transactions" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii) the information under the caption "Item 1: Election of Directors--What is the structure of our board and how often are directors elected?" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and

(iii) the information under the caption "Corporate Governance and Board Matters--Committees of the Board" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Item 14.  Principal Accounting Fees and Services.

Pursuant to General Instruction G(3) to Form 10‑K, the information required by this Item is incorporated herein by reference to the information under the caption "Independent Registered Public Accounting Firm Fees and Services" in the Company's definitive Proxy Statement for its 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

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PART IV

Item 15.  Exhibits, Financial Statement Schedules.

(a) Exhibits, Financial Statements and Financial Statement Schedules:

1. Financial Statements:

The following consolidated financial statements of the Company and reports of the Company's independent registered public accounting firm, included in the Company's Annual Report to Shareholders for the year ended December 31, 2018 under the caption "Consolidated Financial Statements", are incorporated herein by reference:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets as of December 31, 2018 and 2017.

Consolidated Statements of Income for the years ended December 31, 2018,  2017, and 2016.

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018,  2017, and 2016.

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2018,  2017, and 2016.

Consolidated Statements of Cash Flows for the years ended December 31, 2018,  2017, and 2016.

Notes to the Consolidated Financial Statements.

2. Financial Statement Schedules:

Financial statement schedules have been omitted because they either are not required or are not applicable or because equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.

3. 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 June 8, 2009 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).
10.1	Form of Change of Control Agreement and schedule of parties thereto (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10Q for the quarterly period March 31, 2005 and incorporated herein by reference). *
10.2	Hawthorn Bancshares, Inc. Excess Benefit Plan (filed as Exhibit 10.2 to the Company's current report on Form 8-K on November 13, 2018 and incorporated herein by reference). *

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Exhibit No.	Description
10.3	Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.
10.3.1	First Amendment to Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.
10.3.2	Second Amendment to Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.
13	The Company's 2018 Annual Report to Shareholders (only those portions of this Annual Report to Shareholders which are specifically incorporated by reference into this Annual Report on Form 10‑K shall be deemed to be filed with the Commission).
14	Code of Business Conduct and Ethics of the Company.
21	List of Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney (included on the signature page to this Annual Report on Form 10‑K).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a‑14(a) and Rule 15d‑14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a‑14(a) and Rule 15d‑14(a) of the Securities Exchange Act, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)

*Management contracts or compensatory plans or arrangements required to be identified by Item 15(a).

(b) Exhibits.

See exhibits identified above under Item 15(a)3.

(c) Financial Statement Schedules.

See financial statement schedules identified above under Item 15(a)2, if any.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 14, 2019	By	/s/	David T. Turner
			David T. Turner, Chairman of the Board,
			President and Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David T. Turner and W. Bruce Phelps, or either of them, his attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date	Signature and Title
March 14, 2019	/s/ David T. Turner
	David T. Turner, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
March 14, 2019	/s/ W. Bruce Phelps
	W. Bruce Phelps, Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)
March 14, 2019	/s/ Kathleen L. Bruegenhemke
	Kathleen L. Bruegenhemke, Director
March 14, 2019	/s/ Frank E. Burkhead
	Frank E. Burkhead, Director
March 14, 2019	/s/ Philip D. Freeman
	Philip D. Freeman, Director
March 14, 2019	/s/ Kevin L. Riley
	Kevin L. Riley, Director
March 14, 2019	/s/ Gus S. (Jack) Wetzel III
	Gus S. (Jack) Wetzel III, Director
March 14, 2019
	Jonathan D. Holtaway, Director

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EXHIBIT INDEX

HIDDEN_ROW
Exhibit No.	Description	Page No.
10.2	Hawthorn Bancshares, Inc. Excess Benefit Plan (filed as Exhibit 10.2 to the Company's current report on Form 8-K on November 13, 2018 and incorporated herein by reference).
10.3	Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.
10.3.1	First Amendment to Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.
10.3.2	Second Amendment to Purchase and Limited Assumption Agreement of Branch between Hawthorn Bank and Branson Bank.
13	The Company's 2018 Annual Report to Shareholders (only those portions of this Annual Report to Shareholders which are specifically incorporated by reference into this Annual Report on Form 10‑K shall be deemed to be filed with the Commission).
14	Code of Business Conduct and Ethics of the Company.
21	List of Subsidiaries.
23	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney (included on the signature page to this Annual Report on Form 10‑K).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a‑14(a) and Rule 15d‑14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a‑14(a) and Rule 15d‑14(a) of the Securities Exchange Act, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL).*

*As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and Section 18 of the Securities Exchange Act of 1934, as amended.

33

EX-10.3

Exhibit 10.3

PURCHASE AND LIMITED ASSUMPTION AGREEMENT OF BRANCH

THIS PURCHASE AND LIMITED ASSUMPTION AGREEMENT OF BRANCH (this “Agreement”) made and entered into this 17th day of October, 2018 (the “Effective Date”), by and between Hawthorn Bank, a Missouri state-chartered bank with its main office located in Jefferson City, Missouri (“Seller”), and Branson Bank, a Missouri state-chartered bank with its main office located in Branson, Missouri (“Buyer”).

R E C I T A L S:

WHEREAS, Seller operates a branch banking office located at 4675 Gretna Road, Branson, Missouri  65616 (the “Branson Branch”).

WHEREAS, Seller desires to sell and Buyer desires to purchase and acquire (i) the Branson Branch and (ii) certain assets of Seller maintained at the Branson Branch.

WHEREAS, Seller desires to transfer and Buyer desires to assume (i) the deposit accounts at or for the Branson Branch, and (ii) certain other liabilities pertaining to the continuing operations thereof. 

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, each intending to be legally bound, do hereby agree as follows:

1. Subject Property Defined.  The term “Subject Property” as used in this Agreement, shall mean and include the following: 

(a) All of Seller’s right, title, and interest in and to that certain real property legally described on Exhibit “A” and attached hereto and made a part hereof (the “Real Property”), upon which the Branson Branch is operated, and any and all records, files, books and any other documents and instruments relating to the Real Property.  The Real Property shall also include all rights, benefits, privileges, hereditaments, appurtenances, and easements related to the Real Property, including, without limitation, all rights, rights-of-way, roadways, roadbeds, reversions, strips, gores, and any interests in any alleys, streets, or roads abutting or adjacent to the Real Property, and all right, title, and interest of Seller in and to any awards made or to be made in lieu thereof (the Real Property, together will all such other rights and benefits, hereinafter collectively referred to as “Land”).

(b) All of Seller’s right, title, and interest in and to any and all structures, buildings, and other improvements located on the Land, including, without limitation, that certain banking facility and drive up comprised of approximately 12,232 square feet of bank building with an additional 1,165 square feet of drive through and canopy, all fixtures including ATM, safe deposit boxes (exclusive of the contents of leased safe deposit boxes) and safe deposit box contracts and any keys or combinations thereto, pneumatic equipment, parking lots, and related

facilities and improvements (hereinafter collectively referred to as the “Improvements”), and any and all records, files, books and any other documents and instruments relating to the Improvements.  If, prior to the Closing Date, any item described in this sub-paragraph (b) is damaged or destroyed by fire or other casualty, the insurance proceeds relating thereto will be assigned to Buyer.

(c) All of Seller’s right, title and interest in and to the furniture, fixtures, equipment, improvements and other items of tangible personal property located at the Branson Branch as of the close of business on the Closing Date, together with sign structures, and all personal property used in connection with the safe deposit box business being transferred to Buyer hereunder (exclusive of the contents of leased safe deposit boxes) (collectively, the “Tangible Personal Property”), except as set forth on Exhibit “B” (to be prepared and attached as part of this Agreement on or before the Inspection Completion Date) (the “Excluded Personal Property”).  If, prior to the Closing Date, any item of Tangible Personal Property is stolen, destroyed or otherwise lost, such item will be excluded from the sale contemplated hereby, and the term “Tangible Personal Property” as used herein will exclude any such item(s).  If, prior to the Closing Date, any item of Tangible Personal Property is damaged by fire or other casualty, such item(s), if reasonably repairable, will be sold to Buyer (in accordance with the provisions hereof) and the insurance proceeds relating to such item will be assigned to Buyer, it being understood that if any such item is not reasonably repairable, it will be excluded from the sale contemplated hereby.

(d) All of Seller’s right, title, and interest in and to any all contracts or agreements (but only to the extent assignable and transferable without any consents or other restrictions) relating to the upkeep, repair, maintenance, or operation of the Land, the Improvements, or the Tangible Personal Property, to the extent such contracts or agreements are not cancelable upon thirty (30) days’ or shorter prior notice (hereinafter collectively referred to as the “Operating Contracts”), a list of which Operating Contracts is attached hereto as Exhibit “C”, and all of Seller’s obligations and liabilities arising from and after the Closing Date under the Operating Contracts;

(e) All of Seller’s rights under, or created by, the existing lease attached hereto as Exhibit “D” between Seller and Lifestyle Contractors, and all of Seller’s obligations and liabilities arising from and after the Closing Date under the existing lease;

(f) All of Seller’s teller working cash, petty cash and vault cash at the Branson Branch as of the close of business on the Closing Date (“Cash on Hand”);

(g) All of the Seller’s deposit liabilities maintained at the Branson Branch, and all records relating to said deposit liabilities wherever located, in accordance with the terms of the agreements pertaining to such deposits, as shown on the books and records of Seller as of the close of business on the Closing Date, including accrued but unpaid interest thereon through the Closing Date (hereinafter “Deposits”). As used herein, the term “Deposits” includes all of the deposit products offered by Seller from the Branson Branch, including, without limitation, passbook accounts, statement accounts, checking accounts, money market accounts, and certificates of deposit;

2

(h) All records and documentation in whatever form or format relating to any item of the Subject Property; and

(i) Any statutory or common law right, title and interest in and relating to any item of the Subject Property that Seller may own or have and assign, including, without limitation, claims, causes of action, rights of recovery or set-offs, and credit of any kind or nature relating to the Subject Property or any item thereof.

(j) Seller is not selling, assigning, conveying, transferring or delivering, nor will Buyer acquire, any rights or interest in or to: (i) the name “Hawthorn Bank” or any derivation thereof, or (ii) any logos, service marks or trademarks, advertising materials or slogans or any similar items used by Seller or any affiliate of Seller in connection with its business, whether or not such is or was copyrighted or registered. No later than the Closing Date, weather permitting, Seller will remove all signs, logos and other insignia identifying or identified with Seller from the Branson Branch. No signs, logos or insignia identifying or identified with Buyer may be installed in or affixed to the premises until after the close of business on the Closing Date. On and after the Closing Date, Buyer will not use the name or service mark of Seller in any manner in connection with the operation of the Branson Branch. No activity conducted by Buyer on or after the Closing Date will state or imply that Seller is in any way involved as a partner, joint venturer or otherwise in the business of Buyer. Buyer will, at Seller’s discretion, either dispose of or make available to Seller for pick-up, any remaining signs, logos and insignia of Seller removed by Buyer from the Branson Branch after Closing.

2. Sale of Subject Property and Assumption of Liabilities.  Upon the terms and subject to the conditions set forth in this Agreement, (a) Seller shall sell, transfer, assign, and convey to Buyer, and Buyer shall purchase and accept from Seller, all right, title and interest of Seller in and to the Subject Property at the Closing (as hereinafter defined), and (b) Seller shall transfer and assign to Buyer, and Buyer shall assume from Seller and agree to pay, perform and discharge the assumed liabilities arising under the Subject Property, including, without limitation, the Deposits and the Operating Contracts.  Unless otherwise specifically specified herein, Buyer is not assuming any liabilities of Seller which have arisen or may arise or be established in connection with the conduct of business at the Branson Branch prior to the Closing Date

3. Purchase Price.    The calculation and payment of the Purchase Price (defined herein) will be made as follows:

(a) Seller will pay to Buyer an amount of cash (the “Purchase Price”), in addition to the transfer of Cash on Hand, equal to:

(i) the aggregate amount of principal and accrued interest of the Deposits;  plus

(ii) the net amount of any prorated items required by Section 3(e) hereof owed by Seller to Buyer; minus

(iii) the net amount of any prorated items required by Section 3(e) hereof owed by Buyer to Seller;  minus

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(iv) $500,000 for the Land; minus

(v) $3,022,260 for the Improvements; minus

(vi) the aggregate amount for the Tangible Personal Property to be agreed upon by Buyer and Seller on or before the Inspection Completion Date;  minus

(vii) the amount of Cash on Hand; minus

(viii) a premium of 4.1% for all Deposits; provided that on the Adjustment Payment Date (as defined below), Buyer will provide a report based upon the accounts transferred which discloses the previously identified out-of-area accounts.  Those will be compared to the same accounts in existence at Closing and will compare collected balance totals from Closing to the test date.  The parties will adjust the premium paid according to the tested subset.  The subset shall be composed of eighty (80) deposit accounts identified as “out of area” and three (3) other accounts and one “Missouri First Link account, all as set forth on Exhibit “E”.  In the event that any of the deposit accounts lists in exhibit “E” are not still on deposit with Buyer 180 days after the Closing Date, Seller shall reimburse Buyer the above premium on said accounts pursuant to paragraph (d) hereof.

(b) Attached as Exhibit “F” is a sample calculation of the Purchase Price, which is based upon the financial information set forth in Seller’s Call Report, dated as of June 30, 2018.

(c) On the Closing Date, Seller will transfer to Buyer, by wire transfer in immediately available funds to an account designated by Buyer, an amount which Seller estimates to be the amount of the Purchase Price, which estimated amount will be based upon the Deposits, the proration amounts, the Cash on Hand, and the premium as of the close of business on the third business day prior to the Closing Date (collectively, the “Estimated Purchase Price”).

(d) On the 180th day after the Closing Date or such earlier date as may be agreed to in writing by the parties (the “Adjustment Payment Date”), an adjustment payment (the “Adjustment Payment”) will be made by Seller to Buyer, so as to correct any discrepancy between the amount of the Estimated Purchase Price paid under Section 3(c) hereof and the Purchase Price calculated in accordance with this Section 3(a) and any adjustment in accordance with Section 17(e).  Buyer will provide to Seller a closing statement which reflects the calculation of the Adjustment Payment relative to the Estimated Purchase Price.  The Adjustment Payment due to Buyer (if any) pursuant to this paragraph will be paid to Buyer not later than ten (10) days after the Adjustment Payment Date by Seller by wire transfer in immediately available funds to an account designated by Buyer, with interest thereon from the Closing Date through the Adjustment Payment Date at a rate equal to the effective Federal Funds rate as published by the Federal Reserve.

(e) The parties intend that Seller will operate for its own account the business conducted at the Branson Branch until five o’clock (5:00 p.m.) on the Closing Date, and that Buyer will operate such business for its own account on and after five o’clock (5:00 p.m.) on the Closing Date.  Thus, except as otherwise specifically provided in this Agreement, items of expense directly

4

attributable to the operation of the Branson Branch (which will not include any general overhead expenses of Seller) will be prorated as of the close of business on the Closing Date, whether or not such adjustment would normally be made as of such time, including, without limitation, (i) telephone, electric, gas, water, and other utility services (to the extent it is not possible to transfer such services into the name of Buyer as of the Closing Date), (ii) taxes associated with the Land and Tangible Personal Property, (iii) assessments (including, without limitation, assessments attributable to FDIC deposit insurance), (iv) payments due on Operating Contracts, and (v) similar expenses related to the Subject Property transferred hereunder.  To the extent any such item has been prepaid by Seller for a period extending beyond the Closing Date, there will be a proportionate adjustment in favor of Seller.

(f) The allocation of the Purchase Price, as adjusted in accordance with Section 3(d) above, is intended to comply with the allocation method required by Section 1060 of the Internal Revenue Code of 1986, as amended.  The parties will (i) each report the federal, state and local and other tax consequences of the purchase and assumption contemplated hereby (including the filing of Internal Revenue Service Form 8594) in a manner consistent with such allocation and (ii) take no position in any tax filing, return, proceeding, audit or otherwise which is inconsistent with such allocation.  Within thirty (30) days following the Closing Date, Buyer shall provide to Seller a copy of IRS Form 8594 and any required exhibits thereto (the “Asset Acquisition Statement”) with Buyer’s proposed allocation of the consideration payable with respect to Seller’s Assets.  Buyer and Seller shall agree upon the Asset Acquisition Statement within sixty (60) days after the Closing Date; provided that if Buyer and Seller are unable to agree upon an allocation schedule within such sixty (60) day period, the allocation schedule shall be prepared by an accounting firm acceptable to Buyer and Seller.  The fees of such accounting firm incurred in preparing the allocation schedule shall be paid equally by Buyer and Seller. 

(g) Simultaneously with the execution of this Agreement, Buyer shall deliver to Hogan Land Title Company (the “Title Company”) the sum of Twenty Thousand Dollars ($20,000.00) (“Escrow Deposit”) which Escrow Deposit shall be held in escrow by the Title Company. 

4. Permitted Encumbrances.  At Closing, Seller shall convey the Real Property by special warranty deed (the “Deed”), conveying the Real Property to Buyer subject to the following “Permitted Encumbrances”:

(a) Real estate, personal property and ad valorem taxes and assessments for the year of the Closing and subsequent years; and

(b) Prior restrictions, reservations, and prohibitions imposed by governmental entities, including, without limitation, all applicable building, zoning, land use, health, safety, and environmental ordinances, resolutions, and regulations; and any and all land conveyed, used, or deeded for road purposes; and

(c) Any matter deemed to be a Permitted Encumbrance pursuant to Section 5 below; and

(d) All matters created by, through, or under Buyer. 

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5. Title.

(a) Buyer has obtained, at Buyer’s expense, a title report in the form of an ALTA owner’s title insurance commitment with respect to and insuring the Real Property from the Title Company pursuant to which the Title Company shall agree to insure title. 

(b) Within ninety (90) days after the Effective Date (the “Inspection Completion Date”), Buyer shall have the right to obtain at the Buyer’s expense an up-to-date survey on the Land dated no earlier than on the Effective Date (“Survey”) which Survey shall be certified to Buyer and the Title Company under seal by surveyor licensed by the State of Missouri showing the description of the Real Property and calculation of the acreage and square footage of the Real Property and overlay all easements, rights of way, improvements, fences, utilities, poles, water areas, and all other matters affecting title to the Real Property as of the effective date of the title commitment.  The Buyer shall have ninety  (90) days from the Effective Date to review the Survey for any issues. 

(c) Buyer shall have until forty-five (45) days from the Effective Date in which to examine the title work (“Title Review Period”).  If title, as shown in the title commitment, is found to be subject to any matters other than the Permitted Exceptions, Buyer shall, within said Title Review Period, notify Seller in writing, specifying the defects and the actions deemed necessary to cure the same (the “Objection Notice”).  Any matters which Buyer fails to timely object to by the end of the Title Review Period shall be deemed waived and shall be deemed a Permitted Encumbrance.  On or before a date which is three (3) business days following Seller’s receipt of the Objection Notice, Seller shall notify Buyer in writing of which matters, if any, reflected in the Objection Notice that Seller elects to seek to cure (the “Agreed Title Defects”).  In the event that there are any matters set forth in the Objection Notice which are not agreed as title defects, then Buyer’s sole and exclusive remedy shall be to terminate this Agreement by sending written notice to Seller on or before the Title Review Period, in which event the Title Company shall immediately return the Escrow Deposit to Buyer, and the parties shall thereafter be released of all further obligations each to the other under this Agreement.  In the event the Buyer does not elect to terminate this Agreement, then the defects are deemed waived. 

(d) Seller shall use its good faith efforts to cause the Agreed Title Defects to be cured five (5) days before Closing, but shall not be obligated to bring any action or proceeding or expend any funds to undertake any such cure; provided, however, Seller shall be obligated to satisfy and discharge, on or before Closing, any mortgages or monetary liens encumbering the Real Property, caused directly by Seller, and which can be removed and/or satisfied at Closing by the payment of a known and liquidated sum of money under $10,000.00 in the aggregate.  Before Closing, Buyer may have the title commitment updated with respect to the Real Property, and if such update should reveal any matter materially and adversely affecting the marketability of title to the Real Property arising after the effective date of the title commitment, other than the Permitted Encumbrances, or if Seller has not cured the Agreed Title Defects, Buyer shall notify Seller of same and Seller shall have until five (5) days before Closing to cure any such matters.  If Seller is unable to cure such matters on or prior to five (5) days before Closing, Buyer shall have the option to either:  (i) accept title to the Real Property subject to such additional matters and the Agreed Title Defects, as applicable, as additional Permitted Encumbrances and without diminution

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of the Purchase Price; or (ii) terminate this Agreement by written notice to Seller wherein this Agreement shall terminate and the Escrow Deposit returned to Buyer.

6. Due Diligence; Inspections. 

(a) The parties hereto acknowledge that Buyer, as of the Effective Date, has not yet had an opportunity to fully review, examine, and evaluate all aspects of the Subject Property.  If, on or prior to 5:00 p.m., on the Inspection Completion Date, Buyer determines, in its sole discretion that the Subject Property, or any part thereof, is unsatisfactory to the Buyer for any reason, Buyer shall have the right to give notice to Seller electing to terminate the Agreement, provided such notice is delivered by 5:00 p.m. on the Inspection Completion Date.  In the event such notice is timely delivered by the Buyer to the Seller, then the Escrow Deposit shall be released to Seller and this Agreement shall terminate and neither party shall have any further rights or obligations under this Agreement.  If such notice is not given by the Inspection Completion Date, then the condition set forth herein shall be deemed satisfied and the remainder of the Agreement shall remain in full force and effect according to its terms. 

(b) Seller shall timely make available to Buyer copies of any documentation reasonably requested by Buyer that is in Seller’s possession or control with respect to the Subject Property, including, but not limited to, any survey, report, environmental audit, approval, appraisal, permit, license, construction plans or specifications, title work, leases, depository information (but only as it pertains to the Branson Branch) and any other documents or instruments related to the Subject Property (collectively, “Inspection Materials”). 

(c) Buyer acknowledges that all Inspection Materials are proprietary and confidential in nature and will be delivered to Buyer solely to assist Buyer in determining the feasibility of purchasing the Subject Property.  Accordingly, as a material inducement to Seller to deliver the Inspection Materials to Buyer, Buyer hereby covenants and agrees that neither it nor any of its representatives shall, at any time, directly or indirectly, sell, transfer, publish, divulge, display, reveal, or communicate any of the Inspection Materials or the information contained therein, to any person whatsoever and Buyer continues to be bound by the Confidentiality Agreement signed by the parties on April 9, 2018. 

(d) Within five (5) days after the termination of this Agreement for any reason, Buyer shall, as instructed by Seller, either (i) return and deliver to Seller all of the Inspection Materials or (ii) destroy the same and verify such to the Seller. 

(e) Buyer hereby acknowledges, covenants, and agrees that any survey, report, environmental audit, approval, appraisal, permit, license, plans or specifications, and any other documents or instruments related to the Subject  Property prepared by Seller or any third party and provided to Buyer pursuant to this Agreement are provided without representation or warranty of any kind whatsoever, either express or implied, and is without recourse to Seller with respect to the accuracy of any information or statements contained therein. 

(f) In conducting any inspections, investigations, tests, or other examinations of, or related to, the Subject Property, Buyer and its agents and contractors shall:  (i) not undertake any such inspections, investigations, tests, or other examinations on the premises of the Seller, or

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any portion thereof, unless the same are first coordinated and approved by Seller, and in the presence of Seller or its agents or representatives or Clint Caffey; (ii) not disturb any Seller customers, or interfere with the use and quiet enjoyment of the Subject Property as a branch banking facility; (iii) not interfere with the operation and maintenance of the Subject Property, or any part thereof; (iv) not damage any part of the Subject Property or any other personal property located on or used in connection with the operation and maintenance of the Subject Property; (v) not injure or otherwise cause bodily harm to Seller or its agents, representatives, contractors, employees, contractors, guests, or invitees or employees; (vi) promptly pay, when due, the costs of all tests, investigations, and examinations undertaken by Buyer with respect to the Subject Property; (vii) not permit any liens to be placed upon the Subject Property or any portion thereof; and (viii) fully restore the Subject Property to the condition it was in prior to the performance of any of Buyer’s inspections, tests or examinations. 

(g) Buyer agrees to hold the Seller and its agents and assigns harmless from any loss or claim while conducting any inspection, test or examinations on the Subject Property. 

7. The Closing.  The closing hereunder (“Closing”) shall take place through the use of the Title Company on a date mutually agreed upon in writing, by the parties, but in any case, on or before March 11, 2019 (the “Closing Date”), preferably on a Friday; provided that such date is following the receipt of all approvals from any regulatory authorities having jurisdiction over the transaction contemplated hereby, and the satisfaction of all conditions and the lapse of all applicable waiting periods associated therewith.  Buyer and Seller each agree that they will use their commercially reasonable efforts for the Closing to take place on Friday, February 8, 2019. Buyer and Seller agree that the Closing does not need to occur simultaneously with data processing conversion.

8. Conditions Precedent to Closing.    

(a) Conditions to Buyer’s Obligations.  The following shall be conditions precedent to the Buyer’s obligation to close the transactions contemplated hereby: 

(i) The receipt of all required regulatory approvals (state and federal) and the expiration of any applicable waiting period;

(ii) No material adverse change upon the Subject Property between the date of this Agreement and the Closing Date;

(iii) Buyer has received all documents required to be received from Seller on or prior to the Closing Date;

(iv) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the purchase and assumption transaction contemplated by this Agreement is in effect and no proceeding by any bank regulatory authority or other governmental agency seeking any of the foregoing is pending.  There has not been any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the

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purchase and assumption transaction contemplated by this Agreement which makes the consummation of such transaction illegal;

(v) All Seller’s representations and warranties shall be true and correct in all material respects as of the date hereof and as of the time of Closing as if made anew at such times; and

(vi) Seller shall have performed in all material respects all of the covenants and agreements contain in this Agreement that require performance at or prior to Closing.

(b) Conditions to Seller’s Obligations.  The following shall be conditions precedent to the Seller’s obligation to close the transactions contemplated here:

(i) The receipt of all required regulatory approvals (state and federal) and the expiration of any applicable waiting period;

(ii) Seller has received all documents required to be received from Buyer on or prior to the Closing Date;

(iii) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the purchase and assumption transaction contemplated by this Agreement is in effect and no proceeding by any bank regulatory authority or other governmental agency seeking any of the foregoing is pending.  There has not been any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the purchase and assumption transaction contemplated by this Agreement which makes the consummation of such transaction illegal;

(iv) All Buyer’s representations and warranties shall be true and correct in all material respects as of the date hereof and as of the time of Closing as if made anew at such times; and

(v) Buyer shall have performed in all material respects all of the covenants and agreements contain in this Agreement that require performance at or prior to Closing.

9. Representations and Warranties of Seller.  Seller represents and warrants to Buyer that the following representations and warranties are true and correct in all material respects as of the date of this Agreement and as of the Closing Date, except as set forth in Seller’s disclosure schedules attached hereto.  All references to “to the best of Seller’s knowledge” (or similar phrases) shall be deemed to mean the actual knowledge of Clint Caffey or David Turner (as opposed to imputed or constructive knowledge). The disclosure schedule shall be arranged in numbered sections contained in this Section 9 and any information disclosed therein under any section of the disclosure schedule shall be deemed disclosed and incorporated into any other section of the disclosure schedule as and to the extent it is reasonably determined on the face of the disclosure contained therein that such deemed disclosure and incorporation would be appropriate.

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(a) Seller has the full right, power, and authority to own, operate and convey the Subject Property and fully perform this Agreement, and does not need any further consents, joinders, or other authorization from any governmental entities except from the applicable regulatory authorities to execute, deliver, and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. 

(b) Seller is a Missouri state-charted bank, duly organized, validly existing, and in good standing under the laws of the State of Missouri. 

(c) The execution and delivery by Seller of this Agreement, and the performance by Seller of all of its obligations hereunder, have been duly and validly authorized and approved by Seller pursuant to all applicable laws, and no other company action on the part of Seller is necessary to execute this Agreement and consummate the transaction contemplated herein.  This Agreement has been duly and validly executed by Seller and (assuming due authorization, execution and delivery by Buyer) constitutes the valid and legally binding agreement of Seller, enforceable against Seller in accordance with its terms, subject to bankruptcy insolvency, reorganization or other similar law affecting the enforcement of creditors’ rights generally and to general principles of equity, whether considered in a proceeding at law or in equity.  The execution and delivery of this Agreement by Seller and the consummation by Seller of the transactions contemplated hereby, subject to the fulfillment of the terms and compliance with the provisions hereof and all regulatory approvals, will not conflict with, or result in the breach of, or a default with respect to any of the terms, conditions, or provisions of any laws applicable to Seller, or of the charter or by-laws of Seller, or any agreement or other instrument to which Seller is a party or is subject, or by which Seller or any of its properties or any item of the Subject Property is bound, which breach would reasonably be expected to have a material adverse effect on the business or properties of the Branson Branch after the Closing Date. 

(d) To the best of Seller’s knowledge, there is no currently pending or threatened suit, action, claim or proceeding against Seller, nor has Seller received any written notification relating to the Subject Property, or any part thereof, relating to a federal, state, county, or municipal department, commission, board, bureau or agency or other governmental or administrative agency or entity, including, but not limited to, those matters and subjects described in subparagraph (f) of paragraph 10 of this Agreement.

(e) Seller has received no actual written notice that there is any pending condemnation proceeding with respect to the Real Property or the Improvements, or any part thereof. 

(f) To the best of Seller’s knowledge, there are no claims, pending or threatened as to any transactions as to the Deposits or any threats as to cyber security.

(g) Seller hereby represents that it has good and marketable title for the Subject Property, subject only to Permitted Encumbrances and those exceptions accepted or waiver by Buyer.  Other than as specifically set forth otherwise herein, Seller specifically disclaims and makes no other warranties or representations as to the environmental condition of the Real Property, the Subject Property or to any other fact concerning the Subject Property.  Except as set forth in subparagraph (e) of paragraph 1, there are no leases, subleases, licenses or similar

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agreements permitting any party to lease, use or occupy space in or on the Real Property or the Improvements.

(h) There are no other existing claims or agreements for brokerage commissions, finders’ fees, or similar compensation to any person or party engaged by or otherwise representing Seller in connection with the purchase and assumption transaction contemplated by this Agreement.

(i) The Deposits are insured by the FDIC to the fullest extent permitted under federal law.  The Deposits are (i) in all respects genuine and enforceable obligations of Seller and have been acquired and maintained in material compliance with all applicable laws, including, but not limited to, the Truth in Savings Act and regulations promulgated thereunder; (ii) were acquired in the ordinary course of Seller’s business; and, to the best of Seller’s knowledge, (iii) are not subject to any claims that are superior to the rights of persons shown on the records delivered to Buyer indicating the owners of the Deposits, other than claims against such Deposit owners, such as state and federal tax liens, garnishments and other judgment claims, which have matured or may mature into claims against the respective Deposits.  Seller has, for all completed calendar years prior to Closing, has duly and timely sent to each holder of a Deposit all required I.R.S. Forms 1099 and other tax information reporting forms and similar notifications required of Seller.

(j) A true and complete copy of each contract to be assigned to and assumed by Buyer is listed in Exhibit “C”.  To the best of Seller’s knowledge, each contract is valid and enforceable according to its terms.  Seller is not in material default under any contact to be assigned and assumed and, to the best of Seller’s knowledge, there has been no event which, with notice or the lapse of time, or both, would constitute a material default under any contract to be assigned by Seller and assumed by Buyer, including, but not limited to, the consummation of the transactions contemplated by this Agreement.

(k) Although Buyer is purchasing the Subject Property and each item thereof in an “as is” and “where is” and “with all faults” basis, to the best of Seller’s knowledge, Seller has not received any written notification that any software it is using has not been used without a proper license for the same.

(l) The representations and warranties of the Seller contained in this Section 9 as qualified by the disclosure schedules (and any updates thereto) constitute the sole and exclusive representations and warranties of the Seller to the Buyer in connection with the transactions contemplated hereby, and all other representations and warranties of any kind or nature expressed or implied (including, but not limited to, any relating to the future or historical financial condition, results of operations, prospects, business, assets or liabilities of the Seller), whether made by the Seller or any of its affiliates or any of their respective managers, members, partners, officers, directors, employees, advisors, consultants, agents or representatives, are specifically disclaimed by the Seller.  The Seller does not make or provide any warranty or representation, express or implied, as to the quality, merchantability, fitness for a particular purpose, conformity to samples, or condition of the business’s assets or any part thereof.

10. Representations and Warranties of Buyer.  Buyer represents and warrants to Seller as of the date of this Agreement and as of the Closing Date as follows: 

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(a) Buyer has the full right, power, and authority to enter into and perform this Agreement and to purchase the Subject Property, and does not need any further consents, joinders, or other authorizations from any governmental entity other than its regulators to execute, deliver and perform its obligations under this Agreement, and to consummate the transactions contemplated hereby. 

(b) Buyer is a Missouri state-chartered bank, duly organized, validly existing, and in good standing under the laws of the State of Missouri. 

(c) The execution and delivery by Buyer of this Agreement, and the performance by Buyer of all its obligations hereunder, have been duly and validly authorized and approved by Buyer pursuant to all applicable laws and no other action on the part of Buyer is necessary to execute this Agreement and consummate the transactions contemplated herein.  This Agreement and each of the other documents, instruments, and agreements executed by Buyer in connection herewith, have been duly and validly executed by Buyer and constitute the valid and legally binding agreements of Buyer, enforceable against Seller in accordance with their respective terms. 

(d) To the best of Buyer’s knowledge, there is no currently pending or threatened suit, action, claim, or proceeding against Buyer or any of its affiliates affecting the ability of Buyer to carry out this Agreement, or any of the transactions contemplated hereby.  

(e) Since June 30, 2018, there has not occurred any material adverse change in the financial condition, business, prospects or affairs of Buyer, and Buyer has paid all of the debts and obligations in connection with the operation of its business as they become due (except those, if any, contested in good faith). 

(f) The Purchase Price reflects that the Subject Property is being purchased by Buyer on an “as is,” “where is” and “with all faults” basis and that it has conducted to its satisfaction an independent investigation and verification of the financial condition, results of operations, assets, liabilities, properties and projected operations of Seller and the Branson Branch, and, in making its determination to proceed with the transactions contemplated by this Agreement, Buyer has relied solely on the results of its own independent investigation and verification and the representations and warranties of Seller expressly and specifically set forth in Section 9 as qualified by the disclosure schedules (and any updates thereto).  Seller does not make or provide, and Buyer hereby waives, any warranty or representation, express or implied, as to (i) the quality, merchantability, fitness for a particular purpose, conformity to samples, or condition of the Subject Property or any part thereof, (ii) any applicable building, zoning or fire laws or regulations or with respect to compliance therewith or with respect to the existence of or compliance with any required permits, if any, of any governmental agency; (iii) the availability or existence of any water, sewer or utilities, any rights thereto, or any water, sewer or utility districts; (iv) access to any public or private sanitary sewer system; (v) the habitability, marketability, or profitability of the property; (vi) the manner or quality of the construction or materials, if any, incorporated into the Subject Property; (vii) any misstatements or inaccuracies contained in the property materials; or (viii) the presence of any hazardous substances in any Improvements on the Subject Property, including, without limitation, asbestos or formaldehyde, or the presence of any environmentally hazardous wastes or materials on or under the Subject Property.  Without limiting the generality of the

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foregoing, Buyer acknowledges that Seller shall have no liability to Buyer with respect to the condition of the Subject Property under common law, or any federal, state or local law or regulation, including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended, 42 U.S.C.A. Sections 9601 et. seq., the Resource Conservation and Recovery Act, as Amended, 42 U.S.C. Section 6901, et. seq; the Clean Air Act, as Amended, 42 U.S.C. Section 7401, et. seq; the Federal Water Pollution Control Act, as Amended, 33 U.S.C. Section 1251, et. seq; the Toxic Substances Control Act, as Amended, 15 U.S.C. Section 9601, et. seq; the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et. seq; the Safe Drinking Water Act, 42 U.S.C. Section 300F, et. seq; and all comparable state and local laws, and any common law (including, without limitation, common law that may impose strict liability) that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any hazardous substance.  BUYER SPECIFICALLY ACKNOWLEDGES AND AGREES THAT, OTHER THAN THE REPRESENTATIONS SET FORTH IN SECTION 9, NEITHER SELLER NOR ANY OTHER PERSON (INCLUDING, ANY MEMBER, MANAGER, OFFICER, DIRECTOR, EMPLOYEE OR AGENT OF ANY OF THE FOREGOING, WHETHER IN ANY INDIVIDUAL, CORPORATE OR ANY OTHER CAPACITY) IS MAKING, AND BUYER IS NOT RELYING ON, ANY REPRESENTATIONS, WARRANTIES, OR OTHER STATEMENTS OF ANY KIND WHATSOEVER, WHETHER ORAL OR WRITTEN, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, AS TO ANY MATTER CONCERNING SELLER, THE BRANSON BRANCH, THE SUBJECT PROPERTY, THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY, OR THE ACCURACY OR COMPLETENESS OF ANY INFORMATION PROVIDED TO (OR OTHERWISE ACQUIRED BY) BUYER OR ANY OF THE BUYER’S REPRESENTATIVES.

(g) In connection with the investigation by Buyer of the Seller and the Branson Branch,  Buyer has received or may receive from Seller certain projections, forward looking statements and other forecasts.  Buyer acknowledges that there are uncertainties inherent in attempting to make such projections, forward looking statements and other forecasts, that Buyer is familiar with such uncertainties, that Buyer is taking full responsibility for making their own evaluation of the adequacy and accuracy of all projections, forward looking statements and other forecasts so furnished to it (including the reasonableness of the assumptions underlying such projections, forward looking statements and other forecasts), and that neither Seller nor any of its respective affiliates or any of its respective managers, members, partners, officers, directors, employees, advisors, consultants, agents or representatives, whether in an individual, corporate or any other capacity, will have or be subject to any liability or indemnification obligation to Buyer or any other person resulting from (nor shall Buyer have any claim with respect to) the distribution to Buyer, or Buyer’s use of, or reliance on, any information, documents, projections, forecasts or other material made available to Buyer in certain “data rooms,” confidential information memoranda or management presentations in expectation of, or in connection with, the transactions contemplated by this Agreement, regardless of the legal theory under which such liability or obligation may be sought to be imposed, whether sounding in contract or tort, or whether at law or in equity, or otherwise.

(h) There are no other existing claims or agreements for brokerage commissions, finders’ fees, or similar compensation to any person or party engaged by or

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otherwise representing Buyer in connection with the purchase and assumption transaction contemplated by this Agreement.

(i) Buyer does not have any knowledge that any of the representations and warranties of the Seller in this Agreement are not true and correct in all material respects, and does not have any knowledge of any material errors in, or omissions from, the disclosure schedules.

(j) The execution and delivery of this Agreement by Buyer and the consummation by Buyer of the transactions contemplated hereby, subject to the fulfillment of the terms and compliance with the provisions hereof and all regulatory approvals, will not conflict with, or result in the breach of, or a default with respect to any of the terms, conditions, or provisions of any laws applicable to Buyer, or of the charter or by-laws of Buyer, or any agreement or other instrument to which Buyer is a party or is subject.

11. Covenants of the Parties Prior to Closing. 

(a) Conduct of Seller Pending Closing.  During the period from the Effective Date until the Closing Date, the Seller hereby covenants and agrees to continue to conduct the business of the Seller at the Branson Branch in the ordinary course of business and consistent with past practice.  Seller shall maintain its present insurance coverage as it relates to the Subject Property through the Closing Date.

(b) Notice of Developments.  Seller shall give Buyer prompt written notice of any development that is materially adverse to the business, operations, properties or assets of the Branson Branch. 

(c) No Property Changes.  From and after the Effective Date, Seller will refrain from making any material changes to the Real Property; knowingly creating or incurring or permitting to exist any material mortgage, lien, pledge or other matter in any way affecting the Real Property, or the title thereof, except for matters to be paid off by Seller at Closing; or committing any waste or nuisance on the Real Property. 

(d) Regulatory Approvals.    Buyer will file, on a date mutually agreed by the parties hereto, but no later than thirty (30) days after the Effective Date, all regulatory applications required in order to consummate the purchase and assumption transaction contemplated by this Agreement, including, without limitation, the necessary applications for the approval of the Missouri Division of Finance and the Federal Deposit Insurance Corporation. Buyer will provide to Seller a copy of the non-confidential portions of such applications and correspondence pertaining thereto contemporaneously with the filing or receipt of same. Buyer will timely file all documents required to obtain all necessary permits and approvals required to carry out the purchase and assumption transaction contemplated by this Agreement, will pay all expenses incident thereto and will use its best efforts to obtain such permits and approvals on a timely basis. Buyer will provide Seller, as soon as is reasonable, copies of correspondence between Buyer and the pertinent regulatory agencies relating to such applications.

(e) Consummation of the Agreement. The parties will use their commercially reasonable efforts to perform and fulfill all conditions and obligations on its part to be performed

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or fulfilled under this Agreement and to effect the purchase and assumption transaction contemplated by this Agreement in accordance with the terms and conditions hereof.

(f) Employees.    On the Closing Date, Seller will terminate the employment of each employee of Seller working at, or exclusively with the operations of the Branson Branch of Seller, and compensate all currently to the date of Closing, including all accrued wages and vacation time. Buyer has the opportunity, but not the obligation, to hire any or all of such employees from and after the Closing Date.  Seller shall give Buyer a list of its employees working at, or exclusively with the operations of the Branson Branch within five (5) days after the Effective Date hereof, which list shall include all information Seller has with respect each employee, including compensation, bonuses, benefits and terms of employment.  Seller and Buyer will conduct a joint meeting with the employees as soon as is reasonably practicable after the Effective Date to notify the employees of this signing of this Agreement and Buyer’s intent, but not obligation, to re-employ the employees.

(g) Damage or Destruction of Personal or Real Property.  If prior to Closing, there is any damage to or destruction or theft of any item of the Subject Property, or either Buyer or Seller receives or obtains written notice of any proceeding that affects the Subject Property, or any item thereof, then Buyer shall be entitled to and will be assigned at Closing (i) all insurance proceeds payable with respect to the damage, destruction or theft of the item of Subject Property, with Seller paying over to Buyer any deductible under the applicable policy, and (ii) any award of payment received in connection with any proceeding concerning the Subject Property, including any condemnation or eminent domain proceeding.

12. Prorations.

(a) Prorations. The parties intend that Seller will operate for its own account the business conducted at the Branson Branch until the close of business on the Closing Date, and that Buyer will operate such business for its own account on and after the Closing Date.  Thus, except as otherwise specifically provided in this Agreement, items of expense directly attributable to the operation of the Branson Branch will be prorated as of the close of business on the Closing Date, whether or not such adjustment would normally be made as of such time, including, without limitation, (i) telephone, electric, gas, water, and other utility services (to the extent it is not possible to transfer such services into the name of Buyer as of the Closing Date), (ii) taxes associated with the Real Property and Tangible Personal Property, (iii) assessments (including, without limitation, assessments attributable to FDIC deposit insurance), (iv) payments due on Operating Contracts, and (v) similar expenses related to the Subject Property transferred hereunder.  To the extent any such item has been prepaid by Seller for a period extending beyond the Closing Date, there will be a proportionate adjustment in favor of Seller.

(b) Settlement Prorations.  Seller and Buyer shall cooperate with one another in good faith prior to the Closing Date to prepare a mutually acceptable schedule of all of the prorations and adjustments contemplated in this Section.   

13. Closing Costs.    

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(a) Seller Costs.  Seller shall be responsible for the following specific costs associated with this transaction:  (i) the cost of obtaining and preparing any corrective or curative title instruments; and (ii) one half of the Title Company’s fee for acting as a closing agent.

(b) Buyer Costs.  Except for the specific costs which Seller is responsible for under this Section above, and except for its own attorneys’ fees, which will be handled as set forth in Section 13(c) below all other costs of any nature and kind related to the transaction shall be the sole responsibility of Buyer.

(c) Attorneys’ Fees.  Except as otherwise specifically provided herein, the parties shall each bear their own respective attorneys’ fees. 

14. Documents to be Delivered. 

(a) At the Closing, after approval of all regulatory authorities necessary to Close and simultaneously with the payment of the Purchase Price, Seller shall deliver to Buyer the following, all in the form and substance reasonably acceptable to Seller and Buyer:  (i) the Purchase Price adjusted for all prorations, credits and adjustments, of which the Escrow Deposit will be accounted for, (ii) the executed Deed for the Land, fixtures and Improvements; (iii) standard no-lien affidavit in form required to delete the standard pre-printed exceptions to the Title Policy; (iv) an executed bill of sale for the Improvements, Deposits and the Tangible Personal Property; (v) an executed assignment and assumption of the lease with Lifestyle Contractors, Deposits and any Operating Contracts; (vi) a “FIRPTA Affidavit” establishing the Seller is not a “foreign corporation”; (vii) authority documentation reasonably requested by Buyer or reasonably required by the Title Company to evidence Seller’s authority to close the transactions contemplated by this Agreement; (viii) such other documents and instruments contemplated by this Agreement and reasonably requested by Buyer, and (ix) any manuals, combinations, keys, and alarm codes.

(b) At the Closing, Buyer shall execute and deliver, as applicable, to Seller the following, all in a form and substance reasonably acceptable to Seller and Buyer:  (i) an assignment and assumption of the lease with Lifestyle Contractors, Deposits and Operating Contracts; (ii) authority documentation reasonably requested by Seller or the Title Company to evidence Buyer’s authority to close the transactions contemplated by this Agreement; and (iii) such other documents and instruments contemplated by this Agreement and reasonably requested by Seller. 

(c) At the Closing, Seller and Buyer shall mutually execute and deliver to each other a closing statement in customary form, and such other instruments required by this Agreement. 

15. Indemnification.  

(a) Indemnification of Buyer. Seller will indemnify, hold harmless and defend Buyer (and each of Buyer’s directors, officers, subsidiaries, successors and assigns, and affiliates) (collectively, the “Buyer’s Indemnified Parties”) from and against any and all damage, loss, liability, cost, claim, or expense (including reasonable legal fees and expenses) incurred or suffered by Buyer’s Indemnified Parties (i) arising out of or resulting from the breach or inaccuracy of or failure to comply with any representation, warranty or covenant made by the Seller in this

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Agreement which survives the Closing Date as specified in Section 18(b) hereof; (ii) arising out of or resulting from or based upon any Excluded Personal Property; or (iii) arising out of or resulting from Seller’s operation of the Branson Branch before the Closing Date.

(b) Indemnification of Seller.   Buyer will indemnify, hold harmless and defend Seller (and Seller’s directors, officers, subsidiaries, successors and assigns, and affiliates) (collectively, the “Seller’s Indemnified Parties”) from and against any and all damage, loss, liability, cost, claim, or expense (including reasonable legal fees and expenses) incurred or suffered by Seller’s Indemnified Parties (i) arising out of or resulting from the breach or inaccuracy of or failure to comply with any representation, warranty or covenant made by Buyer in this Agreement which survives the Closing Date as specified in Section 18(b) hereof; (ii) by reason of any failure of the Buyer to pay, honor, perform or otherwise discharge the liabilities assumed related to the Subject Property on or after the Closing Date; or (iii) arising out of or resulting from Buyer’s operation of the Branson Branch on or after the Closing Date.

(c) Procedure and Limitations. No indemnification will be provided under Sections 15(a) or 15(b) unless the amount of any claim or aggregate claims exceeds $25,000, and then only to the extent of such excess.  Any indemnified party will give the indemnitor prompt notice of any claim hereunder; provided, the failure to give such notice will not affect the right to indemnification hereunder unless the indemnitor was materially prejudiced by such failure.  The indemnitor will have the right to defend at its own expense any claim for which the indemnitor is liable hereunder, but no settlement or compromise of such claim may be effected which materially affects the indemnified party without its consent thereto, which will not be unreasonably withheld.  The indemnified party will cooperate with the indemnitor in the defense of any such claims and may participate therein with its own counsel at its own expense.

16. Termination or Abandonment. 

(a) Mutual Agreement.  This Agreement may be terminated by the mutual written agreement of the parties at any time prior to the Closing Date.

(b) Breaches of Representations or Agreements.  In the event that there is a material breach in any of the representations and warranties or agreements of Seller or Buyer, which breach is not cured within 20 days after notice to cure such breach is given to the breaching party by the non-breaching party, then the non-breaching party may terminate and cancel this Agreement by providing written notice of such action to the other party hereto.

(c) Failure of Conditions.  In the event that any of the conditions to the obligations of either party are not satisfied or waived on or prior to the Closing Date, and if any applicable cure period provided in Section 16(b) hereof has lapsed, then such party may terminate and cancel this Agreement by delivery of written notice of such action to the other party on such date.

(d) Denial of Regulatory Approval.  If any regulatory application filed pursuant to this Agreement should be finally denied or disapproved by the respective regulatory authority, then this Agreement thereupon will be deemed terminated and canceled; provided, however, that a request for additional information from, or undertakings by, the applicant, as a condition for

17

approval, will not be deemed to be a denial or disapproval so long as the applicant diligently provides the requested information or agrees to the requested undertaking.  If any regulatory agency requests that an application be withdrawn and the applicant, in consultation with the other party to this Agreement, is unable to resolve the concern or objections of such agency, the applicant will be deemed to have failed to obtain regulatory approval.  In the event an application is denied but is subject to an appeal, petition for review, or similar such act on the part of the applicant (hereinafter referred to as the “appeal”) then the application will be deemed denied unless the applicant and the other party to this Agreement agree in writing to appeal the denial and the applicant prepares and timely files such appeal and continues the appellate process for purposes of obtaining the necessary approval, provided, however, that Seller will have the right, at its election, to terminate this Agreement if such appeal remains unresolved for a period exceeding 30 days.

(e) Automatic Termination.  Either Buyer or Seller may, by written notice to the other, terminate this Agreement if the Closing has not occurred on or before March 11, 2019 for reasons other than the failure of the party seeking to terminate to fully comply with its obligations hereunder; provided that such date will be extended if all required regulatory approvals have been obtained and the parties are waiting for the expiration of all regulatory waiting periods to close the transaction, and further provided, that such date may be extended by the mutual agreement of Seller and Buyer on or prior to the date this Agreement would otherwise terminate.

(f) Termination by Buyer. In addition to methods described in this paragraph 16, Buyer may terminate this Agreement as provided in Section 5 or Section 6.

(g) Liabilities.  In the event that this Agreement is terminated pursuant to the provisions of Section 16 hereof, no party hereto will have any liability to any other party for costs, expenses, damages or otherwise; provided, that, notwithstanding the foregoing, in the event that this Agreement is terminated pursuant to Section 16(b) hereof on account of a willful breach of any of the representations and warranties set forth herein, or any breach of any of the agreements set forth herein, then the non-breaching party will be entitled to recover its damages from the breaching party.

17. Transitional and Post-Closing Matters. 

(a) Notification to Branson Branch Customers. Buyer will:

(i) jointly with Seller, as soon as practicable after the execution and delivery of this Agreement on a date as mutually agreed by Buyer and Seller, prepare and mail to each depositor whose Deposit is to be assumed by Buyer, a letter, in form and substance mutually satisfactory to the parties, informing such depositor of the nature of such transaction and the continuing availability of services to be provided by Buyer in the Branson Branch on and after the Closing Date; and

(ii) at its own cost and expense, cause to be printed deposit tickets, checks, withdrawal orders and all other requisite banking transactional forms, and ATM, check and debit cards for each account which constitutes a Deposit and mail such deposit tickets, checks, withdrawal orders and other forms and ATM, check

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and debit cards to each customer having such an account so as to be received by such customer on or within three (3) days prior to the Closing Date, each such document to be encoded with Buyer’s identification numbers and to be accompanied by Buyer’s letter, in form and substance reasonably satisfactory to Seller, advising that, from and after the Closing Date, such newly issued deposit tickets, checks, withdrawal orders and other forms and ATM, check and debit cards are to be used instead of the corresponding existing documents of Seller with respect to the customer’s Deposit account maintained at the Branson Branch, and that any such existing documents of Seller are to be destroyed; and take any other actions required by law or regulation or by any court or regulatory authority to notify customers or depositors of the Branson Branch or residents of the communities in which the Branson Branch is located of the transfers and assumptions occurring pursuant to this Agreement.  The out-of-pocket cost of the mailings required by subsections (a) and (b) of this section will be borne by Buyer.

(b) Payment Instruments.  Following the Closing, Buyer agrees to pay in accordance with law all checks, drafts, and withdrawal orders (including ACH debits) which are properly drawn by depositors with respect to the Deposits assumed by Buyer, which are duly endorsed (or for which necessary endorsements are deemed supplied by applicable law) and otherwise properly payable, in light of credit balances and overdraft privileges, if any, applicable to such depositors, and presented to Buyer by mail, over its counters, or through the check-clearing system of the banking industry, and in all other respects to discharge, in the usual course of the banking business, the duties and obligations of Seller with respect to the balances due and owing to the depositors whose Deposits are assumed by Buyer.

(c) Statements.  Seller will issue statements to its customers which include all transactions with respect to the Deposits through the close of business on the Closing Date, and Buyer will issue statements for all transactions with respect to the Deposits thereafter.  Routine interest and service charge calculations will be processed by the Seller on such customer statements as of the close of business on the Closing Date.

(d) Limited Correspondent.  For a period of sixty (60) calendar days after the Closing Date, Seller will act as Buyer’s limited correspondent for the processing of checks, drafts and withdrawal orders drawn before or after the Closing on the draft, check or withdrawal order forms provided by Seller on Deposits assumed by Buyer hereunder.  For the 60-day period, Seller will use commercially reasonable efforts to transmit to Buyer via facsimile or by imaging, on a timely basis, a copy of each day’s checks, drafts and withdrawal orders, which are on draft, check or withdrawal order forms provided by Seller on Deposits assumed by Buyer hereunder.  Buyer will determine disposition of presented items and notify Seller of such disposition within three (3) hours of receipt of the copies of such items, if receipt occurs on a business day between the hours of 8:00 a.m. and 3:00 p.m., or by 10:00 a.m. the following business day if receipt does not occur on a business day between the hours of 8:00 a.m. and 3:00 p.m.  Items mistakenly routed or presented after the 60-day period will be returned.  Seller and Buyer will make arrangements to provide for the daily settlement through the Clearing Account (as defined below) with immediately available funds by Buyer of any such items honored by Seller pursuant to Buyer’s instructions.

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(e) Uncollected Items.  At Closing, Buyer will establish an account with Seller (the “Clearing Account”).  Buyer and Seller will settle daily through the Clearing Account the amount of all items included in the Deposits on the Closing Date which are returned to Seller after the Closing Date as uncollected; provided, that Seller will, upon Buyer’s making such payment, deliver each such item to Buyer and will assign to Buyer any and all rights which Seller may have or obtain in connection with such returned items.    To the extent that such a returned or uncollected item is not collected prior to the 180th day after the Closing Date, or such earlier date as may be agreed to in writing by the parties (the “Adjustment Payment Date”) as set forth in subparagraph (d) of paragraph 3) the amount of said uncollected items shall be included in the Adjustment Payment to be made from Seller to Buyer.  Buyer shall use its best and commercially reasonable efforts to collect such items.

(f) ACH.  For a period of ninety (90) days beginning on the Closing Date, Seller will use commercially reasonable efforts to transmit to Buyer information with respect to Automated Clearing House (“ACH”) originators effecting debits or credits to the accounts of the Deposit.  Buyer will use its best commercially reasonable efforts to notify all ACH originators effecting debits or credits to the accounts of the Deposit of the purchase and assumption transactions contemplated by this Agreement.  For a period of ninety (90) days beginning on the Closing Date, Seller will honor all ACH items related to accounts of Deposit which are mistakenly routed or presented to Seller.  Seller will make no charge to Buyer for honoring such items, and will use its commercially reasonable efforts to transmit to Buyer via facsimile or by imaging, by 11:00 a.m. or as soon as practicable thereafter, each day’s ACH data that is to be posted that day.  Items mistakenly routed or presented after the 90-day period will be returned to the presenting party.  Seller and Buyer will make arrangements to provide for the daily settlement through the Clearing Account with immediately available funds by Buyer of any ACH items honored by Seller.

(g) Deposits.  For a period of sixty (60) calendar days after the Closing Date, Seller will forward to Buyer as soon as reasonably possible any deposits received by Seller made with respect to Deposits.  Buyer will reimburse Seller upon demand for checks returned on payments forwarded by Seller to Buyer. 

(h) Access to Records.  Seller and Buyer mutually agree to maintain all records and other documents relating to the Subject Property for such periods as provided in Seller and Buyer’s respective record retention policies and required by applicable law, and to examine, inspect, copy and reproduce such records and other documents relating to such Subject Property as may be reasonably requested by the other party.  Seller shall provide the first $2,500.00 of cost of examination and photocopying at Seller’s customary rates without charge to Buyer.  Any charges for such examination and photocopying in excess of this amount will be charged to Buyer at a rate not greater than Seller’s  customary rates for similar requests by its customers.

(i) Information Reporting. With respect to the Deposits purchased and assumed by Buyer pursuant to this Agreement, Seller will be responsible for reporting to the customer and to the Internal Revenue Service (and any state or local taxing authority as required by law) all interest paid or earned by the customer prior to and including the Closing Date, and Buyer will be responsible for reporting to the customer and to the Internal Revenue Service (and any state or local taxing authority as required by law) all interest paid or earned by the customer after the Closing Date.

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(j) Transition.  From and after the date of this Agreement, Seller and Buyer agree to fully cooperate with and assist one another in connection with the transition and conversion of all customer accounts, files (including data processing files) and other information which are being purchased and assumed by Buyer pursuant to the terms hereof.  Additionally, each of the Buyer and Seller agree to provide each other, upon reasonable prior notice, with such information and data as is necessary to allow Seller and Buyer to comply with all tax, regulatory reporting, audit or other compliance obligations relating to the customers, employees and operations of the Branson Branch, and each of Seller and Buyer agree to timely take any and all action as required by law to comply with such tax, regulatory and/or reporting obligations.

18. Miscellaneous. 

(a) Notices. All notices, requests, demands or other communications provided for hereunder shall be addressed to the parties as follows:

As to Seller: With a copy to (which shall not constitute notice):	Mr. David Turner Hawthorn Bank CEO 132 E. High Street P.O. Box 688 Jefferson City, MO  65102 Nate Van Emon Stinson Leonard Street LLP 1201 Walnut Street, Suite 2900 Kansas City, MO  64106
As to Buyer:	Bill Jones 1501 State Highway 248 Branson, MO  65616 With a copy to: Lee Viorel Lowther & Johnson 901 E St Louis St #20 Springfield, MO 65806 And to: David L. Wieland Wieland & Condry, LLC 1548 E. Primrose Springfield, MO 65804

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Notice shall be in writing and shall be deemed delivered:  (i) if mailed by certified mail, return receipt requested, postage prepaid and properly addressed to the address above, then three (3) business days after deposit of same in a regularly maintained US Mail receptacle;  (ii) if mailed by Federal Express, UPS or other nationally recognized overnight courier service, next business day delivery, then one (1) business day after deposit of same in regularly maintained receptacle of such overnight courier; or (iii) if hand delivered, then upon hand delivery thereof. 

(b) Survival.  Subject to the limitations and other provisions of this Agreement, the representations and warranties herein shall survive the Closing and shall remain in full force and effect until the date that is twelve (12) months from the Closing.  None of the covenants or other agreements contained in this Agreement shall survive the Closing, other than those which by their terms contemplate performance after the Closing, and each such surviving covenant or other agreement shall survive the Closing for the period contemplated by its terms.

(c) Time is of the Essence.  The parties hereto agree that time is of the essence with respect to the performance of the obligations hereunder.  The parties agree that in the event that any date on which performance is to occur falls on a Saturday, Sunday or state or national holiday, then the time for such performance shall be extended until the next business day thereafter occurring. 

(d) Captions and Paragraph Headings; Gender.  Captions and Section headings contained in this Agreement are for convenience and reference only and in no way define, describe, extend or limit the scope or intent of this Agreement, nor the intent of any provision hereof.  All terms and words used in this Agreement regardless of the number and gender in which used, shall be deemed to include any other gender or number as the context or use thereof may require. 

(e) No Waiver.  No waiver of any provision of this Agreement shall be effective unless it is in writing, signed by the party against whom it is asserted and any such written waiver shall only be applicable to the specific instance to which it relates and shall not be deemed to be a continuing or future waiver. 

(f) Execution and Counterparts.  This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed and considered on and the same Agreement, and same shall become effective when counterparts have been signed by each party and each party has delivered its signed counterpart to the other party.  In the even that any signature is delivered by facsimile transmission or by e-mail deliver of a “.pdf” format file or other similar format file, such signature shall be deemed an original for all purposes and shall create a valid and binding obligation of the party executing same with the same force and effect as if such facsimile or “.pdf” signature page was an original thereof. 

(g) Binding Effect.  This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective heirs, personal representatives, successors and permitted assigns. 

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(h) Governing Law.  This Agreement shall be construed and interpreted according to the laws of the State of Missouri without giving effect to any choice or conflict of law provision or rule (whether of the State of Missouri or any other jurisdiction). 

(i) Venue.  ANY LEGAL SUIT, ACTION OR PROCEEDING ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY MAY BE INSTITUTED IN THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA OR THE COURTS OF THE STATE OF MISSOURI LOCATED IN THE CITY OF SPRINGFIELD AND COUNTY OF GREENE COUNTY, AND EACH PARTY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS IN ANY SUCH SUIT, ACTION OR PROCEEDING. SERVICE OF PROCESS, SUMMONS, NOTICE OR OTHER DOCUMENT BY MAIL TO SUCH PARTY’S ADDRESS SET FORTH HEREIN SHALL BE EFFECTIVE SERVICE OF PROCESS FOR ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT IN ANY SUCH COURT. THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY OBJECTION TO THE LAYING OF VENUE OF ANY SUIT, ACTION OR ANY PROCEEDING IN SUCH COURTS AND IRREVOCABLY WAIVE AND AGREE NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.

(j) Entire Agreement.  This Agreement, including the Exhibits attached hereto and the documents delivered pursuant hereto, sets forth all the promises, covenants, agreements, conditions and understandings between the parties hereto with respect to the subject matter hereof, and supersedes all prior or contemporaneous agreements, understandings, inducements or conditions, expressed or implied, oral or written, except as herein contained. 

(k) Invalid Provisions.  If any one of the provisions contained in this Agreement, for any reason, shall be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, and this Agreement shall be construed as if the invalid, illegal or unenforceable provision had never been contained herein. 

(l) Relationship.  Nothing contained in this Agreement shall constitute or be construed to be or create a partnership, joint venture or any other relationship between Seller and buyer other than the relationship of a buyer and seller of real property as set forth in this Agreement. 

(m) Modification.  This Agreement shall not be modified (and no purported modification thereof shall be effective) unless in writing and signed by both parties.

(n) Joint Preparation.  The preparation of this Agreement has been a joint effort of the parties and the resulting documents shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. 

(o) Exhibits.  The Exhibits attached hereto contain additional terms of this Agreement and are incorporated herein by reference. 

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written.

HAWTHORN BANK
By:	/s/ David T. Turner
	David T. Turner, CEO
BRANSON BANK
By:	/s/ Bill W. Jones
	Bill W. Jones, CEO

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EX-10.3.1

Exhibit 10.3.1

FIRST AMENDMENT TO

PURCHASE AND LIMITED ASSUMPTION AGREEMENT OF BRANCH

THIS   FIRST   AMENDMENT  TO  PURCHASEAND  LIMITEDASSUMPTION

AGREEMENT OF BRANCH (this "First Amendment") made and entered into as of this 15th day of January, 2019 by and between Hawthorn Bank, a Missouri state-chartered bank with its main office located in Jefferson City, Missouri ("Seller"), and Branson Bank, a Missouri state­ chartered bank with its main office located in Branson, Missouri ("Buyer").

RECITALS:

WHEREAS, Buyer and Seller entered into a Purchase and Limited Assumption Agreement of Branch on the 17th day of October, 2018 (hereinafter referred to as the "Agreement"), and

WHEREAS, Buyer and Seller desires to amend one part of said Agreement, while the balance of the Agreement remains in full force and effect as previously executed.

AGREEMENT:

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, each intending to be legally bound, do hereby agree as follows:

1. Extension of Inspection Completion Date. The "Inspection Completion Date," as defined in Section 5(b) of the Agreement, shall be extended to ninety-seven (97) days after the Effective Date.

2. Balance of Agreement Reaffirmed. Other than as amended in this First Amendment, the Agreement shall remain in full force and effect, and is hereby reaffirmed in its entirety.

3. Governing Law. This First Amendment shall be governed by the  laws of the  State of Missouri and applicable federal laws and regulations.

4. Counterparts. This First Amendment may be executed in any number of counterparts and the counterparts, taken together, shall be deemed to form one original instrument.

[signatures on following page]

IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment as of the day and year first above written.

HAWTHORN BANK

By	/s/	David T. Turner
		David T. Turner, CEO

BRANSON BANK

By	/s/	Bill W. Jones
		Bill W. Jones, CEO

EX-10.3.2

Exhibit 10.3.2

SECOND AMENDMENT TO

PURCHASE AND LIMITED ASSUMPTION AGREEMENT OF BRANCH

THIS SECOND AMENDMENT TO PURCHASE AND LIMITED ASSUMPTION

AGREEMENT OF BRANCH (this "Second Amendment") made and entered into as of this 22d day of January, 2019 by and between Hawthorn Bank, a Missouri state-chartered bank with its main office located in Jefferson City, Missouri ("Seller"), and Branson Bank, a Missouri state­ chartered bank with its main office located in Branson, Missouri ("Buyer").

RECITALS:

WHEREAS, Buyer and Seller entered into a Purchase and Limited Assumption Agreement of Branch on the 17th day of October, 2018 (hereinafter referred to as the "Agreement"), and

WHEREAS, Buyer and Seller entered into a First Amendment of Purchase and Limited Assumption Agreement on the 15th day of January, 2019 (hereinafter referred to as the "First Amendment"), and

WHEREAS, Buyer and Seller again desire to amend one part of said Agreement, while the balance of the Agreement, as amended by the First Amendment remains in full force and effect as previously executed.

AGREEMENT:

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, each intending to be legally bound, do hereby agree as follows:

1. Amendment   of  Purchase  Price.Section 3(a)(v) shall be amended to be

$2,992,260, and section 3(a)(vi) shall be amended to be zero.

2. Balance of Agreement Reaffirmed. Other than as amended in the First and Second Amendments, the Agreement shall remain in full force and effect, and is hereby reaffirmed in its entirety.

3. Governing Law. This Second Amendment shall be governed by the laws of the State of Missouri and applicable federal laws and regulations.

4. Counterparts. This Second Amendment may be executed in any number of counterparts and the counterparts, taken together, shall be deemed to form one original instrument.

[signatures on following page]

IN WTINESS WHEREOF, the parties hereto have duly executed this Second Amendment as of the day and year first above written.

HAWTHORN BANK

By	/s/	David T. Turner
		David T. Turner, CEO

BRANSON BANK

By	/s/	Bill W. Jones
		Bill W. Jones, CEO

EX-13

Exhibit 13

2018

ANNUAL REPORT

TO

SHAREHOLDERS

HAWTHORN BANCSHARES, INC.

Jefferson City, Missouri

March 14, 2019

Dear Shareholders:

Net income for 2018 was $10.7 million, or $1.78 per diluted share, compared to $3.4 million, or $0.56 per diluted share, for 2017.  Included in the 2017 net income is a $4.1 million charge, or $0.68 per diluted share, that includes $3.1 million resulting from application of the Tax Cuts and Jobs Act (the “Tax Act”) enacted in the fourth quarter of 2017, and $1.0 million resulting from tax planning initiatives implemented at year-end 2017.  The 2018 net income reflects a 43.5% increase in non-GAAP earnings per diluted common share excluding the impact of the Tax Act and tax planning initiatives.

Although a portion of the increased earnings for 2018 resulted from the lower tax rate enacted by the Tax Act and tax planning initiatives, our pre-tax income also increased by $1.1 million, or 9.4%.  Loan growth continued to contribute to these increased earnings as net loans increased $77.4 million, or 7.3%, from the last year-end leading to a $1.7 million increase in net interest income over the prior year.  This growth was achieved without a deterioration in loan quality as nonperforming loans to total loans decreased from 0.56% at December 31, 2017, to 0.49% at December 31, 2018.

Our 2018 net interest margin of 3.30% continues to be squeezed by increased interest expense during the recent rising interest rate environment although the last two quarters of 2018 have shown increases from the prior linked quarters compared to the 11 basis points decline year over year. Non-interest income of $9.3 million for 2018 increased $0.4 million, or 4.4%, from the prior year mostly due to increased service charge and bankcard income.  Non-interest expense of $40.3 million for 2018 was $1.5 million, or 3.9%, higher than the prior year. This increase over the prior year was mostly due to a $0.9 million increase in salaries and a $0.5 million increase in benefits.  One-time bonuses paid to staff in the first quarter 2018 as a result of the benefits accruing from the enactment of the Tax Act contributed $0.4 million of the salary increase as did annual cost of living increases averaging 3%.  The increase in benefits was due to higher medical and pension benefit costs.

As of December 31, 2018, we have been able to reduce our full-time equivalent head count by 45, or approximately 14%, since December 31, 2017, most of which occurred in the latter half of 2018.  As a result, the cost savings from this reduction will be more fully realized in 2019. We continue to pursue initiatives to improve our efficiency ratio including right sizing our branch network.  To this end, we closed  our Windsor branch during the fourth quarter 2018 and completed the sale of our Branson branch in February 2019. While these transactions are not expected to have a significant effect on loan or deposit volumes, they will further reduce head count and operating expenses.

Our capital levels at December 31, 2018 continue to exceed regulatory well capitalized thresholds with 9.55% of leverage capital and 13.28% of total risk-based capital.

Maintaining strong asset quality while achieving sustainable growth and improving our net interest margin are our primary initiatives.  As is evident from this year’s financial results, we have taken proactive steps to reduce costs and improve efficiencies, which should continue into the coming year.  I am committed to further improving earnings performance; sustaining sound and proper capital levels; and paying regular dividends.

Hawthorn's staff, management, Board of Directors and Advisory Board members are committed to the continued growth of our strong community bank and delivering long term value to our shareholders.  We appreciate your support and encourage you to continue to use Hawthorn Bank for your banking needs and request that you refer prospective customers to your bank.

Sincerely,

David T. Turner,

Chairman & Chief Executive Officer

A WORD CONCERNING 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 the Company, Hawthorn Bancshares, Inc., and its subsidiaries, 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 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 loan losses,

· costs or difficulties related to the integration of the 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, and

· changes may occur in the securities markets.

We have described under the caption Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, and in other reports filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. 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.

2

HAWTHORN BANCSHARES, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 $1.5 billion in assets at December 31, 2018, 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 (SBA) 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, 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 its banking subsidiary 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 Company's subsidiary bank is a full-service bank conducting 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 and industrial 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.

3

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for the Company as of and for each of the years in the five-years ended December 31, 2018. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company, including the related notes, presented elsewhere herein.

Income Statement Data
(In thousands, except per share data)	2018		2017		2016		2015		2014
Interest income	$	57,779	$	50,935	$	46,010	$	45,756	$	44,498
Interest expense		13,186		8,007		5,663		4,999		5,044
Net interest income		44,593		42,928		40,347		40,757		39,454
Provision for loan losses		1,475		1,765		1,425		250		—
Net interest income after provision for loan losses		43,118		41,163		38,922		40,507		39,454
Non-interest income		9,341		8,950		8,315		9,158		8,729
Investment securities gains, net		255		5		602		8		20
Non-interest expense		40,332		38,802		36,807		36,494		36,507
Income before income taxes		12,382		11,316		11,032		13,179		11,696
Income tax expense		1,668		7,902		3,750		4,580		4,042
Net income	$	10,714	$	3,414	$	7,282	$	8,599	$	7,654
Per Share Data
Basic earnings per share	$	1.78	$	0.56	$	1.19	$	1.41	$	1.25
Diluted earnings per share		1.78		0.56		1.19		1.41		1.25
Cash dividends paid on common stock		1,993		1,474		1,097		1,058		1,017
Common stock dividend		5,014		4,166		3,149		2,847		2,697
Book value per share		16.49		15.08		14.93		14.27		13.17
Market price per share		21.03		19.95		16.36		14.00		12.18
Basic weighted average shares of common stock outstanding		6,026,971		6,057,920		6,095,727		6,116,558		6,116,623
Diluted weighted average shares of common stock outstanding		6,032,013		6,063,417		6,095,727		6,116,558		6,116,623

4

(In thousands)	2018			2017			2016			2015			2014
Balance Sheet Data (at year end)
Total assets	$	1,481,682		$	1,429,216		$	1,287,048		$	1,200,921		$	1,169,731
Net loans		1,134,975			1,057,580			964,143			856,476			852,114
Investment securities		223,880			237,579			224,308			243,091			203,720
Total deposits		1,198,468			1,125,812			1,010,666			947,197			969,514
Federal Home Loan Bank advances and other borrowings		95,153			121,382			93,392			50,000			43,000
Subordinated notes		49,486			49,486			49,486			49,486			49,486
Total stockholders' equity		99,414			91,371			91,017			87,286			80,568
Balance Sheet Data (average balances)
Total assets	$	1,446,160		$	1,352,343		$	1,251,741		$	1,199,061		$	1,156,911
Net loans		1,086,163			1,013,702			904,069			852,514			839,957
Investment securities		242,806			226,911			243,169			242,740			212,697
Total deposits		1,169,243			1,068,487			997,514			975,036			971,777
Federal Home Loan Bank advances and other borrowings		81,945			98,383			67,212			48,474			29,964
Subordinated notes		49,486			49,486			49,486			49,486			49,486
Total stockholders' equity		93,615			95,116			91,401			84,818			78,953
Key Ratios
Earnings Ratios
Return on average total assets		0.74	%		0.25	%		0.58	%		0.72	%		0.66	%
Return on average common stockholders' equity		11.45			3.59			7.97			10.14			9.69
Efficiency ratio (3)		74.78			74.79			75.64			73.10			75.74
Net interest spread		3.05			3.24			3.36			3.59			3.61
Net interest margin		3.30			3.41			3.48			3.69			3.72
Asset Quality Ratios
Allowance for loan losses to loans		1.02	%		1.02	%		1.02	%		1.00	%		1.06	%
Non-performing loans to loans (1)		0.49			0.56			0.36			0.51			2.13
Non-performing assets to loans (2)		1.68			1.80			1.81			2.36			3.51
Non-performing assets to assets (2)		1.30			1.34			1.37			1.70			2.58
Allowance for loan losses to non-performing loans		208.97			180.87			282.94			194.48			49.72
Net loan charge-offs to average loans		0.06			0.08			0.02			0.09			0.54
Capital Ratios
Average stockholders' equity to average total assets		6.47	%		7.03	%		7.30	%		7.07	%		6.82	%
Period-end stockholders' equity to period-end assets		6.71			6.39			7.07			7.27			6.89
Total risk-based capital ratio		13.28			12.93			13.88			14.78			15.78
Tier 1 risk-based capital ratio		11.21			10.72			11.42			12.03			12.38
Common equity Tier 1 capital		8.48			8.04			8.61			9.04			NA
Tier 1 leverage ratio		9.55			9.33			9.87			9.84			9.42

(1) Nonperforming loans consist of nonaccrual loans, troubled debt restructurings included in nonaccrual loans, and loans contractually past due 90 days or more and still accruing interest.

(2) Nonperforming assets consist of nonperforming loans and other real estate owned and repossessed assets.

(3) Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue includes net interest income and non-interest income.

Non-GAAP Financial Measures

The financial measures in the table below include items that are non-GAAP, meaning they are not presented in accordance with generally accepted accounting principles (GAAP) in the U.S. The non-GAAP items presented are non-GAAP net income, non-GAAP basic earnings per share, non-GAAP diluted earnings per share, non-GAAP return on average assets and non-GAAP return on average common equity. These measures include adjustments to exclude the transitional impact of the Tax Cuts and Jobs Act (Tax Act) and the Company's implementation of new tax planning initiatives, which are non-recurring and not considered indicative of underlying earnings performance. The adjustments do not include the ongoing impacts of the lower U.S. statutory rate under the Tax Act on 2018 earnings. The Company believes that the exclusion of these items provides a useful basis for evaluating the Company's underlying performance, but should not be

5

considered in isolation and is not in accordance with, or a substitute for, evaluating performance utilizing GAAP financial information. The Company uses non-GAAP measures to analyze its financial performance and to make financial comparisons to prior periods presented on a similar basis. The Company believes that providing such adjusted results allows investors to better understand the Company's comparative operating performance for the periods presented. Non-GAAP measures are not formally defined by GAAP or codified in the federal banking regulations, and other entities may use calculation methods that differ from those used by the Company. The Company has reconciled each of these measures to a comparable GAAP measure below:

Income Statement Data
(In thousands, except per share data)	2018			2017			2016			2015			2014
Net income - GAAP	$	10,714		$	3,414		$	7,282		$	8,599		$	7,654
Effect of net deferred tax asset adjustments (a)		—			4,105			—			—			—
Net income - non-GAAP	$	10,714		$	7,519		$	7,282		$	8,599		$	7,654
Per Share Data
Basic earnings per share - GAAP	$	1.78		$	0.56		$	1.19		$	1.41		$	1.25
Effect of net deferred tax asset adjustments (a)		—			0.68			—			—			—
Basic earnings per share - non-GAAP	$	1.78		$	1.24		$	1.19		$	1.41		$	1.25
Diluted earnings per share - GAAP	$	1.78		$	0.56		$	1.19		$	1.41		$	1.25
Effect of net deferred tax asset adjustments (a)		—			0.68			—			—			—
Diluted earnings per share - non-GAAP	$	1.78		$	1.24		$	1.19		$	1.41		$	1.25
Key Ratios
Return on average total assets - GAAP		0.74	%		0.25	%		0.58	%		0.72	%		0.66	%
Effect of net deferred tax asset adjustments (a)		—	%		0.31	%		—	%		—	%		—	%
Return on average total assets - non-GAAP		0.74	%		0.56	%		0.58	%		0.72	%		0.66	%
Return on average stockholders' equity - GAAP		11.45	%		3.59	%		7.97	%		10.14	%		9.69	%
Effect of net deferred tax asset adjustments (a)		—	%		4.31	%		—	%		—	%		—	%
Return on average stockholders' equity - non-GAAP		11.45	%		7.90	%		7.97	%		10.14	%		9.69	%

(a) Calculated using the difference in combined statutory rates of 38% for 2017 and 21% for subsequent years.

CRITICAL ACCOUNTING POLICIES

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 Company's critical accounting policies on its 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 Loan Losses

Management has identified the accounting policy related to the allowance for loan losses (ALL) 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 and the impact of any associated risks related to these policies on the Company's business operations is provided in Note 1 to the Company's consolidated financial statements and is also discussed in the Lending and Credit Management section below.

RESULTS OF OPERATIONS ANALYSIS

The Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). 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

6

liabilities at the date of the consolidated 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.

							$ Change				% Change
(In thousands)	2018		2017		2016		'18-'17		'17-'16		'18-'17		'17-'16
Net interest income	$	44,593	$	42,928	$	40,347	$	1,665	$	2,581	3.9	%	6.4	%
Provision for loan losses		1,475		1,765		1,425		(290)		340	(16.4)		23.9
Noninterest income		9,341		8,950		8,315		391		635	4.4		7.6
Investment securities gains, net		255		5		602		250		(597)	NM		(99.2)
Noninterest expense		40,332		38,802		36,807		1,530		1,995	3.9		5.4
Income before income taxes		12,382		11,316		11,032		1,066		284	9.4		2.6
Income tax expense		1,668		7,902		3,750		(6,234)		4,152	(78.9)		110.7
Net income	$	10,714	$	3,414	$	7,282	$	7,300	$	(3,868)	213.8	%	(53.1)	%

NM - not meaningful

Consolidated net income increased $7.3 million to $10.7 million, or $1.78 per diluted share, for the year ended December 31, 2018 compared to $3.4 million, or $0.56 per diluted share, for the year ended December 31, 2017. For the year ended December 31, 2018, the return on average assets (ROA) was 0.74%, the return on average stockholders' equity (ROE) was 11.45%, and the efficiency ratio was 74.78%.

Consolidated net income decreased $3.9 million to $3.4 million, or $0.56 per diluted share, for the year ended December 31, 2017 compared to $7.3 million, or $1.19 per diluted share, for the year ended December 31, 2016. For the year ended December 31, 2017, the return on average assets (ROA) was 0.25%, the return on average stockholders' equity (ROE) was 3.59%, and the efficiency ratio was 74.79%.

The ROA and ROE for 2017 reflects a $4.1 million write-down of the Company's net deferred tax asset (DTA) in response to the enactment of the Tax Cuts and Jobs Act (Tax Act) and additional tax planning initiatives, which was recorded as additional income tax expense during the fourth quarter of 2017. As a result, the Company's effective tax rate for 2017 was 69.8% compared to 13.5% for 2018 and 34% for 2016. The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Act.

Net interest income was $44.6 million for the year ended December 31, 2018 compared to $42.9 million and $40.3 million for the years ended December 31, 2017 and 2016, respectively. The net interest margin was 3.30% for the year ended December 31, 2018 compared to 3.41% and 3.48% for the years ended December 31, 2017 and 2016, respectively.

A $1.5 million provision for loan losses was recorded for the year ended December 31, 2018 compared to a $1.8 million and $1.4 million provision for the years ended December 31, 2017 and 2016, respectively.

The Company's net charge-offs for the year ended December 31, 2018, were $675,000, or 0.06% of average loans compared to $799,000, or 0.08% of average loans for the year ended December 31, 2017, and $143,000, or 0.02% of average loans for the year ended December 31, 2016.

Non-performing loans totaled $5.6 million, or 0.49% of total loans, at December 31, 2018 compared to $6.0 million, or 0.56% of total loans at December 31, 2017, and $3.5 million, or 0.36% of total loans, at December 31, 2016.

Non-interest income increased $391,000, or 4.4%, for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $635,000, or 7.6%, for the year ended December 31, 2017 compared to the year ended December 31, 2016. These changes are discussed in greater detail below under Non-interest Income.

Investment securities gains, net of $255,000 were recorded for the year ended December 31, 2018 compared to $5,000 and $602,000 for the years ended December 31, 2017 and 2016, respectively. Security gains for the year ended December 31, 2018 included gains realized from a series of short term sales of U.S. Treasury securities with repurchase agreements in order to generate capital gains to offset capital losses expiring in 2018 and 2019.

Non-interest expense increased $1.5 million, or 3.9%, for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $2.0 million, or 5.4%, for the year ended December 31, 2017, compared to the year ended December 31, 2016. These changes are discussed in greater detail below under Non-interest Expense.

7

Average Balance Sheets

Net interest income is the largest source of revenue resulting from the Company's lending, investing, borrowing, and deposit gathering activities. It is affected by both 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 sheets, 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 years in the three year periods ended December 31, 2018, 2017, and 2016, respectively.

	2018						2017						2016
			Interest		Rate				Interest		Rate				Interest		Rate
	Average		Income/		Earned/		Average		Income/		Earned/		Average		Income/		Earned/
(In thousands)	Balance		Expense(1)		Paid(1)		Balance		Expense(1)		Paid(1)		Balance		Expense(1)		Paid(1)
ASSETS
Loans: (2) (4)
Commercial	$	199,448	$	10,039	5.03	%	$	186,140	$	8,644	4.64	%	$	161,177	$	7,588	4.71	%
Real estate construction - residential		29,481		1,562	5.30			21,466		998	4.65			17,671		803	4.54
Real estate construction - commercial		103,880		5,072	4.88			78,861		3,550	4.50			43,759		2,016	4.61
Real estate mortgage - residential		245,737		11,850	4.82			255,091		11,706	4.59			253,614		11,544	4.55
Real estate mortgage - commercial		485,911		22,704	4.67			450,427		20,697	4.60			410,672		18,947	4.61
Installment and other consumer		32,927		1,285	3.90			32,225		1,253	3.89			26,280		1,161	4.42
Total loans	$	1,097,384	$	52,512	4.79	%	$	1,024,210	$	46,848	4.57	%	$	913,173	$	42,059	4.61	%
Investment securities: (3)
U.S. Treasury	$	13,092	$	215	1.64	%	$	312	$	6	1.92	%	$	—	$	—	—	%
U.S. government and federal agency obligations		53,856		951	1.77			47,665		693	1.45			48,551		582	1.20
Obligations of states and political subdivisions		41,807		964	2.31			46,716		1,041	2.23			32,836		836	2.55
Mortgage-backed securities		124,492		2,631	2.11			122,124		2,258	1.85			153,024		2,597	1.70
Other debt securities		4,455		247	5.54			4,486		232	5.17			4,486		225	5.02
Total investment securities	$	237,702	$	5,008	2.11	%	$	221,303	$	4,230	1.91	%	$	238,897	$	4,240	1.77	%
Other investment securities		5,104		218	4.27			5,608		158	2.82			4,272		92	2.15
Federal funds sold and interest bearing deposits in other financial institutions		32,142		699	2.17			22,844		267	1.17			15,526		80	0.52
Total interest earning assets	$	1,372,332	$	58,437	4.26	%	$	1,273,965	$	51,503	4.04	%	$	1,171,868	$	46,471	3.97	%
All other assets		85,049						88,886						88,977
Allowance for loan losses		(11,221)						(10,508)						(9,104)
Total assets	$	1,446,160					$	1,352,343					$	1,251,741
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts	$	218,328	$	2,131	0.98	%	$	210,780	$	1,114	0.53	%	$	195,099	$	607	0.31	%
Savings		94,964		48	0.05			98,051		50	0.05			96,130		49	0.05
Interest checking		3,249		34	1.05			1,514		12	0.79			630		3	0.48
Money market		295,982		3,220	1.09			224,076		1,153	0.51			186,356		500	0.27
Time deposits		310,381		3,419	1.10			294,727		2,230	0.76			302,285		1,908	0.63
Total interest bearing deposits	$	922,904	$	8,852	0.96	%	$	829,148	$	4,559	0.55	%	$	780,500	$	3,067	0.39	%
Federal funds purchased and securities sold under agreements to repurchase		39,564		603	1.52			29,512		113	0.38			36,539		64	0.18
Federal Home Loan Bank advances and other borrowings		81,945		1,517	1.85			98,383		1,590	1.62			67,212		1,038	1.54
Subordinated notes		49,486		2,229	4.50			49,486		1,751	3.54			49,486		1,495	3.02
Total borrowings	$	170,995	$	4,349	2.54	%	$	177,381	$	3,454	1.95	%	$	153,237	$	2,597	1.69	%
Total interest bearing liabilities	$	1,093,899	$	13,201	1.21	%	$	1,006,529	$	8,013	0.80	%	$	933,737	$	5,664	0.61	%
Demand deposits		246,339						239,339						217,014
Other liabilities		12,307						11,359						9,589
Total liabilities		1,352,545						1,257,227						1,160,340
Stockholders' equity		93,615						95,116						91,401
Total liabilities and stockholders' equity	$	1,446,160					$	1,352,343					$	1,251,741
Net interest income (FTE)			$	45,236					$	43,490					$	40,807
Net interest spread					3.05	%					3.24	%					3.36	%
Net interest margin					3.30	%					3.41	%					3.48	%

(1) Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21% and 34%, net of nondeductible interest expense. Such adjustments totaled $658,000, $568,000 and $461,000 for the years ended December 31, 2018, 2017 and 2016, respectively.

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

(3) Fees and costs on loans are included in interest income.

8

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 years ended December 31, 2018, compared to December 31, 2017, and for the years ended December 31, 2017 compared to December 31, 2016. 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.

	2018						2017
			Change due to						Change due to
	Total		Average		Average		Total		Average		Average
(In thousands)	Change		Volume		Rate		Change		Volume		Rate
Interest income on a fully taxable equivalent basis: (1)
Loans: (2) (4)
Commercial	$	1,395	$	642	$	753	$	1,056	$	1,160	$	(104)
Real estate construction - residential		564		411		153		195		176		19
Real estate construction - commercial		1,522		1,201		321		1,534		1,581		(47)
Real estate mortgage - residential		144		(438)		582		162		67		95
Real estate mortgage - commercial		2,007		1,653		354		1,750		1,827		(77)
Installment and other consumer		32		27		5		92		242		(150)
Investment securities: (3)
U.S. Treasury		209		210		(1)		6		—		6
U.S. government and federal agency obligations		258		97		161		111		(11)		122
Obligations of states and political subdivisions		(77)		(112)		35		205		319		(114)
Mortgage-backed securities		373		45		328		(339)		(557)		218
Other debt securities		15		(2)		17		7		—		7
Other investment securities		60		(15)		75		66		33		33
Federal funds sold and interest bearing deposits in other financial institutions		432		139		293		187		51		136
Total interest income		6,934		3,858		3,076		5,032		4,888		144
Interest expense:
NOW accounts		1,017		41		976		507		53		454
Savings		(2)		(2)		—		1		1		—
Interest checking		22		17		5		9		6		3
Money market		2,067		462		1,605		653		118		535
Time deposits		1,189		124		1,065		322		(49)		371
Federal funds purchased and securities sold under agreements to repurchase		490		50		440		49		(14)		63
Federal Home Loan Bank advances and other borrowings		(73)		(287)		214		552		501		51
Subordinated notes		478		—		478		256		—		256
Total interest expense		5,188		405		4,783		2,349		616		1,733
Net interest income on a fully taxable equivalent basis	$	1,746	$	3,453	$	(1,707)	$	2,683	$	4,272	$	(1,589)

(1) Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 21% for 2018 and 34% for 2017 and 2016, net of nondeductible interest expense. Such adjustments totaled $658,000, $568,000 and $461,000 for the years ended December 31, 2018, 2017 and 2016, respectively.

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

(3) Fees and costs on loans are included in interest income.

Financial results for the year ended December 31, 2018 compared to the year ended December 31, 2017 reflected an increase in net interest income, on a tax equivalent basis, of $1.7 million, or 4.01%, and financial results for the year ended December 31, 2017 compared to the year ended December 31, 2016 reflected an increase of $2.7 million, or 6.57%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) decreased to 3.30% for the year ended December 31, 2018, compared to 3.41% and 3.48% for the years ended December 31, 2017 and 2016, respectively.

The increase in net interest income for 2018 over 2017 was primarily due to an increase in average earning assets and the decrease in the net interest margin was primarily due to a 41 basis point increase in the rates paid on average interest bearing liabilities. The prime rate increased to 5.50% at December 31, 2018 compared to 4.50% at December 31, 2017.

9

The increase in net interest income for 2017 over 2016 was primarily due to an increase in average earning assets and the decrease in the net interest margin was primarily due to a 19 basis point increase in the rates paid on average interest bearing liabilities. The prime rate increased to 4.50% at December 31, 2017 compared to 3.75% at December 31, 2016.

Average interest-earning assets increased $98.4 million, or 7.72%, to $1.37 billion for the year ended December 31, 2018 compared to $1.27 billion for the year ended December 31, 2017, and average interest bearing liabilities increased $87.4 million, or 8.7%, to $1.1 billion for the year ended December 31, 2018 compared to $1.0 billion for the year ended December 31, 2017.

Average interest-earning assets increased $102.1 million, or 8.71%, to $1.27 billion for the year ended December 31, 2017 compared to $1.17 billion for the year ended December 31, 2016, and average interest bearing liabilities increased $72.8 million, or 7.8%, to $1.0 billion for the year ended December 31, 2017 compared to $933.7 million for the year ended December 31, 2016.

Total interest income (expressed on a fully taxable equivalent basis) increased to $58.4 million for the year ended December 31, 2018 compared to $51.5 million and $46.5 million for the years ended December 31, 2017 and 2016, respectively. The Company's rates earned on interest earning assets were 4.26% for the year ended December 31, 2018 compared to 4.04% and 3.97% for the years ended December 31, 2017 and 2016, respectively.

Interest income on loans increased to $52.5 million for the year ended December 31, 2018 compared to $46.8 million and $42.1 million for the years ended December 31, 2017 and 2016, respectively.

Average loans outstanding increased $73.2 million, or 7.14%, to $1.1 billion for the year ended December 31, 2018 compared to $1.0 billion for the year ended December 31, 2017. The average yield on loans receivable increased to 4.79% during the year ended December 31, 2018 compared to 4.57% for the year ended December 31, 2017.

Average loans outstanding increased $111.0 million, or 12.16%, to $1.0 billion for the year ended December 31, 2017 compared to $913.2 million for the year ended December 31, 2016. The average yield on loans receivable decreased to 4.57% during the year ended December 31, 2017 compared to 4.61% for the year ended December 31, 2016. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio.

Total interest expense was $13.2 million for the year ended December 31, 2018 compared to $8.0 million and $5.7 million for the years ended December 31, 2017 and 2016, respectively. The Company's rates paid on interest bearing liabilities was 1.21% for the year ended December 31, 2018 compared to 0.80% and 0.61% for the years ended December 31, 2017 and 2016, respectively. See the Liquidity Management section for further discussion.

Interest expense on deposits was $8.9 million for the year ended December 31, 2018 compared to $4.6 million and $3.1 million for the years ended December 31, 2017 and 2016, respectively.

Average interest bearing deposits increased $93.8 million, or 11.3%, to $922.9 million for the year ended December 31, 2018 compared to $829.1 million for the year ended December 31, 2017. The average cost of deposits increased to 0.96% during the year ended December 31, 2018 compared to 0.55% for the year ended December 31, 2017.

Average interest bearing deposits increased $48.6 million, or 6.2%, to $829.1 million for the year ended December 31, 2017 compared to $780.5 million for the year ended December 31, 2016. The average cost of deposits increased to 0.55% during the year ended December 31, 2017 compared to 0.39% for the year ended December 31, 2016.

Interest expense on borrowings was $4.3 million for year ended December 31, 2018 compared to $3.5 million and $2.6 million for the  years ended December 31, 2017 and 2016, respectively. Average borrowings were $171.0 million for the year ended December 31, 2018 compared to $177.4 million and $153.2 million for the years ended December 31, 2017 and 2016, respectively. See the Liquidity Management section for further discussion.

10

Non-interest Income and Expense

Non-interest income for the years ended December 31, 2018, 2017, and 2016 was as follows:

						`				$Change				% Change
(In thousands)		2018			2017			2016		'18-'17		'17-'16		'18-'17		'17-'16
Non-interest Income
Service charges and other fees	$	3,736		$	3,437		$	3,400		$	299	$	37	8.7	%	1.1	%
Bank card income and fees		2,754			2,614			2,547			140		67	5.4		2.6
Trust department income		1,166			1,137			952			29		185	2.6		19.4
Real estate servicing fees, net		794			740			325			54		415	7.3		127.7
Gain on sales of mortgage loans, net		721			770			851			(49)		(81)	(6.4)		(9.5)
Other		170			252			240			(82)		12	(32.5)		5.0
Total non-interest income	$	9,341		$	8,950		$	8,315		$	391	$	635	4.4	%	7.6	%
Non-interest income as a % of total revenue *		17.3	%		17.3	%		17.1	%

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

Total non-interest income increased $391,000, or 4.4%, to $9.3 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $635,000, or 7.6%, to $9.0 million for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Service charges and other fees increased $299,000, or 8.7%, to $3.7 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $37,000, or 1.1% to $3.4 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase for the year 2018 over the years ended 2017 and 2016 was primarily due to reduced waived service charges and increases in fees and ATM income resulting from deposit growth.

Bank card income and fees increased $140,000, or 5.4%, to $2.8 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $67,000, or 2.6% to $2.6 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in all years presented was mainly the result of growth in debit card fees as a result of a higher volume of transactions year over year.

Trust department income increased $29,000, or 2.6%, to $1.2 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $185,000, or 19.4% to $1.1 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase year over year was primarily due to new trust customer relationships.

Real estate servicing fees, net of the change in valuation of mortgage serving rights increased $54,000, or 7.3%, to $794,000 for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $415,000, or 127.7%, to $740,000 for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in the years 2018 and 2017 over the prior years presented was primarily due to higher MSR valuations resulting from slower prepayment speeds in a higher rate environment.

Mortgage loan servicing fees earned on loans sold were $821,000 for the year ended December 31, 2018 compared to $833,000 and $854,000 for the years ended 2017 and 2016, respectively. The Company was servicing $279.9 million of mortgage loans at December 31, 2018 compared to $285.8 million and $294.4 million at December 31, 2017 and 2016, respectively.

Gain on sales of mortgage loans decreased $49,000, or 6.4%, to $721,000 for the year ended December 31, 2018 compared to the year ended December 31, 2017, and decreased $81,000, or 9.5%, to $770,000 for the year ended December 31, 2017 compared to the year ended December 31, 2016. The Company sold loans of $37.0 million for the year ended December 31, 2018 compared to $33.8 million and $37.9 million for the years ended December 31, 2017 and 2016, respectively. Although the volume of loans sold in 2018 increased from 2017, the marginal price of the 2018 volume was lower than 2017 leading to reduced income.

Other income decreased $82,000, or 32.5%, to $170,000 for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $12,000, or 5.0% to $252,000 for the year ended December 31, 2017 compared to the year ended December 31, 2016. The variances between the year ended 2018 over 2017 and for the year ended 2017 over 2016 were primarily due to changes in brokerage income. During 2018, the Company transitioned into a new relationship with a financial services provider causing a temporary disruption in brokerage services.

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Investment securities gains, net for the years ended December 31, 2018, 2017, and 2016 was as follows:

(in thousands)	2018		2017		2016
Investment securities gains, net
Available for sale securities:
Gains realized on sales	$	253	$	38	$	623
Losses realized on sales		—		(33)		(21)
Other-than-temporary impairment recognized		—		—		—
Other investment securities:
Fair value adjustments, net		2		—		—
Investment securities gains, net	$	255	$	5	$	602

During the year ended December 31, 2018, the Company received $77.2 million from proceeds from a series of short term sales of U.S. Treasury securities purchased with repurchase agreements and recognized gains of $253,000 in order to generate capital gains to offset capital losses that were to expire during 2018 and 2019.

During the year ended December 31, 2017, the Company received $11.7 million from proceeds on sales of available-for-sale debt securities and recognized gains of $5,000, compared to $60.7 million from proceeds on sales of available-for-sale debt securities and recognized net gains of $602,000 during the year ended December 31, 2016. These transactions were the result of bond sales and purchases to replace several smaller holdings with fewer, larger investments without materially changing the duration or yield of the investment portfolio.

Non-interest expense for the years ended December 31, 2018, 2017, and 2016 was as follows:

										$Change				% Change
(In thousands)	2018			2017			2016			'18-'17		'17-'16		'18-'17		'17-'16
Non-interest Expense
Salaries	$	17,109		$	16,227		$	15,623		$	882	$	604	5.4	%	3.9	%
Employee benefits		5,995			5,492			5,179			503		313	9.2		6.0
Occupancy expense, net		2,957			2,782			2,751			175		31	6.3		1.1
Furniture and equipment expense		3,001			2,683			1,783			318		900	11.9		50.5
Processing expense, network and bank card expense		3,484			3,643			3,309			(159)		334	(4.4)		10.1
Legal, examination, and professional fees		1,223			1,308			1,301			(85)		7	(6.5)		0.5
FDIC insurance assessment		612			478			567			134		(89)	28.0		(15.7)
Advertising and promotion		1,233			1,255			1,083			(22)		172	(1.8)		15.9
Postage, printing, and supplies		996			925			1,018			71		(93)	7.7		(9.1)
Real estate foreclosure expense (gains), net		156			402			370			(246)		32	(61.2)		8.6
Other		3,566			3,607			3,823			(41)		(216)	(1.1)		(5.7)
Total non-interest expense	$	40,332		$	38,802		$	36,807		$	1,530	$	1,995	3.9	%	5.4	%
Efficiency ratio*		74.8	%		74.8	%		75.6	%
Number of full-time equivalent employees		288			333			326

*Efficiency ratio is calculated as non-interest expense as a percentage of total revenue. Total revenue includes net interest income and non-interest income.

Total non-interest expense increased $1.5 million, or 3.9%, to $40.3 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $2.0 million, or 5.4%, to $38.8 million for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Salaries increased $882,000, or 5.4%, to $17.1 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $604,000, or 3.9%, to $16.2 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase for the year ended 2018 over 2017 was primarily due to a bonus that was paid in February 2018 to all eligible full-time and part-time employees as a result of the expected tax savings from the Tax Act, and 3.0% average cost of living increases paid in January

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2018. The increase for the year ended 2017 over 2016 was primarily due to cost of living, merit salary increases, and a decrease in deferred loan costs.

Employee benefits increased $503,000, or 9.2%, to $6.0 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $313,000, or 6.0%, to $5.5 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in the years presented was primarily due to an increase in pension expense due to lower assumed discount rate and   increased medical plan premiums effective July 1 of each year.

Furniture and equipment expense increased $318,000, or 11.9%, to $3.0 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $900,000, 50.5%, to $2.7 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. Beginning December 2016, the Company began upgrading its data processing infrastructure to a hosted network environment. The process included changes in maintenance agreements, service providers, and equipment.

Processing, network, and bank card expense decreased $159,000, or 4.4%, to $3.5 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $334,000, or 10.1%, to $3.6 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease in 2018 over 2017 was due to additional one-time costs associated with a corporate wide network upgrade and changes in processing service providers during 2017. This was partially offset by increased debit card processing expense during 2018. The increase in 2017 over 2016 was primarily due to a corporate wide network upgrade and changes in processing service providers.

FDIC insurance assessment increased $134,000, or 28.0%, to $612,000 for the year ended December 31, 2018 compared to December 31, 2017, and decreased $89,000, or 15.7%, to $478,000 for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase in 2018 over 2017 was primarily due to an increase in the Company's total assessment base.

Advertising and promotion expense decreased $22,000, or 1.8%, to $1.2 million for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $172,000, or 15.9%, to $1.3 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. The decrease in 2018 over 2017 was primarily due to during 2017, the Company advertised and introduced new products and services, such as interactive teller machines, and a new branch in the process of opening in the Columbia market.

Real estate foreclosure expense (gains), net decreased $246,000, or 61.2%, to $156,000 for the year ended December 31, 2018 compared to the year ended December 31, 2017, and increased $32,000, or 8.6%, to $402,000 for the year ended December 31, 2017 compared to the year ended December 31, 2016.

Net losses recognized on other real estate owned were $12,000 and $232,000 for the years ended December 31, 2018 and 2017, respectively, compared to a net gain of $21,000  for the year ended December 31, 2016. Expenses to maintain foreclosed properties were $144,000 for the year ended December 31, 2018, compared to $170,000 and $391,000 for the years ended December 31, 2017 and 2016, respectively.

Income taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 13.5% for the year ended December 31, 2018 compared to 69.8% and 34.0% for the years ended December 31, 2017 and 2016, respectively. As further described below, the decrease in tax rate for the comparative years is primarily due to a decrease in the federal corporate tax rate, the release of the valuation allowance related to capital losses as a result of the Company's tax planning initiatives, a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives.

The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act (Tax Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation allowance related to capital loss carryforwards, a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter of 2017 related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax return, within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's ASC Topic 740, Income Taxes.

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Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 76.6% of total assets as of December 31, 2018 compared to 74.0% as of December 31, 2017.

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.

A summary of loans, by major class within the Company's loan portfolio as of the dates indicated is as follows:

(In thousands)	2018			2017			2016			2015			2014
Commercial, financial, and agricultural	$	207,720		$	192,238		$	182,881		$	149,091		$	154,834
Real estate construction - residential		28,610			26,492			18,907			16,895			18,103
Real estate construction - commercial		106,784			98,340			55,653			33,943			48,822
Real estate mortgage - residential		241,517			246,754			259,900			256,086			247,117
Real estate mortgage - commercial		529,536			472,455			426,470			385,869			372,321
Installment and other consumer		32,460			32,153			30,218			23,196			20,016
Total loans	$	1,146,627		$	1,068,432		$	974,029		$	865,080		$	861,213
Percent of categories to total loans:
Commercial, financial, and agricultural		18.1	%		18.0	%		18.8	%		17.2	%		18.0	%
Real estate construction - residential		2.5			2.5			1.9			2.0			2.1
Real estate construction - commercial		9.3			9.2			5.7			3.9			5.7
Real estate mortgage - residential		21.1			23.1			26.7			29.6			28.7
Real estate mortgage - commercial		46.2			44.2			43.8			44.6			43.2
Installment and other consumer		2.8			3.0			3.1			2.7			2.3
Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

The Company extends credit to its local community market through traditional real estate mortgage products. The Company does not participate in extending credit to sub-prime residential real estate markets. The Company does not lend funds for the type of 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 nonaccrual, past due, or restructured loans if such assets were loans.

The contractual maturities of loan categories at December 31, 2018, and the composition of those loans between fixed rate and floating rate loans are as follows:

	Principal Payments Due
			Over One		Over
	One Year		Year Through		Five
(In thousands)	Or Less		Five Years		Years		Total
Commercial, financial, and agricultural	$	79,207	$	67,592	$	60,921	$	207,720
Real estate construction - residential		25,523		1,210		1,877		28,610
Real estate construction - commercial		35,232		51,456		20,096		106,784
Real estate mortgage - residential		21,463		37,941		182,113		241,517
Real estate mortgage - commercial		66,862		251,075		211,599		529,536
Installment and other consumer		3,476		24,618		4,366		32,460
Total loans	$	231,763	$	433,892	$	480,972	$	1,146,627
Loans with fixed rates		120,762		384,270		131,729		636,761
Loans with floating rates		111,001		49,622		349,243		509,866
Total loans	$	231,763	$	433,892	$	480,972	$	1,146,627

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

14

purchase commitment from the secondary market at a predetermined price. For the year ended December 31, 2018, the Company sold approximately $37.0 million of loans to investors compared to $33.8 million and $37.9 million for the years ended December 31, 2017 and 2016, respectively. At December 31, 2018, the Company was servicing approximately $279.9 million of loans sold to the secondary market compared to $285.5 million at December 31, 2017, and $294.4 million at December 31, 2016.

Risk Elements of the Loan Portfolio

Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Loans in excess of $2.0 million in 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, on a monthly basis, 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 also determines which loans should be considered impaired. Management follows the guidance provided in the FASB's ASC Topic 310-10-35 in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. 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 loan losses are adjusted to maintain the allowance at a level considered necessary by management to provide for probable losses inherent in the loan portfolio.

Nonperforming Assets

The following table summarizes nonperforming assets at the dates indicated:

(In thousands)	2018			2017			2016			2015			2014
Nonaccrual loans:
Commercial, financial, and agricultural	$	1,857		$	2,507		$	982		$	308		$	5,279
Real estate construction - residential		—			—			—			—			1,751
Real estate construction - commercial		153			97			50			102			2,096
Real estate mortgage - residential		2,720			1,956			1,888			2,322			4,419
Real estate mortgage - commercial		474			936			420			1,542			4,465
Installment and other consumer		210			176			89			144			233
Total	$	5,414		$	5,672		$	3,429		$	4,418		$	18,243
Loans contractually past - due 90 days or more and still accruing:
Commercial, financial, and agricultural	$	—		$	2		$	—		$	1		$	—
Real estate construction - residential		—			275			—			—			—
Real estate construction - commercial		—			—			—			—			56
Real estate mortgage - residential		156			28			54			—			—
Real estate mortgage - commercial		—			—			—			—			—
Installment and other consumer		6			23			11			5			2
Total	$	162		$	328		$	65		$	6		$	58
Total non-performing loans (a)		5,576			6,000			3,494			4,424			18,301
Other real estate owned and repossessed assets		13,691			13,182			14,162			15,992			11,885
Total non-performing assets	$	19,267		$	19,182		$	17,656		$	20,416		$	30,186
Loans (c)	$	1,146,044		$	1,068,049		$	973,867		$	863,390		$	861,213
Allowance for loan losses to loans		1.02	%		1.02	%		1.02	%		1.00	%		1.06	%
Non-performing loans to loans (a)		0.49	%		0.56	%		0.36	%		0.51	%		2.13	%
Non-performing assets to loans (b)		1.68	%		1.80	%		1.81	%		2.36	%		3.51	%
Non-performing assets to assets (b)		1.30	%		1.34	%		1.37	%		1.70	%		2.58	%
Allowance for loan losses to non-performing loans		208.97	%		180.87	%		282.94	%		194.48	%		49.72	%

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

15

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

(c) Loan totals do not include loans held for sale.

Total non-performing assets were $19.3 million, or 1.68% of total loans, at December 31, 2018 compared to $19.2 million, or 1.80% of total loans, at December 31, 2017. Non-accrual loans included $2.0 million and $1.7 million of loans classified as TDRs at December 31, 2018 and 2017, respectively.

As of December 31, 2018, approximately $5.2 million compared to $8.8 million at December 31, 2017, of loans classified as substandard, which include performing TDRs, and are not included in the nonperforming asset table, were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. Management believes the general allowance was sufficient to cover the risks and probable losses related to such loans at December 31, 2018 and December 31, 2017, respectively.

Total non-accrual loans at December 31, 2018 decreased $258,000, or 5.0%, to $5.4 million compared to $5.7 million at December 31, 2017. The decrease in non-accrual loans primarily consisted of decreases in commercial, financial, and agricultural loans and real estate mortgage commercial loans, partially offset by an increase in real estate mortgage residential loans.

Loans past due 90 days and still accruing interest at December 31, 2018, were $162,000 compared to $328,000 at December 31, 2017. Other real estate owned and repossessed assets at December 31, 2018 were $13.7 million compared to $13.2 million at December 31, 2017. During the year ended December 31, 2018, $628,000 of non-accrual loans, net of charge-offs taken, moved to other real estate owned and repossessed assets compared to $374,000 for the year ended December 31, 2017.

The following table summarizes the Company's TDRs at the dates indicated:

	December 31, 2018					December 31, 2017
	Number of	Recorded		Specific		Number of	Recorded		Specific
(In thousands)	contracts	Investment		Reserves		contracts	Investment		Reserves
Performing TDRs
Commercial, financial and agricultural	6	$	570	$	174	6	$	500	$	20
Real estate mortgage - residential	9		2,073		72	11		3,116		236
Real estate mortgage - commercial	2		377		8	2		1,068		109
Installment and other consumer	3		44		4	—		—		—
Total performing TDRs	20	$	3,064	$	258	19	$	4,684	$	365
Non-performing TDRs
Commercial, financial and agricultural	5	$	1,042	$	94	4	$	838	$	41
Real estate mortgage - residential	5		867		182	4		290		61
Real estate mortgage - commercial	—		—		—	4		589		110
Installment and other consumer	2		72		9	—		—		—
Total non-performing TDRs	12	$	1,981	$	285	12	$	1,717	$	212
Total TDRs	32	$	5,045	$	543	31	$	6,401	$	577

At December 31, 2018, loans classified as TDRs totaled $5.0 million, with $543,000 of specific reserves, of which $2.0 million were classified as non-performing TDRs and $3.0 million were classified as performing TDRs. This is compared to $6.4 million of loans classified as TDRs, with $577,000 of specific reserves, of which $1.7 million were classified as non-performing TDRs and $4.7 million were classified as performing TDRs at December 31, 2017. 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 if the loan is collateral dependent. The net decrease in total TDRs from December 31, 2017 to December 31, 2018 was primarily due to approximately $2.3 million of payments received, partially offset by $916,000 of new loans designated as TDRs during the year ended December 31, 2018.

16

Allowance for Loan Losses and Provision

Allowance for Loan Losses

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

(In thousands)	2018		2017		2016		2015		2014
Allocation of allowance for loan losses at end of period:
Commercial, financial, and agricultural	$	3,237	$	3,325	$	2,753	$	2,153	$	1,779
Real estate construction - residential		140		170		108		59		171
Real estate construction - commercial		757		807		413		644		466
Real estate mortgage - residential		2,071		1,689		2,385		2,439		2,527
Real estate mortgage - commercial		4,914		4,437		3,793		2,935		3,846
Installment and other consumer		334		345		274		273		270
Unallocated		199		79		160		101		40
Total	$	11,652	$	10,852	$	9,886	$	8,604	$	9,099

The allowance for loan losses was $11.7 million, or 1.02%, of loans outstanding at December 31, 2018 compared to $10.9 million, or 1.02%, of loans outstanding at December 31, 2017. The ratio of the allowance for loan losses to non-performing loans was 208.97% at December 31, 2018, compared to 180.87% at December 31, 2017.

The following table is a summary of the general and specific allocations of the allowance for loan losses:

(In thousands)	2018		2017		2016		2015		2014
Allocation of allowance for loan losses:
Individually evaluated for impairment - specific reserves	$	1,194	$	1,333	$	1,080	$	1,540	$	1,749
Collectively evaluated for impairment - general reserves		10,458		9,519		8,806		7,064		7,350
Total	$	11,652	$	10,852	$	9,886	$	8,604	$	9,099

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2018, $1.2 million of the Company's allowance for loan losses was allocated to impaired loans totaling approximately $8.5 million compared to $1.3 million of the Company's allowance for loan losses allocated to impaired loans totaling approximately $10.4 million at December 31, 2017. Management determined that $2.1 million, or 25%, of total impaired loans required no reserve allocation at December 31, 2018 compared to $2.4 million, or 23%, at December 31, 2017 primarily due to adequate collateral values,  acceptable payment history and adequate cash flow ability.

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by loan type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type. The Company believes that the five-year look-back period provides a representative historical loss period in the current economic environment. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss.

The Company's methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, assessment of changes in the quality of the Company's internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

The specific and general reserve allocations represent management's best estimate of probable losses inherent in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.

17

Provision

A $1.5 million provision for loan losses was required for the year ended December 31, 2018 compared to $1.8 million for the year ended December 31, 2017, and $1.4 million for the year ended December 31, 2016. The decrease in 2018 over 2017 was primarily due to improved credit quality and economic conditions used in assessing the risk in the portfolio. The increase in 2017 over 2016 was primarily due to losses observed in the look-back period in addition to an increase in loans outstanding.

The following table summarizes loan loss experience for the years ended as indicated:

(In thousands)	2018		2017		2016		2015		2014
Analysis of allowance for loan losses:
Balance beginning of period	$	10,852	$	9,886	$	8,604	$	9,099	$	13,719
Charge-offs:
Commercial, financial, and agricultural		484		649		389		1,131		1,285
Real estate construction - residential		48		—		—		—		349
Real estate construction - commercial		30		—		1		15		491
Real estate mortgage - residential		186		219		495		379		408
Real estate mortgage - commercial		38		45		147		363		2,890
Installment and other consumer		255		268		258		302		405
Total charge-offs		1,041		1,181		1,290		2,190		5,828
Recoveries:
Commercial, financial, and agricultural		100		74		299		672		319
Real estate construction - residential		62		88		—		322		181
Real estate construction - commercial		—		—		502		—		—
Real estate mortgage - residential		52		83		60		138		202
Real estate mortgage - commercial		58		32		140		165		320
Installment and other consumer		94		105		146		148		186
Total recoveries		366		382		1,147		1,445		1,208
Net charge-offs		675		799		143		745		4,620
Provision for loan losses		1,475		1,765		1,425		250		—
Balance end of period	$	11,652	$	10,852	$	9,886	$	8,604	$	9,099

Net Loan Charge-offs

The Company's net loan charge-offs were $675,000, or 0.06% of average loans, for the year ended December 31, 2018 compared to net charge-offs of $799,000, or 0.08% of average loans, for the year ended December 31, 2017, and $143,000, or 0.02% of average loans for the year ended December 31, 2016.

Investment Portfolio

The Company's investment portfolio consists of  securities which are classified as available‑for‑sale, equity or other. The largest component, available for sale debt securities are carried at estimated fair value. Unrealized holding gains and losses from available‑for‑sale securities are excluded from earnings and reported, net of applicable taxes, as a separate component of stockholders' equity until realized.

The Company does not engage in trading activities and accordingly does not have any debt or equity securities classified as trading securities. Historically the Company's practice had been to purchase and hold debt instruments until maturity unless special circumstances exist. However, since the investment portfolio's major function is to provide liquidity and to balance the Company's interest rate sensitivity position, all debt securities are classified as available‑for‑sale.

At December 31, 2018, the investment portfolio classified as available‑for‑sale represented 14.7% of total consolidated assets. Future levels of investment securities can be expected to vary depending upon liquidity and interest sensitivity needs as well as other factors.

18

Available for sale securities

The following table presents the composition of the investment portfolio and related fair value by major category:

(In thousands)	2018		2017
U.S. Treasury	$	1,952	$	1,967
U.S. government and federal agency obligations		9,966		12,073
Government sponsored enterprises		43,335		36,897
Obligations of states and political subdivisions		40,386		46,656
Mortgaged-backed securities		118,192		128,949
Other debt securities (a)		3,000		3,000
Bank issued trust preferred securities (a)		1,374		1,486
Total available for sale debt securities, at fair value	$	218,205	$	231,028

(a) Certain hybrid instruments possessing characteristics typically associated with debt obligations were reclassified from other investment securities carried at cost to available for sale securities carried at fair value in the years presented.

As of December 31, 2018, the maturity of debt securities in the investment portfolio was as follows:

				Over One			Over Five									Weighted
	One Year			Through			Through			Over						Average
(In thousands)	Or Less			Five Years			Ten Years			Ten Years			Total			Yield
U.S. Treasury	$	—		$	1,952		$	—		$	—		$	1,952		2.15	%
U.S. government and federal agency obligations		—			5,101			4,865			—			9,966		2.27
Government sponsored enterprises		12,681			30,162			492			—			43,335		1.86
States and political subdivisions (2)		5,284			25,383			8,148			1,571			40,386		2.39
Mortgage-backed securities (1)		299			81,785			34,537			1,571			118,192		2.27
Other debt securities		—			—			—			3,000			3,000		6.00
Bank issued trust preferred securities		—			—			—			1,374			1,374		5.09
Total available-for-sale debt securities	$	18,264		$	144,383		$	48,042		$	7,516		$	218,205		2.28	%
Weighted average yield		1.54	%		2.18	%		2.53	%		4.28	%		2.28	%

(1) Mortgage‑backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio experience during the twelve months ended December 31, 2018 calculated separately for each mortgage-backed security. These repayment speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage interest rates.

(2) Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the statutory federal income tax rate of 21%.

At December 31, 2018, $20.9 million of debt securities classified as available‑for‑sale in the table above had variable rate provisions with adjustment periods ranging from one week to twelve months.

Other investment securities

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

(In thousands)	2018		2017
Federal Home Loan Bank of Des Moines stock	$	5,512	$	6,390
Midwest Independent Bank stock		151		151
Equity securities with readily determinable fair values		12		10
Total other investment securities	$	5,675	$	6,551

19

Liquidity and Capital Resources

Liquidity Management

The role of liquidity management is to ensure 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 the demands is provided by maturing assets, short-term 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.

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, federal funds sold, and excess reserves held at the Federal Reserve Bank.

(In thousands)	2018		2017
Federal funds sold and other overnight interest-bearing deposits	$	18,396	$	39,553
Certificates of deposit in other banks		12,247		3,460
Available-for-sale investment securities		218,205		231,028
Total	$	248,848	$	274,041

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 $218.2 million at December 31, 2018 and included an unrealized net loss of $4.4 million. The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $18.3 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company's deposit base.

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 required by law. The Company's unpledged securities in the available for sale portfolio totaled approximately $65.2 million and $49.3 million at December 31, 2018 and 2017, respectively.

Total investment securities pledged for these purposes were as follows:

(In thousands)	2018		2017
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	9,397	$	9,570
Federal funds purchased and securities sold under agreements to repurchase		32,529		40,931
Other deposits		111,090		131,197
Total pledged, at fair value	$	153,016	$	181,698

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 December 31, 2018, such deposits totaled $1.1 billion and represented 89.9% 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. Time deposits and certificates of deposit of $250,000 and over totaled $113.4 million at December 31, 2018. These accounts are normally considered more volatile and higher costing representing 10.1% of total deposits at December 31, 2018.

20

Core deposits at December 31, 2018 and 2017 were as follows:

(In thousands)	2018		2017
Core deposit base:
Non-interest bearing demand	$	262,857	$	245,380
Interest checking		215,432		229,862
Savings and money market		378,484		345,593
Other time deposits		211,715		230,309
Total	$	1,068,488	$	1,051,144

The total amount of certificates of deposit of $250,000 and greater at December 31, 2018 and 2017 were $104.9 million and $63.2 million, respectively. The Company had brokered deposits totaling $39.8 million and $9.8 million at December 31, 2018 and 2017, 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, Federal Home Loan Bank advances, 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 December 31, 2018, under agreements with these unaffiliated banks, the Bank may borrow up to $42.0 million in federal funds on an unsecured basis and $16.4 million on a secured basis. There were $8.0 million in federal funds purchased outstanding at December 31, 2018. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company's investment portfolio. At December 31, 2018, there were $16.6 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 December 31, 2018.

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. As of December 31, 2018, the Bank had $95.1 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million at December 31, 2018 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

Borrowings outstanding at December 31, 2018 and 2017 were as follows:

(In thousands)	2018		2017
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	$	24,647	$	27,560
Federal Home Loan Bank advances		95,126		121,352
Subordinated notes		49,486		49,486
Other borrowings		27		30
Total	$	169,286	$	198,428

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 borrow from these entities. Based on the type and value of collateral pledged, the Company may draw advances against this collateral.

The following table reflects the advance equivalent of the assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company.

	2018								2017
					Federal								Federal
					Funds								Funds
			Federal		Purchased						Federal		Purchased
(In thousands)	FHLB		Reserve Bank		Lines		Total		FHLB		Reserve Bank		Lines		Total
Advance equivalent	$	301,606	$	9,160	$	57,235	$	368,001	$	294,081	$	9,364	$	47,825	$	351,270
Letters of credit		(80,000)		—		—		(80,000)		(70,000)		—		—		(70,000)
Advances outstanding		(95,126)		—		(8,000)		(103,126)		(121,352)		—		—		(121,352)
Total available	$	126,480	$	9,160	$	49,235	$	184,875	$	102,729	$	9,364	$	47,825	$	159,918

21

At December 31, 2018, loans of $530.1 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit. At December 31, 2018, investments with a market value of $18.8 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Sources and Uses of Funds

Cash and cash equivalents were $42.1 million at December 31, 2018 compared to $62.9 million at December 31, 2017. The $20.8 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 year ended December 31, 2018. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $16.3 million for the year ended December 31, 2018.

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 $78.6 million. The cash outflow primarily consisted of $103.1 million purchases of investment securities, $79.3 million increase in the loan portfolio, and $8.8 million purchases of certificates of deposit in other banks, partially offset by $36.2 million in proceeds from investment maturities, calls, and pay-downs, and $77.2 million in proceeds from sales of investment securities.

Financing activities provided cash of $41.5 million, resulting primarily from a $55.2 million increase in interest-bearing transaction accounts and time deposits, and a $17.5 million increase in demand deposits, partially offset by a $26.2 net repayment of FHLB advances. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2019.

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 $352.0 million in unused loan commitments and standby letters of credit as of December 31, 2018. 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 and paying cash dividends to its shareholders. The Company paid cash dividends to its common shareholders totaling approximately $2.0 million and $1.5 million for the years ended December 31, 2018 and 2017, respectively. A large portion of the Company's liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $5.0 million and $2.6 million in dividends to the Company during the years ended December 31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the Company had cash and cash equivalents totaling $1.3 million and $1.4 million, respectively.

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 phase-in period for the Company began on January 1, 2015. The Federal Reserve System's (FRB) 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, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. 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 will be phased in over four years beginning in 2016.  

22

The capital conservation buffer requirement effectively raises 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.

Under the Basel III requirements, at December 31, 2018, 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 December 31, for the years indicated:

													Minimum Ratios for
											Minimum Ratios		Well-Capitalized
											required for		Under Prompt
											Capital Adequacy		Corrective Action
	2018		2017		2016		2015		2014		Guidelines*		Banks
Risk-based capital ratios:
Total capital ratio	13.28	%	12.93	%	13.88	%	14.78	%	15.78	%	8.0	%	10.0	%
Tier 1 capital ratio	11.21		10.72		11.42		12.03		12.38		6.0		8.0
Common Equity Tier 1 capital ratio	8.48		8.04		8.61		9.04		NA		4.5		6.5
Tier 1 leverage ratio	9.55		9.33		9.87		9.84		9.42		4.0		5.0

*effective January 1, 2015

Stock Dividend For the tenth consecutive year, on July 1, 2018, the Company distributed a four percent stock dividend to common shareholders of record at the close of business on June 15, 2018. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect the stock dividend.

Repurchase Program The Company's share repurchase plan expired on September 8, 2018. As of December 31, 2018, the Company had repurchased a total of 95,709 shares of common stock pursuant to the plan at an average price of $17.90 per share, including 8,668 shares of common stock repurchased pursuant to the plan during the year ended December 31, 2018 at an average price of $20.63 per share.

Commitments, Contractual Obligations, and Off-Balance-Sheet Arrangements

The required payments of time deposits and other borrowed money, not including interest, at December 31, 2018 are as follows:

	Payments due by Period
			Less than 1		1-3		3-5		Over 5
(In thousands)	Total		Year		Years		Years		Years
Time deposits	$	321,571	$	198,609	$	77,304	$	45,658	$	—
Federal Home Loan Bank advances and other borrowed money		95,153		28,231		62,477		4,445		—
Subordinated notes		49,486		—		—		—		49,486

In the normal course of business, the Company is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in the Company's consolidated financial statements. Such activities include traditional off-balance-sheet credit related financial instruments.

The Company provides customers with off-balance-sheet credit support through loan commitments and standby letters of credit.  Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2018 are as follows:

	Amount of Commitment Expiration per Period
			Less than 1		1-3		3-5		Over 5
(In thousands)	Total		Year		Years		Years		Years
Unused loan commitments	$	267,314	$	196,465	$	26,332	$	11,369	$	33,148
Commitments to originate residential first and second mortgage loans		1,759		1,759		—		—		—
Standby letters of credit		82,895		81,527		1,368		—		—
Total	$	351,968	$	279,751	$	27,700	$	11,369	$	33,148

Since many of the unused commitments are expected to expire or be only partially used, the total amount of commitments in the preceding table does not necessarily represent future cash requirements.

23

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 Asset Liability Committee from direction of the Board of Directors. The Asset Liability Committee meets monthly to review, among other things, the sensitivity of the Company's assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee 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 December 31, 2018 and 2017.

	% Change in projected net interest income
Hypothetical shift in interest rates	December 31,
(bps)	2018			2017
200		0.26	%		(3.14)	%
100		1.17	%		(2.05)	%
(100)		3.39	%		1.58	%
(200)		4.19	%		0.46	%

The improvement in our interest rate risk exposure from December 31, 2017 to December 31, 2018 was primarily due to higher offering rates for repricing loans at December 31, 2018 and a decrease in short-term maturity borrowings from December 31, 2017.

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.

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 year ended December 31, 2018.

24

Impact of New Accounting Standards

Intangibles In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40) Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019 and is not expected to have a significant impact on the Company's consolidated financial statements.

Fair Value MeasurementIn August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption on the Company's consolidated financial statements and disclosures.

Derivatives and Hedging The FASB issued guidance within ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (Topic 815) in August 2017. The amendments in ASU 2017-12 to Topic 815, Derivatives and Hedging, are intended to more closely align hedge accounting with companies' risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. The guidance also amends the presentation and disclosure requirements and changes how companies assess effectiveness. Under the new guidance, public companies will have until the end of the first quarter in which a hedge is designated to perform an initial assessment of a hedge's effectiveness. After initial qualification, the new guidance permits a qualitative effectiveness assessment for certain hedges instead of a quantitative test if the company can reasonably support an expectation of high effectiveness throughout the term of the hedge. Additional disclosures include cumulative basis adjustments for fair value hedges and the effect of hedging on individual income statement line items. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the Update. The ASU is not expected to have a significant effect on the Company's Consolidated Financial Statements.

Financial Instruments In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses(Topic 326):Measurement of Credit Losses on Financial Instruments (CECL). The revised accounting guidance will remove all recognition thresholds and will require a company to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. It also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. This new accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2019. While the Company generally expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, the Company has not determined the magnitude of any such one-time adjustment or the overall impact of the new guidance on the Company's consolidated financial statements. The Company has formed a committee and is continuing to evaluate the impact of the ASU's adoption on the Company's consolidated financial statements. Beginning in the first quarter of 2019, the Company plans to run parallel credit risk models to continue evaluating the results.

Leases In February 2016, the FASB issued ASU 2016-02, Leases, in order to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU primarily affects lessee accounting, which requires the lessee to recognize a right-of-use asset and a liability to make lease payments for those leases classified as operating leases under previous GAAP.  For leases with a term of 12 months or less, an election by class of underlying asset not to recognize lease assets and lease liabilities is permitted. The ASU also provides additional guidance as to the definition of a lease, identification of lease components, and sale and leaseback transactions. The amendments in the ASU are effective for interim and annual periods beginning January 1, 2019. The Company's operating leases primarily relate to office space and bank branches.

The Company adopted ASU 2016-02 and related transition guidance on January 1, 2019 and elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allows the carryforward of the historical lease classification, the practical expedient related to land easements and the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company made an accounting policy election to keep leases with an initial term of 12 months or less off of the balance sheet and recognize those lease payments in the Consolidated Statements of Income on a straight-line basis over the lease

25

term. The adoption of ASU 2016-02 and related transition guidance resulted in the recognition of additional net lease assets and liabilities of approximately $296,000 and $296,000, respectively, as of January 1, 2019. The standard will not materially affect our consolidated net earnings or regulatory capital ratios.

Callable Debt Securities In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The ASU does not impact securities held at a discount; the discount continues to be amortized to maturity. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The ASU is effective for the Company on January 1, 2019. The adoption did not have an impact on the consolidated financial statements and related disclosures and no cumulative effect adjustment was required upon adoption.

26

CONSOLIDATED FINANCIAL STATEMENTS

The following consolidated financial statements of the Company and report of the Company's independent auditors appear on the pages indicated.

	Page
Report of Independent Registered Public Accounting Firm	28
Consolidated Balance Sheets as of December 31, 2018 and 2017	29
Consolidated Statements of Income for each of the years ended December 31, 2018, 2017, and 2016	30
Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2018, 2017, and 2016	31
Consolidated Statements of Stockholders' Equity for each of the years ended December 31, 2018, 2017, and 2016	32
Consolidated Statements of Cash Flows for each of the years ended December 31, 2018, 2017, and 2016	33
Notes to the Consolidated Financial Statements	34

27

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors
Hawthorn Bancshares, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Hawthorn Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three‑year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 14, 2019 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company's auditor since 1993.

St. Louis, Missouri
March 14, 2019

28

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except per share data)
	December 31,
	2018		2017
ASSETS
Cash and due from banks	$	23,687	$	23,325
Federal funds sold and other interest-bearing deposits		18,396		39,553
Cash and cash equivalents		42,083		62,878
Certificates of deposit in other banks		12,247		3,460
Available-for-sale debt securities, at fair value		218,205		231,028
Other investments		5,675		6,551
Total investment securities		223,880		237,579
Loans		1,146,627		1,068,432
Allowances for loan losses		(11,652)		(10,852)
Net loans		1,134,975		1,057,580
Premises and equipment - net		34,894		34,811
Mortgage servicing rights		2,931		2,713
Other real estate owned and repossessed assets - net		13,691		13,182
Accrued interest receivable		6,162		5,627
Cash surrender value - life insurance		2,542		2,484
Other assets		8,277		8,902
Total assets	$	1,481,682	$	1,429,216
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand	$	262,857	$	245,380
Savings, interest checking and money market		614,040		584,468
Time deposits $250,000 and over		104,900		63,176
Other time deposits		216,671		232,788
Total deposits		1,198,468		1,125,812
Federal funds purchased and securities sold under agreements to repurchase		24,647		27,560
Federal Home Loan Bank advances and other borrowings		95,153		121,382
Subordinated notes		49,486		49,486
Accrued interest payable		1,035		554
Other liabilities		13,479		13,051
Total liabilities		1,382,268		1,337,845
Stockholders’ equity:
Common stock, $1 par value, authorized 15,000,000 shares; issued 6,278,481 and 6,046,907 shares, respectively		6,279		6,047
Surplus		50,173		45,442
Retained earnings		54,105		50,595
Accumulated other comprehensive loss, net of tax		(6,099)		(5,662)
Treasury stock; 243,638 and 248,898 shares, at cost, respectively		(5,044)		(5,051)
Total stockholders’ equity		99,414		91,371
Total liabilities and stockholders’ equity	$	1,481,682	$	1,429,216

See accompanying notes to the consolidated financial statements.

29

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

	Years Ended December 31,
(In thousands, except per share amounts)	2018		2017		2016
INTEREST INCOME
Interest and fees on loans	$	52,151	$	46,596	$	41,854
Interest on investment securities:
Taxable		4,114		3,257		3,463
Nontaxable		597		657		521
Federal funds sold, other interest-bearing deposits, and certificates of deposit in other banks		699		267		80
Dividends on other investments		218		158		92
Total interest income		57,779		50,935		46,010
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		5,433		2,329		1,159
Time deposits		3,404		2,224		1,907
Total interest expense on deposits		8,837		4,553		3,066
Interest on federal funds purchased and securities sold under agreements to repurchase		603		113		64
Interest on Federal Home Loan Bank advances		1,517		1,590		1,038
Interest on subordinated notes		2,229		1,751		1,495
Total interest expense on borrowings		4,349		3,454		2,597
Total interest expense		13,186		8,007		5,663
Net interest income		44,593		42,928		40,347
Provision for loan losses		1,475		1,765		1,425
Net interest income after provision for loan losses		43,118		41,163		38,922
NON-INTEREST INCOME
Service charges and other fees		3,736		3,437		3,400
Bank card income and fees		2,754		2,614		2,547
Trust department income		1,166		1,137		952
Real estate servicing fees, net		794		740		325
Gain on sale of mortgage loans, net		721		770		851
Other		170		252		240
Total non-interest income		9,341		8,950		8,315
Investment securities gain, net		255		5		602
NON-INTEREST EXPENSE
Salaries and employee benefits		23,104		21,719		20,802
Occupancy expense, net		2,957		2,782		2,751
Furniture and equipment expense		3,001		2,683		1,783
Processing , network, and bank card expense		3,484		3,643		3,309
Legal, examination, and professional fees		1,223		1,308		1,301
FDIC insurance assessment		612		478		567
Advertising and promotion		1,233		1,255		1,083
Postage, printing, and supplies		996		925		1,018
Other		3,722		4,009		4,193
Total non-interest expense		40,332		38,802		36,807
Income before income taxes		12,382		11,316		11,032
Income tax expense		1,668		7,902		3,750
Net income	$	10,714	$	3,414	$	7,282
Basic earnings per share	$	1.78	$	0.56	$	1.19
Diluted earnings per share	$	1.78	$	0.56	$	1.19

See accompanying notes to the consolidated financial statements.

30

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

	Years Ended December 31,
(In thousands)	2018		2017		2016
Net income	$	10,714	$	3,414	$	7,282
Other comprehensive income, net of tax
Investment securities available-for-sale:
Unrealized loss on investment securities available-for-sale, net of tax		(955)		(23)		(972)
Adjustment for gain on sale of investment securities, net of tax		—		(3)		(373)
Defined benefit pension plans:
Net gain (loss) arising during the year, net of tax		345		(673)		(487)
Amortization of prior service cost included in net periodic pension cost, net of tax		173		56		49
Total other comprehensive loss		(437)		(643)		(1,783)
Total comprehensive income	$	10,277	$	2,771	$	5,499

See accompanying notes to the consolidated financial statements.

31

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders' Equity

							Accumulated				Total
							Other				Stock -
	Common				Retained		Comprehensive		Treasury		holders'
(In thousands)	Stock		Surplus		Earnings		Loss		Stock		Equity
Balance, December 31, 2015	$	5,605	$	38,549	$	48,700	$	(2,018)	$	(3,550)	$	87,286
Net income		—		—		7,282		—		—		7,282
Other comprehensive loss		—		—		—		(1,783)		—		(1,783)
Stock based compensation expense		—		17		—		—		—		17
Stock dividend		217		2,932		(3,149)		—		—		—
Purchase of treasury stock		—		—		—		—		(623)		(623)
Cash dividends declared, common stock		—		—		(1,162)		—		—		(1,162)
Balance, December 31, 2016	$	5,822	$	41,498	$	51,671	$	(3,801)	$	(4,173)	$	91,017
Net income		—		—		3,414		—		—		3,414
Other comprehensive loss		—		—		—		(643)		—		(643)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02		—		—		1,218		(1,218)		—		—
Stock based compensation expense		—		3		—		—		—		3
Stock dividend		225		3,941		(4,166)		—		—		—
Purchase of treasury stock		—		—		—		—		(878)		(878)
Cash dividends declared, common stock		—		—		(1,542)		—		—		(1,542)
Balance, December 31, 2017	$	6,047	$	45,442	$	50,595	$	(5,662)	$	(5,051)	$	91,371
Net income		—		—		10,714		—		—		10,714
Other comprehensive loss		—		—		—		(437)		—		(437)
Issuance of stock under equity compensation plan		—		(51)		—		—		186		135
Purchase of treasury stock		—		—		—		—		(179)		(179)
Stock dividend		232		4,782		(5,014)		—		—		—
Cash dividends declared, common stock		—		—		(2,190)		—		—		(2,190)
Balance, December 31, 2018	$	6,279	$	50,173	$	54,105	$	(6,099)	$	(5,044)	$	99,414

See accompanying notes to the consolidated financial statements.

32

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	Year Ended December 31,
(In thousands)	2018		2017		2016
Cash flows from operating activities:
Net income	$	10,714	$	3,414	$	7,282
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,475		1,765		1,425
Depreciation expense		1,797		1,735		1,782
Net amortization of investment securities, premiums, and discounts		1,506		1,664		1,903
Stock based compensation expense		—		3		17
Change in fair value of mortgage servicing rights		27		93		529
Investment securities gain, net		(255)		(5)		(602)
Loss on sales and dispositions of premises and equipment		3		123		(1)
Gain on sales and dispositions of other real estate and repossessed assets		(14)		(45)		(207)
Provision for other real estate owned		26		284		213
Increase in accrued interest receivable		(535)		(444)		(330)
Increase in cash surrender value - life insurance		(58)		(75)		(61)
Decrease (increase) in other assets		854		(808)		317
Decrease in deferred tax asset due to tax reform reclass		—		4,105		—
Increase in accrued interest payable		481		56		116
Increase in other liabilities		667		923		387
Origination of mortgage loans for sale		(36,469)		(33,245)		(36,017)
Proceeds from the sale of mortgage loans		36,990		33,794		37,896
Gain on sale of mortgage loans, net		(721)		(770)		(851)
Other, net		(186)		(88)		(267)
Net cash provided by operating activities		16,302		12,479		13,531
Cash flows from investing activities:
Purchase of certificates of deposit in other banks		(8,787)		(3,460)		—
Proceeds from maturities of certificates of deposit in other banks		—		1,000		—
Net increase in loans		(79,298)		(95,355)		(112,353)
Purchase of available-for-sale debt securities		(103,078)		(64,611)		(113,357)
Proceeds from maturities of available-for-sale debt securities		34,586		31,053		51,855
Proceeds from calls of available-for-sale debt securities		1,685		8,175		17,855
Proceeds from sales of available-for-sale debt securities		77,168		11,653		60,720
Purchases of FHLB stock		(4,713)		(2,483)		(1,759)
Proceeds from sales of FHLB stock		5,591		1,242		—
Purchases of premises and equipment		(2,326)		(1,266)		(1,262)
Proceeds from sales of premises and equipment		13		12		9
Proceeds from sales of other real estate and repossessed assets		585		1,115		4,057
Net cash used in investing activities		(78,574)		(112,925)		(94,235)
Cash flows from financing activities:
Net increase in demand deposits		17,477		9,405		27,940
Net increase in interest-bearing transaction accounts		29,572		115,737		27,651
Net increase (decrease) in time deposits		25,607		(9,996)		7,878
Net decrease in federal funds purchased and securities sold under agreements to repurchase		(2,913)		(3,947)		(25,327)
Repayment of FHLB advances and other borrowings		(220,542)		(183,188)		(24,000)
FHLB advances		194,313		211,670		66,900
Issuance of stock under equity compensation plan		135		—		—
Purchase of treasury stock		(179)		(878)		(623)
Cash dividends paid - common stock		(1,993)		(1,474)		(1,097)
Net cash provided by financing activities		41,477		137,329		79,322
Net (decrease) increase in cash and cash equivalents		(20,795)		36,883		(1,382)
Cash and cash equivalents, beginning of year		62,878		25,995		27,377
Cash and cash equivalents, end of year	$	42,083	$	62,878	$	25,995
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest	$	12,719	$	7,951	$	5,547
Income taxes	$	241	$	3,975	$	3,760
Noncash investing and financing activities:
Other real estate and repossessed assets acquired in settlement of loans	$	635	$	374	$	2,233
Other real estate transferred from other assets	$	471	$	—	$	—
Stock dividends	$	5,014	$	4,166	$	3,149

See accompanying notes to the consolidated financial statements.

33

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

(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 communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area. The Company is subject to competition from other financial and nonfinancial institutions providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

The accompanying consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. 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.

The significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below:

Principles of Consolidation

In December of 2008, the Company formed Hawthorn Real Estate, LLC, (the Real Estate Company); a wholly owned subsidiary of the Company. In December of 2017, the Company formed Hawthorn Risk Management, Inc., (the Insurance Captive); a wholly owned subsidiary of the Company. The consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), the Real Estate Company, and the Insurance Captive. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans

Loans that the Company has the intent and ability to hold for the foreseeable future or to maturity are held for investment at their stated unpaid principal balance amount less unearned income and the allowance for loan losses. Income on loans is accrued on a simple‑interest basis. Loan origination fees and certain direct costs are deferred and recognized over the life of the loan as an adjustment to yield.

Loans Held for Sale

Loans originated, primarily one-to-four family residential mortgage loans, with the intent to be sold in the secondary market are classified as held for sale and are accounted for at the lower of adjusted cost or fair value. Adjusted cost reflects the funded loan amount and any loan origination costs and fees. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. Mortgage loans held for sale were $583,000 at December 31, 2018 compared to $383,000 loans held for sale at December 31, 2017.

Impaired Loans

A loan is considered impaired when it is probable the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. Included in impaired loans are all non-accrual loans and loans whose terms have been modified in a troubled debt restructuring. Impaired loans are individually evaluated for impairment based on fair values of the underlying collateral, obtained through independent appraisals or internal valuations for a collateral dependent loan or by discounting the total expected future cash flows.

34

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Non-Accrual Loans

Loans are placed on nonaccrual status when management believes that the borrower's financial condition, after consideration of business conditions and collection efforts, is such that collection of interest is doubtful. Loans that are contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current.

Restructured Loans

A loan is accounted for as a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the borrowers' financial difficulties, grants a concession to the borrower that it would not otherwise consider. A TDR typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, accrued interest, or an extended maturity date (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Nonperforming TDRs are returned to performing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months. The Company includes all performing and non-performing TDRs in the impaired and non-performing asset totals. The Company measures the impairment loss of a TDR in the same manner as described below. TDRs which are performing under their contractual terms continue to accrue interest which is recognized in current earnings.

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan 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. The fair value of impaired loans deemed collateral dependent, for purposes of the measurement of the impairment loss, can be subject to changing market conditions, supply and demand, condition of the collateral and other factors over time. Such volatility can have an impact on the financial performance of the Company.

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. When loans become 90 days past due, they are generally placed on nonaccrual status or charged off unless extenuating circumstances justify leaving the loan on accrual basis. When loans reach 120 days past due and there is little likelihood of repayment, the uncollectible portion of the loans are charged off. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired.

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded.

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by loan type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type. The Company believes that the five-year look-back period provides a representative historical loss period in the current economic environment. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss.

The Company's methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and  severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, assessment of changes in the quality of the Company's internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

Certificates of Deposit in other banks

Certificates of deposit are investments made by the Company with other financial institutions, in amounts less than $250,000 each in order to qualify for FDIC insurance coverage, that are carried at cost which approximates fair values.

Investment Securities

Available for sale securities

The largest component of the Company's investment portfolio consists of debt securities which are classified as available-for-sale and are carried at fair value. Changes in fair value, excluding certain losses associated with other-than-temporary impairment, are reported in other comprehensive income, net of taxes, a component of stockholders' equity. Securities are periodically evaluated for other-than-temporary impairment in accordance with guidance provided in the FASB ASC Topic 320, Investments – Debt Securities. For those securities with other-than-temporary impairment, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it more likely than not that it will be required to sell the security before the anticipated recovery. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred, which is then recognized in current earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Premiums and discounts are amortized using the interest method over the lives of the respective securities, with consideration of historical and estimated prepayment rates for mortgage‑backed securities, as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available‑for‑sale are included in earnings based on the specific identification method for determining the cost of securities sold.

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

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.

Capital Stock of the Federal Home Loan Bank

The Bank, as a member of the Federal Home Loan Bank System administered by the Federal Housing Finance Agency, is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Des Moines (FHLB) in an amount equal to 12 basis points of the Bank's year-end total assets plus 4.00% of advances from the FHLB to the Bank. These investments are recorded at cost, which represents redemption value.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improvements and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such

36

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

lives are estimated to be 5 to 40 years for buildings and improvements and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.

Mortgage Servicing Rights

The Company originates and sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to the investors or master servicer. Upon a sale of mortgage loans for which servicing rights are retained, the retained mortgage servicing rights asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing activities.

Mortgage servicing rights are carried at fair value in the consolidated balance sheet with changes in the fair value recognized in earnings. As most servicing rights do not trade in an active market with readily observable prices, the Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies, ancillary income, and cost to service. These assumptions are validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party valuation specialist firm.

In addition to the changes in fair value of the mortgage servicing rights, the Company also recorded loan servicing fee income as part of real estate servicing fees, net in the consolidated statements of income. Loan servicing fee income represents revenue earned for servicing mortgage loans. The servicing fees are based on contractual percentage of the outstanding principal balance and recognized as revenue as the related mortgage payments are collected. Corresponding loan servicing costs are charged to expense as incurred.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The valuation write-downs are recorded as other non-interest expense. The Company establishes a valuation allowance related to other real estate owned and repossessed assets on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the cost of the asset.

Pension Plan

The Company provides a noncontributory defined benefit pension plan for all full-time employees.  The benefits are based on age, years of service and the level of compensation during the employees highest ten years of compensation before retirement. Net periodic costs are recognized as employees render the services necessary to earn the retirement benefits. The Company records annual amounts relating to its pension plan based on calculations that incorporate various actuarial and other assumptions including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates.  The Company reviews its assumptions on an annual basis and may make modifications to the assumptions based on current rates and trends when it is appropriate to do so.  The Company believes that the assumptions utilized in recording its obligations under its plan are reasonable based on its experience and market conditions.

The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation – Retirement Plans under the subtopic Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the funded status of a plan as of the date of its fiscal year-end, with limited

37

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

exceptions. Additional disclosures are required to provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures.

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred income tax assets and liabilities are provided as temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements at the enacted tax rate expected to be applied in the period the deferred tax item is expected to be realized. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years.

The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act, (Tax Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation allowance related to capital loss carryforwards, a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter of 2017 related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax return,   within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's ASC Topic 740, Income Taxes.

The Tax Act resulted in stranded income tax effects in accumulated other comprehensive loss, for which new accounting guidance was issued under ASU 2018-02. This guidance allowed the Company to early adopt and retrospectively apply the reclassification of stranded income tax effects from accumulated other comprehensive loss to retained earnings. As of December 31, 2017, the Company reclassified $1.2 million from accumulated other comprehensive loss to retained earnings resulting from the Tax Act.

A tax position is initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Penalties and interest incurred under the applicable tax law are classified as income tax expense. The Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions as of December 31, 2018, 2017, and 2016.

Trust Department

Property held by the Bank in a fiduciary or agency capacity for customers is not included in the accompanying consolidated balance sheets, since such items are not assets of the Company. Trust department income is recognized on the accrual basis.

Consolidated Statements of Cash Flows

For the purpose of the consolidated statements of cash flows, cash and cash equivalents consist of short-term federal funds sold and securities sold or purchased under agreements to resell, overnight interest earning deposits with banks, cash, and due from banks.

Stock-Based Compensation

The Company's stock-based employee compensation plan (the plan) is described in Note 13, Stock Compensation. In accordance with FASB ASC Topic 718, Compensation – Stock Compensation, the Company measures the cost of the stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, on January 1, 2017 and elected to recognize forfeitures as they occur. Prior to the adoption of the ASU, the expense was recognized based on

38

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

an estimation of the number of awards for which the requisite service is expected to be rendered, and is included in salaries and employee benefits in the accompanying Consolidated Statements of Income. The plan expired on February 28, 2010, except as to outstanding options under the plan, and no further options may be granted pursuant to the plan. All options were fully expensed as of September 30, 2017.

Treasury Stock

The purchase of the Company's common stock is recorded at cost. Purchases of the stock are made both in the open market and through negotiated private purchases based on market prices. At the date of subsequent reissue, the treasury stock account is reduced by the cost associated with such stock on a first-in-first-out basis. Gains on the sale of treasury stock are credited to additional paid-in-capital. Losses on the sale of treasury stock are charged to additional paid-in-capital to the extent of pervious gains, otherwise charged to retained earnings.

Stock Dividend On July 1, 2018, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2018. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Summary of Recent Transactions and Events On February 8, 2019, Hawthorn Bank, a wholly-owned subsidiary of Hawthorn Bancshares, Inc., completed the sale of its branch located in Branson, Missouri to Branson Bank, Branson, Missouri. Total deposits transferred were approximately $10.6 million while loans assigned to the branch were retained. The Branson branch land and building were considered assets held for sale at December 31, 2018. The sale is expected to result in a pre-tax gain of approximately $2.1 million, $1.7 million related to the land and building, subject to certain future adjustments required in the definitive agreement. 

Reclassifications Certain prior year information has been reclassified to conform to the 2018 presentation.

The following represents significant new accounting principles adopted in 2018:

Revenue from Contracts with Customers On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue, service charges and fees, debit card income, ATM surcharge income, and other real estate owned sales. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams within the scope of Topic 606 are discussed in Footnote 16.

Financial Instruments The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, in January 2016. The amendments require all equity investments to be measured at fair value with changes in the fair value recognized through net income, other than those accounted for under the equity method of accounting or those that result in the consolidation of the investee. Additionally, these amendments require presentation in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk for those liabilities measured at fair value. The amendments also require use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for interim and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the Company's consolidated financial statements.

The FASB issued ASU 2018-04, Investments - Debt Securities (Topic 320) and Regulated Operations (Topic 980): The amendment in this ASU adds, amends and supersedes various paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and ASC 980, Regulated Operations. The amendments in this ASU are effective when a registrant adopts ASU 2016-01, which for the Company was January 1, 2018. This amendment did not have a significant effect on the Company's consolidated financial statements.

39

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Liabilities The FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products, in March 2016, in order to address current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. Such products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler's checks. The amendments require that the portion of the dollar value of prepaid stored-value products that is ultimately unredeemed (that is, the breakage) be accounted for consistent with the breakage guidance for stored-value product transactions provided in ASC Topic 606 - Revenue from Contracts with Customers. These amendments are effective for interim and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the Company's consolidated financial statements.

Pension The FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost in March 2017. Under the new guidance, the Company presents the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. The Company presents the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. The Company utilizes the ASU's practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote. The amendments were effective January 1, 2018 and did not have a significant effect on the Company's consolidated financial statements. See Note 12 for further discussion.

(2)   Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company's loan portfolio, at December 31, 2018 and 2017 is as follows:

(in thousands)	2018		2017
Commercial, financial, and agricultural	$	207,720	$	192,238
Real estate construction - residential		28,610		26,492
Real estate construction - commercial		106,784		98,340
Real estate mortgage - residential		241,517		246,754
Real estate mortgage - commercial		529,536		472,455
Installment and other consumer		32,460		32,153
Total loans	$	1,146,627	$	1,068,432

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson 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 vehicles. At December 31, 2018, $530.1 million of loans were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

The following is a summary of loans to directors and executive officers or to entities in which such individuals had a beneficial interest of the Company:

(in thousands)
Balance at December 31, 2017	$	6,442
New loans and new directors		1,127
Amounts collected		(1,565)
Balance at December 31, 2018	$	6,004

40

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present unfavorable features.

Allowance for loan losses

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

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, &		Construction -		Construction -		Mortgage -		Mortgage -		Loans to		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Individuals		allocated		Total
Balance at December 31, 2015	$	2,153	$	59	$	644	$	2,439	$	2,935	$	273	$	101	$	8,604
Additions:
Provision for loan losses		690		49		(732)		381		865		113		59		1,425
Deductions:
Loans charged off		389		—		1		495		147		258		—		1,290
Less recoveries on loans		(299)		—		(502)		(60)		(140)		(146)		—		(1,147)
Net loans charged off		90		—		(501)		435		7		112		—		143
Balance at December 31, 2016	$	2,753	$	108	$	413	$	2,385	$	3,793	$	274	$	160	$	9,886
Additions:
Provision for loan losses		1,147		(26)		394		(560)		657		234		(81)		1,765
Deductions:
Loans charged off		649		—		—		219		45		268		—		1,181
Less recoveries on loans		(74)		(88)		—		(83)		(32)		(105)		—		(382)
Net loans charged off		575		(88)		—		136		13		163		—		799
Balance at December 31, 2017	$	3,325	$	170	$	807	$	1,689	$	4,437		345	$	79	$	10,852
Additions:
Provision for loan losses		296		(44)		(20)		516		457		150		120		1,475
Deductions:
Loans charged off		484		48		30		186		38		255		—		1,041
Less recoveries on loans		(100)		(62)		—		(52)		(58)		(94)		—		(366)
Net loans charged off		384		(14)		30		134		(20)		161		—		675
Balance at December 31, 2018	$	3,237	$	140	$	757	$	2,071	$	4,914	$	334	$	199	$	11,652

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration.

Beginning with December 31, 2017, the Company utilized a five-year look-back period, which was considered a representative historical loss period. The look-back period is consistently evaluated for relevance given the current facts and circumstances. 

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

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

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, and		Construction -		Construction -		Mortgage -		Mortgage -		and Other		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Consumer		allocated		Total
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	551	$	—	$	—	$	579	$	37	$	27	$	—	$	1,194
Collectively evaluated for impairment		2,686		140		757		1,492		4,877		307		199		10,458
Total	$	3,237	$	140	$	757	$	2,071	$	4,914	$	334	$	199	$	11,652
Loans outstanding:
Individually evaluated for impairment	$	2,428	$	—	$	153	$	4,793	$	850	$	254	$	—	$	8,478
Collectively evaluated for impairment		205,292		28,610		106,631		236,724		528,686		32,206		—		1,138,149
Total	$	207,720	$	28,610	$	106,784	$	241,517	$	529,536	$	32,460	$	—	$	1,146,627
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment	$	500	$	—	$	48	$	521	$	243	$	21	$	—	$	1,333
Collectively evaluated for impairment		2,825		170		759		1,168		4,194		324		79		9,519
Total	$	3,325	$	170	$	807	$	1,689	$	4,437	$	345	$	79	$	10,852
Loans outstanding:
Individually evaluated for impairment	$	3,007	$	—	$	97	$	5,072	$	2,004	$	176	$	—	$	10,356
Collectively evaluated for impairment		189,231		26,492		98,243		241,682		470,451		31,977		—		1,058,076
Total	$	192,238	$	26,492	$	98,340	$	246,754	$	472,455	$	32,153	$	—	$	1,068,432

Impaired loans

Loans evaluated under ASC 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans individually evaluated for impairment totaled $8.5 million and $10.4 million at December 31, 2018 and 2017, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings (TDRs).

The net carrying value of impaired loans is based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At December 31, 2018 and 2017, $3.8 million and $4.0 million, respectively, of impaired loans were evaluated based on the fair value less estimated selling costs of the loan's collateral. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2018, $1.2 million of the Company's allowance for loan losses was allocated to impaired loans totaling $8.5 million compared to $1.3 million of the Company's allowance for loan losses allocated to impaired loans totaling approximately $10.4 million at December 31, 2017. Management determined that $2.1 million, or 25%, of total impaired loans required no reserve allocation at December 31, 2018 compared to $2.4 million, or 23%, at December 31, 2017 primarily due to adequate collateral values,  acceptable payment history and adequate cash flow ability.

The categories of impaired loans at December 31, 2018 and 2017 are as follows:

(in thousands)	2018		2017
Non-accrual loans	$	5,414	$	5,672
Performing TDRs		3,064		4,684
Total impaired loans	$	8,478	$	10,356

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The following tables provide additional information about impaired loans at December 31, 2018 and 2017, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2018
With no related allowance recorded:
Commercial, financial and agricultural	$	1,264	$	1,550	$	—
Real estate - construction commercial		153		180		—
Real estate - residential		561		602		—
Real estate - commercial		115		119		—
Total	$	2,093	$	2,451	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	1,164	$	1,236	$	551
Real estate - residential		4,232		4,458		579
Real estate - commercial		735		1,093		37
Installment and other consumer		254		280		27
Total	$	6,385	$	7,067	$	1,194
Total impaired loans	$	8,478	$	9,518	$	1,194

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2017
With no related allowance recorded:
Commercial, financial and agricultural	$	1,393	$	1,445	$	—
Real estate - residential		674		688		—
Real estate - commercial		366		395		—
Total	$	2,433	$	2,528	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	1,614	$	1,834	$	500
Real estate - construction commercial		97		97		48
Real estate - residential		4,398		4,500		521
Real estate - commercial		1,638		1,743		243
Installment and other consumer		176		196		21
Total	$	7,923	$	8,370	$	1,333
Total impaired loans	$	10,356	$	10,898	$	1,333

43

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2018 and 2017:

	2018				2017
			Interest				Interest
	Average		Recognized		Average		Recognized
	Recorded		For the		Recorded		For the
(in thousands)	Investment		Period Ended		Investment		Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	1,302	$	—	$	957	$	—
Real estate - construction commercial		120		—		—		—
Real estate - residential		901		10		826		13
Real estate - commercial		59		22		373		—
Installment and other consumer		34		—
Total	$	2,416	$	32	$	2,156	$	13
With an allowance recorded:
Commercial, financial and agricultural	$	1,394	$	32	$	1,536	$	33
Real estate - construction commercial		15		—		49		—
Real estate - residential		4,169		99		4,575		149
Real estate - commercial		763		34		1,641		61
Installment and other consumer		206		2		114		—
Total	$	6,547	$	167	$	7,915	$	243
Total impaired loans	$	8,963	$	199	$	10,071	$	256

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $199,000 and $256,000, for the years ended December 31, 2018 and 2017, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the years reported.

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due. The Company's policy is to discontinue the accrual of interest income on any loan when, in the opinion of management, the ultimate collectability of interest or principal is no longer probable. In general, loans are placed on non-accrual when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual, including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management's collection efforts and the value of the underlying collateral. 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.

44

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The following table provides aging information for the Company's past due and non-accrual loans at December 31, 2018 and 2017.

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
December 31, 2018
Commercial, Financial, and Agricultural	$	205,597	$	266	$	—	$	1,857	$	207,720
Real Estate Construction - Residential		28,404		206		—		—		28,610
Real Estate Construction - Commercial		106,531		100		—		153		106,784
Real Estate Mortgage - Residential		235,734		2,907		156		2,720		241,517
Real Estate Mortgage - Commercial		527,968		1,094		—		474		529,536
Installment and Other Consumer		32,002		242		6		210		32,460
Total	$	1,136,236	$	4,815	$	162	$	5,414	$	1,146,627
December 31, 2017
Commercial, Financial, and Agricultural	$	189,537	$	192	$	2	$	2,507	$	192,238
Real Estate Construction - Residential		25,930		287		275		—		26,492
Real Estate Construction - Commercial		98,243		—		—		97		98,340
Real Estate Mortgage - Residential		242,597		2,173		28		1,956		246,754
Real Estate Mortgage - Commercial		471,476		43		—		936		472,455
Installment and Other Consumer		31,715		239		23		176		32,153
Total	$	1,059,498	$	2,934	$	328	$	5,672	$	1,068,432

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management's risk assessment. Loans are placed on watch status when one or more weaknesses that may result in the deterioration of the repayment exits or the Company's credit position at some future date. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. A loan is classified as a troubled debt restructuring  (TDR) when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation purposes. It is the Company's policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such 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.

45

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The following table presents the risk categories by class at December 31, 2018 and 2017.

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, &		Construction -		Construction -		Mortgage -		Mortgage -		and other
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Consumer		Total
At December 31, 2018
Watch	$	8,871	$	588	$	4,063	$	12,790	$	36,408	$	8	$	62,728
Substandard		53		—		—		1,411		702		3		2,169
Performing TDRs		570		—		—		2,073		377		44		3,064
Non-accrual		1,857		—		153		2,720		474		210		5,414
Total	$	11,351	$	588	$	4,216	$	18,994	$	37,961	$	265	$	73,375
At December 31, 2017
Watch	$	9,868	$	1,459	$	1,284	$	9,978	$	49,197	$	—	$	71,786
Substandard		658		462		—		2,262		723		16		4,121
Performing TDRs		500		—		—		3,116		1,068		—		4,684
Non-accrual		2,507		—		97		1,956		936		176		5,672
Total	$	13,533	$	1,921	$	1,381	$	17,312	$	51,924	$	192	$	86,263

Troubled Debt Restructurings

At December 31, 2018, loans classified as TDRs totaled $5.0 million, of which $2.0 million were classified as nonperforming TDRs and included in non-accrual loans and $3.0 million were classified as performing TDRs. At December 31, 2017, loans classified as TDRs totaled $6.4 million, of which $1.7 million were classified as nonperforming TDRs and included in non-accrual loans and $4.7 million were classified as performing TDRs. Both performing and nonperforming 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 $543,000 and $577,000 related to TDRs were allocated to the allowance for loan losses at December 31, 2018 and 2017, respectively.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2018 and 2017.

	2018					2017
	Recorded Investment (1)					Recorded Investment (1)
	Number of	Pre-		Post-		Number of	Pre-		Post-
(in thousands)	Contracts	Modification		Modification		Contracts	Modification		Modification
Troubled Debt Restructurings
Commercial, financial and agricultural	3	$	510	$	502	3	$	773	$	773
Real estate mortgage - residential	2		149		147	2		118		116
Real estate mortgage - commercial	—		—		—	1		55		49
Installment and other consumer	5		185		117	—		—		—
Total	10	$	844	$	766	6	$	946	$	938

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off, or foreclosed upon during the period ended are not reported.

The Company's portfolio of loans classified as TDRs include concessions for the borrower due to deteriorated financial condition such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. During the year ended December 31, 2018, ten loans meeting the TDR criteria were modified compared to six loans during the year ended December 31, 2017.

The Company considers a TDR to be in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or it is the process of foreclosure. There was one consumer TDR with a $3,000 balance, where a concession was made and subsequently defaulted and was charged off during the year ended December 31, 2018, within twelve months of its modification date. This is compared to one 

46

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

commercial TDR with a $123,000 balance where a concession was made and subsequently defaulted and was charged off during the year ended December 31, 2017.

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

(in thousands)	2018		2017
Commercial	$	1,168	$	727
Real estate construction - residential		179		—
Real estate construction - commercial		12,101		12,380
Real estate mortgage - residential		336		382
Real estate mortgage - commercial		2,909		2,909
Repossessed assets		—		5
Total	$	16,693	$	16,403
Less valuation allowance for other real estate owned		(3,002)		(3,221)
Total other real estate and repossessed assets	$	13,691	$	13,182

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

Balance at December 31, 2016	$	17,291
Additions		374
Proceeds from sales		(1,115)
Charge-offs against the valuation allowance for other real estate owned, net		(192)
Net gain on sales		45
Balance at December 31, 2017		16,403
Additions		1,106
Proceeds from sales		(585)
Charge-offs against the valuation allowance for other real estate owned, net		(245)
Net gain on sales		14
Total other real estate and repossessed assets	$	16,693
Less valuation allowance for other real estate owned		(3,002)
Balance at December 31, 2018	$	13,691

At December 31, 2018, $200,000 of consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to no loans in the process of foreclosure at December 31, 2017.

Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2018, 2017 and 2016, respectively, is summarized as follows:

(in thousands)	2018		2017		2016
Balance, beginning of period	$	3,221	$	3,129	$	3,233
Provision for other real estate owned		26		284		213
Charge-offs		(245)		(192)		(317)
Balance, end of period	$	3,002	$	3,221	$	3,129

47

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

(4)     Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of debt securities classified as available‑for‑sale at December 31, 2018 and 2017 are shown below.

	Total
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
December 31, 2018
U.S. Treasury	$	1,984	$	—	$	(32)	$	1,952
U.S. government and federal agency obligations		10,235		—		(269)		9,966
Government sponsored enterprises		43,784		23		(472)		43,335
Obligations of states and political subdivisions		40,859		28		(501)		40,386
Mortgage-backed securities:		121,230		72		(3,110)		118,192
Other debt securities (a)		3,000		—		—		3,000
Bank issued trust preferred securities (a)		1,486		—		(112)		1,374
Total available-for-sale securities	$	222,578	$	123	$	(4,496)	$	218,205
December 31, 2017
U.S. Treasury	$	1,980	$	—	$	(13)	$	1,967
U.S. government and federal agency obligations		12,341		—		(268)		12,073
Government sponsored enterprises		37,321		—		(424)		36,897
Obligations of states and political subdivisions		47,019		114		(477)		46,656
Mortgage-backed securities:		131,045		44		(2,140)		128,949
Other debt securities (a)		3,000		—		—		3,000
Bank issued trust preferred securities (a)		1,486		—		—		1,486
Total available-for-sale securities	$	234,192	$	158	$	(3,322)	$	231,028

(a) Certain hybrid instruments possessing characteristics typically associated with debt obligations were reclassified from other securities carried at cost to available for sale securities carried at fair value in the years presented.

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

Debt securities with carrying values aggregating approximately $153.0 million and $181.7 million at December 31, 2018 and December 31, 2017, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

48

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The amortized cost and fair value of debt securities classified as available‑for‑sale at December 31, 2018, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	18,076	$	17,964
Due after one year through five years		63,424		62,599
Due after five years through ten years		13,750		13,505
Due after ten years		6,098		5,945
Total		101,348		100,013
Mortgage-backed securities		121,230		118,192
Total available-for-sale securities	$	222,578	$	218,205

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

(in thousands)	2018		2017
Other securities:
FHLB stock	$	5,512	$	6,390
MIB stock		151		151
Equity securities with readily determinable fair values		12		10
Total other investment securities	$	5,675	$	6,551

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 December 31, 2018 and December 31, 2017 were as follows:

	Less than 12 months				12 months or more				Total		Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses		Value		Losses		Value		Losses
At December 31, 2018
U.S. Treasury	$	—	$	—	$	1,952	$	(32)	$	1,952	$	(32)
U.S. government and federal agency obligations		—		—		9,966		(269)		9,966		(269)
Government sponsored enterprises		1,997		(3)		33,346		(469)		35,343		(472)
Obligations of states and political subdivisions		5,851		(16)		28,832		(485)		34,683		(501)
Mortgage-backed securities		10,085		(61)		99,321		(3,049)		109,406		(3,110)
Bank issued trust preferred securities		—		—		1,374		(112)		1,374		(112)
Total	$	17,933	$	(80)	$	174,791	$	(4,416)	$	192,724	$	(4,496)
(in thousands)
At December 31, 2017
U.S. Treasury	$	1,967	$	(13)	$	—	$	—	$	1,967	$	(13)
U.S. government and federal agency obligations		—		—		12,073		(268)		12,073		(268)
Government sponsored enterprises		16,471		(119)		20,426		(305)		36,897		(424)
Obligations of states and political subdivisions		22,013		(165)		12,570		(312)		34,583		(477)
Mortgage-backed securities:		52,829		(488)		69,580		(1,652)		122,409		(2,140)
Total	$	93,280	$	(785)	$	114,649	$	(2,537)	$	207,929	$	(3,322)

49

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The total available for sale portfolio consisted of approximately 366 securities at December 31, 2018. The portfolio included 317 securities having an aggregate fair value of $192.7 million that were in a loss position at December 31, 2018. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer had a fair value of $174.8 million at December 31, 2018. The $4.5 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2018 was caused by interest rate fluctuations.

The total available for sale portfolio consisted of approximately 355 securities at December 31, 2017. The portfolio included 280 securities having an aggregate fair value of $207.9 million that were in a loss position at December 31, 2017. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer had a fair value of $114.6 million at December 31, 2017. The $3.3 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2017 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 December 31, 2018 and 2017, 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.

The table presents the components of investment securities gains and losses, which have been recognized in earnings:

(in thousands)	2018		2017		2016
Investment securities gains, net
Available for sale securities:
Gains realized on sales	$	253	$	38	$	623
Losses realized on sales		—		(33)		(21)
Other-than-temporary impairment recognized		—		—		—
Other investment securities:
Fair value adjustments, net		2		—		—
Investment securities gains, net	$	255	$	5	$	602

(5)      Premises and Equipment

A summary of premises and equipment at December 31, 2018 and 2017 is as follows:

(in thousands)	2018		2017
Land and land improvements	$	9,917	$	9,980
Buildings and improvements		35,674		35,993
Furniture and equipment		14,163		12,973
Construction in progress		754		289
Total		60,508		59,235
Less accumulated depreciation		25,614		24,424
Premises and equipment, net	$	34,894	$	34,811

Depreciation expense for the years ended December 31, 2018, 2017, and 2016 was as follows:

(in thousands)	2018		2017		2016
Depreciation expense	$	1,797	$	1,735	$	1,782

50

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

(6)      Intangible Assets

Mortgage Servicing Rights

At December 31, 2018 and 2017, respectively, the Company serviced mortgage loans for others totaling $279.9 million and $285.8 million, respectively. Mortgage loan servicing fees earned on loans sold and serviced for others were $821,000,  $833,000, and $854,000, for the years ended December 31, 2018, 2017, and 2016, respectively, and are recorded in real estate servicing fees, net in the consolidated statements of income.

The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2018, 2017, and 2016.

(in thousands)	2018		2017		2016
Balance at beginning of period	$	2,713	$	2,584	$	2,847
Originated mortgage servicing rights		245		222		266
Changes in fair value:
Due to changes in model inputs and assumptions (1)		286		364		108
Other changes in fair value (2)		(313)		(457)		(637)
Total changes in fair value		(27)		(93)		(529)
Balance at end of period	$	2,931	$	2,713	$	2,584

(1) The change in fair value resulting from changes in valuation inputs or assumptions 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 reflect changes due to customer payments and passage of time.

Total changes in fair value are reported in real estate servicing fees, net, reported in non-interest income in the Company's consolidated statements of income. 

The following key data and assumptions were used in estimating the fair value of the Company's mortgage servicing rights as of December 31, 2018 and 2017:

	2018		2017
Weighted average constant prepayment rate	8.87	%	9.73	%
Weighted average note rate	3.95	%	3.85	%
Weighted average discount rate	10.28	%	10.09	%
Weighted average expected life (in years)	6.30		5.90

(7)      Deposits

The aggregate amount of time deposits with balances that met or exceeded the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 was $104.9 million and $63.2 million at December 31, 2018 and 2017, respectively. The Company had brokered deposits totaling $39.8 million and $9.8 million at December 31, 2018 and 2017, respectively.

51

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The scheduled maturities of total time deposits at December 31, 2018 were as follows:

(in thousands)
Due within:
2019	$	198,609
2020		43,250
2021		34,054
2022		29,666
2023		15,992
Thereafter		—
Total	$	321,571

The Federal Reserve Bank required the Bank to maintain cash or balances of $1.8 million at both December 31, 2018 and 2017, respectively, to satisfy reserve requirements. Average compensating balances held at correspondent banks were $787,000 and $1.5 million at December 31, 2018 and 2017, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks.

(8)      Federal funds purchased and securities sold under agreements to repurchase

Information relating to federal funds purchased and repurchase agreements is as follows:

	Year End		Average		Average		Maximum
	Weighted		Weighted		Balance		Outstanding at		Balance at
(in thousands)	Rate		Rate		Outstanding		any Month End		December 31,
2018
Federal funds purchased	2.64	%	2.29	%	$	1,242	$	12,863	$	8,000
Short-term repurchase agreements - Bank	0.35		0.67			27,142		36,103		16,647
Short-term repurchase agreements - Company	—		3.51			11,180		25,944		—
Total					$	39,564	$	74,910	$	24,647
2017
Federal funds purchased	1.64	%	0.99	%	$	322	$	1,067	$	—
Short-term repurchase agreements	0.29		0.38			29,190		32,555		27,560
Total					$	29,512	$	33,622	$	27,560

The securities underlying the agreements to repurchase are under the control of the Bank. All securities sold under agreements to repurchase are secured by a portion of the Bank's investment portfolio. Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $42.0 million on an unsecured basis and $16.4 million on a secured basis at December 31, 2018.

During 2018, the Company had purchased U.S. Treasury securities with repurchase agreements in order to generate capital gains to offset capital losses expiring in 2018 and 2019. See Note 10 Income taxes for further discussion.

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

52

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

to repurchase agreements by remaining maturity in the table below are limited to the outstanding balances of the related asset or liability; thus amounts of excess collateral are not shown.

Repurchase Agreements	Remaining Contractual Maturity of the Agreements
	Overnight		Less		Greater
	and		than		than
(in thousands)	continuous		90 days		90 days		Total
At December 31, 2018
U.S. Treasury	$	1,464	$	—	$	—	$	1,464
Government sponsored enterprises		12,976		—		—		12,976
Asset-backed securities		2,207		—		—		2,207
Total	$	16,647	$	—	$	—	$	16,647
At December 31, 2017
U.S. Treasury	$	1,964	$	—	$	—	$	1,964
U.S. government and federal agency obligations		2,977		—		—		2,977
Government sponsored enterprises		8,382		—		—		8,382
Asset-backed securities		14,237		—		—		14,237
Total	$	27,560	$	—	$	—	$	27,560

(9)      Borrowings

Federal  Home Loan Bank and other borrowings of the Company consisted of the following:

			2018				2017
					Year End				Year End
		Maturity	Year End		Weighted		Year End		Weighted
(in thousands)	Borrower	Date	Balance		Rate		Balance		Rate
FHLB advances	The Bank	2018	$	—	—	%	$	63,226	1.65	%
		2019		28,231	1.63	%		28,231	1.63	%
		2020		42,236	2.49	%		21,236	1.90	%
		2021		20,241	2.77	%		4,241	1.73	%
		2022		4,418	2.14	%		4,418	2.14	%
		2023		—	—	%		—	—	%
Other borrowings		2022		27	4.00	%		30	4.00	%
Total Bank			$	95,153			$	121,382
Subordinated notes	The Company	2034	$	25,774	5.49	%	$	25,774	4.30	%
		2035		23,712	4.62	%		23,712	3.43	%
Total Company			$	49,486			$	49,486

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has access to term financing from the FHLB. These borrowings, which are all fixed rate, are secured under a blanket agreement which assigns all investment in FHLB stock, as well as qualifying first mortgage loans as collateral to secure amounts borrowed by the Bank. As of December 31, 2018, the Bank had $95.2 million in outstanding borrowings with the FHLB. Based upon the collateral pledged to the FHLB at December 31, 2018, the Bank could borrow up to an additional $126.5 million under the agreement.

53

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

On March 17, 2005, Exchange Statutory Trust II, a business trust and subsidiary of the Company, issued $23.0 million of 30-year floating rate Trust Preferred Securities (TPS) to a TPS Pool. The floating rate is equal to a three-month LIBOR rate plus 1.83% and reprices quarterly (4.62% at December 31, 2018). The TPS can be prepaid without penalty at any time after five years from the issuance date.

The TPS represent preferred interests in the trust. The Company invested approximately $712,000 in common interests in the trust and the purchaser in the private placement purchased $23.0 million in preferred interests. The proceeds were used by the trust to purchase from the Company its 30-year deeply subordinated debentures whose terms mirror those stated above for the TPS. The debentures are guaranteed by the Company pursuant to a subordinated guarantee. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The trustee for the TPS holders is U.S. Bank, N.A. The trustee does not have the power to take enforcement action in the event of a default under the TPS for five years from the date of default. In the event of default, however, the Company would be precluded from paying dividends until the default is cured.

On March 17, 2004, Exchange Statutory Trust I, a business trust and subsidiary of the Company issued $25.0 million of floating rate TPS to a TPS Pool. The floating rate is equal to the three-month LIBOR rate plus 2.70% and reprices quarterly (5.49% at December 31, 2018). The TPS are fully, irrevocably, and unconditionally guaranteed on a subordinated basis by the Company.

The TPS represent preferred interests in the trust. The Company invested approximately $774,000 in common interests in the trust and the purchaser in the private placement purchased $25.0 million in preferred interests. The proceeds of the TPS were invested in junior subordinated debentures of the Company. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The TPS mature on March 17, 2034. That maturity date may be shortened if certain conditions are met.

The Exchange Statutory Trusts are not consolidated in the Company's financial statements. Accordingly, the Company does not report the securities issued by the Exchange Statutory Trusts as liabilities, and instead reports the subordinated notes issued by the Company and held by the Exchange Statutory Trusts as liabilities. The amount of the subordinated notes as of December 31, 2018 and 2017 was $49.5 million, respectively. The Company has recorded the investments in the common securities issued by the Exchange Statutory Trusts aggregating $1.4 and $1.5 million at December 31, 2018 and 2017, respectively, and the corresponding obligations under the subordinated notes, as well as the interest income and interest expense on such investments and obligations in its consolidated financial statements.

(10)    Income Taxes

The composition of income tax expense for the years ended December 31, 2018, 2017, and 2016 was as follows:

(in thousands)	2018		2017		2016
Current:
Federal	$	1,175	$	2,761	$	3,578
State		(181)		385		489
Total current		994		3,146		4,067
Deferred:
Federal		674		3,189		(267)
State		—		1,567		(50)
Total deferred		674		4,756		(317)
Total income tax expense	$	1,668	$	7,902	$	3,750

54

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Applicable income tax expense for financial reporting purposes differs from the amount computed by applying the statutory federal income tax rate for the reasons noted in the table for the years ended December 31, 2018, 2017, and 2016 are as follows:

	2018				2017				2016
(in thousands)	Amount		%		Amount		%		Amount		%
Income before provision for income tax expense	$	12,382			$	11,316			$	11,032
Tax at statutory federal income tax rate	$	2,600	21.00	%	$	3,847	34.00	%	$	3,751	34.00	%
Tax Cuts and Jobs Act		(343)	(2.77)			3,139	27.74			—	—
State restructuring		(143)	(1.16)			966	8.54			—	—
Tax-exempt income, net		(432)	(3.49)			(394)	(3.48)			(314)	(2.85)
State income tax, net of federal tax benefit		—	—			323	2.85			290	2.63
Other, net		(14)	(0.11)			21	0.18			23	0.21
Provision for income tax expense	$	1,668	13.47	%	$	7,902	69.83	%	$	3,750	33.99	%

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 13.5% for the year ended December 31, 2018 compared to 69.8% and 34.0% for the years ended December 31, 2017 and 2016, respectively. As further described below, the decrease in the effective tax rate in 2018 over 2017 and 2016 is primarily due to a decrease in the federal corporate tax rate, the release of the valuation allowance related to capital losses, a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives.

The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act, (Tax Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation allowance related to capital loss carryforwards, and a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter of 2017 related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax return, within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's ASC Topic 740, Income Taxes. The finalization of the Company's Tax Act adjustments included a $343,000 benefit, while the Company's additional tax planning initiatives included a $143,000 benefit. The total benefits are comprised of $306,000 benefit attributable to the pension contribution discussed above and a $180,000 benefit attributable to various accounting method changes made on the Company's 2017 tax return. Such adjustments were recorded in the second and third quarters of 2018 respectively. 

55

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The components of deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 were as follows:

(in thousands)	2018		2017
Deferred tax assets:
Allowance for loan losses	$	2,285	$	2,279
Impairment of other real estate owned		630		672
Goodwill		227		409
Available-for-sale securities		895		664
Nonaccrual loan interest		119		167
Core deposit intangible		90		160
Pension		1,516		1,669
Deferred compensation		160		87
Other		282		257
Total deferred tax assets	$	6,204	$	6,364
Deferred tax liabilities:
Premises and equipment	$	483	$	333
Mortgage servicing rights		616		570
Deferred loan costs		261		—
Accelerated prepaids		321		356
Other		10		34
Total deferred tax liabilities		1,691		1,293
Net deferred tax assets	$	4,513	$	5,071

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 December 31, 2018. 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. As indicated above, the Company released a $46,000 valuation allowance against certain capital loss carryforwards during the second quarter of 2018 as a result of the execution of certain tax planning initiatives that generated sufficient capital gain income prior to the expiration of the carryforwards.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. For each of the years ended December 31, 2018 and 2017, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

56

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

(11)    Stockholders' Equity

Accumulated Other Comprehensive Loss

The following details the change in the components of the Company's accumulated other comprehensive loss for the years ended December 31, as indicated.

					Accumulated
			Unrecognized Net		Other
			Pension and		Comprehensive
	Unrealized Loss		Postretirement		(Loss)
(in thousands)	on Securities (1)		Costs (2)		Income
Balance, December 31, 2016	$	(1,936)	$	(1,865)	$	(3,801)
Other comprehensive (loss) income, before reclassifications		(37)		90		53
Amounts reclassified from accumulated other comprehensive loss		(5)		(1,085)		(1,090)
Other comprehensive loss, before tax		(42)		(995)		(1,037)
Income tax benefit		16		378		394
Other comprehensive loss, net of tax		(26)		(617)		(643)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02 (3)		(538)		(680)		(1,218)
Balance, December 31, 2017	$	(2,500)	$	(3,162)	$	(5,662)
Other comprehensive (loss) income, before reclassifications		(1,209)		219		(990)
Amounts reclassified from accumulated other comprehensive loss		—		436		436
Other comprehensive (loss) income, before tax		(1,209)		655		(554)
Income tax benefit (expense)		254		(137)		117
Other comprehensive (loss) income, net of tax		(955)		518		(437)
Balance, December 31, 2018	$	(3,455)	$	(2,644)	$	(6,099)

(1) The pre-tax amounts reclassified from accumulated other comprehensive loss are included in gain on sale of investment securities in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost. See Note 12.

(3) As of December 31, 2017, the Company elected to early adopt and retrospectively apply the reclassification of stranded income tax effects from accumulated other comprehensive loss to retained earnings, as permitted under ASU 2018-02.

(12)    Employee Benefit Plans

Employee benefits charged to operating expenses are summarized in the table below for the years ended December 31, as indicated.

(in thousands)	2018		2017		2016
Payroll taxes	$	1,156	$	1,167	$	1,122
Medical plans		2,109		2,026		1,881
401k match and profit sharing		956		873		825
Periodic pension cost		1,707		1,344		1,179
Other		67		82		172
Total employee benefits	$	5,995	$	5,492	$	5,179

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 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.

57

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Other Plans

On November 7, 2018, the Board of Directors of the Company adopted a supplemental executive retirement plan (SERP) which became effective on January 1, 2018. The SERP provides select employees who satisfy certain eligibility requirement with certain benefits upon retirement, termination of employment or death.

As of the year ended December 31, 2018, the accrued liability and expense for this plan was $320,000, and is recognized over the required service period.

Pension

The Company provides a noncontributory defined benefit pension plan for all full‑time employees. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company's funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company made a pension contribution in the amount of $1.8 million on May 10, 2018. There was no 2019 minimum required contribution for the 2018 plan year, and the Company has not determined if will make more than the minimum required contribution. 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.

Obligations and Funded Status at December 31,

(in thousands)	2018		2017
Change in projected benefit obligation:
Balance, January 1	$	27,871	$	23,234
Service cost		1,707		1,343
Interest cost		1,037		1,009
Actuarial (gain) loss		(3,122)		2,843
Benefits paid		(601)		(558)
Balance, December 31,	$	26,892	$	27,871
Change in plan assets:
Fair value, January 1	$	19,924	$	16,502
Actual return on plan assets		(1,329)		2,890
Employer contribution		1,800		1,183
Expenses paid		(122)		(93)
Benefits paid		(601)		(558)
Fair value, December 31,	$	19,672	$	19,924
Funded status at end of year	$	(7,220)	$	(7,947)
Accumulated benefit obligation	$	21,244	$	21,940

58

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

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

The following items are components of net pension cost for the years ended December 31, as indicated:

(in thousands)	2018		2017		2016
Service cost - benefits earned during the year	$	1,707	$	1,343	$	1,179
Interest costs on projected benefit obligations (a)		1,037		1,009		956
Expected return on plan assets (a)		(1,327)		(1,127)		(1,057)
Expected administrative expenses (a)		93		88		70
Amortization of prior service cost (a)		79		79		79
Amortization of unrecognized net loss (a)		140		11		—
Net periodic pension cost	$	1,729	$	1,403	$	1,227

(a) The components of net periodic pension cost other than the service cost component are included in other non-interest expense.

Net periodic pension benefit costs include interest costs based on an assumed discount rate, the expected return on plan assets based on actuarially derived market-related values, and the amortization of net actuarial losses. Net periodic postretirement benefit costs include service costs, interest costs based on an assumed discount rate, and the amortization of prior service credits and net actuarial gains. Differences between expected and actual results in each year are included in the net actuarial gain or loss amount, which is recognized in other comprehensive income. The net actuarial gain or loss in excess of a 10% corridor is amortized in net periodic benefit cost over the average remaining service period of active participants in the Plans. The prior service credit is amortized over the average

remaining service period to full eligibility for participating employees expected to receive benefits.

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss at December 31, 2018 and 2017 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

(in thousands)	2018		2017
Prior service costs	$	(128)	$	(207)
Net accumulated actuarial net loss		(3,219)		(3,796)
Accumulated other comprehensive loss		(3,347)		(4,003)
Net periodic benefit cost in excess of cumulative employer contributions		(3,873)		(3,944)
Net amount recognized at December 31,  balance sheet	$	(7,220)	$	(7,947)
Net gain (loss) arising during period	$	436	$	(1,085)
Prior service cost amortization		79		79
Amortization of net actuarial loss		140		11
Total recognized in other comprehensive loss	$	655	$	(995)
Total recognized in net periodic pension cost and other comprehensive income	$	1,073	$	2,398

Assumptions utilized to determine benefit obligations as of December 31, 2018, 2017 and 2016 and to determine pension expense for the years then ended are as follows:

	2018		2017		2016
Determination of benefit obligation at year end:
Discount rate	4.40	%	3.75	%	4.40	%
Annual rate of compensation increase	4.00	%	4.00	%	4.00	%
Determination of pension expense for year ended:
Discount rate for the service cost	3.75	%	4.40	%	4.70	%
Annual rate of compensation increase	4.00	%	4.00	%	3.78	%
Expected long-term rate of return on plan assets	6.75	%	6.75	%	7.00	%

59

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

The assumed overall expected long-term rate of return on pension plan assets used in calculating 2018 pension expense was 6.75%. Determination of the plan's rate of return is based upon historical returns for equities and fixed income indexes. During the past five years, the Company's plan assets have experienced the following annual returns: -6.2% in 2018, 17.4% in 2017, 8.2% in 2016, -0.4% in 2015, and 8.3% in 2014. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. With a traditional investment mix of over half of the plan's investments in equities, the actual return for any one plan year may fluctuate significantly with changes in the stock market. Primarily due to an increase in the discount rate used in the actuarial calculation of plan income, the Company expects to incur $1.5 million of expense in 2019 compared to $1.7 million 2018.

Plan Assets

The investment policy of the pension plan is designed for growth in value while minimizing risk to the overall portfolio. The Company diversifies the assets through investments in domestic fixed income securities and domestic and international equity securities. The assets are readily marketable and can be sold to fund benefit payment obligations as they become payable. The Company regularly reviews its policies on the investment mix and may make changes depending on economic conditions and perceived investment mix.

The fair value of the Company's pension plan assets at December 31, 2018 and 2017 by asset category was as follows:

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other			Significant
			Identical		Observable			Unobservable
			Assets		Inputs			Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)			(Level 3)
December 31, 2018
Cash equivalents	$	707	$	707	$	—	$	—
U.S gov't agency obligations		1,777		—		1,777		—
Corporate bonds		295		—		295		—
Mutual funds		16,893		16,893		—		—
Total	$	19,672	$	17,600	$	2,072	$	—
December 31, 2017
Cash equivalents	$	1,307	$	1,307	$	—	$	—
U.S gov't agency obligations		1,781		—		1,781		—
Mutual funds		16,836		16,836		—		—
Total	$	19,924	$	18,143	$	1,781	$	—

The following future benefit payments are expected to be paid:

	Pension
Year	benefits
(in thousands)
2019	$	680
2020		801
2021		874
2022		1,026
2023		1,052
2024 to 2028		6,370

60

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

(13)    Stock Compensation

The Company has one equity compensation plan for its employees pursuant to which options were granted.

The following table summarizes the Company's stock option activity:

				Weighted average						Weighted average			Aggregate
	Number of shares			exercise price						Contractual Term			Intrinsic Value
	December 31,			December 31,						(in years)			($000)
	2018	2017	2016	2018		2017		2016		2018	2017	2016	2018		2017		2016
Outstanding, beginning of year	20,909	48,097	70,616	$	14.20	$	18.59	$	19.12
Granted	—	—	—		—		—		—
Exercised	(20,909)	—	—		14.20		—		—
Forfeited or expired	—	(27,188)	(22,519)		—		21.20		20.24
Outstanding, end of year	—	20,909	48,097	$	—	$	14.20	$	18.59	0.00	0.73	0.99	$	0	$	120,242	$	49,842
Exercisable, end of year	—	20,909	46,725	$	—	$	14.20	$	18.72	0.00	0.73	0.97	$	0	$	120,242	$	46,874

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2018.

Total stock-based compensation expense for the years ended December 31, 2018, 2017, and 2016 was zero,  $3,000, and $17,000, respectively. There is no remaining unrecognized compensation expense related to non-vested stock awards. The Plan expired on February 28, 2010, except as to outstanding options under the Plan, and no further options may be granted pursuant to the Plan. During the third quarter of 2018, the remaining 20,909 options to purchase common shares were exercised at a weighted average price of $14.20 a share.

(14)    Earnings per Share

Stock Dividend On July 1, 2018, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2018. 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 common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the year.

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

(dollars in thousands, except per share data)	2018		2017		2016
Basic earnings per share:
Net income available to shareholders	$	10,714	$	3,414	$	7,282
Basic earnings per share	$	1.78	$	0.56	$	1.19
Diluted earnings per share:
Net income available to shareholders	$	10,714	$	3,414	$	7,282
Average shares outstanding		6,026,971		6,057,920		6,095,727
Effect of dilutive stock options		5,042		5,497		—
Average shares outstanding including dilutive stock options		6,032,013		6,063,417		6,095,727
Diluted earnings per share	$	1.78	$	0.56	$	1.19

61

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company's common stock, when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when the Company has a loss from continuing operations available to common shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

The following options to purchase shares during the years ended December 31, 2018, 2017 and 2016 were not included in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.

	Weighted average Shares
	December 31,
	2018	2017	2016
Anti-dilutive shares	—	—	48,097

Repurchase Program The Company's share repurchase plan expired on September 8, 2018. As of December 31, 2018, the Company had repurchased a total of 95,709 shares of common stock pursuant to the plan at an average price of $17.90 per share, including 8,668 shares of common stock repurchased pursuant to the plan during the year ended December 31, 2018 at an average price of $20.63 per share.

(15)    Capital Requirements

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 phase-in period for the Company began on January 1, 2015. The Federal Reserve System's (FRB) 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, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. 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 will be 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 the requirement will increase 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. Once fully phase in , the capital conservation buffer requirement effectively raises 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.

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Under the Basel III requirements, at December 31, 2018 and December 31, 2017, 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:

									Well-Capitalized Under
					Required for Capital				Prompt Corrective Action
	Actual				Adequacy Purposes				Provision
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2018
Total Capital (to risk-weighted assets):
Company	$	165,325	13.28	%	$	99,578	8.00	%	$	N.A.	N.A.	%
Bank		163,814	13.19			99,327	8.00			124,159	10.00
Tier 1 Capital (to risk-weighted assets):
Company	$	139,532	11.21	%	$	74,683	6.00	%	$	N.A.	N.A.	%
Bank		152,002	12.24			74,495	6.00			99,327	8.00
Common Equity Tier 1 Capital
(to risk-weighted assets)
Company	$	105,513	8.48	%	$	56,013	4.50	%	$	N.A.	N.A.	%
Bank		152,002	12.24			55,872	4.50			80,703	6.50
Tier 1 leverage ratio:
Company	$	139,532	9.55	%	$	58,467	4.00	%	$	N.A.	N.A.	%
Bank		152,002	10.43			58,272	4.00			72,839	5.00
(in thousands)
December 31, 2017
Total Capital (to risk-weighted assets):
Company	$	156,045	12.93	%	$	96,577	8.00	%	$	N.A.	N.A.	%
Bank		154,495	12.83			96,326	8.00			120,408	10.00
Tier 1 Capital (to risk-weighted assets):
Company	$	129,369	10.72	%	$	72,433	6.00	%	$	N.A.	N.A.	%
Bank		143,483	11.92			72,245	6.00			96,326	8.00
Common Equity Tier 1 Capital
(to risk-weighted assets)
Company	$	97,033	8.04	%	$	54,325	4.50	%	$	N.A.	N.A.	%
Bank		143,483	11.92			54,184	4.50			78,265	6.50
Tier 1 leverage ratio:
Company	$	129,369	9.33	%	$	55,488	4.00	%	$	N.A.	N.A.	%
Bank		143,483	10.38			55,315	4.00			69,144	5.00

(16)    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 US GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

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.

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

The Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring 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 instruments measured at fair value on a recurring basis

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

Available-for-sale securities

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

Mortgage servicing rights

The fair value of mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rates, 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,

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

cost to service, float earnings rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3.

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2018
Assets:
U.S. Treasury	$	1,952	$	1,952		—	$	—
U.S. government and federal agency obligations		9,966		—		9,966		—
Government sponsored enterprises		43,335		—		43,335		—
Obligations of states and political subdivisions		40,386		—		40,386		—
Mortgage-backed securities		118,192		—		118,192		—
Other debt securities		3,000		—		3,000		—
Bank-issued trust preferred securities		1,374		—		1,374		—
Equity securities		12		—		12		—
Mortgage servicing rights		2,931		—		—		2,931
Total	$	221,148	$	1,952	$	216,265	$	2,931
December 31, 2017
Assets:
U.S. Treasury	$	1,967	$	1,967		—	$	—
U.S. government and federal agency obligations		12,073		—		12,073		—
Government sponsored enterprises		36,897		—		36,897		—
Obligations of states and political subdivisions		46,656		—		46,656		—
Mortgage-backed securities		128,949		—		128,949		—
Other debt securities		3,000		—		3,000		—
Bank-issued trust preferred securities		1,486		—		1,486		—
Equity securities		10		—		10		—
Mortgage servicing rights		2,713		—		—		2,713
Total	$	233,751	$	1,967	$	229,071	$	2,713

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

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)
(in thousands)	Mortgage Servicing Rights
Balance at December 31, 2016	$	2,584
Total gains or (losses) (realized/unrealized):
Included in earnings		(93)
Included in other comprehensive income		—
Purchases		—
Sales		—
Issues		222
Settlements		—
Balance at December 31, 2017	$	2,713
Total gains or losses (realized/unrealized):
Included in earnings		(27)
Included in other comprehensive income		—
Purchases		—
Sales		—
Issues		245
Settlements		—
Balance at December 31, 2018	$	2,931

Valuation methods for instruments measured at fair value on a nonrecurring basis

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

Collateral dependent impaired loans

While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of impaired loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the fair 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 appraisals may be discounted based on the Company's historical knowledge, changes in market conditions from the time of appraisal, or other information available. The Company maintains staff that is trained to perform in-house evaluations and also review third party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Fair values of all loan collateral are regularly reviewed by senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of December 31, 2018, the Company identified $3.8 million in impaired loans that had specific allowances for losses aggregating $867,000. Related to these loans, there were $370,000 in charge-offs recorded during the year ended December 31, 2018. As of December 31, 2017, the Company identified $4.0 million in impaired loans that had specific allowances for losses aggregating $870,000. Related to these loans, there  were $788,000 in charge-offs recorded during the year ended December 31, 2017.

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Other Real Estate Owned and Repossessed Assets

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

			Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total		Assets		Inputs		Inputs		Total Gains
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Losses)*
December 31, 2018
Assets:
Collateral dependent impaired loans:
Commercial, financial, & agricultural	$	1,320	$	—	$	—	$	1,320	$	(244)
Real estate construction - commercial		153		—		—		153		(27)
Real estate mortgage - residential		1,317		—		—		1,317		(44)
Real estate mortgage - commercial		115		—		—		115		(20)
Installment and other consumer		—		—		—		—		(35)
Total	$	2,905	$	—	$	—	$	2,905	$	(370)
Other real estate and repossessed assets	$	13,691	$	—	$	—	$	13,691	$	(15)
December 31, 2017
Assets:
Collateral dependent impaired loans:
Commercial, financial, & agricultural	$	1,583	$	—	$	—	$	1,583	$	(521)
Real estate construction - commercial		153		—		—		153		—
Real estate mortgage - residential		49		—		—		49		(204)
Real estate mortgage - commercial		880		—		—		880		(26)
Installment and other consumer		593		—		—		—		(37)
Total	$	3,258	$	—	$	—	$	2,665	$	(788)
Other real estate and repossessed assets	$	13,182	$	—	$	—	$	13,182	$	(250)

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

(17)    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:

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HAWTHORN BANCSHARES, INC.

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

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.

Investment Securities

A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities.

Other investment securities

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

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.

Federal Funds Sold, Cash, and Due from Banks

The carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell 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. 

Cash Surrender Value – Life Insurance

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

Accrued Interest Receivable and Payable

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

Deposits

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

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

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.

A summary of the carrying amounts and fair values of the Company's financial instruments at December 31, 2018 and 2017 is as follows:

					December 31, 2018
					Fair Value Measurements
						Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2018				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	23,687	$	23,687	$	23,687	$	—	$	—
Federal funds sold and overnight interest-bearing deposits		18,396		18,396		18,396		—		—
Certificates of deposit in other banks		12,247		12,247		12,247		—		—
Available for sale securities		218,205		218,205		1,952		216,253		—
Other investment securities		5,675		5,675		—		5,675		—
Loans, net		1,134,975		1,115,003		—		—		1,115,003
Mortgage servicing rights		2,931		2,931		—		—		2,931
Cash surrender value - life insurance		2,542		2,542		—		2,542		—
Accrued interest receivable		6,162		6,162		6,162		—		—
	$	1,424,820	$	1,404,848	$	62,444	$	224,470	$	1,117,934
Liabilities:
Deposits:
Non-interest bearing demand	$	262,857	$	262,857	$	262,857	$	—	$	—
Savings, interest checking and money market		614,040		614,040		614,040		—		—
Time deposits		321,571		318,949		—		—		318,949
Federal funds purchased and securities sold under agreements to repurchase		24,647		24,647		24,647		—		—
Federal Home Loan Bank advances and other borrowings		95,153		94,326		—		94,326		—
Subordinated notes		49,486		45,749		—		45,749		—
Accrued interest payable		1,035		1,035		1,035		—		—
	$	1,368,789	$	1,361,603	$	902,579	$	140,075	$	318,949

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

					December 31, 2017
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2017				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	23,325	$	23,325	$	23,325	$	—	$	—
Federal funds sold and overnight interest-bearing deposits		39,553		39,553		39,553		—		—
Certificates of deposit in other banks		3,460		3,460		3,460		—		—
Available-for-sale securities		231,028		231,028		1,967		229,061		—
Other investment securities		6,551		6,551		—		6,551		—
Loans, net		1,057,580		1,058,153		—		—		1,058,153
Mortgage servicing rights		2,713		2,713		—		—		2,713
Cash surrender value - life insurance		2,484		2,484		—		2,484		—
Accrued interest receivable		5,627		5,627		5,627		—		—
	$	1,372,321	$	1,372,894	$	73,932	$	238,096	$	1,060,866
Liabilities:
Deposits:
Non-interest bearing demand	$	245,380	$	245,380	$	245,380	$	—	$	—
Savings, interest checking and money market		584,468		584,468		584,468		—		—
Time deposits		295,964		294,778		—		—		294,778
Federal funds purchased and securities sold under agreements to repurchase		27,560		27,560		27,560		—		—
Federal Home Loan Bank advances and other borrowings		121,382		121,291		—		121,291		—
Subordinated notes		49,486		39,692		—		39,692		—
Accrued interest payable		554		554		554		—		—
	$	1,324,794	$	1,313,723	$	857,962	$	160,983	$	294,778

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.

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HAWTHORN BANCSHARES, INC.

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

(18)    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 nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At December 31, 2018, no amounts have been accrued for any estimated losses for these financial instruments.

The contractual amount of off-balance-sheet financial instruments as of December 31, 2018 and 2017 is as follows:

(in thousands)	2018		2017
Commitments to extend credit	$	267,314	$	238,527
Commitments to originate residential first and second mortgage loans		1,759		1,471
Standby letters of credit		82,895		74,004
Total	$	351,968	$	314,002

Commitments

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company's customers. The approximate remaining term of standby letters of credit range from one month to five years at December 31, 2018.

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 amount can be estimated.

(19)    Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 1 Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

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Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are not in the scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue, service charges and fees, debit card income, ATM surcharge income, and sales of other real estate owned. However, the recognition of these revenue streams did not change current business practices or result in any changes to the Company's consolidated financial statements.

Descriptions of our revenue-generating activities within the scope of this guidance, which are presented in our income statement as components of noninterest income are as follows:

Trust Department Revenue

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Gains/Losses on Sales of Other Real Estate Owned (OREO)

The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

(20)    Condensed Financial Information of the Parent Company Only

Following are the condensed financial statements of Hawthorn Bancshares, Inc. (Parent only) as of and for the years indicated:

Condensed Balance Sheets

	December 31,
(in thousands)	2018		2017
Assets
Cash and due from bank subsidiaries	$	1,334	$	1,415
Investment in bank-issued trust preferred securities		1,374		1,486
Investment in subsidiaries		152,735		144,589
Deferred tax asset		1,307		1,677
Other assets		403		133
Total assets	$	157,153	$	149,300
Liabilities and Stockholders' Equity
Subordinated notes	$	49,486	$	49,486
Other liabilities		8,253		8,443
Stockholders' equity		99,414		91,371
Total liabilities and stockholders' equity	$	157,153	$	149,300

Condensed Statements of Income

	For the Years Ended December 31,
	2018		2017		2016
Income
Interest and dividends received from subsidiaries	$	2,653	$	2,653	$	46
Other		428		—		—
Total income		3,081		2,653		46
Expenses
Interest on subordinated notes		2,229		1,751		1,494
Other		3,461		2,358		2,039
Total expenses		5,690		4,109		3,533
Income before income tax benefit and equity in undistributed income of subsidiaries		(195)		(1,456)		(3,487)
Income tax benefit		1,397		191		1,337
Equity in undistributed income of subsidiaries		9,512		4,679		9,432
Net income	$	10,714	$	3,414	$	7,282

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

Condensed Statements of Cash Flows

	For the Years Ended December 31,
(in thousands)	2018		2017		2016
Cash flows from operating activities:
Net income	$	10,714	$	3,414	$	7,282
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Equity in undistributed income of subsidiaries		(9,512)		(4,679)		(9,432)
Stock based compensation expense		—		3		17
Decrease (increase) in deferred tax asset		370		881		(442)
Other, net		(116)		453		769
Net cash provided (used) by operating activities	$	1,456	$	72	$	(1,806)
Cash flows from investing activities:
Decrease (increase) in investment in subsidiaries, net	$	500	$	(250)	$	2,500
Net cash provided (used) by investing activities	$	500	$	(250)	$	2,500
Cash flows from financing activities:
Cash dividends paid - common stock	$	(1,993)	$	(1,474)	$	(1,097)
Issuance of stock under equity compensation plan		135		—		—
Purchase of treasury stock		(179)		(878)		(623)
Net cash used in financing activities	$	(2,037)	$	(2,352)	$	(1,720)
Net decrease in cash and due from banks		(81)		(2,530)		(1,026)
Cash and due from banks at beginning of year		1,415		3,945		4,971
Cash and due from banks at end of year	$	1,334	$	1,415	$	3,945

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HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2018, 2017, and 2016

(21)    Quarterly Financial Information (Unaudited)

									Year
	First		Second		Third		Fourth		to
(In thousands except per share data)	quarter		quarter		quarter		quarter		Date
Year Ended December 31, 2018
Interest income	$	13,544	$	14,288	$	14,751	$	15,196	$	57,779
Interest expense		2,790		3,261		3,443		3,692		13,186
Net interest income		10,754		11,027		11,308		11,504		44,593
Provision for loan losses		300		450		250		475		1,475
Noninterest income		2,203		2,378		2,324		2,436		9,341
Investment gains (losses), net		98		108		50		(1)		255
Noninterest expense		10,254		9,931		9,888		10,259		40,332
Income tax expense		411		225		446		586		1,668
Net income	$	2,090	$	2,907	$	3,098	$	2,619	$	10,714
Net income per share:
Basic earnings per share	$	0.35	$	0.48	$	0.51	$	0.44	$	1.78
Diluted earnings per share		0.35		0.48		0.51		0.44		1.78
Year Ended December 31, 2017
Interest income	$	12,099	$	12,681	$	12,936	$	13,219	$	50,935
Interest expense		1,612		1,861		2,183		2,351		8,007
Net interest income		10,487		10,820		10,753		10,868		42,928
Provision for loan losses		350		330		555		530		1,765
Noninterest income		2,407		2,099		2,181		2,263		8,950
Investment gains (losses), net		—		—		—		5		5
Noninterest expense		9,350		9,687		9,766		9,999		38,802
Income tax expense		1,093		983		847		4,979		7,902
Net income	$	2,101	$	1,919	$	1,766	$	(2,372)	$	3,414
Net income per share:
Basic earnings per share	$	0.35	$	0.32	$	0.29	$	(0.39)	$	0.56
Diluted earnings per share		0.35		0.32		0.29		(0.39)		0.56

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MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS

Market Price

The Company's common stock trades on Nasdaq's global select market under the stock symbol of HWBK. The following table sets forth the range of high and low bid prices of the Company's common stock by quarter for each quarter in 2018 and 2017 in which the stock was traded.

	High		Low
2018
First Quarter	$	20.38	$	19.23
Second Quarter	$	22.22	$	19.52
Third Quarter	$	24.80	$	21.65
Fourth Quarter	$	24.88	$	20.05
2017
First Quarter	$	21.50	$	15.04
Second Quarter	$	20.76	$	15.99
Third Quarter	$	20.67	$	17.38
Fourth Quarter	$	19.95	$	18.37

Shares Outstanding

As of December 31, 2018, the Company had issued 6,278,481 shares of common stock, of which 6,034,843 shares were outstanding. The outstanding shares were held of record by approximately 1,687 shareholders.

Dividends

The following table sets forth information on dividends paid by the Company in 2018 and 2017.

	Dividends Paid
Month Paid	Per Share
January, 2018	$	0.07
April, 2018		0.07
July, 2018		0.10
October, 2018		0.10
Total for 2018	$	0.34
January, 2017	$	0.06
April, 2017		0.06
July, 2017		0.07
October, 2017		0.07
Total for 2017	$	0.26

The board of directors intends that the Company will continue to pay quarterly dividends. The actual amount of quarterly dividends and the payment, as well as the amount, of any special dividend ultimately will depend on the payment of sufficient dividends by the subsidiary Bank to the Company. The payment by the Bank of dividends to the Company will depend upon such factors as the Bank's financial condition, results of operations and current and anticipated cash needs, including capital requirements.

Stock Performance Graph

The following performance graph shows a comparison of cumulative total returns for the Company, the Nasdaq Stock Market (U.S. Companies), and a peer index of financial institutions having total assets of between $1 billion and $5 billion for the period from December 31, 2013, through December 31, 2018. The cumulative total return on investment for each of the periods for the Company, the Nasdaq Stock Market (U.S. Companies) and the peer index is based on the stock price or index at December 31, 2013. The performance graph assumes that the value of an investment in the Company's common stock and each index was $100

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at December 31, 2013 and that all dividends were reinvested. The information presented in the performance graph is historical in nature and is not intended to represent or guarantee future returns.

The comparison of cumulative total returns presented in the above graph was plotted using the following index values and common stock price values:

	Period Ending
	12/31/13		12/31/14		12/31/15		12/31/16		12/31/17		12/31/18
Hawthorn Bancshares, Inc.	$	100.00	$	123.79	$	144.31	$	171.01	$	211.24	$	226.32
Nasdaq Composite (U.S. Companies)	$	100.00	$	114.75	$	122.74	$	133.62	$	173.22	$	168.30
Index of financial institutions ($1 billion to $5 billion)	$	100.00	$	104.56	$	117.04	$	168.38	$	179.51	$	157.27

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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Name	Position with the Company	Position with Subsidiary Bank	Principal Occupation
David T. Turner	Chairman, Chief Executive Officer, President and Director -Class III	Chairman, Chief Executive Officer, President and Director	Position with Hawthorn Bancshares, Inc. and Hawthorn Bank
Kathleen L. Bruegenhemke	Senior Vice President, Chief Risk Officer, Corporate Secretary, and Director-Class I	Senior Vice President, Chief Operating Officer, Chief Risk Officer, Secretary to the Board, and Director	Position with Hawthorn Bancshares, Inc. and Hawthorn Bank
W. Bruce Phelps	Senior Vice President and Chief Financial Officer	Senior Vice President and Chief Financial Officer	Position with Hawthorn Bancshares, Inc. and Hawthorn Bank
Kevin L. Riley	Director‑Class III	Director	Co-owner, Riley Chevrolet, Inc., Riley Toyota-Scion-Cadillac, Inc., Riley Brothers, LLC, and Riley Brothers II, LLC, Jefferson City, Missouri
Frank E. Burkhead	Director-Class II	Director	Owner, Burkhead Wealth Management, Co-owner, Burkhead & Associates, LLC, Pro 356, LLC, and FACT Properties, LLC, Jefferson City, Missouri
Philip D. Freeman	Director‑Class I	Director	Owner, Freeman Properties, JCMO, LLC, Jefferson City, Missouri
Gus S. (Jack) Wetzel III	Director-Class II	Director	President, Meadows Construction Company and Meadows Development Company, Clinton, Missouri
Jonathan D. Holtaway	Director – Class I	Director	Co-owner, Ategra GP, LLC, and Ategra Capital Management LLC, and Managing Member of Ategra Financial Institution Fund, LP, all of Vienna, Virginia

ANNUAL REPORT ON FORM 10-K

A copy of the Company's Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2018 annual meeting of shareholders upon written request to Kathleen L. Bruegenhemke, Corporate Secretary, Hawthorn Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101. The Company will provide a copy of any exhibit to the Form 10-K to any such person upon written request and the payment of the Company's reasonable expenses in furnishing such exhibits. 

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EX-14

Exhibit 14

Hawthorn Bancshares, Inc.

Code of Business Conduct and Ethics

I.GENERAL

A.Purpose and Summary.  To foster a culture of honesty and accountability, we have adopted this Code of Business Conduct and Ethics (this "Code").  This Code sets forth specific corporate policies governing the conduct of the business of Hawthorn Bancshares, Inc. and its subsidiaries (collectively, the "Company" or "we" "our" or "us").  These policies are intended to be applied in good faith with reasonable business judgment to enable us to achieve our operating and financial goals within the framework of the law.

We are committed to conducting our business with honesty and integrity and to maintaining the high standards of conduct reflected in our Code.  We are committed to creating a free and open environment in which compliance with this Code is considered the responsibility of each director, officer, employee and agent of the Company (all "Employees" or "you" or "your").  We require our Employees to act in a manner which promotes:

1.Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

2.Avoidance of conflicts of interest, including disclosure to an appropriate person or persons identified in this Code of any material transaction or relationship that reasonably could be expected to give rise to such a conflict;

3.Full, fair, accurate, timely, and understandable disclosure in reports and documents that our Company files with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Company;

4.Compliance with applicable governmental laws, rules and regulation;

5.The prompt internal reporting to an appropriate person or persons identified in this Code of violations of this Code; and

6.Accountability for adherence to this Code.

The Company recognizes that rapid changes in business constantly pose new ethical and legal considerations.  No set of guidelines, therefore, should be considered the absolute last word under all circumstances.  We encourage our Employees to consult with any supervisor, manager or officer of the Company, or the Audit Committee of the Board of Directors of the Company (the "Audit Committee") if there is any doubt as to the proper course of action (see "Reporting Procedures" below). 

Our policy requires our Employees to observe high standards of business and personal ethics in the conduct of their duties and responsibilities.  Each Employee must obey the law, practice honesty and integrity and act ethically in every aspect of dealing with other Employees, the public, the business community, shareholders, customers, suppliers and government authorities. Our Chief Executive Officer ("CEO") and Senior Officers (as defined herein) are responsible for setting standards of business ethics and overseeing

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compliance with these standards.  Our Employees frequently encounter a variety of ethical and legal questions.  This Code provides general guidance for resolving a variety of legal and ethical questions for our Employees.

The topics discussed in this Code may not cover every situation and are in addition to our other policies and programs.

B.Anti-Retaliation.  No one will suffer any adverse effects to his or her job or career as a result of raising, in good faith, an ethical concern or questioning, in good faith, a Company practice.  It is a violation of this Code to discriminate or retaliate against any Employee for reporting a suspected violation.  Supervisory personnel have a special responsibility to demonstrate high ethical standards in their behavior and to handle reports of suspected violations properly.  Each supervisor is expected to take all necessary actions to ensure compliance with and to bring problems to the attention of higher management or officers of the Company and any member of the Audit Committee.

C.Failureto Comply.  Failure to comply with this Code can have severe consequences for both an Employee and the Company.  Conduct that violates this Code may violate national or state laws and can subject both an Employee and the Company to civil and criminal penalties.  No Employee should be misguided by any sense of loyalty to the Company or a desire for profitability that might cause him or her to disobey any applicable Law or our policies.  Violation of our policies will constitute grounds for disciplinary action, including, when appropriate, termination of employment.

D.Definitions.  As used in this Code, the following terms have the meanings set forth below:

1."Disclosure Controls and Procedures" means the Company's controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files and submits under the Securities Exchange Act of 1934 ("Exchange Act") is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.

2."Fraud" includes, but is not limited to, embezzlement, criminal fraud, taking of property through deceit or artifice, misappropriation and other irregularities including such things as any:

 dishonest or fraudulent act;

 defalcation;

 embezzlement;

 forgery or alteration of negotiable instruments such as Company checks and drafts;

 misappropriation of Company, Employee, customer, partner or supplier assets;

 conversion to personal use of cash, securities, supplies or any other Company asset;

 unauthorized handling or reporting of Company transactions; and

 falsification of Company records or financial statements.

The above list is not all-inclusive but intended to be representative of situations involving Fraud. 

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3."Internal Control over Financial Reporting" is defined as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

4."Laws" means laws, rules, regulations, orders, directives and judgments of governmental agencies, authorities, courts and administrative bodies.

5."Material Nonpublic Information" shall have the same meaning as the phrase is used in connection with the Exchange Act and any related case law, including any information which could reasonably be expected to affect the price of the Company's stock should it become public knowledge.

6."Quarterly Blackout Period" is a period during which the Company prohibits its Senior Officers and certain other persons from trading in its stock, which period begins on the first day of the last month of each fiscal quarter and ends after the market closes on the second trading day after the release to the public of the results of operations for that quarter (and in the case of the last fiscal quarter, its results of operations for the fiscal year then ended).

7."Senior Officers" means all executive officers, the principal financial officer, the controller or the principal accounting officer or any person performing similar functions.

8."Sensitive information" includes confidential and proprietary information, customer lists, materials developed for in-house use, administrative processes, business plans, pricing strategies and any formulas, devices and compilations of information which give the Company a competitive advantage.

II.STANDARDS OF CONDUCT

1.Employees shall exercise honesty, objectivity, and diligence and act ethically in the performance of their duties and responsibilities.  Employees shall be ever mindful of their obligation to maintain the high standards of competence, morality and dignity.

2.Employees shall exhibit loyalty in all matters pertaining to the affairs of the Company.  However, Employees shall not knowingly be a party to any Fraud or other illegal or improper activity.  All Employees are expected to adhere to high standards of personal integrity.  For example, perjury or any other illegal act taken to "protect" the Company and sales made by deception or production quotas achieved through questionable means or figures are wrong and will not be tolerated by the Company.

3.Employees shall not knowingly engage in acts or activities, which are discreditable to the Company.

4.Employees shall refrain from entering into any activity which may be in conflict with the interest of the Company or which would prejudice their ability to carry out objectively their duties and responsibilities.

5.Employees shall not accept anything of value from an Employee, customer or supplier of the Company which would impair or be presumed to impair their professional judgment.  Employees shall not accept costly entertainment or gifts (excepting mementos and novelties of nominal value) from others with whom the Company does business.

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6.Employees shall be prudent in the use of information acquired in the course of their duties.  They shall not use sensitive information for any personal gain, unless approved in advance by the Audit Committee, nor in any manner which would be contrary to Law or detrimental to the welfare of the Company.

7.Employees, when reporting on the results of their work, shall reveal all material facts known to them which, if not revealed, could either distort reports of operations or conceal unlawful practices.

8.Employees shall continually strive for improvement in the proficiency, and in the effectiveness and quality of their service to the Company.

9.Employees shall not become involved in circumstances that produce, or reasonably appear to produce, conflict between personal interests of an employee and interests of the Company, including, without limitation, investments in suppliers, customers or competing companies (except insubstantial securities investments in publicly traded companies), outside employment which would affect working efficiency, and direct or indirect ownership of property or other tangible items which may be sold or leased to the Company.

10.The integrity of the Company's accounting and financial records is based on the validity, accuracy and completeness of basic information supporting entries to the Company's books of account.  All Employees involved in creating, processing or recording such information are held responsible for its integrity and are responsible for full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the Company.

11.Every accounting or financial entry should reflect exactly that which is described by the supporting information.  There must be no concealment of information from (or by) management, or from the Company's independent auditors.

12.Employees who become aware of possible omission, falsification or inaccuracy of accounting or financial entries or basic data supporting such entries, are held responsible for reporting such information.

13.All Employees are encouraged to take part in public matters of their individual choice.  The Company may, to the extent legally permissible, support committees aimed at encouraging political contributions by individuals.

14.In dealing with public officials and private business associates, the Company will utilize only ethical commercial practices.  The Company and its Employees will not seek to influence sales of its products or services (or other events impacting on the Company) by payments of bribes, kickbacks or other questionable inducements.  Payments or commitments (whether cast in the form of commissions, payment or fees for goods or services received, or otherwise) made with the understanding or under circumstances that would indicate that all or part thereof is to be paid (directly or indirectly) to a public official or employee to induce said individual to fail to perform their duties, to perform them in an incorrect manner, or to cause any privilege or favor toward the Company or its products or services are strictly prohibited.

15.While the Company may hire individuals who have knowledge and experience in various technical areas, it is not the Company's intent to employ such persons as a means of gaining access to the trade secrets of others.  New Employees will not be asked to divulge such trade secrets.  Similarly, we require that Employees not make unauthorized disclosure of our trade secrets, either during their employment or thereafter.

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III.COMPLIANCE WITH LAWS

Our policy is to comply fully with all Laws applicable to our business.  You are not authorized by the Company to take any action which you are advised would constitute a violation of Law.

Each Employee and agent is personally responsible for adhering to the standards and restrictions, whether imposed by Law or this Code, applicable to his or her assigned duties and responsibilities and to conduct himself or herself accordingly.  Such standards and restrictions require each employee and agent to avoid any activities which would involve the Company in any practice which is not in compliance with this Code.  Any Employee or agent who does not adhere to such standards and restrictions is acting outside the scope of his or her employment or agency.

Beyond legal compliance, all Employees are expected to observe high standards of business and personal ethics in the discharge of their assigned duties and responsibilities.  This requires the practice of honesty and integrity in every aspect of dealing with other Employees, the public, the business community, shareholders, customers, suppliers and governmental and regulatory authorities.

COMPANY POLICY PROHIBITS EMPLOYEES FROM DISCRIMINATING AGAINST EMPLOYEES, SHAREHOLDERS, DIRECTORS, OFFICERS, CUSTOMERS OR SUPPLIERS ON ACCOUNT OF RACE, COLOR, AGE, SEX, RELIGION OR NATIONAL ORIGIN EXCEPT AS MAY BE REQUIRED BY APPLICABLE LAW.  ALL OF SUCH PERSONS SHALL BE TREATED WITH DIGNITY AND RESPECT AND THEY SHALL NOT BE UNREASONABLY INTERFERED WITH IN THE CONDUCT OF THEIR DUTIES AND RESPONSIBILITIES.

The Company will endeavor to provide a work environment free of all forms of harassment or discrimination, and it is your obligation to assist the Company in that endeavor.

The Company and Employees will comply with all health and safety Laws covering Company facilities and otherwise strive to maintain a safe and happy working environment.

IV.DEFALCATION, MISAPPROPRIATION AND SIMILAR IRREGULARITIES (FRAUD)

The Company prohibits all Fraud.  In accordance with the "Audit Committee – Financial Matters Complaint Policy", situations involving suspected Fraud shall be reported to any supervisor, manager, or officer of the Company, the Chief Financial Officer or the Audit Committee.  All Fraud investigations under the Financial Matters Complaint Policy will be conducted under the authorization and direction of the Audit Committee.

The Chief Financial Officer will maintain close liaison with the Audit Committee and will assist in investigations as deemed appropriate under the circumstances.

V.CONFLICT OF INTEREST

Employees must deal with suppliers, customers, auditors and others doing business with the Company in a manner that avoids even the appearance of conflict between personal interests and those of the Company.  This requirement applies equally to business relationships as well as personal activities.  Employees have a duty of loyalty to the Company to advance its legitimate interests when the opportunity to do so arises.

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You should avoid situations which interfere with your ability to act in an honest and ethical manner, as well as situations where your private interests, or the private interests of members of your family conflict with the interests of the Company.  You should not have any business or financial relationship with customers, suppliers or competitors that could influence or appear to influence you in carrying out your responsibilities.  You should not acquire any interests or participate in any activities that would deprive the Company of the time or attention required to perform your duties properly, or create an obligation of distraction that would affect your judgment or ability to act solely in the Company's best interest.  Any Employee who becomes aware of a potential conflict of interest should communicate this to the Audit Committee in accordance with the Reporting Procedures set forth in Section XV (G) below.  Employees are required to ethically handle actual or apparent conflicts of interest between personal and professional relationships.

Although not all situations in which a conflict may arise can be defined precisely, examples of the types of situations, which must be approved by the Company, are set forth below:

 Obtaining a significant financial or other beneficial interest in one of the Company's outside accounting firms, suppliers, customers or competitors.  None of our executive officers or directors may have been previously employed by our current independent auditor within the most recent five years.

 Engaging in a significant personal business transaction involving the Company for profit or gain.

 If an executive officer or director, obtaining a loan or guarantee from the Company for personal benefit.

 Accepting money, gifts of other than nominal value, excessive hospitality, loans or other improper personal benefits from any supplier, customer or competitor of the Company as a result of his or her position in the Company.

 Participating in the use, sale, loan or gift of Company property, information or position for personal gain.

 Learning of a business opportunity through association with the Company and disclosing it to a third party or investing in the opportunity without first offering it to the Company.

 Competing with the Company.

 Using the Company property or services for personal benefit.

 Working for a competitor, customer or supplier as an employee, consultant or member of its board of directors.

It is always the Bank’s desire to do business with our customers whenever possible; this includes insiders.  In order to make certain that transactions with insiders are fair for everyone involved, we should strive to make the transactions as transparent as possible by adhering to the following guidelines when the expenditure is in excess of $5,000:

1. Whenever possible, transactions with insiders should be pre-approved by the Board of Directors with any affected director abstaining from the approval vote.  Evidence should be presented to the Board of steps that have been taken to make certain that the transaction is fair in relative price and quality of service or product.  This is not to say that the price should always be the cheapest or best quality but should be reasonable in its variance.

6

2. When it is not possible or practical to get pre-approval, the same steps should be taken to gather evidence of the fair nature of the transaction and be presented to the CEO for approval.  The transaction should then be reported to the Board for approval and ratification.

VI.ENTERTAINMENT, GIFTS AND PAYMENTS

The Company considers that in the interests of avoiding even the appearance of impropriety, Employees may not furnish on behalf of the Company expensive gifts or provide excessive entertainment or benefits to other persons.  In addition, Employees may not use their employment status to obtain gain from the Company's auditors, suppliers or customers doing or seeking to do business with the Company.

Family members of Employees may not accept any gift or gratuity in any form from any auditor, supplier or customer of the Company unless the gift is a commonly distributed item of nominal value given for advertising or promotional purposes or is of modest value and consistent with local business custom.    Employees may not solicit or accept gifts, gratuities, tickets or entertainment having a value of $500 or more from auditors, suppliers or customers.

VII.INSIDER TRADING

Employees are prohibited from buying, selling, assigning, transferring or otherwise trading in the securities of the Company while in the possession of Material Nonpublic Information.  Employees also are prohibited from engaging in any action to take advantage of, or pass on to others, Material Nonpublic Information.  These prohibitions are in accordance with the securities laws of the United States. 

Our prohibition applies to Material Nonpublic Information obtained in the course of an Employee's employment relating to any auditors, customers, suppliers and companies with whom the Company is considering a transaction.  We will hold the Employee responsible for the compliance of his or her family members and for the actions of any other party who has received the Material Nonpublic Information from the Employee as a "tip".    

If you are an Executive Officer or Director of the Company, you are subject to certain restrictions on trading, including a prohibition from trading in Company stock during a Quarterly Blackout Period.  Such restrictions may include requiring pre-clearance of trades in Company securities and the prohibition from engaging in any of the following activities with respect to securities of the Company: (i) trading on a short-term basis (i.e., purchase and sale within a six month period); (ii) short sales; or (iii) buying or selling puts or calls.  See the Company's "Section 16 Reporting Policy" and the Company's "Policy Applicable to Covered Persons Regarding Securities Trading and Handling of Nonpublic Information."

VIII.CONCERNS REGARDING DISCLOSURE

The Company is dedicated to fully complying with the applicable securities laws, including reporting requirements, and to ensuring that information contained in its public communications and its publicly filed financial statements and periodic reports fairly present, in all material respects, the matters disclosed and, as applicable, the financial condition, results of operations and cash flows of the Company.

The Company's books and records will reflect, in an accurate, fair and timely manner, the transactions and disposition of assets of the Company.  All funds and assets will be properly recorded and disclosed.  Employees may not use the books and records to mislead those who receive them, or to conceal anything that is

7

improper (e.g., secret funds).  Those responsible for the accounting and record-keeping functions must be vigilant in ensuring that the Company's funds or assets are not used for any unlawful or improper purpose.  Employees are required to promote full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by us and in all public communications.

Accordingly, the Company is committed to providing an environment which is receptive to receiving and effectively dealing with complaints regarding its accounting, internal accounting controls, or auditing matters and maintaining the confidentiality and anonymity of employees who submit concerns regarding questionable accounting or auditing matters.

Under the "Audit Committee – Financial Matters Complaint Policy" the board of directors of the Company and the Audit Committee maintain an "open door" policy to receive, retain and handle complaints and notification regarding the Company's accounting, internal accounting controls, auditing matters and other reportable offenses as described in this policy.  We encourage the prompt reporting of such complaints or concerns so that rapid and constructive action can be taken. 

IX.IMPROPER INFLUENCE OVER AUDITORS

The Company recognizes the importance of preventing improper influence on the conduct of auditors. Accordingly, the Company prohibits any Employee from conducting any action to fraudulently influence, coerce, manipulate, or mislead any of our auditors during their review or examination of our financial statements for the purpose of rendering the financial statements materially misleading. Such conduct is prohibited even if it does not succeed in affecting our audit or review. Improper influence would include, but is not limited to, directly or indirectly:

1.Offering or paying bribes or other financial incentives, including offering future employment or contracts for non-audit services.

2.Providing an auditor with inaccurate or misleading accounting, financial or legal analysis, records or information.

3.Threatening to cancel or canceling existing non-audit or audit engagements if the auditor object to the proposed accounting.

4.Seeking to have a partner removed from the audit engagement because the partner objects to the proposed accounting.

5.Blackmailing; and

6.Making physical threats.

X.INTERNAL CONTROLS OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES

The Company shall maintain Disclosure Controls and Procedures to ensure that the information required to be disclosed by the issuer in its periodic reports, current reports and proxy statements ("Exchange Act Reports") filed by the Company under the Exchange Act is:

· Recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms; and

8

· Accumulated and communicated to the management, including the CEO and Chief Financial Officer ("CFO") to allow timely decisions regarding required disclosure.

The Company shall maintain a system of Internal Controls over Financial Reporting to ensure reliability and adequacy of its books and records and proper recording of all transactions including dispositions of assets.  The Company has established guidelines and procedures related to the keeping of books and records that in reasonable detail accurately and fairly reflect the Company's transactions and dispositions of assets.  The Company's guidelines and procedures are intended to prevent the records from being misleading or concealing anything that is improper. 

Employees must strictly comply with Disclosure Controls and Procedures and Internal Controls over Financial Reporting and must be vigilant in ensuring that the Company's funds or assets are not used for any unlawful or improper purpose.  Employees may only enter into transactions which are executed in accordance with the Company's specific authorization or established formalized policies and procedures.  Employees must not allow any transaction to be recorded in the accounts of the Company unless it is within the scope of written policies and procedures or is specifically and formally approved by an appropriate and designated employee.  Such approval requires the determination that the transaction:

 has been authorized in accordance with Company policy, and

 is supported by documentary evidence to verify the validity of the transaction.

All transactions that have been accounted for in accordance with Company policy will be accumulated and processed in a manner which will permit preparation of financial statements, reports and data for purposes of internal, public and regulatory reporting.  Such statements, reports and data must be in a form sufficient to reflect accurately and fairly the results of transactions entered into by the Company and to permit proper accountability for assets.

The implementation and maintenance of Disclosure Controls and Procedures and Internal Controls over Financial Reporting that are adequate in all respects to satisfy the requirements of the Company will be the primary responsibility of the Chief Financial Officer.  All failures regarding these of which an Employee becomes aware should be reported to the Chief Financial Officer,so that deficiencies can be corrected and assurance of compliance can be maintained.

XI.CONFIDENTIAL, PROPRIETARY INFORMATION

Employees have access to and become knowledgeable about sensitive information regarding the Company and our customers that is confidential, private or proprietary and which is valuable to us.  Disclosure of confidential and proprietary information outside the Company either during or after an Employee's employment with the Company could be irreparably harmful to the Company or a customer or be helpful to a competitor.  The Company regularly receives sensitive information from those with whom it does business.  Confidential and proprietary information of a customer is often received under the terms of a written agreement that specifies the Company's obligations for the use and protection of the customer's information ("Customer Confidentiality Agreements").

Employees entrusted with or otherwise knowledgeable about information of a confidential or proprietary nature, shall not disclose such information to non-employees without written Company authorization.

9

Employees shall disclose sensitive information to other Employees of the Company only on a need to know basis.

Employees must use or disclose the customer's sensitive information only for Company purposes and not for personal benefit or a competing interest.  Access to sensitive information will be limited to those having a need to know.  Employees have a continuing duty to the Company to maintain the confidentiality of sensitive information both during and after employment.  Employees must protect the confidentiality of any such information, whether or not such a Customer Confidentiality agreement exists, and limit use of it to what is authorized.  Employees must protect the confidentiality of such customer sensitive information, whether or not such customer confidentiality agreement exists, and limit the use of such information to the extent authorized by the customer.

XII.FAIR DEALING

The Company is committed to promoting the values of honesty, integrity and fairness in the conduct of its business and sustaining a work environment that fosters mutual respect, openness and individual integrity. Employees are expected to deal honestly and fairly with the Company's customers, suppliers, competitors and other third parties.  To this end, Employees shall not:

 make false or misleading statements to customers, suppliers or other third parties;

 make false or misleading statements about competitors;

 solicit or accept any fee, commission or other compensation for referring customers to third-party vendors; or

 otherwise take unfair advantage of the Company's customers or suppliers, or other third parties, through manipulation, concealment, abuse of privileged information or any other unfair-dealing practice.

XIII.IMPROPER INFLUENCE OR PAYMENTS; POLITICAL CONTRIBUTIONS

In dealing with public officials and private business associates, the Company will utilize only ethical commercial practices.  Improper influence over auditors, suppliers or customers through accepting or giving bribes, kickbacks or other payoffs and other questionable inducements is illegal, unethical and dishonest.  Accordingly, the Company prohibits Employees from using such schemes to influence sales of its products or services (or other events impacting on the Company).

Employees must not take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged to perform an audit of the financial statements of the Company for the purpose of rendering such financial statements materially misleading.  The Company strictly prohibits Employees from accepting or taking any kickbacks, bribes and other illegal payments.

Without our prior approval, Employees may not directly or indirectly offer, solicit, provide or accept any kind of payments, commitments (whether cast in the form of commissions, payments, fees or goods or services received or otherwise) or contribution of a significant value (other than salary, wages or other ordinary compensation from the Company) for the purpose of:

 influencing customers, suppliers or governmental entities including their officers or employees to cause any privilege or favor toward the Company or its products,

10

 obtaining, giving or keeping business,

 persuading any officials or employees for another company to fail to perform or improperly perform their duties, or

 influencing legislation or regulations.

The Company policy does not prohibit expenditures of nominal amounts by Employees for meals and entertainment of suppliers and customers which are ordinary and customary business expenses, if they are otherwise lawful.  The lawful expenditures incurred in this way should be properly accounted for in an expense report.  Employees may not use Company funds, goods or services as contributions for political parties, candidates or campaigns, unless previously authorized in writing by the Company.

XIV.RECORD RETENTION AND DESTRUCTION; GOVERNMENT INVESTIGATIONS

The Company's corporate records are important assets.  The Company is required by Law and its business needs to follow certain specific requirements in managing Company records, including certain requirements regarding the retention and destruction of certain records.  Records include paper documents, CDs, computer hard disks, e-mail, floppy disks, microfiche, microfilm and all other media, and all other records Employees produce, whether in hard copy or electronic form, and informal records such as desk calendars and personal notes regarding Company matters.  The Company and its Employees may be subject to certain civil and criminal penalties for failure to comply with these requirements.  From time to time the Company establishes retention or destruction policies and schedules for specific categories of records in order to ensure legal compliance, and also to accomplish other objectives, such as preserving intellectual property and cost management. 

Each Employee must fully comply with any such published records retention or destruction policies and schedules with the important exceptions described below.  If an Employee has reason to believe, or the Company informs an Employee (such as through a legal hold described in the next subsection), that Company records are relevant to pending or anticipated litigation or a governmental proceeding or investigation, then the Employee must preserve those records until the Company's legal counsel determines that the records are no longer needed.  This exception to any record destruction policy supersedes any previously or subsequently established destruction schedule for those records.  If an Employee has reason to believe that the exception to any record destruction policy may apply, or has any question regarding the possible applicability of such exception, the Employee should contact the Company's CEO or Chief Financial Officer for advice.

XV.ADMINISTRATION OF CODE OF BUSINESS CONDUCT

This Code of Business Conduct of the Company shall be administered as follows:

A.Scope.  The Audit Committee shall, periodically, in light of the experience of the Company, review this Code, and when necessary or desirable, make recommendations to the Board of Directors (i) to ensure its continued conformance to applicable Law, (ii) to ensure that it meets or exceeds industry standards, and (iii) to ensure that any weaknesses revealed through monitoring, auditing and reporting systems are eliminated or corrected.

B.Allocations of Responsibility.  The Audit Committee shall be responsible for the administration of this Code.  The Audit Committee shall establish such procedures as it shall deem necessary or desirable in

11

order to discharge this responsibility.  Such procedures shall provide for obtaining advice of legal counsel where appropriate.  In discharging these responsibilities, the Audit Committee may delegate authority to such committees, officers and other employees and may engage such agents and advisors as it shall deem necessary or desirable.

C.Delegation of Substantial Discretionary Authority.  No Employee shall delegate substantial discretionary authority to any individual who such Employee knows, or through the exercise of due diligence should know, has a propensity to engage in illegal activities.

D.Communication of Policies.  To ensure the continued dissemination and communication of this Code, the Audit Committee shall take, or cause to be taken, reasonable steps to communicate effectively the standards and procedures included in this Code to employees and agents of the Company.

E.Monitoring and Auditing.  The Audit Committee shall take reasonable steps to monitor and audit compliance with this Code, including the establishment of monitoring and auditing systems that are reasonably designed to detect conduct in violation of this Code by employees and agents of the Company.

To the extent so directed by the Audit Committee, the information developed by the Company's independent accountants in performing their engagement by the Company and by its internal auditors in the performance of their assigned responsibilities shall be made available to the Audit Committee in its capacity as administrator of this Code as a means of monitoring and auditing compliance with this Code.

To the extent so directed by the Audit Committee, the results of the periodic health, safety and environmental audits and export administration audits of the Company's facilities shall be made available to the Audit Committee in its capacity as the administrator of this Code as a means to monitor and audit compliance with this Code.

F.Board Committees.  The CEO or the Chief Financial Officer shall report to the Audit Committee, at least once each year, regarding the general effectiveness of this Code.

G.Reporting Procedures.  The Company expects Employees to report possible violations of this Code.  No retaliatory action will be taken against Employees who report in good faith suspected criminal activity or ethical violations.  You should first consult with your immediate supervisor.  Supervisors are responsible for maintaining a workplace environment that encourages and solicits frank and open communication regarding the importance of operating under this Code.

Employees that feel uncomfortable raising a concern with their immediate supervisor should notify the head of their operation.  If this course of action is not acceptable under the circumstances, Employees may contact the Chief Financial Officer or any other Senior Officer, or any member of the Audit Committee. Employees may write directly to the Audit Committee at the following address:

Audit Committee
Hawthorn Bancshares, Inc.
132 East High Street, Box 688
Jefferson City, MO 65102
Attn:  Chairman of Audit Committee

12

Employees may make reports anonymously to the Audit Committee as stated above if the Employees deem it necessary. Employees may submit anonymous complaints via the Internet by completing the "whistleblower" section of the Company's internet website https://hawthorn.ethicaladvocate.com.  Employees may also submit anonymous complaints by calling Ethical Advocate’s call center for Hawthorn Bancshares toll free at (844) 379-4453.  Employees are, however, encouraged to identify themselves, in the knowledge that there will be no retaliation where reports are made in good faith, to enable the Company to clarify details and take appropriate action

The Company will promptly forward all financial matters complaints to the Audit Committee to investigate as appropriate and, as appropriate, will investigate any report of alleged misbehavior, take the appropriate action and respect the rights of all parties concerned.

H.Investigation of Violations.  If, through operation of the Company's compliance monitoring and auditing systems or its violation reporting systems or otherwise, the Company receives information regarding an alleged violation of this Code, the person or persons authorized by the Audit Committee to investigate alleged violations of this Code shall, as appropriate:

1.evaluate such information as to gravity and credibility;

2.initiate an informal inquiry or a formal investigation with respect thereto;

3.prepare a report of the results of such inquiry or investigation, including recommendations as to the disposition of such matter;

4.make the results of such inquiry or investigation available to the Board of Directors or the Audit Committee for action;

5.recommend discipline or changes in this Code necessary or desirable to prevent further similar violations; and

6.if required, ensure reporting of any change or waiver of this Code within 2 business days of the change or waiver on a Form 8-K or on the Company's website.

The Company may disclose the results of investigations to law enforcement agencies.

I.Documentation.  Subject to the applicable document retention program, the Company shall document its compliance efforts and results to evidence its commitment to comply with the standards and procedures set forth above.

XVI.COMPLIANCE WITH CODE

The Company encourages strict compliance with this Code.  Failure to comply with this Code can have severe consequences for both Employees and the Company.  The Audit Committee will impose appropriate discipline, which may include discharge, for violations of this Code.  Conduct that violates this Code may also violate federal or state laws and can subject both Employees and the Company to civil and criminal penalties.  Only with the approval of our board of directors or any committee created by our board of directors, the Company may, in special and appropriate circumstances, waive compliance with this Code by individual Senior Officers or directors.

13

XVII.DISSEMINATION; DISTRIBUTION AND ACKNOWLEDGMENT

This Code will be posted at each Company office and facility in the appropriate locations, and may be made available on the Company's internet website.  If required by applicable Law, amendments to this Code will be filed with the SEC on Form 8-K and posted at each Company office and facility. 

***

14

[At commencement of employment and on a periodic basis thereafter, anyone who may have access to sensitive information will be provided with a copy of this Code and will be required to sign the prescribed form of acknowledgment.]

I acknowledge that I have received a copy of the Hawthorn Bancshares, Inc. Code of Business Conduct and Ethics and that I have read this Code and understand its provisions.

List any organizations/entities of which you are on the board, act as an officer, or have official signatory authority (N/A if none):

________________________________________________________________________

________________________________________________________________________

I am not employed by any other entity or individual, except as listed below (N/A if none):

________________________________________________________________________

________________________________________________________________________

_________________________________________

Signature

_________________________________________

Printed Name

_____________________

Date

15

EX-21

Exhibit 21

List of Subsidiaries

Name of Subsidiary	Jurisdiction of Organization
Union State Bancshares, Inc.	Missouri
Hawthorn Bank	Missouri
Jefferson City IHC, LLC	Missouri (limited liability company)
HB Reality, LLC.	Missouri (limited liability company)
Exchange National Statutory Trust I	Connecticut
Exchange National Statutory Trust II	Delaware
Hawthorn Real Estate, LLC	Missouri (limited liability company)
Hawthorn Risk Management, Inc.	Missouri

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Hawthorn Bancshares, Inc.:

We consent to the incorporation by reference in the registration statement (No. 333‑68366 and No. 333-136477) on Form S-8 of Hawthorn Bancshares, Inc. of our reports dated March 14, 2019, with respect to the consolidated balance sheets of Hawthorn Bancshares, Inc. as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the consolidated financial statements), and the effectiveness of internal control over financial reporting as of December 31, 2018, which reports appear in the December 31, 2018 annual report on Form 10‑K of Hawthorn Bancshares, Inc.

/s/ KPMG LLP

St. Louis, Missouri

March 14, 2019

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, David T. Turner, certify that:

1.  I have reviewed this report on Form 10-K of Hawthorn Bancshares, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

3
Date: March 14, 2019
	/s/ David T. Turner
	David T. Turner
	Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, W. Bruce Phelps, certify that:

1.  I have reviewed this report on Form 10-K of Hawthorn Bancshares, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)  Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)  Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)  Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)  Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.  The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)  All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)  Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 14, 2019
	/s/ W. Bruce Phelps
	W. Bruce Phelps
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

In connection with the Annual Report of Hawthorn Bancshares, Inc. (the Company) on Form 10-K for the period ended December 31, 2018 as filed with the Securities and Exchange Commission (the Report), I, David T. Turner, Chairman of the Board and Chief Executive Officer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(a)          The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(b)          The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated: March 14, 2019
	/s/ David T. Turner
	David T. Turner
	Chairman of the Board and Chief Executive Officer

“A signed original of this written statement required by Section 906 has been provided to Hawthorn Bancshares, Inc. and will be retained by Hawthorn Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.”

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

In connection with the Annual Report of Hawthorn Bancshares, Inc. (the Company) on Form 10-K for the period ended December 31, 2018 as filed with the Securities and Exchange Commission (the Report), I, W. Bruce Phelps, Chief Financial Officer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(a)          The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(b)          The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated: March 14, 2019
	/s/ W. Bruce Phelps
	W. Bruce Phelps
	Chief Financial Officer

“A signed original of this written statement required by Section 906 has been provided to Hawthorn Bancshares, Inc. and will be retained by Hawthorn Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.”

XML

Document and Entity Information - USD ($)	12 Months Ended
	Dec. 31, 2018	Mar. 14, 2019	Jun. 29, 2018
Document And Entity Information Abstract
Entity Registrant Name	HAWTHORN BANCSHARES, INC.
Entity Central Index Key	0000893847
Trading Symbol	hwbk
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		6,034,843
Entity Current Reporting Status	Yes
Entity Public Float			$ 103,406,154
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Document Type	10-K
Document Period End Date	Dec. 31, 2018
Amendment Flag	false
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	FY
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false

XML

Consolidated Balance Sheets - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
ASSETS
Cash and due from banks	$ 23,687	$ 23,325
Federal funds sold and other interest-bearing deposits	18,396	39,553
Cash and cash equivalents	42,083	62,878
Certificates of deposit in other banks	12,247	3,460
Available-for-sale debt securities, at fair value	218,205	231,028
Other investments	5,675	6,551
Total investment securities	223,880	237,579
Loans	1,146,627	1,068,432
Allowances for loan losses	(11,652)	(10,852)
Net loans	1,134,975	1,057,580
Premises and equipment - net	34,894	34,811
Mortgage servicing rights	2,931	2,713
Other real estate owned and repossessed assets - net	13,691	13,182
Accrued interest receivable	6,162	5,627
Cash surrender value - life insurance	2,542	2,484
Other assets	8,277	8,902
Total assets	1,481,682	1,429,216
Deposits
Non-interest bearing demand	262,857	245,380
Savings, interest checking and money market	614,040	584,468
Time deposits $250,000 and over	104,900	63,176
Other time deposits	216,671	232,788
Total deposits	1,198,468	1,125,812
Federal funds purchased and securities sold under agreements to repurchase	24,647	27,560
Federal Home Loan Bank advances and other borrowings	95,153	121,382
Subordinated notes	49,486	49,486
Accrued interest payable	1,035	554
Other liabilities	13,479	13,051
Total liabilities	1,382,268	1,337,845
Stockholders' equity:
Common stock, $1 par value, authorized 15,000,000 shares; issued 6,278,481 and 6,046,907 shares, respectively	6,279	6,047
Surplus	50,173	45,442
Retained earnings	54,105	50,595
Accumulated other comprehensive loss, net of tax	(6,099)	(5,662)
Treasury stock; 243,638 and 248,898 shares, at cost, respectively	(5,044)	(5,051)
Total stockholders' equity	99,414	91,371
Total liabilities and stockholders' equity	$ 1,481,682	$ 1,429,216

XML

Consolidated Balance Sheets (Parentheticals) - $ / shares	Dec. 31, 2018	Dec. 31, 2017
Consolidated Balance Sheets
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	6,278,481	6,046,907
Treasury stock, shares	243,638	248,898

XML

Consolidated Statements of Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
INTEREST INCOME
Interest and fees on loans	$ 52,151	$ 46,596	$ 41,854
Interest on investment securities:
Taxable	4,114	3,257	3,463
Nontaxable	597	657	521
Federal funds sold, other interest-bearing deposits, and certificates of deposit in other banks	699	267	80
Dividends on other investments	218	158	92
Total interest income	57,779	50,935	46,010
Interest on deposits:
Savings, interest checking and money market	5,433	2,329	1,159
Time deposits	3,404	2,224	1,907
Total interest expense on deposits	8,837	4,553	3,066
Interest on federal funds purchased and securities sold under agreements to repurchase	603	113	64
Interest on Federal Home Loan Bank advances	1,517	1,590	1,038
Interest on subordinated notes	2,229	1,751	1,495
Total interest expense on borrowings	4,349	3,454	2,597
Total interest expense	13,186	8,007	5,663
Net interest income	44,593	42,928	40,347
Provision for loan losses	1,475	1,765	1,425
Net interest income after provision for loan losses	43,118	41,163	38,922
NON-INTEREST INCOME
Gain on sale of mortgage loans, net	721	770	851
Other	170	252	240
Total non-interest income	9,341	8,950	8,315
Investment securities gain, net	255	5	602
NON-INTEREST EXPENSE
Salaries and employee benefits	23,104	21,719	20,802
Occupancy expense, net	2,957	2,782	2,751
Furniture and equipment expense	3,001	2,683	1,783
Processing, network, and bank card expense	3,484	3,643	3,309
Legal, examination, and professional fees	1,223	1,308	1,301
FDIC insurance assessment	612	478	567
Advertising and promotion	1,233	1,255	1,083
Postage, printing, and supplies	996	925	1,018
Other	3,722	4,009	4,193
Total non-interest expense	40,332	38,802	36,807
Income before income taxes	12,382	11,316	11,032
Income tax expense	1,668	7,902	3,750
Net income	$ 10,714	$ 3,414	$ 7,282
Basic earnings per share (in dollars per share)	$ 1.78	$ 0.56	$ 1.19
Diluted earnings per share (in dollars per share)	$ 1.78	$ 0.56	$ 1.19
Service charges and other fees
NON-INTEREST INCOME
Income from fees	$ 3,736	$ 3,437	$ 3,400
Bank card income and fees
NON-INTEREST INCOME
Income from fees	2,754	2,614	2,547
Trust department income
NON-INTEREST INCOME
Income from fees	1,166	1,137	952
Real estate servicing fees, net
NON-INTEREST INCOME
Income from fees	$ 794	$ 740	$ 325

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Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Consolidated Statements of Comprehensive Income
Net income	$ 10,714	$ 3,414	$ 7,282
Investment securities available-for-sale:
Unrealized (loss) gain on investment securities available-for-sale, net of tax	(955)	(23)	(972)
Adjustment for gain on sale of investment securities, net of tax	0	(3)	(373)
Defined benefit pension plans:
Net gain (loss) arising during the year, net of tax	(345)	673	487
Amortization of prior service cost included in net periodic pension cost, net of tax	173	56	49
Other comprehensive (loss) income, net of tax	437	643	1,783
Total comprehensive income	$ 10,277	$ 2,771	$ 5,499

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Consolidated Statements of Stockholders' Equity - USD ($) $ in Thousands	Common Stock	Surplus	Retained Earnings	Accumulated Other Comprehensive Loss	Treasury Stock	Total
Balance at Dec. 31, 2015	$ 5,605	$ 38,549	$ 48,700	$ (2,018)	$ (3,550)	$ 87,286
Increase (Decrease) in Stockholders' Equity
Net income	0	0	7,282	0	0	7,282
Other comprehensive income (loss)	0	0	0	(1,783)	0	(1,783)
Stock based compensation expense	0	17	0	0	0	17
Stock dividend	217	2,932	(3,149)	0	0	0
Purchase of treasury stock	0	0	0	0	(623)	(623)
Cash dividends declared, common stock	0	0	(1,162)	0	0	(1,162)
Balance at Dec. 31, 2016	5,822	41,498	51,671	(3,801)	(4,173)	91,017
Increase (Decrease) in Stockholders' Equity
Net income	0	0	3,414	0	0	3,414
Other comprehensive income (loss)	0	0	0	(643)	0	(643)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02	0	0	1,218	(1,218)	0	0
Stock based compensation expense	0	3	0	0	0	3
Stock dividend	225	3,941	(4,166)	0	0	0
Purchase of treasury stock	0	0	0	0	(878)	(878)
Cash dividends declared, common stock	0	0	(1,542)	0	0	(1,542)
Balance at Dec. 31, 2017	6,047	45,442	50,595	(5,662)	(5,051)	91,371
Increase (Decrease) in Stockholders' Equity
Net income	0	0	10,714	0	0	10,714
Other comprehensive income (loss)	0	0	0	(437)	0	(437)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02						0
Issuance of stock under equity compensation plan	0	(51)	0	0	186	135
Stock dividend	232	4,782	(5,014)	0	0	0
Purchase of treasury stock	0	0	0	0	(179)	(179)
Cash dividends declared, common stock	0	0	(2,190)	0	0	(2,190)
Balance at Dec. 31, 2018	$ 6,279	$ 50,173	$ 54,105	$ (6,099)	$ (5,044)	$ 99,414

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Cash flows from operating activities:
Net income	$ 10,714	$ 3,414	$ 7,282
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,475	1,765	1,425
Depreciation expense	1,797	1,735	1,782
Net amortization of investment securities, premiums, and discounts	1,506	1,664	1,903
Stock based compensation expense	0	3	17
Change in fair value of mortgage servicing rights	27	93	529
Investment securities gain, net	(255)	(5)	(602)
Loss on sales and dispositions of premises and equipment	3	123	(1)
Gain on sales and dispositions of other real estate and repossessed assets	(14)	(45)	(207)
Provision for other real estate owned	26	284	213
(Increase) decrease in accrued interest receivable	(535)	(444)	(330)
Increase in cash surrender value - life insurance	(58)	(75)	(61)
Decrease (increase) in other assets	854	(808)	317
Decrease in deferred tax asset due to tax reform reclass	0	4,105	0
Increase (decrease) in accrued interest payable	481	56	116
Decrease in other liabilities	667	923	387
Origination of mortgage loans for sale	(36,469)	(33,245)	(36,017)
Proceeds from the sale of mortgage loans	36,990	33,794	37,896
Gain on sale of mortgage loans, net	(721)	(770)	(851)
Other, net	(186)	(88)	(267)
Net cash provided by operating activities	16,302	12,479	13,531
Cash flows from investing activities:
Purchase of certificates of deposit in other banks	(8,787)	(3,460)	0
Proceeds from maturities of certificates of deposit in other banks	0	1,000	0
Net increase in loans	(79,298)	(95,355)	(112,353)
Purchase of available-for-sale debt securities	(103,078)	(64,611)	(113,357)
Proceeds from maturities of available-for-sale debt securities	34,586	31,053	51,855
Proceeds from calls of available-for-sale debt securities	1,685	8,175	17,855
Proceeds from sales of available-for-sale debt securities	77,168	11,653	60,720
Purchases of FHLB stock	(4,713)	(2,483)	(1,759)
Proceeds from sales of FHLB stock	5,591	1,242	0
Purchases of premises and equipment	(2,326)	(1,266)	(1,262)
Proceeds from sales of premises and equipment	13	12	9
Proceeds from sales of other real estate and repossessed assets	585	1,115	4,057
Net cash used in investing activities	(78,574)	(112,925)	(94,235)
Cash flows from financing activities:
Net increase in demand deposits	17,477	9,405	27,940
Net increase in interest-bearing transaction accounts	29,572	115,737	27,651
Net increase (decrease) in time deposits	25,607	(9,996)	7,878
Net increase in federal funds purchased and securities sold under agreements to repurchase	(2,913)	(3,947)	(25,327)
Repayment of FHLB advances and other borrowings	(220,542)	(183,188)	(24,000)
FHLB advances	194,313	211,670	66,900
Issuance of stock under equity compensation plan	135	0	0
Purchase of treasury stock	(179)	(878)	(623)
Cash dividends paid - common stock	(1,993)	(1,474)	(1,097)
Net cash provided by financing activities	41,477	137,329	79,322
Net (decrease) increase in cash and cash equivalents	(20,795)	36,883	(1,382)
Cash and cash equivalents, beginning of period	62,878
Cash and cash equivalents, end of period	42,083	62,878
Cash paid during the year for:
Interest	12,719	7,951	5,547
Income taxes	241	3,975	3,760
Noncash investing and financing activities:
Other real estate and repossessed assets acquired in settlement of loans	635	374	2,233
Other real estate transferred from other assets	471	0	0
Stock dividends	$ 5,014	$ 4,166	$ 3,149

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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2018

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

(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 communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area. The Company is subject to competition from other financial and nonfinancial institutions providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo periodic examinations by those regulatory agencies.

The accompanying consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. 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.

The significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below:

Principles of Consolidation

In December of 2008, the Company formed Hawthorn Real Estate, LLC, (the Real Estate Company); a wholly owned subsidiary of the Company. In December of 2017, the Company formed Hawthorn Risk Management, Inc., (the Insurance Captive); a wholly owned subsidiary of the Company. The consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), the Real Estate Company, and the Insurance Captive. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans

Loans that the Company has the intent and ability to hold for the foreseeable future or to maturity are held for investment at their stated unpaid principal balance amount less unearned income and the allowance for loan losses. Income on loans is accrued on a simple‑interest basis. Loan origination fees and certain direct costs are deferred and recognized over the life of the loan as an adjustment to yield.

Loans Held for Sale

Loans originated, primarily one-to-four family residential mortgage loans, with the intent to be sold in the secondary market are classified as held for sale and are accounted for at the lower of adjusted cost or fair value. Adjusted cost reflects the funded loan amount and any loan origination costs and fees. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. Mortgage loans held for sale were $583,000 at December 31, 2018 compared to $383,000 loans held for sale at December 31, 2017.

Impaired Loans

A loan is considered impaired when it is probable the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. Included in impaired loans are all non-accrual loans and loans whose terms have been modified in a troubled debt restructuring. Impaired loans are individually evaluated for impairment based on fair values of the underlying collateral, obtained through independent appraisals or internal valuations for a collateral dependent loan or by discounting the total expected future cash flows.

Non-Accrual Loans

Loans are placed on nonaccrual status when management believes that the borrower's financial condition, after consideration of business conditions and collection efforts, is such that collection of interest is doubtful. Loans that are contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current.

Restructured Loans

A loan is accounted for as a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the borrowers' financial difficulties, grants a concession to the borrower that it would not otherwise consider. A TDR typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, accrued interest, or an extended maturity date (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Nonperforming TDRs are returned to performing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months. The Company includes all performing and non-performing TDRs in the impaired and non-performing asset totals. The Company measures the impairment loss of a TDR in the same manner as described below. TDRs which are performing under their contractual terms continue to accrue interest which is recognized in current earnings.

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan 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. The fair value of impaired loans deemed collateral dependent, for purposes of the measurement of the impairment loss, can be subject to changing market conditions, supply and demand, condition of the collateral and other factors over time. Such volatility can have an impact on the financial performance of the Company.

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. When loans become 90 days past due, they are generally placed on nonaccrual status or charged off unless extenuating circumstances justify leaving the loan on accrual basis. When loans reach 120 days past due and there is little likelihood of repayment, the uncollectible portion of the loans are charged off. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired.

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded.

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by loan type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type. The Company believes that the five-year look-back period provides a representative historical loss period in the current economic environment. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss.

The Company's methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and  severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, assessment of changes in the quality of the Company's internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

Certificates of Deposit in other banks

Certificates of deposit are investments made by the Company with other financial institutions, in amounts less than $250,000 each in order to qualify for FDIC insurance coverage, that are carried at cost which approximates fair values.

Investment Securities

Available for sale securities

The largest component of the Company's investment portfolio consists of debt securities which are classified as available-for-sale and are carried at fair value. Changes in fair value, excluding certain losses associated with other-than-temporary impairment, are reported in other comprehensive income, net of taxes, a component of stockholders' equity. Securities are periodically evaluated for other-than-temporary impairment in accordance with guidance provided in the FASB ASC Topic 320, Investments – Debt Securities. For those securities with other-than-temporary impairment, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it more likely than not that it will be required to sell the security before the anticipated recovery. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred, which is then recognized in current earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Premiums and discounts are amortized using the interest method over the lives of the respective securities, with consideration of historical and estimated prepayment rates for mortgage‑backed securities, as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available‑for‑sale are included in earnings based on the specific identification method for determining the cost of securities sold.

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

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.

Capital Stock of the Federal Home Loan Bank

The Bank, as a member of the Federal Home Loan Bank System administered by the Federal Housing Finance Agency, is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Des Moines (FHLB) in an amount equal to 12 basis points of the Bank's year-end total assets plus 4.00% of advances from the FHLB to the Bank. These investments are recorded at cost, which represents redemption value.

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improvements and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such lives are estimated to be 5 to 40 years for buildings and improvements and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.

Mortgage Servicing Rights

The Company originates and sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to the investors or master servicer. Upon a sale of mortgage loans for which servicing rights are retained, the retained mortgage servicing rights asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing activities.

Mortgage servicing rights are carried at fair value in the consolidated balance sheet with changes in the fair value recognized in earnings. As most servicing rights do not trade in an active market with readily observable prices, the Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies, ancillary income, and cost to service. These assumptions are validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party valuation specialist firm.

In addition to the changes in fair value of the mortgage servicing rights, the Company also recorded loan servicing fee income as part of real estate servicing fees, net in the consolidated statements of income. Loan servicing fee income represents revenue earned for servicing mortgage loans. The servicing fees are based on contractual percentage of the outstanding principal balance and recognized as revenue as the related mortgage payments are collected. Corresponding loan servicing costs are charged to expense as incurred.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The valuation write-downs are recorded as other non-interest expense. The Company establishes a valuation allowance related to other real estate owned and repossessed assets on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the cost of the asset.

Pension Plan

The Company provides a noncontributory defined benefit pension plan for all full-time employees.  The benefits are based on age, years of service and the level of compensation during the employees highest ten years of compensation before retirement. Net periodic costs are recognized as employees render the services necessary to earn the retirement benefits. The Company records annual amounts relating to its pension plan based on calculations that incorporate various actuarial and other assumptions including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates.  The Company reviews its assumptions on an annual basis and may make modifications to the assumptions based on current rates and trends when it is appropriate to do so.  The Company believes that the assumptions utilized in recording its obligations under its plan are reasonable based on its experience and market conditions.

The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation – Retirement Plans under the subtopic Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the funded status of a plan as of the date of its fiscal year-end, with limited exceptions. Additional disclosures are required to provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures.

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred income tax assets and liabilities are provided as temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements at the enacted tax rate expected to be applied in the period the deferred tax item is expected to be realized. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years.

The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act, (Tax Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation allowance related to capital loss carryforwards, a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter of 2017 related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax return,  within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's ASC Topic 740, Income Taxes.

The Tax Act resulted in stranded income tax effects in accumulated other comprehensive loss, for which new accounting guidance was issued under ASU 2018-02. This guidance allowed the Company to early adopt and retrospectively apply the reclassification of stranded income tax effects from accumulated other comprehensive loss to retained earnings. As of December 31, 2017, the Company reclassified $1.2 million from accumulated other comprehensive loss to retained earnings resulting from the Tax Act.

A tax position is initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Penalties and interest incurred under the applicable tax law are classified as income tax expense. The Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions as of December 31, 2018, 2017, and 2016.

Trust Department

Property held by the Bank in a fiduciary or agency capacity for customers is not included in the accompanying consolidated balance sheets, since such items are not assets of the Company. Trust department income is recognized on the accrual basis.

Consolidated Statements of Cash Flows

For the purpose of the consolidated statements of cash flows, cash and cash equivalents consist of short-term federal funds sold and securities sold or purchased under agreements to resell, overnight interest earning deposits with banks, cash, and due from banks.

Stock-Based Compensation

The Company's stock-based employee compensation plan (the plan) is described in Note 13, Stock Compensation. In accordance with FASB ASC Topic 718, Compensation – Stock Compensation, the Company measures the cost of the stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, on January 1, 2017 and elected to recognize forfeitures as they occur. Prior to the adoption of the ASU, the expense was recognized based on an estimation of the number of awards for which the requisite service is expected to be rendered, and is included in salaries and employee benefits in the accompanying Consolidated Statements of Income. The plan expired on February 28, 2010, except as to outstanding options under the plan, and no further options may be granted pursuant to the plan. All options were fully expensed as of September 30, 2017.

Treasury Stock

The purchase of the Company's common stock is recorded at cost. Purchases of the stock are made both in the open market and through negotiated private purchases based on market prices. At the date of subsequent reissue, the treasury stock account is reduced by the cost associated with such stock on a first-in-first-out basis. Gains on the sale of treasury stock are credited to additional paid-in-capital. Losses on the sale of treasury stock are charged to additional paid-in-capital to the extent of pervious gains, otherwise charged to retained earnings.

Stock Dividend On July 1, 2018, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2018. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Summary of Recent Transactions and Events On February 8, 2019, Hawthorn Bank, a wholly-owned subsidiary of Hawthorn Bancshares, Inc., completed the sale of its branch located in Branson, Missouri to Branson Bank, Branson, Missouri. Total deposits transferred were approximately $10.6 million while loans assigned to the branch were retained.  The Branson branch land and building were considered assets held for sale at December 31, 2018. The sale is expected to result in a pre-tax gain of approximately $2.1 million, $1.7 million related to the land and building, subject to certain future adjustments required in the definitive agreement.

Reclassifications Certain prior year information has been reclassified to conform to the 2018 presentation.

The following represents significant new accounting principles adopted in 2018:

Revenue from Contracts with Customers On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue, service charges and fees, debit card income, ATM surcharge income, and other real estate owned sales. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams within the scope of Topic 606 are discussed in Footnote 16.

Financial Instruments The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, in January 2016. The amendments require all equity investments to be measured at fair value with changes in the fair value recognized through net income, other than those accounted for under the equity method of accounting or those that result in the consolidation of the investee. Additionally, these amendments require presentation in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk for those liabilities measured at fair value. The amendments also require use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for interim and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the Company's consolidated financial statements.

The FASB issued ASU 2018-04, Investments - Debt Securities (Topic 320) and Regulated Operations (Topic 980): The amendment in this ASU adds, amends and supersedes various paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and ASC 980, Regulated Operations. The amendments in this ASU are effective when a registrant adopts ASU 2016-01, which for the Company was January 1, 2018. This amendment did not have a significant effect on the Company's consolidated financial statements.

Liabilities The FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products, in March 2016, in order to address current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. Such products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler's checks. The amendments require that the portion of the dollar value of prepaid stored-value products that is ultimately unredeemed (that is, the breakage) be accounted for consistent with the breakage guidance for stored-value product transactions provided in ASC Topic 606 - Revenue from Contracts with Customers. These amendments are effective for interim and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the Company's consolidated financial statements.

Pension The FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost in March 2017. Under the new guidance, the Company presents the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. The Company presents the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. The Company utilizes the ASU's practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote. The amendments were effective January 1, 2018 and did not have a significant effect on the Company's consolidated financial statements. See Note 12 for further discussion.

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Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2018

Loans and Allowances for Loan Losses

Loans and Allowance for Loan Losses

(2)   Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company's loan portfolio, at December 31, 2018 and 2017 is as follows:

(in thousands)	2018		2017
Commercial, financial, and agricultural	$	207,720	$	192,238
Real estate construction - residential		28,610		26,492
Real estate construction - commercial		106,784		98,340
Real estate mortgage - residential		241,517		246,754
Real estate mortgage - commercial		529,536		472,455
Installment and other consumer		32,460		32,153
Total loans	$	1,146,627	$	1,068,432

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson 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 vehicles. At December 31, 2018, $530.1 million of loans were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

The following is a summary of loans to directors and executive officers or to entities in which such individuals had a beneficial interest of the Company:

(in thousands)
Balance at December 31, 2017	$	6,442
New loans and new directors		1,127
Amounts collected		(1,565)
Balance at December 31, 2018	$	6,004

Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present unfavorable features.

Allowance for loan losses

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

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, &		Construction -		Construction -		Mortgage -		Mortgage -		Loans to		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Individuals		allocated		Total
Balance at December 31, 2015	$	2,153	$	59	$	644	$	2,439	$	2,935	$	273	$	101	$	8,604
Additions:
Provision for loan losses		690		49		(732)		381		865		113		59		1,425
Deductions:
Loans charged off		389		—		1		495		147		258		—		1,290
Less recoveries on loans		(299)		—		(502)		(60)		(140)		(146)		—		(1,147)
Net loans charged off		90		—		(501)		435		7		112		—		143
Balance at December 31, 2016	$	2,753	$	108	$	413	$	2,385	$	3,793	$	274	$	160	$	9,886
Additions:
Provision for loan losses		1,147		(26)		394		(560)		657		234		(81)		1,765
Deductions:
Loans charged off		649		—		—		219		45		268		—		1,181
Less recoveries on loans		(74)		(88)		—		(83)		(32)		(105)		—		(382)
Net loans charged off		575		(88)		—		136		13		163		—		799
Balance at December 31, 2017	$	3,325	$	170	$	807	$	1,689	$	4,437		345	$	79	$	10,852
Additions:
Provision for loan losses		296		(44)		(20)		516		457		150		120		1,475
Deductions:
Loans charged off		484		48		30		186		38		255		—		1,041
Less recoveries on loans		(100)		(62)		—		(52)		(58)		(94)		—		(366)
Net loans charged off		384		(14)		30		134		(20)		161		—		675
Balance at December 31, 2018	$	3,237	$	140	$	757	$	2,071	$	4,914	$	334	$	199	$	11,652

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration.

Beginning with December 31, 2017, the Company utilized a five-year look-back period, which was considered a representative historical loss period. The look-back period is consistently evaluated for relevance given the current facts and circumstances. 

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

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, and		Construction -		Construction -		Mortgage -		Mortgage -		and Other		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Consumer		allocated		Total
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	551	$	—	$	—	$	579	$	37	$	27	$	—	$	1,194
Collectively evaluated for impairment		2,686		140		757		1,492		4,877		307		199		10,458
Total	$	3,237	$	140	$	757	$	2,071	$	4,914	$	334	$	199	$	11,652
Loans outstanding:
Individually evaluated for impairment	$	2,428	$	—	$	153	$	4,793	$	850	$	254	$	—	$	8,478
Collectively evaluated for impairment		205,292		28,610		106,631		236,724		528,686		32,206		—		1,138,149
Total	$	207,720	$	28,610	$	106,784	$	241,517	$	529,536	$	32,460	$	—	$	1,146,627
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment	$	500	$	—	$	48	$	521	$	243	$	21	$	—	$	1,333
Collectively evaluated for impairment		2,825		170		759		1,168		4,194		324		79		9,519
Total	$	3,325	$	170	$	807	$	1,689	$	4,437	$	345	$	79	$	10,852
Loans outstanding:
Individually evaluated for impairment	$	3,007	$	—	$	97	$	5,072	$	2,004	$	176	$	—	$	10,356
Collectively evaluated for impairment		189,231		26,492		98,243		241,682		470,451		31,977		—		1,058,076
Total	$	192,238	$	26,492	$	98,340	$	246,754	$	472,455	$	32,153	$	—	$	1,068,432

Impaired loans

Loans evaluated under ASC 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans individually evaluated for impairment totaled $8.5 million and $10.4 million at December 31, 2018 and 2017, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings (TDRs).

The net carrying value of impaired loans is based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At December 31, 2018 and 2017, $3.8 million and $4.0 million, respectively, of impaired loans were evaluated based on the fair value less estimated selling costs of the loan's collateral. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2018, $1.2 million of the Company's allowance for loan losses was allocated to impaired loans totaling $8.5 million compared to $1.3 million of the Company's allowance for loan losses allocated to impaired loans totaling approximately $10.4 million at December 31, 2017. Management determined that $2.1 million, or 25%, of total impaired loans required no reserve allocation at December 31, 2018 compared to $2.4 million, or 23%, at December 31, 2017 primarily due to adequate collateral values,  acceptable payment history and adequate cash flow ability.

The categories of impaired loans at December 31, 2018 and 2017 are as follows:

(in thousands)	2018		2017
Non-accrual loans	$	5,414	$	5,672
Performing TDRs		3,064		4,684
Total impaired loans	$	8,478	$	10,356

The following tables provide additional information about impaired loans at December 31, 2018 and 2017, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2018
With no related allowance recorded:
Commercial, financial and agricultural	$	1,264	$	1,550	$	—
Real estate - construction commercial		153		180		—
Real estate - residential		561		602		—
Real estate - commercial		115		119		—
Total	$	2,093	$	2,451	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	1,164	$	1,236	$	551
Real estate - residential		4,232		4,458		579
Real estate - commercial		735		1,093		37
Installment and other consumer		254		280		27
Total	$	6,385	$	7,067	$	1,194
Total impaired loans	$	8,478	$	9,518	$	1,194

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2017
With no related allowance recorded:
Commercial, financial and agricultural	$	1,393	$	1,445	$	—
Real estate - residential		674		688		—
Real estate - commercial		366		395		—
Total	$	2,433	$	2,528	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	1,614	$	1,834	$	500
Real estate - construction commercial		97		97		48
Real estate - residential		4,398		4,500		521
Real estate - commercial		1,638		1,743		243
Installment and other consumer		176		196		21
Total	$	7,923	$	8,370	$	1,333
Total impaired loans	$	10,356	$	10,898	$	1,333

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2018 and 2017:

	2018				2017
			Interest				Interest
	Average		Recognized		Average		Recognized
	Recorded		For the		Recorded		For the
(in thousands)	Investment		Period Ended		Investment		Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	1,302	$	—	$	957	$	—
Real estate - construction commercial		120		—		—		—
Real estate - residential		901		10		826		13
Real estate - commercial		59		22		373		—
Installment and other consumer		34		—
Total	$	2,416	$	32	$	2,156	$	13
With an allowance recorded:
Commercial, financial and agricultural	$	1,394	$	32	$	1,536	$	33
Real estate - construction commercial		15		—		49		—
Real estate - residential		4,169		99		4,575		149
Real estate - commercial		763		34		1,641		61
Installment and other consumer		206		2		114		—
Total	$	6,547	$	167	$	7,915	$	243
Total impaired loans	$	8,963	$	199	$	10,071	$	256

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $199,000 and $256,000, for the years ended December 31, 2018 and 2017, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the years reported.

Delinquent and Non-Accrual Loans

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

The following table provides aging information for the Company's past due and non-accrual loans at December 31, 2018 and 2017.

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
December 31, 2018
Commercial, Financial, and Agricultural	$	205,597	$	266	$	—	$	1,857	$	207,720
Real Estate Construction - Residential		28,404		206		—		—		28,610
Real Estate Construction - Commercial		106,531		100		—		153		106,784
Real Estate Mortgage - Residential		235,734		2,907		156		2,720		241,517
Real Estate Mortgage - Commercial		527,968		1,094		—		474		529,536
Installment and Other Consumer		32,002		242		6		210		32,460
Total	$	1,136,236	$	4,815	$	162	$	5,414	$	1,146,627
December 31, 2017
Commercial, Financial, and Agricultural	$	189,537	$	192	$	2	$	2,507	$	192,238
Real Estate Construction - Residential		25,930		287		275		—		26,492
Real Estate Construction - Commercial		98,243		—		—		97		98,340
Real Estate Mortgage - Residential		242,597		2,173		28		1,956		246,754
Real Estate Mortgage - Commercial		471,476		43		—		936		472,455
Installment and Other Consumer		31,715		239		23		176		32,153
Total	$	1,059,498	$	2,934	$	328	$	5,672	$	1,068,432

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management's risk assessment. Loans are placed on watch status when one or more weaknesses that may result in the deterioration of the repayment exits or the Company's credit position at some future date. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. A loan is classified as a troubled debt restructuring  (TDR) when a borrower is experiencing financial difficulties that lead to the restructuring of a loan, and the Company grants concessions to the borrower in the restructuring that it would not otherwise consider. Loans classified as TDRs which are accruing interest are classified as performing TDRs. Loans classified as TDRs which are not accruing interest are classified as nonperforming TDRs and are included with all other nonaccrual loans for presentation purposes. It is the Company's policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such 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.

The following table presents the risk categories by class at December 31, 2018 and 2017.

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, &		Construction -		Construction -		Mortgage -		Mortgage -		and other
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Consumer		Total
At December 31, 2018
Watch	$	8,871	$	588	$	4,063	$	12,790	$	36,408	$	8	$	62,728
Substandard		53		—		—		1,411		702		3		2,169
Performing TDRs		570		—		—		2,073		377		44		3,064
Non-accrual		1,857		—		153		2,720		474		210		5,414
Total	$	11,351	$	588	$	4,216	$	18,994	$	37,961	$	265	$	73,375
At December 31, 2017
Watch	$	9,868	$	1,459	$	1,284	$	9,978	$	49,197	$	—	$	71,786
Substandard		658		462		—		2,262		723		16		4,121
Performing TDRs		500		—		—		3,116		1,068		—		4,684
Non-accrual		2,507		—		97		1,956		936		176		5,672
Total	$	13,533	$	1,921	$	1,381	$	17,312	$	51,924	$	192	$	86,263

Troubled Debt Restructurings

At December 31, 2018, loans classified as TDRs totaled $5.0 million, of which $2.0 million were classified as nonperforming TDRs and included in non-accrual loans and $3.0 million were classified as performing TDRs. At December 31, 2017, loans classified as TDRs totaled $6.4 million, of which $1.7 million were classified as nonperforming TDRs and included in non-accrual loans and $4.7 million were classified as performing TDRs. Both performing and nonperforming 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 $543,000 and $577,000 related to TDRs were allocated to the allowance for loan losses at December 31, 2018 and 2017, respectively.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2018 and 2017.

	2018					2017
	Recorded Investment (1)					Recorded Investment (1)
	Number of	Pre-		Post-		Number of	Pre-		Post-
(in thousands)	Contracts	Modification		Modification		Contracts	Modification		Modification
Troubled Debt Restructurings
Commercial, financial and agricultural	3	$	510	$	502	3	$	773	$	773
Real estate mortgage - residential	2		149		147	2		118		116
Real estate mortgage - commercial	—		—		—	1		55		49
Installment and other consumer	5		185		117	—		—		—
Total	10	$	844	$	766	6	$	946	$	938

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off, or foreclosed upon during the period ended are not reported.

The Company's portfolio of loans classified as TDRs include concessions for the borrower due to deteriorated financial condition such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. During the year ended December 31, 2018, ten loans meeting the TDR criteria were modified compared to six loans during the year ended December 31, 2017.

The Company considers a TDR to be in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or it is the process of foreclosure. There was one consumer TDR with a $3,000 balance, where a concession was made and subsequently defaulted and was charged off during the year ended December 31, 2018, within twelve months of its modification date. This is compared to one commercial TDR with a $123,000 balance where a concession was made and subsequently defaulted and was charged off during the year ended December 31, 2017.

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Other Real Estate and Repossessed Assets Acquired in Settlement of Loans

12 Months Ended

Dec. 31, 2018

Other Real Estate and Repossessed Assets Acquired in Settlement of Loans

Other Real Estate and Repossessed Assets Acquired in Settlement of Loans

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

(in thousands)	2018		2017
Commercial	$	1,168	$	727
Real estate construction - residential		179		—
Real estate construction - commercial		12,101		12,380
Real estate mortgage - residential		336		382
Real estate mortgage - commercial		2,909		2,909
Repossessed assets		—		5
Total	$	16,693	$	16,403
Less valuation allowance for other real estate owned		(3,002)		(3,221)
Total other real estate and repossessed assets	$	13,691	$	13,182

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

Balance at December 31, 2016	$	17,291
Additions		374
Proceeds from sales		(1,115)
Charge-offs against the valuation allowance for other real estate owned, net		(192)
Net gain on sales		45
Balance at December 31, 2017		16,403
Additions		1,106
Proceeds from sales		(585)
Charge-offs against the valuation allowance for other real estate owned, net		(245)
Net gain on sales		14
Total other real estate and repossessed assets	$	16,693
Less valuation allowance for other real estate owned		(3,002)
Balance at December 31, 2018	$	13,691

At December 31, 2018, $200,000 of consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to no loans in the process of foreclosure at December 31, 2017.

Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2018, 2017 and 2016, respectively, is summarized as follows:

(in thousands)	2018		2017		2016
Balance, beginning of period	$	3,221	$	3,129	$	3,233
Provision for other real estate owned		26		284		213
Charge-offs		(245)		(192)		(317)
Balance, end of period	$	3,002	$	3,221	$	3,129

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Investment Securities

12 Months Ended

Dec. 31, 2017

Investment Securities

Investment Securities

(4)     Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of debt securities classified as available‑for‑sale at December 31, 2018 and 2017 are shown below.

	Total
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
December 31, 2018
U.S. Treasury	$	1,984	$	—	$	(32)	$	1,952
U.S. government and federal agency obligations		10,235		—		(269)		9,966
Government sponsored enterprises		43,784		23		(472)		43,335
Obligations of states and political subdivisions		40,859		28		(501)		40,386
Mortgage-backed securities:		121,230		72		(3,110)		118,192
Other debt securities (a)		3,000		—		—		3,000
Bank issued trust preferred securities (a)		1,486		—		(112)		1,374
Total available-for-sale securities	$	222,578	$	123	$	(4,496)	$	218,205
December 31, 2017
U.S. Treasury	$	1,980	$	—	$	(13)	$	1,967
U.S. government and federal agency obligations		12,341		—		(268)		12,073
Government sponsored enterprises		37,321		—		(424)		36,897
Obligations of states and political subdivisions		47,019		114		(477)		46,656
Mortgage-backed securities:		131,045		44		(2,140)		128,949
Other debt securities (a)		3,000		—		—		3,000
Bank issued trust preferred securities (a)		1,486		—		—		1,486
Total available-for-sale securities	$	234,192	$	158	$	(3,322)	$	231,028

(a) Certain hybrid instruments possessing characteristics typically associated with debt obligations were reclassified from other securities carried at cost to available for sale securities carried at fair value in the years presented.

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

Debt securities with carrying values aggregating approximately $153.0 million and $181.7 million at December 31, 2018 and December 31, 2017, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities classified as available‑for‑sale at December 31, 2018, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	18,076	$	17,964
Due after one year through five years		63,424		62,599
Due after five years through ten years		13,750		13,505
Due after ten years		6,098		5,945
Total		101,348		100,013
Mortgage-backed securities		121,230		118,192
Total available-for-sale securities	$	222,578	$	218,205

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

(in thousands)	2018		2017
Other securities:
FHLB stock	$	5,512	$	6,390
MIB stock		151		151
Equity securities with readily determinable fair values		12		10
Total other investment securities	$	5,675	$	6,551

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 December 31, 2018 and December 31, 2017 were as follows:

	Less than 12 months				12 months or more				Total		Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses		Value		Losses		Value		Losses
At December 31, 2018
U.S. Treasury	$	—	$	—	$	1,952	$	(32)	$	1,952	$	(32)
U.S. government and federal agency obligations		—		—		9,966		(269)		9,966		(269)
Government sponsored enterprises		1,997		(3)		33,346		(469)		35,343		(472)
Obligations of states and political subdivisions		5,851		(16)		28,832		(485)		34,683		(501)
Mortgage-backed securities		10,085		(61)		99,321		(3,049)		109,406		(3,110)
Bank issued trust preferred securities		—		—		1,374		(112)		1,374		(112)
Total	$	17,933	$	(80)	$	174,791	$	(4,416)	$	192,724	$	(4,496)
(in thousands)
At December 31, 2017
U.S. Treasury	$	1,967	$	(13)	$	—	$	—	$	1,967	$	(13)
U.S. government and federal agency obligations		—		—		12,073		(268)		12,073		(268)
Government sponsored enterprises		16,471		(119)		20,426		(305)		36,897		(424)
Obligations of states and political subdivisions		22,013		(165)		12,570		(312)		34,583		(477)
Mortgage-backed securities:		52,829		(488)		69,580		(1,652)		122,409		(2,140)
Total	$	93,280	$	(785)	$	114,649	$	(2,537)	$	207,929	$	(3,322)

The total available for sale portfolio consisted of approximately 366 securities at December 31, 2018. The portfolio included 317 securities having an aggregate fair value of $192.7 million that were in a loss position at December 31, 2018. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer had a fair value of $174.8 million at December 31, 2018. The $4.5 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2018 was caused by interest rate fluctuations.

The total available for sale portfolio consisted of approximately 355 securities at December 31, 2017. The portfolio included 280 securities having an aggregate fair value of $207.9 million that were in a loss position at December 31, 2017. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer had a fair value of $114.6 million at December 31, 2017. The $3.3 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, 2017 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 December 31, 2018 and 2017, 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.

The table presents the components of investment securities gains and losses, which have been recognized in earnings:

(in thousands)	2018		2017		2016
Investment securities gains, net
Available for sale securities:
Gains realized on sales	$	253	$	38	$	623
Losses realized on sales		—		(33)		(21)
Other-than-temporary impairment recognized		—		—		—
Other investment securities:
Fair value adjustments, net		2		—		—
Investment securities gains, net	$	255	$	5	$	602

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Premises and Equipment

12 Months Ended

Dec. 31, 2018

Premises and Equipment

Premises and Equipment

(5)      Premises and Equipment

A summary of premises and equipment at December 31, 2018 and 2017 is as follows:

(in thousands)	2018		2017
Land and land improvements	$	9,917	$	9,980
Buildings and improvements		35,674		35,993
Furniture and equipment		14,163		12,973
Construction in progress		754		289
Total		60,508		59,235
Less accumulated depreciation		25,614		24,424
Premises and equipment, net	$	34,894	$	34,811

Depreciation expense for the years ended December 31, 2018, 2017, and 2016 was as follows:

(in thousands)	2018		2017		2016
Depreciation expense	$	1,797	$	1,735	$	1,782

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Intangible Assets

12 Months Ended

Dec. 31, 2018

Intangible Assets

Intangible Assets

(6)      Intangible Assets

Mortgage Servicing Rights

At December 31, 2018 and 2017, respectively, the Company serviced mortgage loans for others totaling $279.9 million and $285.8 million, respectively. Mortgage loan servicing fees earned on loans sold and serviced for others were $821,000,  $833,000, and $854,000, for the years ended December 31, 2018, 2017, and 2016, respectively, and are recorded in real estate servicing fees, net in the consolidated statements of income.

The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2018, 2017, and 2016.

(in thousands)	2018		2017		2016
Balance at beginning of period	$	2,713	$	2,584	$	2,847
Originated mortgage servicing rights		245		222		266
Changes in fair value:
Due to changes in model inputs and assumptions (1)		286		364		108
Other changes in fair value (2)		(313)		(457)		(637)
Total changes in fair value		(27)		(93)		(529)
Balance at end of period	$	2,931	$	2,713	$	2,584

(1) The change in fair value resulting from changes in valuation inputs or assumptions 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 reflect changes due to customer payments and passage of time.

Total changes in fair value are reported in real estate servicing fees, net, reported in non-interest income in the Company's consolidated statements of income. 

The following key data and assumptions were used in estimating the fair value of the Company's mortgage servicing rights as of December 31, 2018 and 2017:

	2018		2017
Weighted average constant prepayment rate	8.87	%	9.73	%
Weighted average note rate	3.95	%	3.85	%
Weighted average discount rate	10.28	%	10.09	%
Weighted average expected life (in years)	6.30		5.90

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Deposits

12 Months Ended

Dec. 31, 2018

Deposits

Deposits

(7)      Deposits

The aggregate amount of time deposits with balances that met or exceeded the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 was $104.9 million and $63.2 million at December 31, 2018 and 2017, respectively. The Company had brokered deposits totaling $39.8 million and $9.8 million at December 31, 2018 and 2017, respectively.

The scheduled maturities of total time deposits at December 31, 2018 were as follows:

(in thousands)
Due within:
2019	$	198,609
2020		43,250
2021		34,054
2022		29,666
2023		15,992
Thereafter		—
Total	$	321,571

The Federal Reserve Bank required the Bank to maintain cash or balances of $1.8 million at both December 31, 2018 and 2017, respectively, to satisfy reserve requirements. Average compensating balances held at correspondent banks were $787,000 and $1.5 million at December 31, 2018 and 2017, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks.

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Federal funds purchased and securities sold under agreements to repurchase

12 Months Ended

Dec. 31, 2018

Federal funds purchased and securities sold under agreements to repurchase

Federal funds purchased and securities sold under agreements to repurchase

(8)      Federal funds purchased and securities sold under agreements to repurchase

Information relating to federal funds purchased and repurchase agreements is as follows:

	Year End		Average		Average		Maximum
	Weighted		Weighted		Balance		Outstanding at		Balance at
(in thousands)	Rate		Rate		Outstanding		any Month End		December 31,
2018
Federal funds purchased	2.64	%	2.29	%	$	1,242	$	12,863	$	8,000
Short-term repurchase agreements - Bank	0.35		0.67			27,142		36,103		16,647
Short-term repurchase agreements - Company	—		3.51			11,180		25,944		—
Total					$	39,564	$	74,910	$	24,647
2017
Federal funds purchased	1.64	%	0.99	%	$	322	$	1,067	$	—
Short-term repurchase agreements	0.29		0.38			29,190		32,555		27,560
Total					$	29,512	$	33,622	$	27,560

The securities underlying the agreements to repurchase are under the control of the Bank. All securities sold under agreements to repurchase are secured by a portion of the Bank's investment portfolio. Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $42.0 million on an unsecured basis and $16.4 million on a secured basis at December 31, 2018.

During 2018, the Company had purchased U.S. Treasury securities with repurchase agreements in order to generate capital gains to offset capital losses expiring in 2018 and 2019. See Note 10 Income taxes for further discussion.

The Company offers a sweep account program whereby amounts in excess of an established limit are “swept” from the customer's demand deposit account on a daily basis into retail repurchase agreements pursuant to individual repurchase agreements between the Company and its customers.  Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral pledged for the repurchase agreements with customers is maintained by a designated third party custodian.  The collateral amounts pledged to repurchase agreements by remaining maturity in the table below are limited to the outstanding balances of the related asset or liability; thus amounts of excess collateral are not shown.

Repurchase Agreements	Remaining Contractual Maturity of the Agreements
	Overnight		Less		Greater
	and		than		than
(in thousands)	continuous		90 days		90 days		Total
At December 31, 2018
U.S. Treasury	$	1,464	$	—	$	—	$	1,464
Government sponsored enterprises		12,976		—		—		12,976
Asset-backed securities		2,207		—		—		2,207
Total	$	16,647	$	—	$	—	$	16,647
At December 31, 2017
U.S. Treasury	$	1,964	$	—	$	—	$	1,964
U.S. government and federal agency obligations		2,977		—		—		2,977
Government sponsored enterprises		8,382		—		—		8,382
Asset-backed securities		14,237		—		—		14,237
Total	$	27,560	$	—	$	—	$	27,560

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Borrowings

12 Months Ended

Dec. 31, 2018

Borrowings

Borrowings

(9)      Borrowings

Federal  Home Loan Bank and other borrowings of the Company consisted of the following:

			2018				2017
					Year End				Year End
		Maturity	Year End		Weighted		Year End		Weighted
(in thousands)	Borrower	Date	Balance		Rate		Balance		Rate
FHLB advances	The Bank	2018	$	—	—	%	$	63,226	1.65	%
		2019		28,231	1.63	%		28,231	1.63	%
		2020		42,236	2.49	%		21,236	1.90	%
		2021		20,241	2.77	%		4,241	1.73	%
		2022		4,418	2.14	%		4,418	2.14	%
		2023		—	—	%		—	—	%
Other borrowings		2022		27	4.00	%		30	4.00	%
Total Bank			$	95,153			$	121,382
Subordinated notes	The Company	2034	$	25,774	5.49	%	$	25,774	4.30	%
		2035		23,712	4.62	%		23,712	3.43	%
Total Company			$	49,486			$	49,486

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has access to term financing from the FHLB. These borrowings, which are all fixed rate, are secured under a blanket agreement which assigns all investment in FHLB stock, as well as qualifying first mortgage loans as collateral to secure amounts borrowed by the Bank. As of December 31, 2018, the Bank had $95.2 million in outstanding borrowings with the FHLB. Based upon the collateral pledged to the FHLB at December 31, 2018, the Bank could borrow up to an additional $126.5 million under the agreement.

On March 17, 2005, Exchange Statutory Trust II, a business trust and subsidiary of the Company, issued $23.0 million of 30-year floating rate Trust Preferred Securities (TPS) to a TPS Pool. The floating rate is equal to a three-month LIBOR rate plus 1.83% and reprices quarterly (4.62% at December 31, 2018). The TPS can be prepaid without penalty at any time after five years from the issuance date.

The TPS represent preferred interests in the trust. The Company invested approximately $712,000 in common interests in the trust and the purchaser in the private placement purchased $23.0 million in preferred interests. The proceeds were used by the trust to purchase from the Company its 30-year deeply subordinated debentures whose terms mirror those stated above for the TPS. The debentures are guaranteed by the Company pursuant to a subordinated guarantee. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The trustee for the TPS holders is U.S. Bank, N.A. The trustee does not have the power to take enforcement action in the event of a default under the TPS for five years from the date of default. In the event of default, however, the Company would be precluded from paying dividends until the default is cured.

On March 17, 2004, Exchange Statutory Trust I, a business trust and subsidiary of the Company issued $25.0 million of floating rate TPS to a TPS Pool. The floating rate is equal to the three-month LIBOR rate plus 2.70% and reprices quarterly (5.49% at December 31, 2018). The TPS are fully, irrevocably, and unconditionally guaranteed on a subordinated basis by the Company.

The TPS represent preferred interests in the trust. The Company invested approximately $774,000 in common interests in the trust and the purchaser in the private placement purchased $25.0 million in preferred interests. The proceeds of the TPS were invested in junior subordinated debentures of the Company. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The TPS mature on March 17, 2034. That maturity date may be shortened if certain conditions are met.

The Exchange Statutory Trusts are not consolidated in the Company's financial statements. Accordingly, the Company does not report the securities issued by the Exchange Statutory Trusts as liabilities, and instead reports the subordinated notes issued by the Company and held by the Exchange Statutory Trusts as liabilities. The amount of the subordinated notes as of December 31, 2018 and 2017 was $49.5 million, respectively. The Company has recorded the investments in the common securities issued by the Exchange Statutory Trusts aggregating $1.4 and $1.5 million at December 31, 2018 and 2017, respectively, and the corresponding obligations under the subordinated notes, as well as the interest income and interest expense on such investments and obligations in its consolidated financial statements.

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Income Taxes

12 Months Ended

Dec. 31, 2018

Income Taxes

Income taxes

(10)    Income Taxes

The composition of income tax expense for the years ended December 31, 2018, 2017, and 2016 was as follows:

(in thousands)	2018		2017		2016
Current:
Federal	$	1,175	$	2,761	$	3,578
State		(181)		385		489
Total current		994		3,146		4,067
Deferred:
Federal		674		3,189		(267)
State		—		1,567		(50)
Total deferred		674		4,756		(317)
Total income tax expense	$	1,668	$	7,902	$	3,750

Applicable income tax expense for financial reporting purposes differs from the amount computed by applying the statutory federal income tax rate for the reasons noted in the table for the years ended December 31, 2018, 2017, and 2016 are as follows:

	2018				2017				2016
(in thousands)	Amount		%		Amount		%		Amount		%
Income before provision for income tax expense	$	12,382			$	11,316			$	11,032
Tax at statutory federal income tax rate	$	2,600	21.00	%	$	3,847	34.00	%	$	3,751	34.00	%
Tax Cuts and Jobs Act		(343)	(2.77)			3,139	27.74			—	—
State restructuring		(143)	(1.16)			966	8.54			—	—
Tax-exempt income, net		(432)	(3.49)			(394)	(3.48)			(314)	(2.85)
State income tax, net of federal tax benefit		—	—			323	2.85			290	2.63
Other, net		(14)	(0.11)			21	0.18			23	0.21
Provision for income tax expense	$	1,668	13.47	%	$	7,902	69.83	%	$	3,750	33.99	%

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 13.5% for the year ended December 31, 2018 compared to 69.8% and 34.0% for the years ended December 31, 2017 and 2016, respectively. As further described below, the decrease in the effective tax rate in 2018 over 2017 and 2016 is primarily due to a decrease in the federal corporate tax rate, the release of the valuation allowance related to capital losses, a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives.

The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act, (Tax Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation allowance related to capital loss carryforwards, and a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter of 2017 related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax return, within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's ASC Topic 740, Income Taxes. The finalization of the Company's Tax Act adjustments included a $343,000 benefit, while the Company's additional tax planning initiatives included a $143,000 benefit. The total benefits are comprised of $306,000 benefit attributable to the pension contribution discussed above and a $180,000 benefit attributable to various accounting method changes made on the Company's 2017 tax return. Such adjustments were recorded in the second and third quarters of 2018 respectively. 

The components of deferred tax assets and deferred tax liabilities at December 31, 2018 and 2017 were as follows:

(in thousands)	2018		2017
Deferred tax assets:
Allowance for loan losses	$	2,285	$	2,279
Impairment of other real estate owned		630		672
Goodwill		227		409
Available-for-sale securities		895		664
Nonaccrual loan interest		119		167
Core deposit intangible		90		160
Pension		1,516		1,669
Deferred compensation		160		87
Other		282		257
Total deferred tax assets	$	6,204	$	6,364
Deferred tax liabilities:
Premises and equipment	$	483	$	333
Mortgage servicing rights		616		570
Deferred loan costs		261		—
Accelerated prepaids		321		356
Other		10		34
Total deferred tax liabilities		1,691		1,293
Net deferred tax assets	$	4,513	$	5,071

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 December 31, 2018. 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. As indicated above, the Company released a $46,000 valuation allowance against certain capital loss carryforwards during the second quarter of 2018 as a result of the execution of certain tax planning initiatives that generated sufficient capital gain income prior to the expiration of the carryforwards.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. For each of the years ended December 31, 2018 and 2017, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

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Stockholders' Equity

12 Months Ended

Dec. 31, 2018

Stockholders' Equity

Stockholders' Equity

(11)    Stockholders' Equity

Accumulated Other Comprehensive Loss

The following details the change in the components of the Company's accumulated other comprehensive loss for the years ended December 31, as indicated.

					Accumulated
			Unrecognized Net		Other
			Pension and		Comprehensive
	Unrealized Loss		Postretirement		(Loss)
(in thousands)	on Securities (1)		Costs (2)		Income
Balance, December 31, 2016	$	(1,936)	$	(1,865)	$	(3,801)
Other comprehensive (loss) income, before reclassifications		(37)		90		53
Amounts reclassified from accumulated other comprehensive loss		(5)		(1,085)		(1,090)
Other comprehensive loss, before tax		(42)		(995)		(1,037)
Income tax benefit		16		378		394
Other comprehensive loss, net of tax		(26)		(617)		(643)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02 (3)		(538)		(680)		(1,218)
Balance, December 31, 2017	$	(2,500)	$	(3,162)	$	(5,662)
Other comprehensive (loss) income, before reclassifications		(1,209)		219		(990)
Amounts reclassified from accumulated other comprehensive loss		—		436		436
Other comprehensive (loss) income, before tax		(1,209)		655		(554)
Income tax benefit (expense)		254		(137)		117
Other comprehensive (loss) income, net of tax		(955)		518		(437)
Balance, December 31, 2018	$	(3,455)	$	(2,644)	$	(6,099)

(1) The pre-tax amounts reclassified from accumulated other comprehensive loss are included in gain on sale of investment securities in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost. See Note 12.

(3) As of December 31, 2017, the Company elected to early adopt and retrospectively apply the reclassification of stranded income tax effects from accumulated other comprehensive loss to retained earnings, as permitted under ASU 2018-02.

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Employee Benefit Plans

12 Months Ended

Dec. 31, 2018

Employee Benefit Plans

Employee Benefit Plans

(12)    Employee Benefit Plans

Employee benefits charged to operating expenses are summarized in the table below for the years ended December 31, as indicated.

(in thousands)	2018		2017		2016
Payroll taxes	$	1,156	$	1,167	$	1,122
Medical plans		2,109		2,026		1,881
401k match and profit sharing		956		873		825
Periodic pension cost		1,707		1,344		1,179
Other		67		82		172
Total employee benefits	$	5,995	$	5,492	$	5,179

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 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) which became effective on January 1, 2018. The SERP provides select employees who satisfy certain eligibility requirement with certain benefits upon retirement, termination of employment or death.

As of the year ended December 31, 2018, the accrued liability and expense for this plan was $320,000, and is recognized over the required service period.

Pension

The Company provides a noncontributory defined benefit pension plan for all full‑time employees. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company's funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company made a pension contribution in the amount of $1.8 million on May 10, 2018. There was no 2019 minimum required contribution for the 2018 plan year, and the Company has not determined if will make more than the minimum required contribution. 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.

Obligations and Funded Status at December 31,

(in thousands)	2018		2017
Change in projected benefit obligation:
Balance, January 1	$	27,871	$	23,234
Service cost		1,707		1,343
Interest cost		1,037		1,009
Actuarial (gain) loss		(3,122)		2,843
Benefits paid		(601)		(558)
Balance, December 31,	$	26,892	$	27,871
Change in plan assets:
Fair value, January 1	$	19,924	$	16,502
Actual return on plan assets		(1,329)		2,890
Employer contribution		1,800		1,183
Expenses paid		(122)		(93)
Benefits paid		(601)		(558)
Fair value, December 31,	$	19,672	$	19,924
Funded status at end of year	$	(7,220)	$	(7,947)
Accumulated benefit obligation	$	21,244	$	21,940

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

The following items are components of net pension cost for the years ended December 31, as indicated:

(in thousands)	2018		2017		2016
Service cost - benefits earned during the year	$	1,707	$	1,343	$	1,179
Interest costs on projected benefit obligations (a)		1,037		1,009		956
Expected return on plan assets (a)		(1,327)		(1,127)		(1,057)
Expected administrative expenses (a)		93		88		70
Amortization of prior service cost (a)		79		79		79
Amortization of unrecognized net loss (a)		140		11		—
Net periodic pension cost	$	1,729	$	1,403	$	1,227

(a) The components of net periodic pension cost other than the service cost component are included in other non-interest expense.

Net periodic pension benefit costs include interest costs based on an assumed discount rate, the expected return on plan assets based on actuarially derived market-related values, and the amortization of net actuarial losses. Net periodic postretirement benefit costs include service costs, interest costs based on an assumed discount rate, and the amortization of prior service credits and net actuarial gains. Differences between expected and actual results in each year are included in the net actuarial gain or loss amount, which is recognized in other comprehensive income. The net actuarial gain or loss in excess of a 10% corridor is amortized in net periodic benefit cost over the average remaining service period of active participants in the Plans. The prior service credit is amortized over the average

remaining service period to full eligibility for participating employees expected to receive benefits.

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss at December 31, 2018 and 2017 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

(in thousands)	2018		2017
Prior service costs	$	(128)	$	(207)
Net accumulated actuarial net loss		(3,219)		(3,796)
Accumulated other comprehensive loss		(3,347)		(4,003)
Net periodic benefit cost in excess of cumulative employer contributions		(3,873)		(3,944)
Net amount recognized at December 31,  balance sheet	$	(7,220)	$	(7,947)
Net gain (loss) arising during period	$	436	$	(1,085)
Prior service cost amortization		79		79
Amortization of net actuarial loss		140		11
Total recognized in other comprehensive loss	$	655	$	(995)
Total recognized in net periodic pension cost and other comprehensive income	$	1,073	$	2,398

Assumptions utilized to determine benefit obligations as of December 31, 2018, 2017 and 2016 and to determine pension expense for the years then ended are as follows:

	2018		2017		2016
Determination of benefit obligation at year end:
Discount rate	4.40	%	3.75	%	4.40	%
Annual rate of compensation increase	4.00	%	4.00	%	4.00	%
Determination of pension expense for year ended:
Discount rate for the service cost	3.75	%	4.40	%	4.70	%
Annual rate of compensation increase	4.00	%	4.00	%	3.78	%
Expected long-term rate of return on plan assets	6.75	%	6.75	%	7.00	%

The assumed overall expected long-term rate of return on pension plan assets used in calculating 2018 pension expense was 6.75%. Determination of the plan's rate of return is based upon historical returns for equities and fixed income indexes. During the past five years, the Company's plan assets have experienced the following annual returns: -6.2% in 2018, 17.4% in 2017, 8.2% in 2016, -0.4% in 2015, and 8.3% in 2014. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. With a traditional investment mix of over half of the plan's investments in equities, the actual return for any one plan year may fluctuate significantly with changes in the stock market. Primarily due to an increase in the discount rate used in the actuarial calculation of plan income, the Company expects to incur $1.5 million of expense in 2019 compared to $1.7 million 2018.

Plan Assets

The investment policy of the pension plan is designed for growth in value while minimizing risk to the overall portfolio. The Company diversifies the assets through investments in domestic fixed income securities and domestic and international equity securities. The assets are readily marketable and can be sold to fund benefit payment obligations as they become payable. The Company regularly reviews its policies on the investment mix and may make changes depending on economic conditions and perceived investment mix.

The fair value of the Company's pension plan assets at December 31, 2018 and 2017 by asset category was as follows:

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other			Significant
			Identical		Observable			Unobservable
			Assets		Inputs			Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)			(Level 3)
December 31, 2018
Cash equivalents	$	707	$	707	$	—	$	—
U.S gov't agency obligations		1,777		—		1,777		—
Corporate bonds		295		—		295		—
Mutual funds		16,893		16,893		—		—
Total	$	19,672	$	17,600	$	2,072	$	—
December 31, 2017
Cash equivalents	$	1,307	$	1,307	$	—	$	—
U.S gov't agency obligations		1,781		—		1,781		—
Mutual funds		16,836		16,836		—		—
Total	$	19,924	$	18,143	$	1,781	$	—

The following future benefit payments are expected to be paid:

	Pension
Year	benefits
(in thousands)
2019	$	680
2020		801
2021		874
2022		1,026
2023		1,052
2024 to 2028		6,370

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Stock Compensation

12 Months Ended

Dec. 31, 2018

Stock Compensation

Stock Compensation

(13)    Stock Compensation

The Company has one equity compensation plan for its employees pursuant to which options were granted.

The following table summarizes the Company's stock option activity:

				Weighted average						Weighted average			Aggregate
	Number of shares			exercise price						Contractual Term			Intrinsic Value
	December 31,			December 31,						(in years)			($000)
	2018	2017	2016	2018		2017		2016		2018	2017	2016	2018		2017		2016
Outstanding, beginning of year	20,909	48,097	70,616	$	14.20	$	18.59	$	19.12
Granted	—	—	—		—		—		—
Exercised	(20,909)	—	—		14.20		—		—
Forfeited or expired	—	(27,188)	(22,519)		—		21.20		20.24
Outstanding, end of year	—	20,909	48,097	$	—	$	14.20	$	18.59	0.00	0.73	0.99	$	0	$	120,242	$	49,842
Exercisable, end of year	—	20,909	46,725	$	—	$	14.20	$	18.72	0.00	0.73	0.97	$	0	$	120,242	$	46,874

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2018.

Total stock-based compensation expense for the years ended December 31, 2018, 2017, and 2016 was zero,  $3,000, and $17,000, respectively. There is no remaining unrecognized compensation expense related to non-vested stock awards. The Plan expired on February 28, 2010, except as to outstanding options under the Plan, and no further options may be granted pursuant to the Plan. During the third quarter of 2018, the remaining 20,909 options to purchase common shares were exercised at a weighted average price of $14.20 a share.

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Earnings per Share

12 Months Ended

Dec. 31, 2018

Earnings Per Share

Earnings per Share

(14)    Earnings per Share

Stock Dividend On July 1, 2018, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2018. 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 common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the year.

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

(dollars in thousands, except per share data)	2018		2017		2016
Basic earnings per share:
Net income available to shareholders	$	10,714	$	3,414	$	7,282
Basic earnings per share	$	1.78	$	0.56	$	1.19
Diluted earnings per share:
Net income available to shareholders	$	10,714	$	3,414	$	7,282
Average shares outstanding		6,026,971		6,057,920		6,095,727
Effect of dilutive stock options		5,042		5,497		—
Average shares outstanding including dilutive stock options		6,032,013		6,063,417		6,095,727
Diluted earnings per share	$	1.78	$	0.56	$	1.19

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company's common stock, when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when the Company has a loss from continuing operations available to common shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

The following options to purchase shares during the years ended December 31, 2018, 2017 and 2016 were not included in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.

	Weighted average Shares
	December 31,
	2018	2017	2016
Anti-dilutive shares	—	—	48,097

Repurchase Program The Company's share repurchase plan expired on September 8, 2018. As of December 31, 2018, the Company had repurchased a total of 95,709 shares of common stock pursuant to the plan at an average price of $17.90 per share, including 8,668 shares of common stock repurchased pursuant to the plan during the year ended December 31, 2018 at an average price of $20.63 per share.

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Capital Requirements

12 Months Ended

Dec. 31, 2018

Capital Requirements

Capital Requirements

(15)    Capital Requirements

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 phase-in period for the Company began on January 1, 2015. The Federal Reserve System's (FRB) 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, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. 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 will be 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 the requirement will increase 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. Once fully phase in , the capital conservation buffer requirement effectively raises 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.

Under the Basel III requirements, at December 31, 2018 and December 31, 2017, 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:

									Well-Capitalized Under
					Required for Capital				Prompt Corrective Action
	Actual				Adequacy Purposes				Provision
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2018
Total Capital (to risk-weighted assets):
Company	$	165,325	13.28	%	$	99,578	8.00	%	$	N.A.	N.A.	%
Bank		163,814	13.19			99,327	8.00			124,159	10.00
Tier 1 Capital (to risk-weighted assets):
Company	$	139,532	11.21	%	$	74,683	6.00	%	$	N.A.	N.A.	%
Bank		152,002	12.24			74,495	6.00			99,327	8.00
Common Equity Tier 1 Capital
(to risk-weighted assets)
Company	$	105,513	8.48	%	$	56,013	4.50	%	$	N.A.	N.A.	%
Bank		152,002	12.24			55,872	4.50			80,703	6.50
Tier 1 leverage ratio:
Company	$	139,532	9.55	%	$	58,467	4.00	%	$	N.A.	N.A.	%
Bank		152,002	10.43			58,272	4.00			72,839	5.00
(in thousands)
December 31, 2017
Total Capital (to risk-weighted assets):
Company	$	156,045	12.93	%	$	96,577	8.00	%	$	N.A.	N.A.	%
Bank		154,495	12.83			96,326	8.00			120,408	10.00
Tier 1 Capital (to risk-weighted assets):
Company	$	129,369	10.72	%	$	72,433	6.00	%	$	N.A.	N.A.	%
Bank		143,483	11.92			72,245	6.00			96,326	8.00
Common Equity Tier 1 Capital
(to risk-weighted assets)
Company	$	97,033	8.04	%	$	54,325	4.50	%	$	N.A.	N.A.	%
Bank		143,483	11.92			54,184	4.50			78,265	6.50
Tier 1 leverage ratio:
Company	$	129,369	9.33	%	$	55,488	4.00	%	$	N.A.	N.A.	%
Bank		143,483	10.38			55,315	4.00			69,144	5.00

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Fair Value Measurements

12 Months Ended

Dec. 31, 2018

Fair Value Measurements

Fair Value Measurements

(16)    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 US GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

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.

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

The Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring 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 instruments measured at fair value on a recurring basis

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

Available-for-sale securities

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

Mortgage servicing rights

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

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2018
Assets:
U.S. Treasury	$	1,952	$	1,952		—	$	—
U.S. government and federal agency obligations		9,966		—		9,966		—
Government sponsored enterprises		43,335		—		43,335		—
Obligations of states and political subdivisions		40,386		—		40,386		—
Mortgage-backed securities		118,192		—		118,192		—
Other debt securities		3,000		—		3,000		—
Bank-issued trust preferred securities		1,374		—		1,374		—
Equity securities		12		—		12		—
Mortgage servicing rights		2,931		—		—		2,931
Total	$	221,148	$	1,952	$	216,265	$	2,931
December 31, 2017
Assets:
U.S. Treasury	$	1,967	$	1,967		—	$	—
U.S. government and federal agency obligations		12,073		—		12,073		—
Government sponsored enterprises		36,897		—		36,897		—
Obligations of states and political subdivisions		46,656		—		46,656		—
Mortgage-backed securities		128,949		—		128,949		—
Other debt securities		3,000		—		3,000		—
Bank-issued trust preferred securities		1,486		—		1,486		—
Equity securities		10		—		10		—
Mortgage servicing rights		2,713		—		—		2,713
Total	$	233,751	$	1,967	$	229,071	$	2,713

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)
(in thousands)	Mortgage Servicing Rights
Balance at December 31, 2016	$	2,584
Total gains or (losses) (realized/unrealized):
Included in earnings		(93)
Included in other comprehensive income		—
Purchases		—
Sales		—
Issues		222
Settlements		—
Balance at December 31, 2017	$	2,713
Total gains or losses (realized/unrealized):
Included in earnings		(27)
Included in other comprehensive income		—
Purchases		—
Sales		—
Issues		245
Settlements		—
Balance at December 31, 2018	$	2,931

Valuation methods for instruments measured at fair value on a nonrecurring basis

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

Collateral dependent impaired loans

While the overall loan portfolio is not carried at fair value, the Company periodically records nonrecurring adjustments to the carrying value of impaired loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the fair 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 appraisals may be discounted based on the Company's historical knowledge, changes in market conditions from the time of appraisal, or other information available. The Company maintains staff that is trained to perform in-house evaluations and also review third party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Fair values of all loan collateral are regularly reviewed by senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of December 31, 2018, the Company identified $3.8 million in impaired loans that had specific allowances for losses aggregating $867,000. Related to these loans, there were $370,000 in charge-offs recorded during the year ended December 31, 2018. As of December 31, 2017, the Company identified $4.0 million in impaired loans that had specific allowances for losses aggregating $870,000. Related to these loans, there  were $788,000 in charge-offs recorded during the year ended December 31, 2017.

Other Real Estate Owned and Repossessed Assets

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

			Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total		Assets		Inputs		Inputs		Total Gains
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Losses)*
December 31, 2018
Assets:
Collateral dependent impaired loans:
Commercial, financial, & agricultural	$	1,320	$	—	$	—	$	1,320	$	(244)
Real estate construction - commercial		153		—		—		153		(27)
Real estate mortgage - residential		1,317		—		—		1,317		(44)
Real estate mortgage - commercial		115		—		—		115		(20)
Installment and other consumer		—		—		—		—		(35)
Total	$	2,905	$	—	$	—	$	2,905	$	(370)
Other real estate and repossessed assets	$	13,691	$	—	$	—	$	13,691	$	(15)
December 31, 2017
Assets:
Collateral dependent impaired loans:
Commercial, financial, & agricultural	$	1,583	$	—	$	—	$	1,583	$	(521)
Real estate construction - commercial		153		—		—		153		—
Real estate mortgage - residential		49		—		—		49		(204)
Real estate mortgage - commercial		880		—		—		880		(26)
Installment and other consumer		593		—		—		—		(37)
Total	$	3,258	$	—	$	—	$	2,665	$	(788)
Other real estate and repossessed assets	$	13,182	$	—	$	—	$	13,182	$	(250)

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

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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2018

Fair Value of Financial Instruments

Fair Value of Financial Instruments

(17)    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.

Investment Securities

A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment security portfolio is provided in the Fair Value Measurement section above. A schedule of investment securities by category and maturity is provided in the notes on Investment Securities.

Other investment securities

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

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.

Federal Funds Sold, Cash, and Due from Banks

The carrying amounts of short-term federal funds sold and securities purchased under agreements to resell, interest earning deposits with banks, and cash and due from banks approximate fair value. Federal funds sold and securities purchased under agreements to resell 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. 

Cash Surrender Value – Life Insurance

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

Accrued Interest Receivable and Payable

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

Deposits

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

Federal funds purchased and Securities Sold under Agreements to Repurchase

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

Subordinated Notes and Other Borrowings

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

A summary of the carrying amounts and fair values of the Company's financial instruments at December 31, 2018 and 2017 is as follows:

					December 31, 2018
					Fair Value Measurements
						Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2018				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	23,687	$	23,687	$	23,687	$	—	$	—
Federal funds sold and overnight interest-bearing deposits		18,396		18,396		18,396		—		—
Certificates of deposit in other banks		12,247		12,247		12,247		—		—
Available for sale securities		218,205		218,205		1,952		216,253		—
Other investment securities		5,675		5,675		—		5,675		—
Loans, net		1,134,975		1,115,003		—		—		1,115,003
Mortgage servicing rights		2,931		2,931		—		—		2,931
Cash surrender value - life insurance		2,542		2,542		—		2,542		—
Accrued interest receivable		6,162		6,162		6,162		—		—
	$	1,424,820	$	1,404,848	$	62,444	$	224,470	$	1,117,934
Liabilities:
Deposits:
Non-interest bearing demand	$	262,857	$	262,857	$	262,857	$	—	$	—
Savings, interest checking and money market		614,040		614,040		614,040		—		—
Time deposits		321,571		318,949		—		—		318,949
Federal funds purchased and securities sold under agreements to repurchase		24,647		24,647		24,647		—		—
Federal Home Loan Bank advances and other borrowings		95,153		94,326		—		94,326		—
Subordinated notes		49,486		45,749		—		45,749		—
Accrued interest payable		1,035		1,035		1,035		—		—
	$	1,368,789	$	1,361,603	$	902,579	$	140,075	$	318,949

					December 31, 2017
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2017				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	23,325	$	23,325	$	23,325	$	—	$	—
Federal funds sold and overnight interest-bearing deposits		39,553		39,553		39,553		—		—
Certificates of deposit in other banks		3,460		3,460		3,460		—		—
Available-for-sale securities		231,028		231,028		1,967		229,061		—
Other investment securities		6,551		6,551		—		6,551		—
Loans, net		1,057,580		1,058,153		—		—		1,058,153
Mortgage servicing rights		2,713		2,713		—		—		2,713
Cash surrender value - life insurance		2,484		2,484		—		2,484		—
Accrued interest receivable		5,627		5,627		5,627		—		—
	$	1,372,321	$	1,372,894	$	73,932	$	238,096	$	1,060,866
Liabilities:
Deposits:
Non-interest bearing demand	$	245,380	$	245,380	$	245,380	$	—	$	—
Savings, interest checking and money market		584,468		584,468		584,468		—		—
Time deposits		295,964		294,778		—		—		294,778
Federal funds purchased and securities sold under agreements to repurchase		27,560		27,560		27,560		—		—
Federal Home Loan Bank advances and other borrowings		121,382		121,291		—		121,291		—
Subordinated notes		49,486		39,692		—		39,692		—
Accrued interest payable		554		554		554		—		—
	$	1,324,794	$	1,313,723	$	857,962	$	160,983	$	294,778

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.

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Commitments and Contingencies

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies

Commitments and Contingencies

(18)    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 nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At December 31, 2018, no amounts have been accrued for any estimated losses for these financial instruments.

The contractual amount of off-balance-sheet financial instruments as of December 31, 2018 and 2017 is as follows:

(in thousands)	2018		2017
Commitments to extend credit	$	267,314	$	238,527
Commitments to originate residential first and second mortgage loans		1,759		1,471
Standby letters of credit		82,895		74,004
Total	$	351,968	$	314,002

Commitments

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company's customers. The approximate remaining term of standby letters of credit range from one month to five years at December 31, 2018.

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 amount can be estimated.

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Revenue Recognition

12 Months Ended

Dec. 31, 2018

Revenue Recognition

Revenue Recognition

(19)    Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 1 Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are not in the scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue, service charges and fees, debit card income, ATM surcharge income, and sales of other real estate owned. However, the recognition of these revenue streams did not change current business practices or result in any changes to the Company's consolidated financial statements.

Descriptions of our revenue-generating activities within the scope of this guidance, which are presented in our income statement as components of noninterest income are as follows:

Trust Department Revenue

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Gains/Losses on Sales of Other Real Estate Owned (OREO)

The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

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Condensed Financial Information of the Parent Company Only

12 Months Ended

Dec. 31, 2018

Condensed Financial Information of the Parent Company Only

Condensed Financial Information of the Parent Company Only

(20)    Condensed Financial Information of the Parent Company Only

Following are the condensed financial statements of Hawthorn Bancshares, Inc. (Parent only) as of and for the years indicated:

Condensed Balance Sheets

	December 31,
(in thousands)	2018		2017
Assets
Cash and due from bank subsidiaries	$	1,334	$	1,415
Investment in bank-issued trust preferred securities		1,374		1,486
Investment in subsidiaries		152,735		144,589
Deferred tax asset		1,307		1,677
Other assets		403		133
Total assets	$	157,153	$	149,300
Liabilities and Stockholders' Equity
Subordinated notes	$	49,486	$	49,486
Other liabilities		8,253		8,443
Stockholders' equity		99,414		91,371
Total liabilities and stockholders' equity	$	157,153	$	149,300

Condensed Statements of Income

	For the Years Ended December 31,
	2018		2017		2016
Income
Interest and dividends received from subsidiaries	$	2,653	$	2,653	$	46
Other		428		—		—
Total income		3,081		2,653		46
Expenses
Interest on subordinated notes		2,229		1,751		1,494
Other		3,461		2,358		2,039
Total expenses		5,690		4,109		3,533
Income before income tax benefit and equity in undistributed income of subsidiaries		(195)		(1,456)		(3,487)
Income tax benefit		1,397		191		1,337
Equity in undistributed income of subsidiaries		9,512		4,679		9,432
Net income	$	10,714	$	3,414	$	7,282

Condensed Statements of Cash Flows

	For the Years Ended December 31,
(in thousands)	2018		2017		2016
Cash flows from operating activities:
Net income	$	10,714	$	3,414	$	7,282
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Equity in undistributed income of subsidiaries		(9,512)		(4,679)		(9,432)
Stock based compensation expense		—		3		17
Decrease (increase) in deferred tax asset		370		881		(442)
Other, net		(116)		453		769
Net cash provided (used) by operating activities	$	1,456	$	72	$	(1,806)
Cash flows from investing activities:
Decrease (increase) in investment in subsidiaries, net	$	500	$	(250)	$	2,500
Net cash provided (used) by investing activities	$	500	$	(250)	$	2,500
Cash flows from financing activities:
Cash dividends paid - common stock	$	(1,993)	$	(1,474)	$	(1,097)
Issuance of stock under equity compensation plan		135		—		—
Purchase of treasury stock		(179)		(878)		(623)
Net cash used in financing activities	$	(2,037)	$	(2,352)	$	(1,720)
Net decrease in cash and due from banks		(81)		(2,530)		(1,026)
Cash and due from banks at beginning of year		1,415		3,945		4,971
Cash and due from banks at end of year	$	1,334	$	1,415	$	3,945

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Quarterly Financial Information (Unaudited)

12 Months Ended

Dec. 31, 2018

Quarterly Financial Information (Unaudited)

Quarterly Financial Information (Unaudited)

(21)    Quarterly Financial Information (Unaudited)

									Year
	First		Second		Third		Fourth		to
(In thousands except per share data)	quarter		quarter		quarter		quarter		Date
Year Ended December 31, 2018
Interest income	$	13,544	$	14,288	$	14,751	$	15,196	$	57,779
Interest expense		2,790		3,261		3,443		3,692		13,186
Net interest income		10,754		11,027		11,308		11,504		44,593
Provision for loan losses		300		450		250		475		1,475
Noninterest income		2,203		2,378		2,324		2,436		9,341
Investment gains (losses), net		98		108		50		(1)		255
Noninterest expense		10,254		9,931		9,888		10,259		40,332
Income tax expense		411		225		446		586		1,668
Net income	$	2,090	$	2,907	$	3,098	$	2,619	$	10,714
Net income per share:
Basic earnings per share	$	0.35	$	0.48	$	0.51	$	0.44	$	1.78
Diluted earnings per share		0.35		0.48		0.51		0.44		1.78
Year Ended December 31, 2017
Interest income	$	12,099	$	12,681	$	12,936	$	13,219	$	50,935
Interest expense		1,612		1,861		2,183		2,351		8,007
Net interest income		10,487		10,820		10,753		10,868		42,928
Provision for loan losses		350		330		555		530		1,765
Noninterest income		2,407		2,099		2,181		2,263		8,950
Investment gains (losses), net		—		—		—		5		5
Noninterest expense		9,350		9,687		9,766		9,999		38,802
Income tax expense		1,093		983		847		4,979		7,902
Net income	$	2,101	$	1,919	$	1,766	$	(2,372)	$	3,414
Net income per share:
Basic earnings per share	$	0.35	$	0.32	$	0.29	$	(0.39)	$	0.56
Diluted earnings per share		0.35		0.32		0.29		(0.39)		0.56

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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2018

Summary of Significant Accounting Policies

Principles of Consolidation

Principles of Consolidation

In December of 2008, the Company formed Hawthorn Real Estate, LLC, (the Real Estate Company); a wholly owned subsidiary of the Company. In December of 2017, the Company formed Hawthorn Risk Management, Inc., (the Insurance Captive); a wholly owned subsidiary of the Company. The consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), the Real Estate Company, and the Insurance Captive. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans

Loans

Loans that the Company has the intent and ability to hold for the foreseeable future or to maturity are held for investment at their stated unpaid principal balance amount less unearned income and the allowance for loan losses. Income on loans is accrued on a simple‑interest basis. Loan origination fees and certain direct costs are deferred and recognized over the life of the loan as an adjustment to yield.

Loans Held for Sale

Loans originated, primarily one-to-four family residential mortgage loans, with the intent to be sold in the secondary market are classified as held for sale and are accounted for at the lower of adjusted cost or fair value. Adjusted cost reflects the funded loan amount and any loan origination costs and fees. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. Mortgage loans held for sale were $583,000 at December 31, 2018 compared to $383,000 loans held for sale at December 31, 2017.

Impaired Loans

A loan is considered impaired when it is probable the Company will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. Included in impaired loans are all non-accrual loans and loans whose terms have been modified in a troubled debt restructuring. Impaired loans are individually evaluated for impairment based on fair values of the underlying collateral, obtained through independent appraisals or internal valuations for a collateral dependent loan or by discounting the total expected future cash flows.

Non-Accrual Loans

Loans are placed on nonaccrual status when management believes that the borrower's financial condition, after consideration of business conditions and collection efforts, is such that collection of interest is doubtful. Loans that are contractually 90 days past due as to principal and/or interest payments are generally placed on non-accrual, unless they are both well-secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. A loan remains on nonaccrual status until the loan is current as to payment of both principal and interest and/or the borrower demonstrates the ability to pay and remain current.

Restructured Loans

A loan is accounted for as a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the borrowers' financial difficulties, grants a concession to the borrower that it would not otherwise consider. A TDR typically involves (1) modification of terms such as a reduction of the stated interest rate, loan principal, accrued interest, or an extended maturity date (2) a loan renewal at a stated interest rate lower than the current market rate for a new loan with similar risk, or (3) debt that was not reaffirmed in bankruptcy. Nonperforming TDRs are returned to performing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months. The Company includes all performing and non-performing TDRs in the impaired and non-performing asset totals. The Company measures the impairment loss of a TDR in the same manner as described below. TDRs which are performing under their contractual terms continue to accrue interest which is recognized in current earnings.

Allowance for Loan Losses

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan 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. The fair value of impaired loans deemed collateral dependent, for purposes of the measurement of the impairment loss, can be subject to changing market conditions, supply and demand, condition of the collateral and other factors over time. Such volatility can have an impact on the financial performance of the Company.

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. When loans become 90 days past due, they are generally placed on nonaccrual status or charged off unless extenuating circumstances justify leaving the loan on accrual basis. When loans reach 120 days past due and there is little likelihood of repayment, the uncollectible portion of the loans are charged off. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired.

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded.

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by loan type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type. The Company believes that the five-year look-back period provides a representative historical loss period in the current economic environment. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss.

The Company's methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of nonaccrual loans, and the volume and  severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, assessment of changes in the quality of the Company's internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

Certificates of Deposit in other banks

Certificates of Deposit in other banks

Certificates of deposit are investments made by the Company with other financial institutions, in amounts less than $250,000 each in order to qualify for FDIC insurance coverage, that are carried at cost which approximates fair values.

Investment Securities

Investment Securities

Available for sale securities

The largest component of the Company's investment portfolio consists of debt securities which are classified as available-for-sale and are carried at fair value. Changes in fair value, excluding certain losses associated with other-than-temporary impairment, are reported in other comprehensive income, net of taxes, a component of stockholders' equity. Securities are periodically evaluated for other-than-temporary impairment in accordance with guidance provided in the FASB ASC Topic 320, Investments – Debt Securities. For those securities with other-than-temporary impairment, the entire loss in fair value is required to be recognized in current earnings if the Company intends to sell the securities or believes it more likely than not that it will be required to sell the security before the anticipated recovery. If neither condition is met, but the Company does not expect to recover the amortized cost basis, the Company determines whether a credit loss has occurred, which is then recognized in current earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Premiums and discounts are amortized using the interest method over the lives of the respective securities, with consideration of historical and estimated prepayment rates for mortgage‑backed securities, as an adjustment to yield. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available‑for‑sale are included in earnings based on the specific identification method for determining the cost of securities sold.

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

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.

Capital Stock of the Federal Home Loan Bank

Capital Stock of the Federal Home Loan Bank

The Bank, as a member of the Federal Home Loan Bank System administered by the Federal Housing Finance Agency, is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Des Moines (FHLB) in an amount equal to 12 basis points of the Bank's year-end total assets plus 4.00% of advances from the FHLB to the Bank. These investments are recorded at cost, which represents redemption value.

Premises and Equipment

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improvements and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such lives are estimated to be 5 to 40 years for buildings and improvements and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.

Mortgage Servicing Rights

Mortgage Servicing Rights

The Company originates and sells residential mortgage loans in the secondary market and typically retains the right to service the loans sold. Servicing involves the collection of payments from individual borrowers and the distribution of those payments to the investors or master servicer. Upon a sale of mortgage loans for which servicing rights are retained, the retained mortgage servicing rights asset is capitalized at the fair value of future net cash flows expected to be realized for performing servicing activities.

Mortgage servicing rights are carried at fair value in the consolidated balance sheet with changes in the fair value recognized in earnings. As most servicing rights do not trade in an active market with readily observable prices, the Company determines the fair value of mortgage servicing rights by estimating the fair value of the future cash flows associated with the mortgage loans being serviced. Key assumptions used in measuring the fair value of mortgage servicing rights include, but are not limited to, prepayment speeds, discount rates, delinquencies, ancillary income, and cost to service. These assumptions are validated on a periodic basis. The fair value is validated on a quarterly basis with an independent third party valuation specialist firm.

In addition to the changes in fair value of the mortgage servicing rights, the Company also recorded loan servicing fee income as part of real estate servicing fees, net in the consolidated statements of income. Loan servicing fee income represents revenue earned for servicing mortgage loans. The servicing fees are based on contractual percentage of the outstanding principal balance and recognized as revenue as the related mortgage payments are collected. Corresponding loan servicing costs are charged to expense as incurred.

Other Real Estate Owned and Repossessed Assets

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consist of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are initially recorded as held for sale at the fair value of the collateral less estimated selling costs. Any adjustment is recorded as a charge-off against the allowance for loan losses. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. The valuation write-downs are recorded as other non-interest expense. The Company establishes a valuation allowance related to other real estate owned and repossessed assets on an asset-by-asset basis. The valuation allowance is created during the holding period when the fair value less cost to sell is lower than the cost of the asset.

Pension Plan

Pension Plan

The Company provides a noncontributory defined benefit pension plan for all full-time employees.  The benefits are based on age, years of service and the level of compensation during the employees highest ten years of compensation before retirement. Net periodic costs are recognized as employees render the services necessary to earn the retirement benefits. The Company records annual amounts relating to its pension plan based on calculations that incorporate various actuarial and other assumptions including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates.  The Company reviews its assumptions on an annual basis and may make modifications to the assumptions based on current rates and trends when it is appropriate to do so.  The Company believes that the assumptions utilized in recording its obligations under its plan are reasonable based on its experience and market conditions.

The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation – Retirement Plans under the subtopic Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the funded status of a plan as of the date of its fiscal year-end, with limited exceptions. Additional disclosures are required to provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures.

Income Taxes

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred income tax assets and liabilities are provided as temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements at the enacted tax rate expected to be applied in the period the deferred tax item is expected to be realized. A valuation allowance, if needed, reduces deferred tax assets to the expected amount most likely to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years.

The federal corporate income tax rate declined from 34% to 21% effective January 1, 2018 as a result of the Tax Cuts and Jobs Act, (Tax Act). The Company's tax rate is lower than the federal statutory rate primarily as a result of tax-exempt income, the release of the valuation allowance related to capital loss carryforwards, a pension contribution made during the second quarter of 2018 that was attributable to the 2017 plan year, and the Company's additional tax planning initiatives. The provisional adjustments recorded in the fourth quarter of 2017 related to the enactment of the Tax Act were finalized during the third quarter of 2018 with the filing of the Company's 2017 tax return,  within the one-year measurement period provided under Staff Accounting Bulletin No. 118 in regards to the application of FASB's ASC Topic 740, Income Taxes.

The Tax Act resulted in stranded income tax effects in accumulated other comprehensive loss, for which new accounting guidance was issued under ASU 2018-02. This guidance allowed the Company to early adopt and retrospectively apply the reclassification of stranded income tax effects from accumulated other comprehensive loss to retained earnings. As of December 31, 2017, the Company reclassified $1.2 million from accumulated other comprehensive loss to retained earnings resulting from the Tax Act.

A tax position is initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Penalties and interest incurred under the applicable tax law are classified as income tax expense. The Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions as of December 31, 2018, 2017, and 2016.

Trust Department

Trust Department

Property held by the Bank in a fiduciary or agency capacity for customers is not included in the accompanying consolidated balance sheets, since such items are not assets of the Company. Trust department income is recognized on the accrual basis.

Consolidated Statements of Cash Flows

Consolidated Statements of Cash Flows

For the purpose of the consolidated statements of cash flows, cash and cash equivalents consist of short-term federal funds sold and securities sold or purchased under agreements to resell, overnight interest earning deposits with banks, cash, and due from banks.

Stock-Based Compensation

Stock-Based Compensation

The Company's stock-based employee compensation plan (the plan) is described in Note 13, Stock Compensation. In accordance with FASB ASC Topic 718, Compensation – Stock Compensation, the Company measures the cost of the stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The Company adopted ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, on January 1, 2017 and elected to recognize forfeitures as they occur. Prior to the adoption of the ASU, the expense was recognized based on an estimation of the number of awards for which the requisite service is expected to be rendered, and is included in salaries and employee benefits in the accompanying Consolidated Statements of Income. The plan expired on February 28, 2010, except as to outstanding options under the plan, and no further options may be granted pursuant to the plan. All options were fully expensed as of September 30, 2017.

Treasury Stock

Treasury Stock

The purchase of the Company's common stock is recorded at cost. Purchases of the stock are made both in the open market and through negotiated private purchases based on market prices. At the date of subsequent reissue, the treasury stock account is reduced by the cost associated with such stock on a first-in-first-out basis. Gains on the sale of treasury stock are credited to additional paid-in-capital. Losses on the sale of treasury stock are charged to additional paid-in-capital to the extent of pervious gains, otherwise charged to retained earnings.

Stock Dividend

Stock Dividend On July 1, 2018, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2018. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Summary of Recent Transactions and Events

Summary of Recent Transactions and Events On February 8, 2019, Hawthorn Bank, a wholly-owned subsidiary of Hawthorn Bancshares, Inc., completed the sale of its branch located in Branson, Missouri to Branson Bank, Branson, Missouri. Total deposits transferred were approximately $10.6 million while loans assigned to the branch were retained.  The Branson branch land and building were considered assets held for sale at December 31, 2018. The sale is expected to result in a pre-tax gain of approximately $2.1 million, $1.7 million related to the land and building, subject to certain future adjustments required in the definitive agreement.

Reclassifications

Reclassifications Certain prior year information has been reclassified to conform to the 2018 presentation.

New accounting principles adopted

The following represents significant new accounting principles adopted in 2018:

Revenue from Contracts with Customers On January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and all subsequent ASUs that modified Topic 606. The implementation of the new standard did not have a material impact on the measurement or recognition of revenue; as such, a cumulative effect adjustment to opening retained earnings was not deemed necessary. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be reported in accordance with historic accounting under Topic 605.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are not in scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust department revenue, service charges and fees, debit card income, ATM surcharge income, and other real estate owned sales. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Noninterest revenue streams within the scope of Topic 606 are discussed in Footnote 16.

Financial Instruments The FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, in January 2016. The amendments require all equity investments to be measured at fair value with changes in the fair value recognized through net income, other than those accounted for under the equity method of accounting or those that result in the consolidation of the investee. Additionally, these amendments require presentation in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk for those liabilities measured at fair value. The amendments also require use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes. These amendments are effective for interim and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the Company's consolidated financial statements.

The FASB issued ASU 2018-04, Investments - Debt Securities (Topic 320) and Regulated Operations (Topic 980): The amendment in this ASU adds, amends and supersedes various paragraphs that contain SEC guidance in ASC 320, Investments-Debt Securities and ASC 980, Regulated Operations. The amendments in this ASU are effective when a registrant adopts ASU 2016-01, which for the Company was January 1, 2018. This amendment did not have a significant effect on the Company's consolidated financial statements.

Liabilities The FASB issued ASU 2016-04, Recognition of Breakage for Certain Prepaid Stored-Value Products, in March 2016, in order to address current and potential future diversity in practice related to the derecognition of a prepaid stored-value product liability. Such products include prepaid gift cards issued on a specific payment network and redeemable at network-accepting merchant locations, prepaid telecommunication cards, and traveler's checks. The amendments require that the portion of the dollar value of prepaid stored-value products that is ultimately unredeemed (that is, the breakage) be accounted for consistent with the breakage guidance for stored-value product transactions provided in ASC Topic 606 - Revenue from Contracts with Customers. These amendments are effective for interim and annual periods beginning January 1, 2018. The adoption of the ASU did not have a significant effect on the Company's consolidated financial statements.

Pension The FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost in March 2017. Under the new guidance, the Company presents the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. The Company presents the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. The Company utilizes the ASU's practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote. The amendments were effective January 1, 2018 and did not have a significant effect on the Company's consolidated financial statements. See Note 12 for

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Loans and Allowance for Loan Losses (Tables)

12 Months Ended

Dec. 31, 2018

Loans and Allowances for Loan Losses

Schedule of summary of loans, by major class within the Company's loan portfolio

(in thousands)	2018		2017
Commercial, financial, and agricultural	$	207,720	$	192,238
Real estate construction - residential		28,610		26,492
Real estate construction - commercial		106,784		98,340
Real estate mortgage - residential		241,517		246,754
Real estate mortgage - commercial		529,536		472,455
Installment and other consumer		32,460		32,153
Total loans	$	1,146,627	$	1,068,432

Schedule of loans to directors and executive officers

(in thousands)
Balance at December 31, 2017	$	6,442
New loans and new directors		1,127
Amounts collected		(1,565)
Balance at December 31, 2018	$	6,004

Schedule of changes in the allowance for loan losses by portfolio segment

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

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, &		Construction -		Construction -		Mortgage -		Mortgage -		Loans to		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Individuals		allocated		Total
Balance at December 31, 2015	$	2,153	$	59	$	644	$	2,439	$	2,935	$	273	$	101	$	8,604
Additions:
Provision for loan losses		690		49		(732)		381		865		113		59		1,425
Deductions:
Loans charged off		389		—		1		495		147		258		—		1,290
Less recoveries on loans		(299)		—		(502)		(60)		(140)		(146)		—		(1,147)
Net loans charged off		90		—		(501)		435		7		112		—		143
Balance at December 31, 2016	$	2,753	$	108	$	413	$	2,385	$	3,793	$	274	$	160	$	9,886
Additions:
Provision for loan losses		1,147		(26)		394		(560)		657		234		(81)		1,765
Deductions:
Loans charged off		649		—		—		219		45		268		—		1,181
Less recoveries on loans		(74)		(88)		—		(83)		(32)		(105)		—		(382)
Net loans charged off		575		(88)		—		136		13		163		—		799
Balance at December 31, 2017	$	3,325	$	170	$	807	$	1,689	$	4,437		345	$	79	$	10,852
Additions:
Provision for loan losses		296		(44)		(20)		516		457		150		120		1,475
Deductions:
Loans charged off		484		48		30		186		38		255		—		1,041
Less recoveries on loans		(100)		(62)		—		(52)		(58)		(94)		—		(366)
Net loans charged off		384		(14)		30		134		(20)		161		—		675
Balance at December 31, 2018	$	3,237	$	140	$	757	$	2,071	$	4,914	$	334	$	199	$	11,652

Schedule of allowance for loan losses and recorded investment by portfolio segment

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

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, and		Construction -		Construction -		Mortgage -		Mortgage -		and Other		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Consumer		allocated		Total
December 31, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	551	$	—	$	—	$	579	$	37	$	27	$	—	$	1,194
Collectively evaluated for impairment		2,686		140		757		1,492		4,877		307		199		10,458
Total	$	3,237	$	140	$	757	$	2,071	$	4,914	$	334	$	199	$	11,652
Loans outstanding:
Individually evaluated for impairment	$	2,428	$	—	$	153	$	4,793	$	850	$	254	$	—	$	8,478
Collectively evaluated for impairment		205,292		28,610		106,631		236,724		528,686		32,206		—		1,138,149
Total	$	207,720	$	28,610	$	106,784	$	241,517	$	529,536	$	32,460	$	—	$	1,146,627
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment	$	500	$	—	$	48	$	521	$	243	$	21	$	—	$	1,333
Collectively evaluated for impairment		2,825		170		759		1,168		4,194		324		79		9,519
Total	$	3,325	$	170	$	807	$	1,689	$	4,437	$	345	$	79	$	10,852
Loans outstanding:
Individually evaluated for impairment	$	3,007	$	—	$	97	$	5,072	$	2,004	$	176	$	—	$	10,356
Collectively evaluated for impairment		189,231		26,492		98,243		241,682		470,451		31,977		—		1,058,076
Total	$	192,238	$	26,492	$	98,340	$	246,754	$	472,455	$	32,153	$	—	$	1,068,432

Schedule of impaired loans

The categories of impaired loans at December 31, 2018 and 2017 are as follows:

(in thousands)	2018		2017
Non-accrual loans	$	5,414	$	5,672
Performing TDRs		3,064		4,684
Total impaired loans	$	8,478	$	10,356

The following tables provide additional information about impaired loans at December 31, 2018 and 2017, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2018
With no related allowance recorded:
Commercial, financial and agricultural	$	1,264	$	1,550	$	—
Real estate - construction commercial		153		180		—
Real estate - residential		561		602		—
Real estate - commercial		115		119		—
Total	$	2,093	$	2,451	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	1,164	$	1,236	$	551
Real estate - residential		4,232		4,458		579
Real estate - commercial		735		1,093		37
Installment and other consumer		254		280		27
Total	$	6,385	$	7,067	$	1,194
Total impaired loans	$	8,478	$	9,518	$	1,194

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2017
With no related allowance recorded:
Commercial, financial and agricultural	$	1,393	$	1,445	$	—
Real estate - residential		674		688		—
Real estate - commercial		366		395		—
Total	$	2,433	$	2,528	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	1,614	$	1,834	$	500
Real estate - construction commercial		97		97		48
Real estate - residential		4,398		4,500		521
Real estate - commercial		1,638		1,743		243
Installment and other consumer		176		196		21
Total	$	7,923	$	8,370	$	1,333
Total impaired loans	$	10,356	$	10,898	$	1,333

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2018 and 2017:

	2018				2017
			Interest				Interest
	Average		Recognized		Average		Recognized
	Recorded		For the		Recorded		For the
(in thousands)	Investment		Period Ended		Investment		Period Ended
With no related allowance recorded:
Commercial, financial and agricultural	$	1,302	$	—	$	957	$	—
Real estate - construction commercial		120		—		—		—
Real estate - residential		901		10		826		13
Real estate - commercial		59		22		373		—
Installment and other consumer		34		—
Total	$	2,416	$	32	$	2,156	$	13
With an allowance recorded:
Commercial, financial and agricultural	$	1,394	$	32	$	1,536	$	33
Real estate - construction commercial		15		—		49		—
Real estate - residential		4,169		99		4,575		149
Real estate - commercial		763		34		1,641		61
Installment and other consumer		206		2		114		—
Total	$	6,547	$	167	$	7,915	$	243
Total impaired loans	$	8,963	$	199	$	10,071	$	256

Schedule of aging information for the Company's past due and non-accrual loans

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
December 31, 2018
Commercial, Financial, and Agricultural	$	205,597	$	266	$	—	$	1,857	$	207,720
Real Estate Construction - Residential		28,404		206		—		—		28,610
Real Estate Construction - Commercial		106,531		100		—		153		106,784
Real Estate Mortgage - Residential		235,734		2,907		156		2,720		241,517
Real Estate Mortgage - Commercial		527,968		1,094		—		474		529,536
Installment and Other Consumer		32,002		242		6		210		32,460
Total	$	1,136,236	$	4,815	$	162	$	5,414	$	1,146,627
December 31, 2017
Commercial, Financial, and Agricultural	$	189,537	$	192	$	2	$	2,507	$	192,238
Real Estate Construction - Residential		25,930		287		275		—		26,492
Real Estate Construction - Commercial		98,243		—		—		97		98,340
Real Estate Mortgage - Residential		242,597		2,173		28		1,956		246,754
Real Estate Mortgage - Commercial		471,476		43		—		936		472,455
Installment and Other Consumer		31,715		239		23		176		32,153
Total	$	1,059,498	$	2,934	$	328	$	5,672	$	1,068,432

Schedule of risk categories by class

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, &		Construction -		Construction -		Mortgage -		Mortgage -		and other
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Consumer		Total
At December 31, 2018
Watch	$	8,871	$	588	$	4,063	$	12,790	$	36,408	$	8	$	62,728
Substandard		53		—		—		1,411		702		3		2,169
Performing TDRs		570		—		—		2,073		377		44		3,064
Non-accrual		1,857		—		153		2,720		474		210		5,414
Total	$	11,351	$	588	$	4,216	$	18,994	$	37,961	$	265	$	73,375
At December 31, 2017
Watch	$	9,868	$	1,459	$	1,284	$	9,978	$	49,197	$	—	$	71,786
Substandard		658		462		—		2,262		723		16		4,121
Performing TDRs		500		—		—		3,116		1,068		—		4,684
Non-accrual		2,507		—		97		1,956		936		176		5,672
Total	$	13,533	$	1,921	$	1,381	$	17,312	$	51,924	$	192	$	86,263

Schedule of summary of loans that were modified as TDRs

	2018					2017
	Recorded Investment (1)					Recorded Investment (1)
	Number of	Pre-		Post-		Number of	Pre-		Post-
(in thousands)	Contracts	Modification		Modification		Contracts	Modification		Modification
Troubled Debt Restructurings
Commercial, financial and agricultural	3	$	510	$	502	3	$	773	$	773
Real estate mortgage - residential	2		149		147	2		118		116
Real estate mortgage - commercial	—		—		—	1		55		49
Installment and other consumer	5		185		117	—		—		—
Total	10	$	844	$	766	6	$	946	$	938

(1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off, or foreclosed upon during the period ended are not reported.

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

12 Months Ended

Dec. 31, 2018

Other Real Estate and Repossessed Assets Acquired in Settlement of Loans

Schedule of summary of real estate and other assets acquired in settlement of loans

(in thousands)	2018		2017
Commercial	$	1,168	$	727
Real estate construction - residential		179		—
Real estate construction - commercial		12,101		12,380
Real estate mortgage - residential		336		382
Real estate mortgage - commercial		2,909		2,909
Repossessed assets		—		5
Total	$	16,693	$	16,403
Less valuation allowance for other real estate owned		(3,002)		(3,221)
Total other real estate and repossessed assets	$	13,691	$	13,182

Schedule of changes in the net carrying amount of other real estate owned and repossessed assets

Balance at December 31, 2016	$	17,291
Additions		374
Proceeds from sales		(1,115)
Charge-offs against the valuation allowance for other real estate owned, net		(192)
Net gain on sales		45
Balance at December 31, 2017		16,403
Additions		1,106
Proceeds from sales		(585)
Charge-offs against the valuation allowance for other real estate owned, net		(245)
Net gain on sales		14
Total other real estate and repossessed assets	$	16,693
Less valuation allowance for other real estate owned		(3,002)
Balance at December 31, 2018	$	13,691

Schedule of summary of activity in valuation allowance for other real estate owned

(in thousands)	2018		2017		2016
Balance, beginning of period	$	3,221	$	3,129	$	3,233
Provision for other real estate owned		26		284		213
Charge-offs		(245)		(192)		(317)
Balance, end of period	$	3,002	$	3,221	$	3,129

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Investment Securities (Tables)

12 Months Ended

Dec. 31, 2018

Investment Securities

Schedule of amortized cost and fair value of debt securities available-for-sale

	Total
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
December 31, 2018
U.S. Treasury	$	1,984	$	—	$	(32)	$	1,952
U.S. government and federal agency obligations		10,235		—		(269)		9,966
Government sponsored enterprises		43,784		23		(472)		43,335
Obligations of states and political subdivisions		40,859		28		(501)		40,386
Mortgage-backed securities:		121,230		72		(3,110)		118,192
Other debt securities (a)		3,000		—		—		3,000
Bank issued trust preferred securities (a)		1,486		—		(112)		1,374
Total available-for-sale securities	$	222,578	$	123	$	(4,496)	$	218,205
December 31, 2017
U.S. Treasury	$	1,980	$	—	$	(13)	$	1,967
U.S. government and federal agency obligations		12,341		—		(268)		12,073
Government sponsored enterprises		37,321		—		(424)		36,897
Obligations of states and political subdivisions		47,019		114		(477)		46,656
Mortgage-backed securities:		131,045		44		(2,140)		128,949
Other debt securities (a)		3,000		—		—		3,000
Bank issued trust preferred securities (a)		1,486		—		—		1,486
Total available-for-sale securities	$	234,192	$	158	$	(3,322)	$	231,028

(a) Certain hybrid instruments possessing characteristics typically associated with debt obligations were reclassified from other securities carried at cost to available for sale securities carried at fair value in the years presented.

Schedule of amortized cost and fair value of debt securities classified as available-for-sale by contractual maturity

	Amortized		Fair
(in thousands)	Cost		Value
Due in one year or less	$	18,076	$	17,964
Due after one year through five years		63,424		62,599
Due after five years through ten years		13,750		13,505
Due after ten years		6,098		5,945
Total		101,348		100,013
Mortgage-backed securities		121,230		118,192
Total available-for-sale securities	$	222,578	$	218,205

Schedule of Other securities

(in thousands)	2018		2017
Other securities:
FHLB stock	$	5,512	$	6,390
MIB stock		151		151
Equity securities with readily determinable fair values		12		10
Total other investment securities	$	5,675	$	6,551

Schedule of gross unrealized losses on debt securities and fair value of related securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position

	Less than 12 months				12 months or more				Total		Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses		Value		Losses		Value		Losses
At December 31, 2018
U.S. Treasury	$	—	$	—	$	1,952	$	(32)	$	1,952	$	(32)
U.S. government and federal agency obligations		—		—		9,966		(269)		9,966		(269)
Government sponsored enterprises		1,997		(3)		33,346		(469)		35,343		(472)
Obligations of states and political subdivisions		5,851		(16)		28,832		(485)		34,683		(501)
Mortgage-backed securities		10,085		(61)		99,321		(3,049)		109,406		(3,110)
Bank issued trust preferred securities		—		—		1,374		(112)		1,374		(112)
Total	$	17,933	$	(80)	$	174,791	$	(4,416)	$	192,724	$	(4,496)
(in thousands)
At December 31, 2017
U.S. Treasury	$	1,967	$	(13)	$	—	$	—	$	1,967	$	(13)
U.S. government and federal agency obligations		—		—		12,073		(268)		12,073		(268)
Government sponsored enterprises		16,471		(119)		20,426		(305)		36,897		(424)
Obligations of states and political subdivisions		22,013		(165)		12,570		(312)		34,583		(477)
Mortgage-backed securities:		52,829		(488)		69,580		(1,652)		122,409		(2,140)
Total	$	93,280	$	(785)	$	114,649	$	(2,537)	$	207,929	$	(3,322)

Schedule of components of investment securities gains and losses

(in thousands)	2018		2017		2016
Investment securities gains, net
Available for sale securities:
Gains realized on sales	$	253	$	38	$	623
Losses realized on sales		—		(33)		(21)
Other-than-temporary impairment recognized		—		—		—
Other investment securities:
Fair value adjustments, net		2		—		—
Investment securities gains, net	$	255	$	5	$	602

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Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2018

Premises and Equipment

Schedule of summary of premises and equipment

(in thousands)	2018		2017
Land and land improvements	$	9,917	$	9,980
Buildings and improvements		35,674		35,993
Furniture and equipment		14,163		12,973
Construction in progress		754		289
Total		60,508		59,235
Less accumulated depreciation		25,614		24,424
Premises and equipment, net	$	34,894	$	34,811

Schedule of depreciation expense

(in thousands)	2018		2017		2016
Depreciation expense	$	1,797	$	1,735	$	1,782

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Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2018

Intangible Assets

Schedule of changes in mortgage servicing rights (MSRs)

(in thousands)	2018		2017		2016
Balance at beginning of period	$	2,713	$	2,584	$	2,847
Originated mortgage servicing rights		245		222		266
Changes in fair value:
Due to changes in model inputs and assumptions (1)		286		364		108
Other changes in fair value (2)		(313)		(457)		(637)
Total changes in fair value		(27)		(93)		(529)
Balance at end of period	$	2,931	$	2,713	$	2,584

(1) The change in fair value resulting from changes in valuation inputs or assumptions 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 reflect changes due to customer payments and passage of time.

Schedule of key data and assumptions used in estimating the fair value of the Company's MSRs

	2018		2017
Weighted average constant prepayment rate	8.87	%	9.73	%
Weighted average note rate	3.95	%	3.85	%
Weighted average discount rate	10.28	%	10.09	%
Weighted average expected life (in years)	6.30		5.90

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Deposits (Tables)

12 Months Ended

Dec. 31, 2018

Deposits

Schedule of maturities of total time deposits

(in thousands)
Due within:
2019	$	198,609
2020		43,250
2021		34,054
2022		29,666
2023		15,992
Thereafter		—
Total	$	321,571

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Federal funds purchased and securities sold under agreements to repurchase (Tables)

12 Months Ended

Dec. 31, 2018

Federal funds purchased and securities sold under agreements to repurchase

Schedule of federal funds purchased and securities sold under agreements to repurchase

Information relating to federal funds purchased and repurchase agreements is as follows:

	Year End		Average		Average		Maximum
	Weighted		Weighted		Balance		Outstanding at		Balance at
(in thousands)	Rate		Rate		Outstanding		any Month End		December 31,
2018
Federal funds purchased	2.64	%	2.29	%	$	1,242	$	12,863	$	8,000
Short-term repurchase agreements - Bank	0.35		0.67			27,142		36,103		16,647
Short-term repurchase agreements - Company	—		3.51			11,180		25,944		—
Total					$	39,564	$	74,910	$	24,647
2017
Federal funds purchased	1.64	%	0.99	%	$	322	$	1,067	$	—
Short-term repurchase agreements	0.29		0.38			29,190		32,555		27,560
Total					$	29,512	$	33,622	$	27,560

Schedule of repurchase agreements by remaining maturity of the agreements

Repurchase Agreements	Remaining Contractual Maturity of the Agreements
	Overnight		Less		Greater
	and		than		than
(in thousands)	continuous		90 days		90 days		Total
At December 31, 2018
U.S. Treasury	$	1,464	$	—	$	—	$	1,464
Government sponsored enterprises		12,976		—		—		12,976
Asset-backed securities		2,207		—		—		2,207
Total	$	16,647	$	—	$	—	$	16,647
At December 31, 2017
U.S. Treasury	$	1,964	$	—	$	—	$	1,964
U.S. government and federal agency obligations		2,977		—		—		2,977
Government sponsored enterprises		8,382		—		—		8,382
Asset-backed securities		14,237		—		—		14,237
Total	$	27,560	$	—	$	—	$	27,560

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Borrowings (Tables)

12 Months Ended

Dec. 31, 2018

Borrowings

Schedule of other borrowings

			2018				2017
					Year End				Year End
		Maturity	Year End		Weighted		Year End		Weighted
(in thousands)	Borrower	Date	Balance		Rate		Balance		Rate
FHLB advances	The Bank	2018	$	—	—	%	$	63,226	1.65	%
		2019		28,231	1.63	%		28,231	1.63	%
		2020		42,236	2.49	%		21,236	1.90	%
		2021		20,241	2.77	%		4,241	1.73	%
		2022		4,418	2.14	%		4,418	2.14	%
		2023		—	—	%		—	—	%
Other borrowings		2022		27	4.00	%		30	4.00	%
Total Bank			$	95,153			$	121,382
Subordinated notes	The Company	2034	$	25,774	5.49	%	$	25,774	4.30	%
		2035		23,712	4.62	%		23,712	3.43	%
Total Company			$	49,486			$	49,486

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2018

Income Taxes

Schedule of composition of income tax expense

(in thousands)	2018		2017		2016
Current:
Federal	$	1,175	$	2,761	$	3,578
State		(181)		385		489
Total current		994		3,146		4,067
Deferred:
Federal		674		3,189		(267)
State		—		1,567		(50)
Total deferred		674		4,756		(317)
Total income tax expense	$	1,668	$	7,902	$	3,750

Schedule of the applicable income tax expense for financial reporting purposes differs from the amount computed by applying the statutory Federal income tax rate

	2018				2017				2016
(in thousands)	Amount		%		Amount		%		Amount		%
Income before provision for income tax expense	$	12,382			$	11,316			$	11,032
Tax at statutory federal income tax rate	$	2,600	21.00	%	$	3,847	34.00	%	$	3,751	34.00	%
Tax Cuts and Jobs Act		(343)	(2.77)			3,139	27.74			—	—
State restructuring		(143)	(1.16)			966	8.54			—	—
Tax-exempt income, net		(432)	(3.49)			(394)	(3.48)			(314)	(2.85)
State income tax, net of federal tax benefit		—	—			323	2.85			290	2.63
Other, net		(14)	(0.11)			21	0.18			23	0.21
Provision for income tax expense	$	1,668	13.47	%	$	7,902	69.83	%	$	3,750	33.99	%

Schedule of components of deferred tax assets and deferred tax liabilities

(in thousands)	2018		2017
Deferred tax assets:
Allowance for loan losses	$	2,285	$	2,279
Impairment of other real estate owned		630		672
Goodwill		227		409
Available-for-sale securities		895		664
Nonaccrual loan interest		119		167
Core deposit intangible		90		160
Pension		1,516		1,669
Deferred compensation		160		87
Other		282		257
Total deferred tax assets	$	6,204	$	6,364
Deferred tax liabilities:
Premises and equipment	$	483	$	333
Mortgage servicing rights		616		570
Deferred loan costs		261		—
Accelerated prepaids		321		356
Other		10		34
Total deferred tax liabilities		1,691		1,293
Net deferred tax assets	$	4,513	$	5,071

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Stockholders' Equity (Tables)

12 Months Ended

Dec. 31, 2018

Stockholders' Equity

Schedule of the change in the components of the accumulated other comprehensive loss

The following details the change in the components of the Company's accumulated other comprehensive loss for the years ended December 31, as indicated.

					Accumulated
			Unrecognized Net		Other
			Pension and		Comprehensive
	Unrealized Loss		Postretirement		(Loss)
(in thousands)	on Securities (1)		Costs (2)		Income
Balance, December 31, 2016	$	(1,936)	$	(1,865)	$	(3,801)
Other comprehensive (loss) income, before reclassifications		(37)		90		53
Amounts reclassified from accumulated other comprehensive loss		(5)		(1,085)		(1,090)
Other comprehensive loss, before tax		(42)		(995)		(1,037)
Income tax benefit		16		378		394
Other comprehensive loss, net of tax		(26)		(617)		(643)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02 (3)		(538)		(680)		(1,218)
Balance, December 31, 2017	$	(2,500)	$	(3,162)	$	(5,662)
Other comprehensive (loss) income, before reclassifications		(1,209)		219		(990)
Amounts reclassified from accumulated other comprehensive loss		—		436		436
Other comprehensive (loss) income, before tax		(1,209)		655		(554)
Income tax benefit (expense)		254		(137)		117
Other comprehensive (loss) income, net of tax		(955)		518		(437)
Balance, December 31, 2018	$	(3,455)	$	(2,644)	$	(6,099)

(1) The pre-tax amounts reclassified from accumulated other comprehensive loss are included in gain on sale of investment securities in the consolidated statements of income.

(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost. See Note 12.

(3) As of December 31, 2017, the Company elected to early adopt and retrospectively apply the reclassification of stranded income tax effects from accumulated other comprehensive loss to retained earnings, as permitted under ASU 2018-02.

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Employee Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2018

Employee Benefit Plans

Schedule of employee benefits charged to operating expenses

(in thousands)	2018		2017		2016
Payroll taxes	$	1,156	$	1,167	$	1,122
Medical plans		2,109		2,026		1,881
401k match and profit sharing		956		873		825
Periodic pension cost		1,707		1,344		1,179
Other		67		82		172
Total employee benefits	$	5,995	$	5,492	$	5,179

Schedule of obligations and funded status

(in thousands)	2018		2017
Change in projected benefit obligation:
Balance, January 1	$	27,871	$	23,234
Service cost		1,707		1,343
Interest cost		1,037		1,009
Actuarial (gain) loss		(3,122)		2,843
Benefits paid		(601)		(558)
Balance, December 31,	$	26,892	$	27,871
Change in plan assets:
Fair value, January 1	$	19,924	$	16,502
Actual return on plan assets		(1,329)		2,890
Employer contribution		1,800		1,183
Expenses paid		(122)		(93)
Benefits paid		(601)		(558)
Fair value, December 31,	$	19,672	$	19,924
Funded status at end of year	$	(7,220)	$	(7,947)
Accumulated benefit obligation	$	21,244	$	21,940

Schedule of components of net pension cost

(in thousands)	2018		2017		2016
Service cost - benefits earned during the year	$	1,707	$	1,343	$	1,179
Interest costs on projected benefit obligations (a)		1,037		1,009		956
Expected return on plan assets (a)		(1,327)		(1,127)		(1,057)
Expected administrative expenses (a)		93		88		70
Amortization of prior service cost (a)		79		79		79
Amortization of unrecognized net loss (a)		140		11		—
Net periodic pension cost	$	1,729	$	1,403	$	1,227

(a) The components of net periodic pension cost other than the service cost component are included in other non-interest expense.

Schedule of amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive loss, including amounts recognized in other comprehensive income

(in thousands)	2018		2017
Prior service costs	$	(128)	$	(207)
Net accumulated actuarial net loss		(3,219)		(3,796)
Accumulated other comprehensive loss		(3,347)		(4,003)
Net periodic benefit cost in excess of cumulative employer contributions		(3,873)		(3,944)
Net amount recognized at December 31,  balance sheet	$	(7,220)	$	(7,947)
Net gain (loss) arising during period	$	436	$	(1,085)
Prior service cost amortization		79		79
Amortization of net actuarial loss		140		11
Total recognized in other comprehensive loss	$	655	$	(995)
Total recognized in net periodic pension cost and other comprehensive income	$	1,073	$	2,398

Schedule of assumptions utilized to determine benefit obligations and to determine pension expense

	2018		2017		2016
Determination of benefit obligation at year end:
Discount rate	4.40	%	3.75	%	4.40	%
Annual rate of compensation increase	4.00	%	4.00	%	4.00	%
Determination of pension expense for year ended:
Discount rate for the service cost	3.75	%	4.40	%	4.70	%
Annual rate of compensation increase	4.00	%	4.00	%	3.78	%
Expected long-term rate of return on plan assets	6.75	%	6.75	%	7.00	%

Schedule of fair value of the Company's pension plan assets, by asset category

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other			Significant
			Identical		Observable			Unobservable
			Assets		Inputs			Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)			(Level 3)
December 31, 2018
Cash equivalents	$	707	$	707	$	—	$	—
U.S gov't agency obligations		1,777		—		1,777		—
Corporate bonds		295		—		295		—
Mutual funds		16,893		16,893		—		—
Total	$	19,672	$	17,600	$	2,072	$	—
December 31, 2017
Cash equivalents	$	1,307	$	1,307	$	—	$	—
U.S gov't agency obligations		1,781		—		1,781		—
Mutual funds		16,836		16,836		—		—
Total	$	19,924	$	18,143	$	1,781	$	—

Schedule of future benefit payments expected to be paid

	Pension
Year	benefits
(in thousands)
2019	$	680
2020		801
2021		874
2022		1,026
2023		1,052
2024 to 2028		6,370

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Stock Compensation (Tables)

12 Months Ended

Dec. 31, 2018

Stock Compensation

Schedule of summary of Company's stock option activity

				Weighted average						Weighted average			Aggregate
	Number of shares			exercise price						Contractual Term			Intrinsic Value
	December 31,			December 31,						(in years)			($000)
	2018	2017	2016	2018		2017		2016		2018	2017	2016	2018		2017		2016
Outstanding, beginning of year	20,909	48,097	70,616	$	14.20	$	18.59	$	19.12
Granted	—	—	—		—		—		—
Exercised	(20,909)	—	—		14.20		—		—
Forfeited or expired	—	(27,188)	(22,519)		—		21.20		20.24
Outstanding, end of year	—	20,909	48,097	$	—	$	14.20	$	18.59	0.00	0.73	0.99	$	0	$	120,242	$	49,842
Exercisable, end of year	—	20,909	46,725	$	—	$	14.20	$	18.72	0.00	0.73	0.97	$	0	$	120,242	$	46,874

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Earnings per Share (Tables)

12 Months Ended

Dec. 31, 2018

Earnings Per Share

Schedule of calculations of basic and diluted earnings per common share

(dollars in thousands, except per share data)	2018		2017		2016
Basic earnings per share:
Net income available to shareholders	$	10,714	$	3,414	$	7,282
Basic earnings per share	$	1.78	$	0.56	$	1.19
Diluted earnings per share:
Net income available to shareholders	$	10,714	$	3,414	$	7,282
Average shares outstanding		6,026,971		6,057,920		6,095,727
Effect of dilutive stock options		5,042		5,497		—
Average shares outstanding including dilutive stock options		6,032,013		6,063,417		6,095,727
Diluted earnings per share	$	1.78	$	0.56	$	1.19

Schedule of average market price of the common shares and were considered anti-dilutive

	Weighted average Shares
	December 31,
	2018	2017	2016
Anti-dilutive shares	—	—	48,097

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Capital Requirements (Tables)

12 Months Ended

Dec. 31, 2018

Capital Requirements

Schedule of capital adequacy requirements of regulatory capital ratios in excess of the levels established for well-capitalized

									Well-Capitalized Under
					Required for Capital				Prompt Corrective Action
	Actual				Adequacy Purposes				Provision
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2018
Total Capital (to risk-weighted assets):
Company	$	165,325	13.28	%	$	99,578	8.00	%	$	N.A.	N.A.	%
Bank		163,814	13.19			99,327	8.00			124,159	10.00
Tier 1 Capital (to risk-weighted assets):
Company	$	139,532	11.21	%	$	74,683	6.00	%	$	N.A.	N.A.	%
Bank		152,002	12.24			74,495	6.00			99,327	8.00
Common Equity Tier 1 Capital
(to risk-weighted assets)
Company	$	105,513	8.48	%	$	56,013	4.50	%	$	N.A.	N.A.	%
Bank		152,002	12.24			55,872	4.50			80,703	6.50
Tier 1 leverage ratio:
Company	$	139,532	9.55	%	$	58,467	4.00	%	$	N.A.	N.A.	%
Bank		152,002	10.43			58,272	4.00			72,839	5.00
(in thousands)
December 31, 2017
Total Capital (to risk-weighted assets):
Company	$	156,045	12.93	%	$	96,577	8.00	%	$	N.A.	N.A.	%
Bank		154,495	12.83			96,326	8.00			120,408	10.00
Tier 1 Capital (to risk-weighted assets):
Company	$	129,369	10.72	%	$	72,433	6.00	%	$	N.A.	N.A.	%
Bank		143,483	11.92			72,245	6.00			96,326	8.00
Common Equity Tier 1 Capital
(to risk-weighted assets)
Company	$	97,033	8.04	%	$	54,325	4.50	%	$	N.A.	N.A.	%
Bank		143,483	11.92			54,184	4.50			78,265	6.50
Tier 1 leverage ratio:
Company	$	129,369	9.33	%	$	55,488	4.00	%	$	N.A.	N.A.	%
Bank		143,483	10.38			55,315	4.00			69,144	5.00

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Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2018

Fair Value Measurements

Schedule of assets and liabilities recorded at fair value on a recurring basis

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2018
Assets:
U.S. Treasury	$	1,952	$	1,952		—	$	—
U.S. government and federal agency obligations		9,966		—		9,966		—
Government sponsored enterprises		43,335		—		43,335		—
Obligations of states and political subdivisions		40,386		—		40,386		—
Mortgage-backed securities		118,192		—		118,192		—
Other debt securities		3,000		—		3,000		—
Bank-issued trust preferred securities		1,374		—		1,374		—
Equity securities		12		—		12		—
Mortgage servicing rights		2,931		—		—		2,931
Total	$	221,148	$	1,952	$	216,265	$	2,931
December 31, 2017
Assets:
U.S. Treasury	$	1,967	$	1,967		—	$	—
U.S. government and federal agency obligations		12,073		—		12,073		—
Government sponsored enterprises		36,897		—		36,897		—
Obligations of states and political subdivisions		46,656		—		46,656		—
Mortgage-backed securities		128,949		—		128,949		—
Other debt securities		3,000		—		3,000		—
Bank-issued trust preferred securities		1,486		—		1,486		—
Equity securities		10		—		10		—
Mortgage servicing rights		2,713		—		—		2,713
Total	$	233,751	$	1,967	$	229,071	$	2,713

Schedule of summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
(in thousands)	Mortgage Servicing Rights
Balance at December 31, 2016	$	2,584
Total gains or (losses) (realized/unrealized):
Included in earnings		(93)
Included in other comprehensive income		—
Purchases		—
Sales		—
Issues		222
Settlements		—
Balance at December 31, 2017	$	2,713
Total gains or losses (realized/unrealized):
Included in earnings		(27)
Included in other comprehensive income		—
Purchases		—
Sales		—
Issues		245
Settlements		—
Balance at December 31, 2018	$	2,931

Schedule of valuation methods for instruments measured at fair value on a nonrecurring basis

			Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total		Assets		Inputs		Inputs		Total Gains
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Losses)*
December 31, 2018
Assets:
Collateral dependent impaired loans:
Commercial, financial, & agricultural	$	1,320	$	—	$	—	$	1,320	$	(244)
Real estate construction - commercial		153		—		—		153		(27)
Real estate mortgage - residential		1,317		—		—		1,317		(44)
Real estate mortgage - commercial		115		—		—		115		(20)
Installment and other consumer		—		—		—		—		(35)
Total	$	2,905	$	—	$	—	$	2,905	$	(370)
Other real estate and repossessed assets	$	13,691	$	—	$	—	$	13,691	$	(15)
December 31, 2017
Assets:
Collateral dependent impaired loans:
Commercial, financial, & agricultural	$	1,583	$	—	$	—	$	1,583	$	(521)
Real estate construction - commercial		153		—		—		153		—
Real estate mortgage - residential		49		—		—		49		(204)
Real estate mortgage - commercial		880		—		—		880		(26)
Installment and other consumer		593		—		—		—		(37)
Total	$	3,258	$	—	$	—	$	2,665	$	(788)
Other real estate and repossessed assets	$	13,182	$	—	$	—	$	13,182	$	(250)

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

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Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2018

Fair Value of Financial Instruments

Schedule of summary of the carrying amounts and fair values of financial instruments

					December 31, 2018
					Fair Value Measurements
						Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2018				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	23,687	$	23,687	$	23,687	$	—	$	—
Federal funds sold and overnight interest-bearing deposits		18,396		18,396		18,396		—		—
Certificates of deposit in other banks		12,247		12,247		12,247		—		—
Available for sale securities		218,205		218,205		1,952		216,253		—
Other investment securities		5,675		5,675		—		5,675		—
Loans, net		1,134,975		1,115,003		—		—		1,115,003
Mortgage servicing rights		2,931		2,931		—		—		2,931
Cash surrender value - life insurance		2,542		2,542		—		2,542		—
Accrued interest receivable		6,162		6,162		6,162		—		—
	$	1,424,820	$	1,404,848	$	62,444	$	224,470	$	1,117,934
Liabilities:
Deposits:
Non-interest bearing demand	$	262,857	$	262,857	$	262,857	$	—	$	—
Savings, interest checking and money market		614,040		614,040		614,040		—		—
Time deposits		321,571		318,949		—		—		318,949
Federal funds purchased and securities sold under agreements to repurchase		24,647		24,647		24,647		—		—
Federal Home Loan Bank advances and other borrowings		95,153		94,326		—		94,326		—
Subordinated notes		49,486		45,749		—		45,749		—
Accrued interest payable		1,035		1,035		1,035		—		—
	$	1,368,789	$	1,361,603	$	902,579	$	140,075	$	318,949

					December 31, 2017
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2017				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	23,325	$	23,325	$	23,325	$	—	$	—
Federal funds sold and overnight interest-bearing deposits		39,553		39,553		39,553		—		—
Certificates of deposit in other banks		3,460		3,460		3,460		—		—
Available-for-sale securities		231,028		231,028		1,967		229,061		—
Other investment securities		6,551		6,551		—		6,551		—
Loans, net		1,057,580		1,058,153		—		—		1,058,153
Mortgage servicing rights		2,713		2,713		—		—		2,713
Cash surrender value - life insurance		2,484		2,484		—		2,484		—
Accrued interest receivable		5,627		5,627		5,627		—		—
	$	1,372,321	$	1,372,894	$	73,932	$	238,096	$	1,060,866
Liabilities:
Deposits:
Non-interest bearing demand	$	245,380	$	245,380	$	245,380	$	—	$	—
Savings, interest checking and money market		584,468		584,468		584,468		—		—
Time deposits		295,964		294,778		—		—		294,778
Federal funds purchased and securities sold under agreements to repurchase		27,560		27,560		27,560		—		—
Federal Home Loan Bank advances and other borrowings		121,382		121,291		—		121,291		—
Subordinated notes		49,486		39,692		—		39,692		—
Accrued interest payable		554		554		554		—		—
	$	1,324,794	$	1,313,723	$	857,962	$	160,983	$	294,778

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Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2018

Commitments and Contingencies

Schedule of contractual amount of off-balance-sheet financial instruments

(in thousands)	2018		2017
Commitments to extend credit	$	267,314	$	238,527
Commitments to originate residential first and second mortgage loans		1,759		1,471
Standby letters of credit		82,895		74,004
Total	$	351,968	$	314,002

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Condensed Financial Information of the Parent Company Only (Tables)

12 Months Ended

Dec. 31, 2018

Condensed Financial Information of the Parent Company Only

Schedule of Condensed Balance Sheets

	December 31,
(in thousands)	2018		2017
Assets
Cash and due from bank subsidiaries	$	1,334	$	1,415
Investment in bank-issued trust preferred securities		1,374		1,486
Investment in subsidiaries		152,735		144,589
Deferred tax asset		1,307		1,677
Other assets		403		133
Total assets	$	157,153	$	149,300
Liabilities and Stockholders' Equity
Subordinated notes	$	49,486	$	49,486
Other liabilities		8,253		8,443
Stockholders' equity		99,414		91,371
Total liabilities and stockholders' equity	$	157,153	$	149,300

Schedule of Condensed Statements of Income

	For the Years Ended December 31,
	2018		2017		2016
Income
Interest and dividends received from subsidiaries	$	2,653	$	2,653	$	46
Other		428		—		—
Total income		3,081		2,653		46
Expenses
Interest on subordinated notes		2,229		1,751		1,494
Other		3,461		2,358		2,039
Total expenses		5,690		4,109		3,533
Income before income tax benefit and equity in undistributed income of subsidiaries		(195)		(1,456)		(3,487)
Income tax benefit		1,397		191		1,337
Equity in undistributed income of subsidiaries		9,512		4,679		9,432
Net income	$	10,714	$	3,414	$	7,282

Schedule of Condensed Statements of Cash Flows

	For the Years Ended December 31,
(in thousands)	2018		2017		2016
Cash flows from operating activities:
Net income	$	10,714	$	3,414	$	7,282
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Equity in undistributed income of subsidiaries		(9,512)		(4,679)		(9,432)
Stock based compensation expense		—		3		17
Decrease (increase) in deferred tax asset		370		881		(442)
Other, net		(116)		453		769
Net cash provided (used) by operating activities	$	1,456	$	72	$	(1,806)
Cash flows from investing activities:
Decrease (increase) in investment in subsidiaries, net	$	500	$	(250)	$	2,500
Net cash provided (used) by investing activities	$	500	$	(250)	$	2,500
Cash flows from financing activities:
Cash dividends paid - common stock	$	(1,993)	$	(1,474)	$	(1,097)
Issuance of stock under equity compensation plan		135		—		—
Purchase of treasury stock		(179)		(878)		(623)
Net cash used in financing activities	$	(2,037)	$	(2,352)	$	(1,720)
Net decrease in cash and due from banks		(81)		(2,530)		(1,026)
Cash and due from banks at beginning of year		1,415		3,945		4,971
Cash and due from banks at end of year	$	1,334	$	1,415	$	3,945

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Quarterly Financial Information (Unaudited) (Tables)

12 Months Ended

Dec. 31, 2018

Quarterly Financial Information (Unaudited)

Schedule of quarterly financial data (unaudited)

									Year
	First		Second		Third		Fourth		to
(In thousands except per share data)	quarter		quarter		quarter		quarter		Date
Year Ended December 31, 2018
Interest income	$	13,544	$	14,288	$	14,751	$	15,196	$	57,779
Interest expense		2,790		3,261		3,443		3,692		13,186
Net interest income		10,754		11,027		11,308		11,504		44,593
Provision for loan losses		300		450		250		475		1,475
Noninterest income		2,203		2,378		2,324		2,436		9,341
Investment gains (losses), net		98		108		50		(1)		255
Noninterest expense		10,254		9,931		9,888		10,259		40,332
Income tax expense		411		225		446		586		1,668
Net income	$	2,090	$	2,907	$	3,098	$	2,619	$	10,714
Net income per share:
Basic earnings per share	$	0.35	$	0.48	$	0.51	$	0.44	$	1.78
Diluted earnings per share		0.35		0.48		0.51		0.44		1.78
Year Ended December 31, 2017
Interest income	$	12,099	$	12,681	$	12,936	$	13,219	$	50,935
Interest expense		1,612		1,861		2,183		2,351		8,007
Net interest income		10,487		10,820		10,753		10,868		42,928
Provision for loan losses		350		330		555		530		1,765
Noninterest income		2,407		2,099		2,181		2,263		8,950
Investment gains (losses), net		—		—		—		5		5
Noninterest expense		9,350		9,687		9,766		9,999		38,802
Income tax expense		1,093		983		847		4,979		7,902
Net income	$	2,101	$	1,919	$	1,766	$	(2,372)	$	3,414
Net income per share:
Basic earnings per share	$	0.35	$	0.32	$	0.29	$	(0.39)	$	0.56
Diluted earnings per share		0.35		0.32		0.29		(0.39)		0.56

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Summary of Significant Accounting Policies - Other (Details) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Summary Of Significant Accounting Policies
Mortgage loans held for sale	$ 583,000	$ 383,000
Depreciation methods	straight-line and accelerated methods
Sustained period of repayment performance for non-accrual TDRs	6 months
Period of employees highest compensation before retirement	10 years
Certificates of deposit in other banks	$ 12,247,000	$ 3,460,000
Federal corporate income tax rate	21.00%	34.00%	34.00%
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02	$ 0	$ 0
Retained Earnings
Summary Of Significant Accounting Policies
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02		1,218,000
Accumulated Other Comprehensive Loss
Summary Of Significant Accounting Policies
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02		$ (1,218,000)
Buildings and improvements | Minimum
Summary Of Significant Accounting Policies
Estimated useful lives	5 years
Buildings and improvements | Maximum
Summary Of Significant Accounting Policies
Estimated useful lives	40 years
Furniture and Fixtures | Minimum
Summary Of Significant Accounting Policies
Estimated useful lives	3 years
Furniture and Fixtures | Maximum
Summary Of Significant Accounting Policies
Estimated useful lives	15 years
Federal Home Loan Bank of Des Moines
Summary Of Significant Accounting Policies
Investment in capital stock of the Federal Home Loan Bank of total assets	0.12%
Investment in capital stock of Federal Home Loan Bank required percentage of advances	4.00%

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Summary of Significant Accounting Policies - Recent Transactions (Details) - USD ($) $ in Millions	Feb. 08, 2019	Jul. 01, 2018
Summary Of Significant Accounting Policies
Special stock dividend (as percentage)		4.00%
Hawthorn Bank | Branch Located in Branson, Missouri | Subsequent Event
Summary Of Significant Accounting Policies
Sale of Deposits	$ 10.6
Pre-tax gain on sale branch business	2.1
Pre-tax gain related to sale of land and building	$ 1.7

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Loans and Allowance for Loan Losses - Summary of Loans by Major Class (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Loans and Allowance for Loan Losses
Total loans	$ 1,146,627	$ 1,068,432
Commercial, financial, and agricultural
Loans and Allowance for Loan Losses
Total loans	207,720	192,238
Residential real estate | Construction
Loans and Allowance for Loan Losses
Total loans	28,610	26,492
Residential real estate | Mortgages
Loans and Allowance for Loan Losses
Total loans	241,517	246,754
Commercial real estate | Construction
Loans and Allowance for Loan Losses
Total loans	106,784	98,340
Commercial real estate | Mortgages
Loans and Allowance for Loan Losses
Total loans	529,536	472,455
Installment and other consumer
Loans and Allowance for Loan Losses
Total loans	$ 32,460	$ 32,153

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Loans and Allowance for Loan Losses - Loans Pledged (Details) $ in Millions	Dec. 31, 2018 USD ($)
Loans and Allowances for Loan Losses
Amount of loans pledged as collateral to the Federal Home Loan Bank	$ 530.1

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Loans and Allowance for Loan Losses - Related Parties (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2018 USD ($)
Summary of loans to directors and executive officers
Balance at December 31, 2017	$ 6,442
New loans and new directors	1,127
Amounts collected	(1,565)
Balance at December 31, 2018	$ 6,004

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Loans and Allowance for Loan Losses - Allowance for Loan Losses (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Summary of the allowance for loan losses
Balance at beginning of period				$ 10,852				$ 9,886	$ 10,852	$ 9,886	$ 8,604
Additions:
Provision for loan losses	$ 475	$ 250	$ 450	300	$ 530	$ 555	$ 330	350	1,475	1,765	1,425
Deductions:
Loans charged off									1,041	1,181	1,290
Less recoveries on loans									(366)	(382)	(1,147)
Net loan charge-offs (recoveries)									675	799	143
Balance at end of period	11,652				10,852				11,652	10,852	9,886
Commercial, financial, and agricultural
Summary of the allowance for loan losses
Balance at beginning of period				3,325				2,753	3,325	2,753	2,153
Additions:
Provision for loan losses									296	1,147	690
Deductions:
Loans charged off									484	649	389
Less recoveries on loans									(100)	(74)	(299)
Net loan charge-offs (recoveries)									384	575	90
Balance at end of period	3,237				3,325				3,237	3,325	2,753
Residential real estate | Construction
Summary of the allowance for loan losses
Balance at beginning of period				170				108	170	108	59
Additions:
Provision for loan losses									(44)	(26)	49
Deductions:
Loans charged off									48	0	0
Less recoveries on loans									(62)	(88)	0
Net loan charge-offs (recoveries)									(14)	(88)	0
Balance at end of period	140				170				140	170	108
Residential real estate | Mortgages
Summary of the allowance for loan losses
Balance at beginning of period				1,689				2,385	1,689	2,385	2,439
Additions:
Provision for loan losses									516	(560)	381
Deductions:
Loans charged off									186	219	495
Less recoveries on loans									(52)	(83)	(60)
Net loan charge-offs (recoveries)									134	136	435
Balance at end of period	2,071				1,689				2,071	1,689	2,385
Commercial real estate | Construction
Summary of the allowance for loan losses
Balance at beginning of period				807				413	807	413	644
Additions:
Provision for loan losses									(20)	394	(732)
Deductions:
Loans charged off									30	0	1
Less recoveries on loans									0	0	(502)
Net loan charge-offs (recoveries)									30	0	(501)
Balance at end of period	757				807				757	807	413
Commercial real estate | Mortgages
Summary of the allowance for loan losses
Balance at beginning of period				4,437				3,793	4,437	3,793	2,935
Additions:
Provision for loan losses									457	657	865
Deductions:
Loans charged off									38	45	147
Less recoveries on loans									(58)	(32)	(140)
Net loan charge-offs (recoveries)									(20)	13	7
Balance at end of period	4,914				4,437				4,914	4,437	3,793
Installment and other consumer
Summary of the allowance for loan losses
Balance at beginning of period				345				274	345	274	273
Additions:
Provision for loan losses									150	234	113
Deductions:
Loans charged off									255	268	258
Less recoveries on loans									(94)	(105)	(146)
Net loan charge-offs (recoveries)									161	163	112
Balance at end of period	334				345				334	345	274
Unallocated
Summary of the allowance for loan losses
Balance at beginning of period				$ 79				$ 160	79	160	101
Additions:
Provision for loan losses									120	(81)	59
Deductions:
Loans charged off									0	0	0
Less recoveries on loans									0	0	0
Net loan charge-offs (recoveries)									0	0	0
Balance at end of period	$ 199				$ 79				$ 199	$ 79	$ 160

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Loans and Allowance for Loan Losses - Impairment Methodology (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Allowance for loan losses:
Individually evaluated for impairment	$ 1,194	$ 1,333
Collectively evaluated for impairment	10,458	9,519
Total	11,652	10,852	$ 9,886	$ 8,604
Loans outstanding:
Individually evaluated for impairment	8,478	10,356
Collectively evaluated for impairment	1,138,149	1,058,076
Total	1,146,627	1,068,432
Commercial, financial, and agricultural
Allowance for loan losses:
Individually evaluated for impairment	551	500
Collectively evaluated for impairment	2,686	2,825
Total	3,237	3,325	2,753	2,153
Loans outstanding:
Individually evaluated for impairment	2,428	3,007
Collectively evaluated for impairment	205,292	189,231
Total	207,720	192,238
Residential real estate | Construction
Allowance for loan losses:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	140	170
Total	140	170	108	59
Loans outstanding:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	28,610	26,492
Total	28,610	26,492
Residential real estate | Mortgages
Allowance for loan losses:
Individually evaluated for impairment	579	521
Collectively evaluated for impairment	1,492	1,168
Total	2,071	1,689	2,385	2,439
Loans outstanding:
Individually evaluated for impairment	4,793	5,072
Collectively evaluated for impairment	236,724	241,682
Total	241,517	246,754
Commercial real estate | Construction
Allowance for loan losses:
Individually evaluated for impairment	0	48
Collectively evaluated for impairment	757	759
Total	757	807	413	644
Loans outstanding:
Individually evaluated for impairment	153	97
Collectively evaluated for impairment	106,631	98,243
Total	106,784	98,340
Commercial real estate | Mortgages
Allowance for loan losses:
Individually evaluated for impairment	37	243
Collectively evaluated for impairment	4,877	4,194
Total	4,914	4,437	3,793	2,935
Loans outstanding:
Individually evaluated for impairment	850	2,004
Collectively evaluated for impairment	528,686	470,451
Total	529,536	472,455
Installment and other consumer
Allowance for loan losses:
Individually evaluated for impairment	27	21
Collectively evaluated for impairment	307	324
Total	334	345	274	273
Loans outstanding:
Individually evaluated for impairment	254	176
Collectively evaluated for impairment	32,206	31,977
Total	32,460	32,153
Unallocated
Allowance for loan losses:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	199	79
Total	199	79	$ 160	$ 101
Loans outstanding:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	0	0
Total	$ 0	$ 0

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Loans and Allowance for Loan Losses - Impaired Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Loans and Allowances for Loan Losses
Impaired loans individually evaluated for impairment	$ 8,478	$ 10,356
Impaired loans were evaluated based on the fair value of the loan's collateral	3,800	4,000
Specific allowance related to impaired loans	1,194	1,333
Impaired loans with no reserve allocation	$ 2,093	$ 2,433
Impaired loans required no reserve allocation, percentage	25.00%	23.00%

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Loans and Allowance for Loan Losses - Categories of Impaired Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Categories of impaired loans
Non-accrual loans	$ 5,414	$ 5,672
Performing TDRs	3,064	4,684
Total impaired loans	$ 8,478	$ 10,356

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Loans and Allowance for Loan Losses - Additional information about Impaired Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Impaired loans
Recorded Investment, With no related allowance recorded	$ 2,093	$ 2,433
Unpaid Principal Balance, With no related allowance recorded	2,451	2,528
Recorded Investment, With an allowance recorded	6,385	7,923
Unpaid Principal Balance, With an allowance recorded	7,067	8,370
Specific Reserves, With an allowance recorded	1,194	1,333
Total impaired loans, Recorded Investment	8,478	10,356
Total impaired loans, Unpaid Principal Balance	9,518	10,898
Commercial, financial, and agricultural
Impaired loans
Recorded Investment, With no related allowance recorded	1,264	1,393
Unpaid Principal Balance, With no related allowance recorded	1,550	1,445
Recorded Investment, With an allowance recorded	1,164	1,614
Unpaid Principal Balance, With an allowance recorded	1,236	1,834
Specific Reserves, With an allowance recorded	551	500
Residential real estate
Impaired loans
Recorded Investment, With no related allowance recorded	561	674
Unpaid Principal Balance, With no related allowance recorded	602	688
Recorded Investment, With an allowance recorded	4,232	4,398
Unpaid Principal Balance, With an allowance recorded	4,458	4,500
Specific Reserves, With an allowance recorded	579	521
Commercial real estate
Impaired loans
Recorded Investment, With no related allowance recorded	115	366
Unpaid Principal Balance, With no related allowance recorded	119	395
Recorded Investment, With an allowance recorded	735	1,638
Unpaid Principal Balance, With an allowance recorded	1,093	1,743
Specific Reserves, With an allowance recorded	37	243
Commercial real estate | Construction
Impaired loans
Recorded Investment, With no related allowance recorded	153
Unpaid Principal Balance, With no related allowance recorded	180
Recorded Investment, With an allowance recorded		97
Unpaid Principal Balance, With an allowance recorded		97
Specific Reserves, With an allowance recorded		48
Installment and other consumer
Impaired loans
Recorded Investment, With an allowance recorded	254	176
Unpaid Principal Balance, With an allowance recorded	280	196
Specific Reserves, With an allowance recorded	$ 27	$ 21

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Loans and Allowance for Loan Losses - Average Recorded Investment and Interest Income (Details) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
With no related allowance recorded:
With no related allowance recorded, Average Recorded Investment	$ 2,416,000	$ 2,156,000
With no related allowance recorded, Interest Recognized For The Period Ended	32,000	13,000
With an allowance recorded:
With an allowance recorded, Average Recorded Investment	6,547,000	7,915,000
With an allowance recorded, Interest Recognized For The Period Ended	167,000	243,000
Total average recorded investment	8,963,000	10,071,000
Total interest income recognized For the Period Ended	199,000	256,000
Commercial, financial, and agricultural
With no related allowance recorded:
With no related allowance recorded, Average Recorded Investment	1,302,000	957,000
With no related allowance recorded, Interest Recognized For The Period Ended	0	0
With an allowance recorded:
With an allowance recorded, Average Recorded Investment	1,394,000	1,536,000
With an allowance recorded, Interest Recognized For The Period Ended	32,000	33,000
Residential real estate
With no related allowance recorded:
With no related allowance recorded, Average Recorded Investment	901,000	826,000
With no related allowance recorded, Interest Recognized For The Period Ended	10,000	13,000
With an allowance recorded:
With an allowance recorded, Average Recorded Investment	4,169,000	4,575,000
With an allowance recorded, Interest Recognized For The Period Ended	99,000	149,000
Commercial real estate
With no related allowance recorded:
With no related allowance recorded, Average Recorded Investment	59,000	373,000
With no related allowance recorded, Interest Recognized For The Period Ended	22,000	0
With an allowance recorded:
With an allowance recorded, Average Recorded Investment	763,000	1,641,000
With an allowance recorded, Interest Recognized For The Period Ended	34,000	61,000
Commercial real estate | Construction
With no related allowance recorded:
With no related allowance recorded, Average Recorded Investment	120,000
With an allowance recorded:
With an allowance recorded, Average Recorded Investment	15,000	49,000
With an allowance recorded, Interest Recognized For The Period Ended	0	0
Installment and other consumer
With no related allowance recorded:
With no related allowance recorded, Average Recorded Investment	34,000
With an allowance recorded:
With an allowance recorded, Average Recorded Investment	206,000	114,000
With an allowance recorded, Interest Recognized For The Period Ended	$ 2,000	$ 0

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Loans and Allowance for Loan Losses - Past Due and Non-accrual Loans (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Aging information for the Company's past due and non-accrual loans
90 Days Past Due And Still Accruing	$ 162	$ 328
Non-Accrual	5,414	5,672
Loans	1,146,627	1,068,432
Current or Less Than 30 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	1,136,236	1,059,498
30 - 89 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	4,815	2,934
Commercial, financial, and agricultural
Aging information for the Company's past due and non-accrual loans
90 Days Past Due And Still Accruing	0	2
Non-Accrual	1,857	2,507
Loans	207,720	192,238
Commercial, financial, and agricultural | Current or Less Than 30 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	205,597	189,537
Commercial, financial, and agricultural | 30 - 89 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	266	192
Residential real estate | Construction
Aging information for the Company's past due and non-accrual loans
90 Days Past Due And Still Accruing	0	275
Non-Accrual	0	0
Loans	28,610	26,492
Residential real estate | Construction | Current or Less Than 30 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	28,404	25,930
Residential real estate | Construction | 30 - 89 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	206	287
Residential real estate | Mortgages
Aging information for the Company's past due and non-accrual loans
90 Days Past Due And Still Accruing	156	28
Non-Accrual	2,720	1,956
Loans	241,517	246,754
Residential real estate | Mortgages | Current or Less Than 30 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	235,734	242,597
Residential real estate | Mortgages | 30 - 89 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	2,907	2,173
Commercial real estate | Construction
Aging information for the Company's past due and non-accrual loans
90 Days Past Due And Still Accruing	0	0
Non-Accrual	153	97
Loans	106,784	98,340
Commercial real estate | Construction | Current or Less Than 30 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	106,531	98,243
Commercial real estate | Construction | 30 - 89 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	100	0
Commercial real estate | Mortgages
Aging information for the Company's past due and non-accrual loans
90 Days Past Due And Still Accruing	0	0
Non-Accrual	474	936
Loans	529,536	472,455
Commercial real estate | Mortgages | Current or Less Than 30 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	527,968	471,476
Commercial real estate | Mortgages | 30 - 89 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	1,094	43
Installment and other consumer
Aging information for the Company's past due and non-accrual loans
90 Days Past Due And Still Accruing	6	23
Non-Accrual	210	176
Loans	32,460	32,153
Installment and other consumer | Current or Less Than 30 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	32,002	31,715
Installment and other consumer | 30 - 89 Days Past Due
Aging information for the Company's past due and non-accrual loans
Financing receivable, recorded investment, past due	$ 242	$ 239

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Loans and Allowance for Loan Losses - Credit Quality (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	$ 1,146,627	$ 1,068,432
Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	62,728	71,786
Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,169	4,121
Performing TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	3,064	4,684
Nonperforming TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	5,414	5,672
Total
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	73,375	86,263
Commercial, financial, and agricultural
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	207,720	192,238
Commercial, financial, and agricultural | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	8,871	9,868
Commercial, financial, and agricultural | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	53	658
Commercial, financial, and agricultural | Performing TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	570	500
Commercial, financial, and agricultural | Nonperforming TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	1,857	2,507
Commercial, financial, and agricultural | Total
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	11,351	13,533
Residential real estate | Construction
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	28,610	26,492
Residential real estate | Construction | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	588	1,459
Residential real estate | Construction | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	0	462
Residential real estate | Construction | Performing TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	0	0
Residential real estate | Construction | Nonperforming TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	0	0
Residential real estate | Construction | Total
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	588	1,921
Residential real estate | Mortgages
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	241,517	246,754
Residential real estate | Mortgages | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	12,790	9,978
Residential real estate | Mortgages | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	1,411	2,262
Residential real estate | Mortgages | Performing TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,073	3,116
Residential real estate | Mortgages | Nonperforming TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,720	1,956
Residential real estate | Mortgages | Total
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	18,994	17,312
Commercial real estate | Construction
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	106,784	98,340
Commercial real estate | Construction | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	4,063	1,284
Commercial real estate | Construction | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	0	0
Commercial real estate | Construction | Performing TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	0	0
Commercial real estate | Construction | Nonperforming TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	153	97
Commercial real estate | Construction | Total
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	4,216	1,381
Commercial real estate | Mortgages
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	529,536	472,455
Commercial real estate | Mortgages | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	36,408	49,197
Commercial real estate | Mortgages | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	702	723
Commercial real estate | Mortgages | Performing TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	377	1,068
Commercial real estate | Mortgages | Nonperforming TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	474	936
Commercial real estate | Mortgages | Total
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	37,961	51,924
Installment and other consumer
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	32,460	32,153
Installment and other consumer | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	8	0
Installment and other consumer | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	3	16
Installment and other consumer | Performing TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	44	0
Installment and other consumer | Nonperforming TDRs
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	210	176
Installment and other consumer | Total
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	$ 265	$ 192

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Loans and Allowance for Loan Losses - Troubled Debt Restructurings (Details)		12 Months Ended
		Dec. 31, 2018 USD ($) contract	Dec. 31, 2017 USD ($) contract	Dec. 31, 2016 USD ($)
Troubled Debt Restructurings
Troubled debt restructurings		$ 5,000,000	$ 6,400,000
Amount of specific reserves related to TDRs which were allocated to the allowance for loan losses			$ 543,000	$ 577,000
Number of contracts called for default and charged off | contract		1	1
Value of contracts called for default and charged off		$ 3,000,000	$ 123,000,000
Number of Contracts | contract	[1]	10	6
Pre- Modification	[1]	$ 844,000	$ 946,000
Post- Modification	[1]	$ 766,000	$ 938,000
Commercial, financial, and agricultural
Troubled Debt Restructurings
Number of Contracts | contract	[1]	3	3
Pre- Modification	[1]	$ 510,000	$ 773,000
Post- Modification	[1]	$ 502,000	$ 773,000
Residential real estate | Mortgages
Troubled Debt Restructurings
Number of Contracts | contract	[1]	2	2
Pre- Modification	[1]	$ 149,000	$ 118,000
Post- Modification	[1]	$ 147,000	$ 116,000
Commercial real estate | Mortgages
Troubled Debt Restructurings
Number of Contracts | contract	[1]	0	1
Pre- Modification	[1]	$ 0	$ 55,000
Post- Modification	[1]	$ 0	$ 49,000
Installment and other consumer
Troubled Debt Restructurings
Number of Contracts | contract	[1]	5	0
Pre- Modification	[1]	$ 185,000	$ 0
Post- Modification	[1]	117,000	0
Performing TDRs
Troubled Debt Restructurings
Troubled debt restructurings		3,000,000	4,700,000
Nonperforming TDRs
Troubled Debt Restructurings
Troubled debt restructurings		$ 2,000,000	$ 1,700,000

[1] (1) The amounts reported post-modification are inclusive of all partial pay-downs and charge-offs, and no portion of the debt was forgiven. Loans modified as a TDR that were fully paid down, charged-off, or foreclosed upon during the period ended are not reported.

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Other Real Estate and Repossessed Assets Acquired in Settlement of Loans - Summary (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Summary of real estate and other assets acquired in settlement of loans
Repossessed assets	$ 0	$ 5
Total	16,693	16,403	$ 17,291
Less valuation allowance for other real estate owned	(3,002)	(3,221)	$ (3,129)	$ (3,233)
Total other real estate and repossessed assets	13,691	13,182
Commercial
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	1,168	727
Residential real estate | Construction
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	179	0
Residential real estate | Mortgages
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	336	382
Commercial real estate | Construction
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	12,101	12,380
Commercial real estate | Mortgages
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	$ 2,909	$ 2,909

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Other Real Estate and Repossessed Assets Acquired in Settlement of Loans - Changes in Net Carrying Amount (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Schedule of real estate acquired in settlement of loans
Balance at beginning of period	$ 16,403	$ 17,291
Additions	1,106	374
Proceeds from sales	(585)	(1,115)	$ (4,057)
Charge-offs against the valuation allowance for other real estate owned, net	(245)	(192)
Net gain on sales	14	45
Total other real estate and repossessed assets	16,693	16,403	$ 17,291
Less valuation allowance for other real estate owned	(3,002)
Balance at end of period	$ 13,691	$ 13,182

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Other Real Estate and Repossessed Assets Acquired in Settlement of Loans - Foreclosure (Details) - USD ($)	Dec. 31, 2018	Dec. 31, 2017
Other Real Estate and Repossessed Assets Acquired in Settlement of Loans
Consumer mortgage loans in process of foreclosure	$ 200,000	$ 0

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Other Real Estate and Repossessed Assets Acquired in Settlement of Loans - Valuation Allowance (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Summary of activity in valuation allowance for other real estate owned in settlement of loans
Balance, beginning of period	$ 3,221	$ 3,129	$ 3,233
Provision for other real estate owned	26	284	213
Charge-offs	(245)	(192)	(317)
Balance, end of period	$ 3,002	$ 3,221	$ 3,129

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Investment Securities - Amortized Costs, Gains and Losses, Fair Value (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Amortized cost and fair value of debt securities available-for-sale
Total Amortized Cost	$ 222,578	$ 234,192
Gross Unrealized Gains	123	158
Gross Unrealized Losses	(4,496)	(3,322)
Fair value	218,205	231,028
U.S. Treasury
Amortized cost and fair value of debt securities available-for-sale
Total Amortized Cost	1,984	1,980
Gross Unrealized Gains	0	0
Gross Unrealized Losses	(32)	(13)
Fair value	1,952	1,967
U.S. government and federal agency obligations
Amortized cost and fair value of debt securities available-for-sale
Total Amortized Cost	10,235	12,341
Gross Unrealized Gains	0	0
Gross Unrealized Losses	(269)	(268)
Fair value	9,966	12,073
Government sponsored enterprises
Amortized cost and fair value of debt securities available-for-sale
Total Amortized Cost	43,784	37,321
Gross Unrealized Gains	23	0
Gross Unrealized Losses	(472)	(424)
Fair value	43,335	36,897
Obligations of states and political subdivisions
Amortized cost and fair value of debt securities available-for-sale
Total Amortized Cost	40,859	47,019
Gross Unrealized Gains	28	114
Gross Unrealized Losses	(501)	(477)
Fair value	40,386	46,656
Mortgage-backed securities
Amortized cost and fair value of debt securities available-for-sale
Total Amortized Cost	121,230	131,045
Gross Unrealized Gains	72	44
Gross Unrealized Losses	(3,110)	(2,140)
Fair value	118,192	128,949
Other debt securities
Amortized cost and fair value of debt securities available-for-sale
Total Amortized Cost	3,000	3,000
Gross Unrealized Gains	0	0
Gross Unrealized Losses	0	0
Fair value	3,000	3,000
Bank issued trust preferred securities
Amortized cost and fair value of debt securities available-for-sale
Total Amortized Cost	1,486	1,486
Gross Unrealized Gains	0	0
Gross Unrealized Losses	(112)	0
Fair value	$ 1,374	$ 1,486

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Investment Securities - Securities Pledged (Details) - USD ($) $ in Millions	Dec. 31, 2018	Dec. 31, 2017
Investment Securities
Debt securities with carrying values, pledged	$ 153.0	$ 181.7

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Investment Securities - Amortized Cost and Fair Value by Contractual Maturity (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Amortized Cost
Due in one year or less	$ 18,076
Due after one year through five years	63,424
Due after five years through ten years	13,750
Due after ten years	6,098
Total	101,348
Mortgage-backed securities	121,230
Total available-for-sale securities	222,578	$ 234,192
Fair Value
Due in one year or less	17,964
Due after one year through five years	62,599
Due after five years through ten years	13,505
Due after ten years	5,945
Total	100,013
Mortgage-backed securities	118,192
Total available-for-sale securities	$ 218,205	$ 231,028

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Investment Securities - Other Securities (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Investment Securities
FHLB stock	$ 5,512	$ 6,390
MIB stock	151	151
Equity securities with readily determinable fair values	12	10
Total other investment securities	$ 5,675	$ 6,551

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Investment Securities - Unrealized Losses (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Fair Value
Less than 12 months	$ 17,933	$ 93,280
12 months or more	174,791	114,649
Total	192,724	207,929
Unrealized Losses
Less than 12 months	(80)	(785)
12 months or more	(4,416)	(2,537)
Total	(4,496)	(3,322)
U.S. Treasury
Fair Value
Less than 12 months	0	1,967
12 months or more	1,952	0
Total	1,952	1,967
Unrealized Losses
Less than 12 months	0	(13)
12 months or more	(32)	0
Total	(32)	(13)
U.S. government and federal agency obligations
Fair Value
Less than 12 months	0	0
12 months or more	9,966	12,073
Total	9,966	12,073
Unrealized Losses
Less than 12 months	0	0
12 months or more	(269)	(268)
Total	(269)	(268)
Government sponsored enterprises
Fair Value
Less than 12 months	1,997	16,471
12 months or more	33,346	20,426
Total	35,343	36,897
Unrealized Losses
Less than 12 months	(3)	(119)
12 months or more	(469)	(305)
Total	(472)	(424)
Obligations of states and political subdivisions
Fair Value
Less than 12 months	5,851	22,013
12 months or more	28,832	12,570
Total	34,683	34,583
Unrealized Losses
Less than 12 months	(16)	(165)
12 months or more	(485)	(312)
Total	(501)	(477)
Mortgage-backed securities
Fair Value
Less than 12 months	10,085	52,829
12 months or more	99,321	69,580
Total	109,406	122,409
Unrealized Losses
Less than 12 months	(61)	(488)
12 months or more	(3,049)	(1,652)
Total	(3,110)	$ (2,140)
Bank issued trust preferred securities
Fair Value
Less than 12 months	0
12 months or more	1,374
Total	1,374
Unrealized Losses
Less than 12 months	0
12 months or more	(112)
Total	$ (112)

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Investment Securities - Other (Details) $ in Thousands	Dec. 31, 2018 USD ($) security	Dec. 31, 2017 USD ($) security
Investment Securities
Number of securities consisted in portfolio | security	366	355
Number of Positions for unrealized losses | security	317	280
Aggregate fair value of securities in loss position	$ 192,724	$ 207,929
Loss position for 12 months or longer	174,791	114,649
Aggregate unrealized loss included in accumulated other comprehensive income (loss)	$ 4,496	$ 3,322

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Investment Securities - Components of Investment Securities Gains and Losses (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Available for sale securities:
Gains realized on sales	$ 253	$ 38	$ 623
Losses realized on sales	0	(33)	(21)
Other-than-temporary impairment recognized	0	0	0
Other investment securities:
Fair value adjustments, net	2	0	0
Investment securities gains, net	$ 255	$ 5	$ 602

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Premises and Equipment - Summary (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Summary of premises and equipment
Total, premises and equipment	$ 60,508	$ 59,235
Less accumulated depreciation	25,614	24,424
Property, Plant and Equipment, Net, Total	34,894	34,811
Land and land improvements
Summary of premises and equipment
Total, premises and equipment	9,917	9,980
Buildings and improvements
Summary of premises and equipment
Total, premises and equipment	35,674	35,993
Furniture and equipment
Summary of premises and equipment
Total, premises and equipment	14,163	12,973
Construction in progress
Summary of premises and equipment
Total, premises and equipment	$ 754	$ 289

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Premises and Equipment - Depreciation (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Depreciation expense
Depreciation expense	$ 1,797	$ 1,735	$ 1,782

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Intangible Assets - Mortgage Servicing Rights (Details) - Mortgage servicing rights (MSRs) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Mortgage Servicing Rights
Mortgage loans serviced for others		$ 279,900,000	$ 285,800,000
Mortgage loan servicing fees reported as non-interest income	$ 821,000	$ 833,000	$ 854,000

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Intangible Assets - Changes in Mortgage Servicing Rights (Details) - USD ($) $ in Thousands		12 Months Ended
		Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Changes in mortgage servicing rights
Balance at beginning of period		$ 2,713
Changes in fair value:
Total changes in fair value		(27)	$ (93)	$ (529)
Balance at end of period		2,931	2,713
Mortgage servicing rights (MSRs)
Changes in mortgage servicing rights
Balance at beginning of period		2,713	2,584	2,847
Originated mortgage servicing rights		245	222	266
Changes in fair value:
Due to changes in model inputs and assumptions	[1]	286	364	108
Other changes in fair value	[2]	313	457	637
Balance at end of period		$ 2,931	$ 2,713	$ 2,584

[1] The change in fair value resulting from changes in valuation inputs or assumptions 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 reflect changes due to customer payments and passage of time.Total changes in fair value are reported in real estate servicing fees, net, reported in non-interest income in the Company's consolidated statements of income.

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Intangible Assets - FV Assumptions (Details) - Mortgage servicing rights (MSRs)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Assumptions used in estimating the fair value of mortgage service rights
Weighted average constant prepayment rate	8.87%	9.73%
Weighted average note rate	3.95%	3.85%
Weighted average discount rate	10.28%	10.09%
Weighted average expected life (in years)	6 years 3 months 18 days	5 years 10 months 24 days

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Deposits - Narrative (Details) - USD ($) $ in Millions	Dec. 31, 2018	Dec. 31, 2017
Deposits
Time deposits with balances exceeded FDIC insurance limit of $250,000	$ 104.9	$ 63.2
Brokered deposits	39.8	9.8
Cash reserve deposit required as per Federal Reserve Bank	1.8
Average compensating balances	$ 787,000.0	$ 1.5

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Deposits - Maturities (Details) $ in Thousands	Dec. 31, 2018 USD ($)
Due within:
2019	$ 198,609
2020	43,250
2021	34,054
2022	29,666
2023	15,992
Thereafter	0
Time Deposits, Total	$ 321,571

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Federal funds purchased and securities sold under agreements to repurchase - Federal Funds and Repurchase Agreements (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Federal funds purchased and securities sold under agreements to repurchase
Year End Weighted Rate (as a percent)	0.00%	0.00%
Average Weighted Rate (as a percent)	0.00%	0.00%
Average Balance Outstanding	$ 39,564	$ 29,512
Maximum Outstanding at any Month End	74,910	33,622
Balance	$ 24,647	$ 27,560
Federal funds purchased
Federal funds purchased and securities sold under agreements to repurchase
Year End Weighted Rate (as a percent)	2.64%	1.64%
Average Weighted Rate (as a percent)	2.29%	0.99%
Average Balance Outstanding	$ 1,242	$ 322
Maximum Outstanding at any Month End	12,863	1,067
Balance	$ 8,000	$ 0
Short-term repurchase agreements
Federal funds purchased and securities sold under agreements to repurchase
Year End Weighted Rate (as a percent)	0.00%	0.29%
Average Weighted Rate (as a percent)	3.51%	0.38%
Average Balance Outstanding	$ 11,180	$ 29,190
Maximum Outstanding at any Month End	25,944	32,555
Balance	$ 0	$ 27,560
Bank | Short-term repurchase agreements
Federal funds purchased and securities sold under agreements to repurchase
Year End Weighted Rate (as a percent)	0.35%
Average Weighted Rate (as a percent)	0.67%
Average Balance Outstanding	$ 27,142
Maximum Outstanding at any Month End	36,103
Balance	$ 16,647

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Federal funds purchased and securities sold under agreements to repurchase - Secured and Unsecured (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Federal funds purchased and securities sold under agreements to repurchase
Long-term Federal Home Loan Bank Advances	$ 95,153	$ 121,382
Federal funds purchased
Federal funds purchased and securities sold under agreements to repurchase
Maximum borrowing capacity of federal funds on unsecured basis	42,000
Maximum borrowing capacity of federal funds on secured basis	16,400
Bank
Federal funds purchased and securities sold under agreements to repurchase
Long-term Federal Home Loan Bank Advances	$ 95,200

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Federal funds purchased and securities sold under agreements to repurchase - Repurchase Agreements - Maturity (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	$ 16,647	$ 27,560
U.S. Treasury
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	1,464	1,964
U.S. government and federal agency obligations
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements		2,977
Government sponsored enterprises
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	12,976	8,382
Asset-backed securities
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	2,207	14,237
Overnight and continuous
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	16,647	27,560
Overnight and continuous | U.S. Treasury
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	1,464	1,964
Overnight and continuous | U.S. government and federal agency obligations
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements		2,977
Overnight and continuous | Government sponsored enterprises
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	12,976	8,382
Overnight and continuous | Asset-backed securities
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	2,207	14,237
Less than 90 days
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	0	0
Less than 90 days | U.S. Treasury
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	0	0
Less than 90 days | U.S. government and federal agency obligations
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements		0
Less than 90 days | Government sponsored enterprises
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	0	0
Less than 90 days | Asset-backed securities
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	0	0
Greater than 90 days
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	0	0
Greater than 90 days | U.S. Treasury
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	0	0
Greater than 90 days | U.S. government and federal agency obligations
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements		0
Greater than 90 days | Government sponsored enterprises
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	0	0
Greater than 90 days | Asset-backed securities
Federal funds purchased and securities sold under agreements to repurchase
Repurchase agreements	$ 0	$ 0

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Borrowings - FHLB and Other (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Borrowings
Long-term Federal Home Loan Bank Advances, Total	$ 95,153	$ 121,382
Year End Balance - Total Company	49,486	49,486
Bank
Borrowings
Long-term Federal Home Loan Bank Advances, Total	95,200
Maximum additional borrowing amount under agreement with FHLB	126,500
FHLB advances | Bank
Borrowings
2018	0	63,226
2019	28,231	28,231
2020	42,236	21,236
2021	20,241	4,241
2022	4,418	4,418
2023	$ 0	$ 0
2018 (as a percent)	0.00%	1.65%
2019 (as a percent)	1.63%	1.63%
2020 (as a percent)	2.49%	1.90%
2021 (as a percent)	2.77%	1.73%
2022 (as a percent)	2.14%	2.14%
2023 (as a percent)	0.00%	0.00%
Other Borrowings Due On 2022
Borrowings
Year End Balance - Other borrowings	$ 27	$ 30
Year End Weighted Rate (as a percent)	4.00%	4.00%
Subordinated notes due 2034
Borrowings
Year End Balance - Total Company	$ 25,774	$ 25,774
Year End Weighted Rate (as a percent)	5.49%	4.30%
Subordinated notes due 2035
Borrowings
Year End Balance - Total Company	$ 23,712	$ 23,712
Year End Weighted Rate (as a percent)	4.62%	3.43%

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Borrowings - Trust Preferred Securities (Details) - USD ($)			1 Months Ended		12 Months Ended
	Mar. 17, 2005	Mar. 17, 2004	Mar. 17, 2005	Dec. 17, 2004	Dec. 31, 2018	Dec. 31, 2017
Borrowings
Subordinated notes					$ 49,486,000	$ 49,486,000
Investment in common securities of the trust					$ 1,400,000	$ 1,500,000
Exchange Statutory Trust II
Borrowings
Trust preferred securities issued floating rate Trust Preferred Securities (TPS) to a TPS Pool			$ 23,000,000
Floating rate Trust Preferred Securities (TPS) to a TPS Pool, term			30 years
Description of variable rate						three-month LIBOR rate
Basis spread on variable rate (as a percent)						1.83%
Interest rate at end of period (as a percent)						4.62%
Period of time after issuance in which TPS can be repaid without penalty			5 years
Investment in preferred interests of the trust by a third party during the period	$ 23,000,000
Investment in common securities of the trust	$ 712,000		$ 712,000
Exchange Statutory Trust I
Borrowings
Trust preferred securities issued floating rate Trust Preferred Securities (TPS) to a TPS Pool				$ 25,000,000
Description of variable rate						three-month LIBOR rate
Basis spread on variable rate (as a percent)						2.70%
Interest rate at end of period (as a percent)						5.49%
Minimum duration of time needs to complete to take action against default					5 years
Investment in preferred interests of the trust by a third party during the period		$ 25,000,000
Investment in common securities of the trust		$ 774,000

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Income Taxes - Components of Income Tax Expense (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Current:
Federal									$ 1,175	$ 2,761	$ 3,578
State									(181)	385	489
Total current									994	3,146	4,067
Deferred:
Federal									674	3,189	(267)
State									0	1,567	(50)
Total deferred									674	4,756	(317)
Income Tax Expense (Benefit), Total	$ 586	$ 446	$ 225	$ 411	$ 4,979	$ 847	$ 983	$ 1,093	$ 1,668	$ 7,902	$ 3,750

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Income Taxes - Income Tax Reconciliation (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Effective Income Tax Rate Reconciliation, Amount
Income before provision for income tax expense									$ 12,382	$ 11,316	$ 11,032
Tax at statutory federal income tax rate									2,600	3,847	3,751
Tax Cuts and Jobs Act									(343)	3,139	0
State restructuring									(143)	966	0
Tax-exempt income, net									(432)	(394)	(314)
State income tax, net of federal tax benefit									0	323	290
Other, net									(14)	21	23
Income Tax Expense (Benefit), Total	$ 586	$ 446	$ 225	$ 411	$ 4,979	$ 847	$ 983	$ 1,093	$ 1,668	$ 7,902	$ 3,750
Effective Income Tax Rate Reconciliation, Percent
Tax at statutory federal income tax rate (as a percent)									21.00%	34.00%	34.00%
Tax Cuts and Jobs Act (as a percent)									(2.77%)	27.74%	0.00%
State restructuring (as a percent)									(1.16%)	8.54%	0.00%
Tax-exempt income, net (as a percent)									(3.49%)	(3.48%)	(2.85%)
State income tax, net of federal tax benefit (as a percent)									0.00%	2.85%	2.63%
Other, net (as a percent)									(0.11%)	0.18%	0.21%
Provision for income tax expense (as a percent)									13.47%	69.83%	33.99%

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Income Taxes - Other (Details) - USD ($)	3 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Income Taxes
Federal corporate income tax rate (as a percent)		13.47%	69.83%	33.99%
Tax at statutory federal income tax rate (as a percent)		21.00%	34.00%	34.00%
Income tax benefit attributable to Tax Act	$ 343,000
Income tax benefit related additional tax planning initiatives	143,000
Income tax benefit attributable to the pension contribution	306,000
Income tax benefit attributable to accounting method changes on tax return	$ 180,000
Valuation allowance against certain capital loss carryforward		$ 46,000

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Income Taxes - Deferred Taxes (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Deferred tax assets:
Allowance for loan losses	$ 2,285	$ 2,279
Impairment of other real estate owned	630	672
Goodwill	227	409
Available-for-sale securities	895	664
Nonaccrual loan interest	119	167
Core deposit intangible	90	160
Pension	1,516	1,669
Deferred compensation	160	87
Other	282	257
Total deferred tax assets	6,204	6,364
Deferred tax liabilities:
Premises and equipment	483	333
Mortgage servicing rights	616	570
Deferred loan costs	261	0
Accelerated prepaids	321	356
Other	10	34
Total deferred tax liabilities	1,691	1,293
Net deferred tax assets	$ 4,513	$ 5,071

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Stockholders' Equity (Details) - USD ($) $ in Thousands		12 Months Ended
		Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period		$ (5,662)
Other comprehensive (loss) income, net of tax		(437)	$ (643)	$ (1,783)
Balance at end of period		(6,099)	(5,662)
Unrealized Gain (Loss) on Securities
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	[1]	(2,500)	(1,936)
Other comprehensive (loss) income, before reclassifications	[1]	(1,209)	(37)
Amounts reclassified from accumulated other comprehensive (loss) income	[1]	0	(5)
Other comprehensive (loss) income, before tax	[1]	(1,209)	(42)
Income tax expense (benefit)	[1]	254	16
Other comprehensive (loss) income, net of tax	[1]	(955)	(26)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02	[1],[2]		(538)
Balance at end of period	[1]	(3,455)	(2,500)	(1,936)
Unrecognized Net Pension and Postretirement Costs
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	[3]	(3,162)	(1,865)
Other comprehensive (loss) income, before reclassifications	[3]	219	90
Amounts reclassified from accumulated other comprehensive (loss) income	[3]	436	(1,085)
Other comprehensive (loss) income, before tax	[3]	655	(995)
Income tax expense (benefit)	[3]	(137)	378
Other comprehensive (loss) income, net of tax	[3]	518	(617)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02	[2],[3]		(680)
Balance at end of period	[3]	(2,644)	(3,162)	(1,865)
Accumulated Other Comprehensive Loss
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period		(5,662)	(3,801)
Other comprehensive (loss) income, before reclassifications		(990)	53
Amounts reclassified from accumulated other comprehensive (loss) income		436	(1,090)
Other comprehensive (loss) income, before tax		(554)	(1,037)
Income tax expense (benefit)		117	394
Other comprehensive (loss) income, net of tax		(437)	(643)	(1,783)
Amounts reclassified from accumulated other comprehensive loss per ASU 2018-02	[2]		(1,218)
Balance at end of period		$ (6,099)	$ (5,662)	$ (3,801)

[1] The pre-tax amounts reclassified from accumulated other comprehensive loss are included in gain on sale of investment securities in the consolidated statements of income.

[2] As of December 31, 2017, the Company elected to early adopt and retrospectively apply the reclassification of stranded income tax effects from accumulated other comprehensive loss to retained earnings, as permitted under ASU 2018-02

[3] The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost. See Note 12.

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Employee Benefit Plans - Expense (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Summary of employee benefits charged to operating expenses
Payroll taxes	$ 1,156	$ 1,167	$ 1,122
Medical plans	2,109	2,026	1,881
401k match and profit sharing	956	873	825
Periodic pension cost	1,707	1,344	1,179
Other	67	82	172
Total employee benefits	$ 5,995	$ 5,492	$ 5,179

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Employee Benefit Plans - Change in PBO (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Change in projected benefit obligation:
Balance, January 1	$ 27,871	$ 23,234
Service cost	1,707	1,343	$ 1,179
Interest cost	1,037	1,009	956
Actuarial loss	(3,122)	2,843
Benefits paid	(601)	(558)
Balance, December 31	26,892	27,871	23,234
Change in plan assets:
Fair value, January 1	19,924	16,502
Actual return on plan assets	(1,329)	2,890
Employer contribution	1,800	1,183
Expenses paid	(122)	(93)
Benefits paid	(601)	(558)
Fair value, December 31	19,672	19,924	$ 16,502
Funded status at end of year	(7,220)	(7,947)
Accumulated benefit obligation	$ 21,244	$ 21,940

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Employee Benefit Plans - Net Pension Cost (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Components of net pension cost
Service cost - benefits earned during the year	$ 1,707	$ 1,343	$ 1,179
Interest costs on projected benefit obligations	1,037	1,009	956
Expected return on plan assets	(1,327)	(1,127)	(1,057)
Expected administrative expenses	93	88	70
Amortization of prior service cost	79	79	79
Amortization of unrecognized net loss	140	11	0
Net periodic pension cost	1,729	1,403	1,227
Net periodic pension cost for the three and nine months ended September 30, (actual)	$ 1,707	$ 1,344	$ 1,179

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Employee Benefit Plans - Accumulated and Other Comprehensive Loss (Details) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Employee Benefit Plans
Prior service costs	$ (128)	$ (207)
Net accumulated actuarial net loss	(3,219)	(3,796)
Accumulated other comprehensive loss	(3,347)	(4,003)
Net periodic benefit cost in excess of cumulative employer contributions	(3,873)	(3,944)
Net amount recognized at December 31, balance sheet	(7,220)	(7,947)
Net gain (loss) arising during period	436	(1,085)
Prior service cost amortization	79	79
Amortization of net actuarial loss	140	11
Total recognized in other comprehensive loss	655	(995)
Total recognized in net periodic pension cost and other comprehensive income	$ 1,073	$ 2,398

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Employee Benefit Plans - Assumptions (Details)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Determination of benefit obligation at year end:
Discount rate	4.40%	3.75%	4.40%
Annual rate of compensation increase	4.00%	4.00%	4.00%
Determination of pension expense for year ended:
Discount rate for the service cost	3.75%	4.40%	4.70%
Annual rate of compensation increase	4.00%	4.00%	3.78%
Expected long-term rate of return on plan assets	6.75%	6.75%	7.00%

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Employee Benefit Plans - FV of Plan Assets (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Employee Benefit Plans
Fair Value	$ 19,672	$ 19,924	$ 16,502
Quoted Prices in Active Markets for Identical Assets (Level 1)
Employee Benefit Plans
Fair Value	17,600	18,143
Other Observable Inputs (Level 2)
Employee Benefit Plans
Fair Value	2,072	1,781
Significant Unobservable Inputs (Level 3)
Employee Benefit Plans
Fair Value	0	0
Cash equivalents
Employee Benefit Plans
Fair Value	707	1,307
Cash equivalents | Quoted Prices in Active Markets for Identical Assets (Level 1)
Employee Benefit Plans
Fair Value	707	1,307
Cash equivalents | Other Observable Inputs (Level 2)
Employee Benefit Plans
Fair Value	0	0
Cash equivalents | Significant Unobservable Inputs (Level 3)
Employee Benefit Plans
Fair Value	0	0
Mutual Fund
Employee Benefit Plans
Fair Value	16,893	16,836
Mutual Fund | Quoted Prices in Active Markets for Identical Assets (Level 1)
Employee Benefit Plans
Fair Value	16,893	16,836
Mutual Fund | Other Observable Inputs (Level 2)
Employee Benefit Plans
Fair Value	0	0
Mutual Fund | Significant Unobservable Inputs (Level 3)
Employee Benefit Plans
Fair Value	0	0
Corporate bonds
Employee Benefit Plans
Fair Value	295
Corporate bonds | Quoted Prices in Active Markets for Identical Assets (Level 1)
Employee Benefit Plans
Fair Value	0
Corporate bonds | Other Observable Inputs (Level 2)
Employee Benefit Plans
Fair Value	295
Corporate bonds | Significant Unobservable Inputs (Level 3)
Employee Benefit Plans
Fair Value	0
U.S. government and federal agency obligations
Employee Benefit Plans
Fair Value	1,777	1,781
U.S. government and federal agency obligations | Quoted Prices in Active Markets for Identical Assets (Level 1)
Employee Benefit Plans
Fair Value	0	0
U.S. government and federal agency obligations | Other Observable Inputs (Level 2)
Employee Benefit Plans
Fair Value	1,777	1,781
U.S. government and federal agency obligations | Significant Unobservable Inputs (Level 3)
Employee Benefit Plans
Fair Value	$ 0	$ 0

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Employee Benefit Plans - Future Benefit Payments (Details) $ in Thousands	Dec. 31, 2018 USD ($)
Future benefit payments expected to be paid
2019	$ 680
2020	801
2021	874
2022	1,026
2023	1,052
2024 to 2028	$ 6,370

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Employee Benefit Plans (Details) - USD ($)		12 Months Ended
	May 10, 2018	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015	Dec. 31, 2014
Defined Benefit Plan Disclosure
Percentage of employer match		3.00%
Defined benefit plan contributions by employer percent		6.00%
Annual returns on planned assets (as percentage)		(6.20%)	17.40%	8.20%	(0.40%)	8.30%
Contribution to defined benefit plan	$ 1,800,000
Defined benefit plan, minimum required contribution		$ 0
Defined benefit obligation expenses in next year		1,500,000	$ 1,700,000
Supplemental Executive Retirement Plan
Defined Benefit Plan Disclosure
Accrued liability		320,000
Accrued expense		$ 320,000

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Stock Compensation - Stock Option Activity (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Number of Shares
Outstanding, beginning of year		20,909	48,097	70,616
Granted		0	0	0
Exercised	(20,909)	(20,909)	0	0
Forfeited or expired		0	(27,188)	(22,519)
Outstanding, end of year		0	20,909	48,097
Outstanding, end of year		0	20,909	46,725
Weighted average Exercise Price
Outstanding, beginning of period		$ 14.20	$ 18.59	$ 19.12
Granted		0.00	0.00	0.00
Exercised	$ 14.20	14.20	0.00	0.00
Forfeited or expired		0.00	21.20	20.24
Outstanding, end of year		0.00	14.20	18.59
Exercisable, end of year		$ 0.00	$ 14.20	$ 18.72
Weighted Average Contractual Term (in years)
Outstanding, end of year		0 years	8 months 23 days	11 months 27 days
Exercisable, end of year		0 years	8 months 23 days	11 months 19 days
Aggregate Intrinsic Value
Outstanding, end of year		$ 0	$ 120,242	$ 49,842
Exercisable, end of year		$ 0	$ 120,242	$ 46,874

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Stock Compensation - Other (Details) - USD ($)		3 Months Ended	12 Months Ended
	Jul. 01, 2018	Sep. 30, 2018	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Stock Compensation
Special stock dividend, rate percent	4.00%
Dividends Payable, Date to be Paid	Jul. 01, 2018
Stock based compensation expense			$ 0	$ 3,000	$ 17,000
Remaining unrecognized compensation expense related to non-vested stock awards				$ 0
Exercised (in shares)		20,909	20,909	0	0
Exercised (per share)		$ 14.20	$ 14.20	$ 0.00	$ 0.00
Defined Benefit Plan, Expected Future Employer Contributions, Next Fiscal Year			$ 1,500,000	$ 1,700,000

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Earnings per Share - Components (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Basic earnings per share:
Net income available to shareholders	$ 2,619	$ 3,098	$ 2,907	$ 2,090	$ (2,372)	$ 1,766	$ 1,919	$ 2,101	$ 10,714	$ 3,414	$ 7,282
Average shares outstanding									6,026,971	6,057,920	6,095,727
Basic earnings per share (in dollars per share)	$ 0.44	$ 0.51	$ 0.48	$ 0.35	$ (0.39)	$ 0.29	$ 0.32	$ 0.35	$ 1.78	$ 0.56	$ 1.19
Diluted earnings per share:
Net income available to shareholders	$ 2,619	$ 3,098	$ 2,907	$ 2,090	$ (2,372)	$ 1,766	$ 1,919	$ 2,101	$ 10,714	$ 3,414	$ 7,282
Average shares outstanding									6,026,971	6,057,920	6,095,727
Effect of dilutive stock options									5,042	5,497	0
Average shares outstanding including dilutive stock options									6,032,013	6,063,417	6,095,727
Diluted earnings per share (in dollars per share)	$ 0.44	$ 0.51	$ 0.48	$ 0.35	$ (0.39)	$ 0.29	$ 0.32	$ 0.35	$ 1.78	$ 0.56	$ 1.19

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Earnings per Share - Anti-dilutive (Details) - Option shares - shares	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Summary of anti-dilutive shares
Anti-dilutive shares	0	0	48,097
Dilutive shares	0	0	0

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Earnings per Share - Repurchase Program (Details) - $ / shares		12 Months Ended
	Jul. 01, 2018	Dec. 31, 2018	Dec. 31, 2017
Earnings Per Share
Dividends Payable, Date to be Paid	Jul. 01, 2018
Special stock dividend, rate percent	4.00%
Special stock dividend, record date	Jun. 15, 2018
Repurchase Program
Earnings Per Share
Total number of common stock repurchased		95,709
Average price per share of total common stock repurchased		$ 17.90
Number of common stock repurchased			8,668
Average price per share of common stock repurchased			$ 20.63

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Capital Requirements (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
The actual and required capital amounts and ratios for the Company and the Bank
Total capital (to risk-weighted assets), Actual Amount	$ 165,325	$ 156,045
Total capital (to risk-weighted assets), Actual Ratio (as a percent)	13.28%	12.93%
Total capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Amount	$ 99,578	$ 96,577
Total capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Ratio (as a percent)	8.00%	8.00%
Total capital (to risk-weighted assets), Well-Capitalized Capital requirements, Amount	$ 0	$ 0
Total capital (to risk-weighted assets), Well-Capitalized Capital requirements, Ratio (as a percent)	0.00%	0.00%
Tier I capital (to risk-weighted assets), Actual Amount	$ 139,532	$ 129,369
Tier I capital (to risk-weighted assets), Actual, Ratio (as a percent)	11.21%	10.72%
Tier I capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Amount	$ 74,683	$ 72,433
Tier I capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Ratio (as a percent)	6.00%	6.00%
Tier I capital (to risk-weighted assets), Well-Capitalized Capital requirements, Amount	$ 0	$ 0
Tier I capital (to risk-weighted assets), Well-Capitalized Capital requirements, Ratio (as a percent)	0.00%	0.00%
Common Equity Tier I Capital (to risk-weighted assets), Actual Amount	$ 105,513	$ 97,033
Common Equity Tier I Capital (to risk-weighted assets), Actual Ratio (as a percent)	8.48%	8.04%
Common Equity Tier I Capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Amount	$ 56,013	$ 54,325
Common Equity Tier I Capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Ratio (as a percent)	4.50%	4.50%
Common Equity Tier I Capital (to risk-weighted assets), Well-Capitalized Under Prompt Corrective Action Provision, Amount	$ 0	$ 0
Common Equity Tier I Capital (to risk-weighted assets), Well-Capitalized Under Prompt Corrective Action Provision, Ratio (as a percent)	0.00%	0.00%
Tier I Capital (to adjusted average assets), Actual Amount	$ 139,532	$ 129,369
Tier I Capital (to adjusted average assets), Actual Ratio (as a percent)	9.55%	9.33%
Tier I Capital (to adjusted average assets), Required for Capital Adequacy Purposes, Amount	$ 58,467	$ 55,488
Tier I capital (to adjusted average assets) Required for Capital Adequacy Purposes, Ratio (as a percent)	4.00%	4.00%
Tier I capital (to adjusted average assets), Well-Capitalized Capital requirements, Amount	$ 0	$ 0
Tier I capital (to adjusted average assets), Well-Capitalized Capital requirements, Ratio (as a percent)	0.00%	0.00%
Bank
The actual and required capital amounts and ratios for the Company and the Bank
Total capital (to risk-weighted assets), Actual Amount	$ 163,814	$ 154,495
Total capital (to risk-weighted assets), Actual Ratio (as a percent)	13.19%	12.83%
Total capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Amount	$ 99,327	$ 96,326
Total capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Ratio (as a percent)	8.00%	8.00%
Total capital (to risk-weighted assets), Well-Capitalized Capital requirements, Amount	$ 124,159	$ 120,408
Total capital (to risk-weighted assets), Well-Capitalized Capital requirements, Ratio (as a percent)	10.00%	10.00%
Tier I capital (to risk-weighted assets), Actual Amount	$ 152,002	$ 143,483
Tier I capital (to risk-weighted assets), Actual, Ratio (as a percent)	12.24%	11.92%
Tier I capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Amount	$ 74,495	$ 72,245
Tier I capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Ratio (as a percent)	6.00%	6.00%
Tier I capital (to risk-weighted assets), Well-Capitalized Capital requirements, Amount	$ 99,327	$ 96,326
Tier I capital (to risk-weighted assets), Well-Capitalized Capital requirements, Ratio (as a percent)	8.00%	8.00%
Common Equity Tier I Capital (to risk-weighted assets), Actual Amount	$ 152,002	$ 143,483
Common Equity Tier I Capital (to risk-weighted assets), Actual Ratio (as a percent)	12.24%	11.92%
Common Equity Tier I Capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Amount	$ 55,872	$ 54,184
Common Equity Tier I Capital (to risk-weighted assets), Required for Capital Adequacy Purposes, Ratio (as a percent)	4.50%	4.50%
Common Equity Tier I Capital (to risk-weighted assets), Well-Capitalized Under Prompt Corrective Action Provision, Amount	$ 80,703	$ 78,265
Common Equity Tier I Capital (to risk-weighted assets), Well-Capitalized Under Prompt Corrective Action Provision, Ratio (as a percent)	6.50%	6.50%
Tier I Capital (to adjusted average assets), Actual Amount	$ 152,002	$ 143,483
Tier I Capital (to adjusted average assets), Actual Ratio (as a percent)	10.43%	10.38%
Tier I Capital (to adjusted average assets), Required for Capital Adequacy Purposes, Amount	$ 58,272	$ 55,315
Tier I capital (to adjusted average assets) Required for Capital Adequacy Purposes, Ratio (as a percent)	4.00%	4.00%
Tier I capital (to adjusted average assets), Well-Capitalized Capital requirements, Amount	$ 72,839	$ 69,144
Tier I capital (to adjusted average assets), Well-Capitalized Capital requirements, Ratio (as a percent)	5.00%	5.00%

XML

Fair Value Measurements - Mortgage Servicing Rights - Summary (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Assets:
Available for sale debt securities, fair value	$ 218,205	$ 231,028
Mortgage servicing rights, fair value	2,931	2,713
Recurring
Assets:
Assets, Total	221,148	233,751
Recurring | U.S. Treasury
Assets:
Available for sale debt securities, fair value	1,952	1,967
Recurring | U.S. government and federal agency obligations
Assets:
Available for sale debt securities, fair value	9,966	12,073
Recurring | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	43,335	36,897
Recurring | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	40,386	46,656
Recurring | Mortgage-backed securities
Assets:
Available for sale debt securities, fair value	118,192	128,949
Recurring | Other debt securities
Assets:
Available for sale debt securities, fair value	3,000	3,000
Recurring | Bank issued trust preferred securities
Assets:
Available for sale debt securities, fair value	1,374	1,486
Recurring | Equity securities
Assets:
Available for sale debt securities, fair value	12	10
Recurring | Mortgage servicing rights (MSRs)
Assets:
Mortgage servicing rights, fair value	2,931	2,713
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Assets, Total	1,952	1,967
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | U.S. Treasury
Assets:
Available for sale debt securities, fair value	1,952	1,967
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | U.S. government and federal agency obligations
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Mortgage-backed securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Other debt securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Bank issued trust preferred securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Equity securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Mortgage servicing rights (MSRs)
Assets:
Mortgage servicing rights, fair value	0	0
Recurring | Other Observable Inputs (Level 2)
Assets:
Assets, Total	216,265	229,071
Recurring | Other Observable Inputs (Level 2) | U.S. Treasury
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Other Observable Inputs (Level 2) | U.S. government and federal agency obligations
Assets:
Available for sale debt securities, fair value	9,966	12,073
Recurring | Other Observable Inputs (Level 2) | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	43,335	36,897
Recurring | Other Observable Inputs (Level 2) | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	40,386	46,656
Recurring | Other Observable Inputs (Level 2) | Mortgage-backed securities
Assets:
Available for sale debt securities, fair value	118,192	128,949
Recurring | Other Observable Inputs (Level 2) | Other debt securities
Assets:
Available for sale debt securities, fair value	3,000	3,000
Recurring | Other Observable Inputs (Level 2) | Bank issued trust preferred securities
Assets:
Available for sale debt securities, fair value	1,374	1,486
Recurring | Other Observable Inputs (Level 2) | Equity securities
Assets:
Available for sale debt securities, fair value	12	10
Recurring | Other Observable Inputs (Level 2) | Mortgage servicing rights (MSRs)
Assets:
Mortgage servicing rights, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3)
Assets:
Assets, Total	2,931	2,713
Recurring | Significant Unobservable Inputs (Level 3) | U.S. Treasury
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | U.S. government and federal agency obligations
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Mortgage-backed securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Other debt securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Bank issued trust preferred securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Equity securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Mortgage servicing rights (MSRs)
Assets:
Mortgage servicing rights, fair value	$ 2,931	$ 2,713

XML

Fair Value Measurements - Mortage Servicing Rights - Level 3 (Details) - Recurring - Significant Unobservable Inputs (Level 3) - Mortgage servicing rights (MSRs) - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Fair value of assets
Balance at beginning of period	$ 2,713	$ 2,584
Total gains or losses (realized/unrealized): Included in earnings	27	93
Total gains or losses (realized/unrealized): Included in other comprehensive income	0	0
Purchases	0	0
Sales	0	0
Issues	245	222
Settlements	0	0
Balance at end of period	$ 2,931	$ 2,713

XML

Fair Value Measurements - Mortgage Servicing Rights - Other (Details) - USD ($)	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Fair Value Measurements
Impaired loans with a specific allowance	$ 6,385,000	$ 7,923,000
Specific allowance related to impaired loans	1,194,000	1,333,000
Collateral dependent impaired loans
Fair Value Measurements
Impaired loans with a specific allowance	3,800,000	4,000,000
Specific allowance related to impaired loans	867,000	870,000
Impaired financing receivable charge offs	$ 370,000	$ 788,000

XML

Fair Value Measurements - Other Real Estate Owned and Repossessed Assets (Details) - Nonrecurring - USD ($) $ in Thousands	12 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
Total Fair Value
Fair Value Measurements
Impaired loans	$ 2,905	$ 3,258
Other real estate and repossessed assets	13,691	13,182
Total Fair Value | Commercial, financial, and agricultural
Fair Value Measurements
Impaired loans	1,320	1,583
Total Fair Value | Commercial real estate | Construction
Fair Value Measurements
Impaired loans	153	153
Total Fair Value | Commercial real estate | Mortgages
Fair Value Measurements
Impaired loans	115	880
Total Fair Value | Residential real estate | Mortgages
Fair Value Measurements
Impaired loans	1,317	49
Total Fair Value | Installment and other consumer
Fair Value Measurements
Impaired loans	0	593
Total Gains (Losses)
Fair Value Measurements
Gains (losses) on impaired loans	(370)	(788)
Gains (losses) on other real estate owned and repossessed assets	15	250
Total Gains (Losses) | Commercial, financial, and agricultural
Fair Value Measurements
Gains (losses) on impaired loans	(244)	(521)
Total Gains (Losses) | Commercial real estate | Construction
Fair Value Measurements
Gains (losses) on impaired loans	(27)	0
Total Gains (Losses) | Commercial real estate | Mortgages
Fair Value Measurements
Gains (losses) on impaired loans	(20)	(26)
Total Gains (Losses) | Residential real estate | Mortgages
Fair Value Measurements
Gains (losses) on impaired loans	(44)	(204)
Total Gains (Losses) | Installment and other consumer
Fair Value Measurements
Gains (losses) on impaired loans	(35)	(37)
Quoted Prices in Active Markets for Identical Assets (Level 1) | Total Fair Value
Fair Value Measurements
Impaired loans	0	0
Other real estate and repossessed assets	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Total Fair Value | Commercial, financial, and agricultural
Fair Value Measurements
Impaired loans	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Total Fair Value | Commercial real estate | Construction
Fair Value Measurements
Impaired loans	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Total Fair Value | Commercial real estate | Mortgages
Fair Value Measurements
Impaired loans	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Total Fair Value | Residential real estate | Mortgages
Fair Value Measurements
Impaired loans	0	0
Quoted Prices in Active Markets for Identical Assets (Level 1) | Total Fair Value | Installment and other consumer
Fair Value Measurements
Impaired loans	0	0
Other Observable Inputs (Level 2) | Total Fair Value
Fair Value Measurements
Impaired loans	0	0
Other real estate and repossessed assets	0	0
Other Observable Inputs (Level 2) | Total Fair Value | Commercial, financial, and agricultural
Fair Value Measurements
Impaired loans	0	0
Other Observable Inputs (Level 2) | Total Fair Value | Commercial real estate | Construction
Fair Value Measurements
Impaired loans	0	0
Other Observable Inputs (Level 2) | Total Fair Value | Commercial real estate | Mortgages
Fair Value Measurements
Impaired loans	0	0
Other Observable Inputs (Level 2) | Total Fair Value | Residential real estate | Mortgages
Fair Value Measurements
Impaired loans	0	0
Other Observable Inputs (Level 2) | Total Fair Value | Installment and other consumer
Fair Value Measurements
Impaired loans	0	0
Significant Unobservable Inputs (Level 3) | Total Fair Value
Fair Value Measurements
Impaired loans	2,905	2,665
Other real estate and repossessed assets	13,691	13,182
Significant Unobservable Inputs (Level 3) | Total Fair Value | Commercial, financial, and agricultural
Fair Value Measurements
Impaired loans	1,320	1,583
Significant Unobservable Inputs (Level 3) | Total Fair Value | Commercial real estate | Construction
Fair Value Measurements
Impaired loans	153	153
Significant Unobservable Inputs (Level 3) | Total Fair Value | Commercial real estate | Mortgages
Fair Value Measurements
Impaired loans	115	880
Significant Unobservable Inputs (Level 3) | Total Fair Value | Residential real estate | Mortgages
Fair Value Measurements
Impaired loans	1,317	49
Significant Unobservable Inputs (Level 3) | Total Fair Value | Installment and other consumer
Fair Value Measurements
Impaired loans	$ 0	$ 0

XML

Fair Value of Financial Instruments - Summary (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Assets:
Cash and due from banks	$ 23,687	$ 23,325
Federal funds sold and overnight interest-bearing deposits	18,396	39,553
Certificates of deposit in other banks	12,247	3,460
Available for sale securities	218,205	231,028
Mortgage servicing rights	2,931	2,713
Accrued interest receivable	6,162	5,627
Deposits:
Non-interest bearing demand	262,857	245,380
Savings, interest checking and money market	614,040	584,468
Time deposits	321,571
Accrued interest payable	1,035	554
Carrying Amount
Assets:
Cash and due from banks	23,687	23,325
Federal funds sold and overnight interest-bearing deposits	18,396	39,553
Certificates of deposit in other banks	12,247	3,460
Available for sale securities	218,205	231,028
Other investment securities	5,675	6,551
Loans, net	1,134,975	1,057,580
Mortgage servicing rights	2,931	2,713
Cash surrender value - life insurance	2,542	2,484
Accrued interest receivable	6,162	5,627
Assets, Total	1,424,820	1,372,321
Deposits:
Non-interest bearing demand	262,857	245,380
Savings, interest checking and money market	614,040	584,468
Time deposits	321,571	295,964
Federal funds purchased and securities sold under agreements to repurchase	24,647	27,560
Federal Home Loan Bank advances and other borrowings	95,153	121,382
Subordinated notes	49,486	49,486
Accrued interest payable	1,035	554
Liabilities, Total	1,368,789	1,324,794
Total Fair Value
Assets:
Cash and due from banks	23,687	23,325
Federal funds sold and overnight interest-bearing deposits	18,396	39,553
Certificates of deposit in other banks	12,247	3,460
Available for sale securities	218,205	231,028
Other investment securities	5,675	6,551
Loans, net	1,115,003	1,058,153
Mortgage servicing rights	2,931	2,713
Cash surrender value - life insurance	2,542	2,484
Accrued interest receivable	6,162	5,627
Assets, Total	1,404,848	1,372,894
Deposits:
Non-interest bearing demand	262,857	245,380
Savings, interest checking and money market	614,040	584,468
Time deposits	318,949	294,778
Federal funds purchased and securities sold under agreements to repurchase	24,647	27,560
Federal Home Loan Bank advances and other borrowings	94,326	121,291
Subordinated notes	45,749	39,692
Accrued interest payable	1,035	554
Liabilities, Total	1,361,603	1,313,723
Quoted Prices in Active Markets for Identical Assets (Level 1) | Total Fair Value
Assets:
Cash and due from banks	23,687	23,325
Federal funds sold and overnight interest-bearing deposits	18,396	39,553
Certificates of deposit in other banks	12,247	3,460
Available for sale securities	1,952	1,967
Other investment securities	0	0
Loans, net	0	0
Mortgage servicing rights	0	0
Cash surrender value - life insurance	0	0
Accrued interest receivable	6,162	5,627
Assets, Total	62,444	73,932
Deposits:
Non-interest bearing demand	262,857	245,380
Savings, interest checking and money market	614,040	584,468
Time deposits	0	0
Federal funds purchased and securities sold under agreements to repurchase	24,647	27,560
Federal Home Loan Bank advances and other borrowings	0	0
Subordinated notes	0	0
Accrued interest payable	1,035	554
Liabilities, Total	902,579	857,962
Other Observable Inputs (Level 2) | Total Fair Value
Assets:
Cash and due from banks	0	0
Federal funds sold and overnight interest-bearing deposits	0	0
Certificates of deposit in other banks	0	0
Available for sale securities	216,253	229,061
Other investment securities	5,675	6,551
Loans, net	0	0
Mortgage servicing rights	0	0
Cash surrender value - life insurance	2,542	2,484
Accrued interest receivable	0	0
Assets, Total	224,470	238,096
Deposits:
Non-interest bearing demand	0	0
Savings, interest checking and money market	0	0
Time deposits	0	0
Federal funds purchased and securities sold under agreements to repurchase	0	0
Federal Home Loan Bank advances and other borrowings	94,326	121,291
Subordinated notes	45,749	39,692
Accrued interest payable	0	0
Liabilities, Total	140,075	160,983
Significant Unobservable Inputs (Level 3) | Total Fair Value
Assets:
Cash and due from banks	0	0
Federal funds sold and overnight interest-bearing deposits	0	0
Certificates of deposit in other banks	0	0
Available for sale securities	0	0
Other investment securities	0	0
Loans, net	1,115,003	1,058,153
Mortgage servicing rights	2,931	2,713
Cash surrender value - life insurance	0	0
Accrued interest receivable	0	0
Assets, Total	1,117,934	1,060,866
Deposits:
Non-interest bearing demand	0	0
Savings, interest checking and money market	0	0
Time deposits	318,949	294,778
Federal funds purchased and securities sold under agreements to repurchase	0	0
Federal Home Loan Bank advances and other borrowings	0	0
Subordinated notes	0	0
Accrued interest payable	0	0
Liabilities, Total	$ 318,949	$ 294,778

XML

Commitments and Contingencies - Contractual Amounts (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017
Contractual amount of off-balance-sheet financial instruments
Total contractual amount of off-balance-sheet financial instruments	$ 351,968	$ 314,002
Commitments to extend credit
Contractual amount of off-balance-sheet financial instruments
Total contractual amount of off-balance-sheet financial instruments	267,314	238,527
Commitments to originate residential first and second mortgage loans
Contractual amount of off-balance-sheet financial instruments
Total contractual amount of off-balance-sheet financial instruments	1,759	1,471
Standby letters of credit
Contractual amount of off-balance-sheet financial instruments
Total contractual amount of off-balance-sheet financial instruments	$ 82,895	$ 74,004

XML

Commitments and Contingencies - Other (Details)	12 Months Ended
	Dec. 31, 2018
Minimum
Commitments and Contingencies
Remaining term of conditional commitment	1 month
Maximum
Commitments and Contingencies
Remaining term of conditional commitment	5 years

XML

Condensed Financial Information of the Parent Company Only - Balance Sheets (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016	Dec. 31, 2015
Assets
Cash and due from bank subsidiaries	$ 23,687	$ 23,325
Deferred tax asset	6,204	6,364
Other assets	8,277	8,902
Total assets	1,481,682	1,429,216
Liabilities and Stockholders' Equity
Subordinated notes	49,486	49,486
Other liabilities	13,479	13,051
Stockholders' equity	99,414	91,371	$ 91,017	$ 87,286
Total liabilities and stockholders' equity	1,481,682	1,429,216
HAWTHORN BANCSHARES, INC. | Reportable Legal Entities
Assets
Cash and due from bank subsidiaries	1,334	1,415
Investment in bank-issued trust preferred securities	1,374	1,486
Investment in subsidiaries	152,735	144,589
Deferred tax asset	1,307	1,677
Other assets	403	133
Total assets	157,153	149,300
Liabilities and Stockholders' Equity
Subordinated notes	49,486	49,486
Other liabilities	8,253	8,443
Stockholders' equity	99,414	91,371
Total liabilities and stockholders' equity	$ 157,153	$ 149,300

XML

Condensed Financial Information of the Parent Company Only - Income (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Income
Interest and dividends received from subsidiaries	$ 15,196	$ 14,751	$ 14,288	$ 13,544	$ 13,219	$ 12,936	$ 12,681	$ 12,099	$ 57,779	$ 50,935	$ 46,010
Expenses
Interest on subordinated notes									2,229	1,751	1,495
Other									3,722	4,009	4,193
Income tax benefit	(586)	(446)	(225)	(411)	(4,979)	(847)	(983)	(1,093)	(1,668)	(7,902)	(3,750)
Net income	$ 2,619	$ 3,098	$ 2,907	$ 2,090	$ (2,372)	$ 1,766	$ 1,919	$ 2,101	10,714	3,414	7,282
HAWTHORN BANCSHARES, INC. | Reportable Legal Entities
Income
Interest and dividends received from subsidiaries									2,653	2,653	46
Other									428	0	0
Total income									3,081	2,653	46
Expenses
Interest on subordinated notes									2,229	1,751	1,494
Other									3,461	2,358	2,039
Total expenses									5,690	4,109	3,533
Income before income tax benefit and equity in undistributed income of subsidiaries									(195)	(1,456)	(3,487)
Income tax benefit									1,397	191	1,337
Equity in undistributed income of subsidiaries									9,512	4,679	9,432
Net income									$ 10,714	$ 3,414	$ 7,282

XML

Condensed Financial Information of the Parent Company Only - Cash Flows (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Cash flows from operating activities:
Net income	$ 2,619	$ 3,098	$ 2,907	$ 2,090	$ (2,372)	$ 1,766	$ 1,919	$ 2,101	$ 10,714	$ 3,414	$ 7,282
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation expense									0	3	17
Other, net									(186)	(88)	(267)
Net cash provided (used) by operating activities									16,302	12,479	13,531
Cash flows from investing activities:
Net cash provided (used) by investing activities									(78,574)	(112,925)	(94,235)
Cash flows from financing activities:
Cash dividends paid - common stock									(1,993)	(1,474)	(1,097)
Issuance of stock under equity compensation plan									135	0	0
Purchase of treasury stock									(179)	(878)	(623)
Net cash used in financing activities									41,477	137,329	79,322
Net decrease in cash and due from banks									(20,795)	36,883	(1,382)
Cash and cash equivalents, beginning of year				62,878				25,995	62,878	25,995	27,377
Cash and cash equivalents, end of year	42,083				62,878				42,083	62,878	25,995
HAWTHORN BANCSHARES, INC. | Reportable Legal Entities
Cash flows from operating activities:
Net income									10,714	3,414	7,282
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiaries									(9,512)	(4,679)	(9,432)
Stock based compensation expense									0	3	17
Decrease (increase) in deferred tax asset									370	881	(442)
Other, net									(116)	453	769
Net cash provided (used) by operating activities									1,456	72	(1,806)
Cash flows from investing activities:
Decrease (increase) in investment in subsidiaries, net									500	(250)	2,500
Net cash provided (used) by investing activities									500	(250)	2,500
Cash flows from financing activities:
Cash dividends paid - common stock									(1,993)	(1,474)	(1,097)
Issuance of stock under equity compensation plan									135	0	0
Purchase of treasury stock									(179)	(878)	(623)
Net cash used in financing activities									(2,037)	(2,352)	(1,720)
Net decrease in cash and due from banks									(81)	(2,530)	(1,026)
Cash and cash equivalents, beginning of year				$ 1,415				$ 3,945	1,415	3,945	4,971
Cash and cash equivalents, end of year	$ 1,334				$ 1,415				$ 1,334	$ 1,415	$ 3,945

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Quarterly Financial Information (Unaudited) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended								12 Months Ended
	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Dec. 31, 2017	Sep. 30, 2017	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2016
Quarterly Financial Information (Unaudited)
Interest income	$ 15,196	$ 14,751	$ 14,288	$ 13,544	$ 13,219	$ 12,936	$ 12,681	$ 12,099	$ 57,779	$ 50,935	$ 46,010
Interest expense	3,692	3,443	3,261	2,790	2,351	2,183	1,861	1,612	13,186	8,007	5,663
Net interest income	11,504	11,308	11,027	10,754	10,868	10,753	10,820	10,487	44,593	42,928	40,347
Provision for loan losses	475	250	450	300	530	555	330	350	1,475	1,765	1,425
Noninterest income	2,436	2,324	2,378	2,203	2,263	2,181	2,099	2,407	9,341	8,950	8,315
Investment gains (losses), net	(1)	50	108	98	5	0	0	0	255	5	602
Noninterest expense	10,259	9,888	9,931	10,254	9,999	9,766	9,687	9,350	40,332	38,802	36,807
Income tax expense	586	446	225	411	4,979	847	983	1,093	1,668	7,902	3,750
Net income	$ 2,619	$ 3,098	$ 2,907	$ 2,090	$ (2,372)	$ 1,766	$ 1,919	$ 2,101	$ 10,714	$ 3,414	$ 7,282
Net income per share
Basic earnings per share (in dollars per share)	$ 0.44	$ 0.51	$ 0.48	$ 0.35	$ (0.39)	$ 0.29	$ 0.32	$ 0.35	$ 1.78	$ 0.56	$ 1.19
Diluted earnings per share (in dollars per share)	$ 0.44	$ 0.51	$ 0.48	$ 0.35	$ (0.39)	$ 0.29	$ 0.32	$ 0.35	$ 1.78	$ 0.56	$ 1.19