Quarterlytics / Financial Services / Banks - Regional / Hawthorn Bancshares, Inc.

Hawthorn Bancshares, Inc.

hwbk · NASDAQ Financial Services
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FY2020 Annual Report · Hawthorn Bancshares, Inc.
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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, 2020

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
(State or other jurisdiction of
incorporation or organization)

43-1626350
(I.R.S. Employer
Identification No.)

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
Common Stock, $1.00 par value

Trading Symbol(s)
HWBK

Name of each exchange on which registered
The Nasdaq Stock Market LLC

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  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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

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 5,805,361 shares of voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the $19.69
closing price of such common equity on June 30, 2020, the last business day of the registrant's most recently completed second fiscal quarter, was $114,307,556. Aggregate
market value excludes an aggregate of 680,287 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 12, 2021, the registrant had 6,769,322 shares of common stock, par value $1.00 per share, issued and 6,362,476 shares outstanding.

Portions  of  the  following  documents  are  incorporated  by  reference  into  the  indicated  parts  of  this  report:    (1)  2020  Annual  Report  to  Shareholders  -  Part  II  and

(2) definitive Proxy Statement for the 2021 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A - Part III.

DOCUMENTS INCORPORATED BY REFERENCE

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  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.

2

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, 2020, the approximate aggregate book value
of the mortgage loans and participation interests held by HB Realty was $464,631,531.

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 made 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 was given
the  opportunity  to  own  one  preferred  share  of  HB  Realty.  These  preferred  shares  were  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  Board  of  Managers  of  HB  Realty,  which  is  responsible  for  the
management of the business and affairs of HB Realty, is currently comprised of David T. Turner, Kathleen L. Bruegenhemke,
Gregg A. Bexten and Stephen E. Guthrie.

On December 7th, 2020 Hawthorn Bank was informed that certain mortgage loans and participation interests contributed

to HB Realty from Hawthorn Bank would no longer be eligible as collateral at the Federal Home Loan Bank

3

(“FHLB”), where Hawthorn Bank maintains credit facilities. The FHLB has implemented a 5 year run-off period for the affected
collateral pledged as of September 30, 2020 and Hawthorn Bank continues to investigate alternative solutions for maintaining the
borrowing capacity relative to the affected collateral.

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, 2020, Hawthorn and its subsidiaries had approximately 290 full-time and 16 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,  and  Springfield,  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 tenth 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.

4

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;

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

5

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 Basel III Rules established three components of regulatory capital: (1) common equity tier 1 capital (“CET1”), (2)
additional tier 1 capital, and (3) tier 2 capital. CET1 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. Tier 1 Capital generally includes CET1 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  Basel  III  Capital  Rules  provide  for  a  number  of  deductions  from  and  adjustments  to  CET1.  These  include,  for
example,  the  requirement  that  mortgage  servicing  rights,  deferred  tax  assets  dependent  upon  future  taxable  income  and
investments in the capital of unconsolidated financial institutions be deducted from CET1 to the extent that any one such category
exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Beginning April 1, 2020, this framework for
regulatory capital deductions to CET1 will be simplified by increasing the deduction threshold to 25% at the individual level for
each of the aforementioned categories. Pursuant to the Basel III Rules, the effects of certain accumulated other comprehensive
income  or  loss  (“AOCI”)  items  are  not  excluded;  however,  “non-advanced  approaches  banking  organizations,”  including  the
Company and the Bank, could make a one-time permanent election to continue to exclude these items. The Company made its
one-time,  permanent  election  to  continue  to  exclude  AOCI  from  capital  in  its  filing  with  the  Federal  Reserve  Board  for  the
quarter ended March 31, 2015. If the Company would not have made this election, unrealized gains and losses would have been
included in the calculation of its regulatory capital.

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). Under the Basel III Rules, the minimum capital ratios effective as of January 1, 2015 are:

6

● Common Equity Tier 1 risk-based capital ratio equal to at least 4.5% of its risk-weighted assets;

●

●

●

Tier 1 risk-based capital ratio equal to at least 6% of its risk-weighted assets;

Total risk-based capital ratio equal to at least 8% of its risk-weighted assets; and

Tier 1 capital to average consolidated assets (leverage ratio) of at least 4%.

In addition to the higher requirements, the Basel III Rules established 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  began  being
phased in over four years beginning in 2016. On January 1, 2016, the first phase of the requirement went into effect at 0.625% of
risk-weighted assets, and increased each subsequent year by an additional 0.625 percentage points, to reach its final level of 2.5%
of  risk  weighted  assets  on  January  1,  2019.  At  December  31,  2019,  the  capital  conservation  buffer  requirement  of  2.5%,
effectively raised the minimum required risk-based capital ratios to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and
10.5% Total Capital on a fully phased-in basis.

On December 31, 2020, the Company was in compliance with the FRB's capital adequacy guidelines. The Company's
capital ratios calculated under the Basel III Rules (minimum plus a 2.5% capital conservation buffer) on December 31, 2020 are
as follows:

Tier 1 Leverage Ratio (4%)
(min requirement)

     Common Equity Tier 1 Risk-
Based Capital Ratio (7.0%)
(min requirement plus buffer)

Tier 1 Risk-Based Capital
Ratio (8.5%)
(min requirement plus buffer)

Total Risk-Based
Capital Ratio (10.5%)
(min requirement plus buffer)  

 10.19 %

 10.00 %

 13.37 %

 14.97 %

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 4, 2019, federal regulators issued final rules
that provide certain banks and their holding companies with the option to elect out of complying with the Basel III Capital Rules.
Under  this  new  rule,  a  qualifying  community  banking  organization  is  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:

●

●

●

a CBLR greater than 9%;

total consolidated assets of less than $10 billion;

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

●

total trading assets and trading liabilities of 5% or less of total consolidated assets.

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 CBLR is generally calculated in accordance with the regulations for calculating the Tier 1 leverage ratio
under the regulatory capital framework discussed above and below, with certain specified exceptions.  As of December 31, 2020,
the Company and the Bank each qualified to elect the community bank leverage ratio framework because they had a CBLR of
greater than 9% and satisfied the other requirements. The Company does not have immediate plans to elect to use the community
bank leverage ratio framework but may make such an election in the future.

Implementing Section 4012 of The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), federal banking

agencies issued final rules that, effective October 1, 2020, temporarily lower the community bank leverage ratio

7

    
    
    
 
threshold and provide a gradual transition back to the prior level. Specifically, the community bank leverage ratio is 8% percent
for 2020 and 8.5% for 2021 and is reset at 9% beginning January 1, 2022.

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.

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.

8

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.
As of December 31, 2020, the Bank was classified as "well-capitalized," which is required for Hawthorn to remain a financial
holding company.

The  capital  ratios  and  classifications  of  the  Bank  as  of  December  31,  2020  and  the  minimum  requirements  to  be

considered well-capitalized are as follows:

Tier 1 Leverage Ratio
(5.0% minimum
requirement)

Common Equity Tier 1 Risk-
Based Capital Ratio (6.5%)
(min requirement)

Tier 1 Risk-Based Capital
Ratio (8.0%)
(min requirement)

Total Risk-Based
Capital Ratio (10.0%)
(min requirement)

 10.41 %  

 13.62 %  

 13.62 %  

 14.87 %

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.

9

    
    
    
 
 
 
 
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  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

10

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.  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

11

limited to, those factors described below. The risk factors highlighted below are not necessarily the only ones that the Company
faces.

Public health threats or outbreaks of communicable diseases has adversely affected, and is expected to continue
to adversely effect on the Company's operations and financial results. The Company and the Bank may face risks related to
public  health  threats  or  outbreaks  of  communicable  diseases.  A  widespread  healthcare  crisis,  such  as  an  outbreak  of  a
communicable  disease  could  adversely  affect  the  global  economy  and  the  Company's  financial  performance.  For example,  the
ongoing  global  Coronavirus  Disease  2019  (COVID-19)  pandemic  has  destabilized  the  financial  markets  in  which  the  Bank
operates,  and  likely  will  continue  to  cause  significant  disruption  in  the  global  economies  and  financial  markets,  including  the
Bank's  local  markets.  The  Company  and  the  Bank  are  dependent  upon  the  willingness  and  ability  of  the  Bank's  customers  to
conduct banking and other financial transactions. In reaction to and as preventative measure to attempt to slow the spread of the
pandemic,  government  authorities  have  in  many  states  and  municipalities  implemented  mandatory  closures,  shelter-in-place
orders, and social distancing protocols, including orders within many of the geographic areas that the Bank operates. Although
the Bank is typically considered an essential business, access to its branches and office locations have been restricted at times for
the  safety  of  its  employees  and  customers.  Limiting  customers'  access  to  the  Bank's  physical  business  could  prevent  some
customers  from  transacting  with  the  Bank  and  lower  demand  for  lending  and  other  services  offered  by  the  Bank,  adversely
affecting the Bank's and the Company's cash flows, financial condition, results of operations, profitability and asset quality and
could continue to do so for an indefinite period of time. This could have a material adverse effect on the Bank's and Company's
results of operations, financial condition, and liquidity. In particular, the continued spread of COVID-19 and efforts to contain the
virus could:

●

●

●

●

●

●

●

negatively impact customer demand of the Bank's lending and related services;

cause the Bank to experience an increase in costs as a result of the Bank implementing operational
changes to accommodate its newly-remote workforce;

cause delayed payments from customers and uncollectible accounts, defaults, foreclosures, and declining
collateral values, resulting in losses to the Bank and the Company;

result in losses on the Bank's investment portfolio, due to volatility in the markets and lower trading
volume driven by economic uncertainty;

cause market interest rates to continue to decline, which could adversely affect the Bank's and the
Company's net interest income and profitability;

cause the Bank's credit losses to grow substantially; and

impact availability of qualified personnel.

The situation surrounding COVID-19 remains uncertain and the potential for a material adverse impact on the Bank and
the Company increases the longer the virus impacts activity levels in the United States and globally. The ultimate extent of the
negative  impact  on  the  Bank  and  the  Company  are  highly  uncertain  and  cannot  be  predicted.  The  Bank  and  the  Company
continue to adapt to the changing dynamics of the COVID-19 impacts to the economy, needs of employees and customers, and
authoritative measures mandated by federal, state, and local governments. However, there is no assurance that the Bank and the
Company  can  adequately  mitigate  the  risks  of  such  business  disruptions  and  interruptions.  Beyond  the  current  COVID-19
pandemic,  the  potential  impacts  of  epidemics,  pandemics,  or  other  outbreaks  of  an  illness,  disease,  or  virus  could  therefore
materially  and  adversely  affect  the  Bank's  and  the  Company's  business,  revenue,  operations,  financial  condition,  liquidity  and
cash flows.

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  and  business  activity  prevailing  in  the  portion  of  Missouri  in  which  its  operations  are
located.  Although  our  customers'  business  and  financial  interests  may  extend  well  beyond  our  market  areas,    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.

12

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.

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  the  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

13

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. A significant source of risk for us arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of
their loans. 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 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  the  Company  in  January  2023.  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

14

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. 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 by assessing different credit risk
models.  As  a  result  of  the  FASB  issuing  a  delay  in  the  implementation  of  this  ASU,  the  Company  will  extend  its  evaluation
process over the new implementation deadline of January 2023.

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 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

15

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 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

16

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
savings banks
savings and loan associations

Competition for deposits comes principally from:

·
·
·
·

other commercial banks
savings banks
savings and loan associations
credit unions

·
·
·

·
·
·
·

mortgage banking companies
finance companies
credit unions

brokerage firms
insurance companies
money market mutual funds
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 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 it service areas.
Increased  competition in our markets  from new competitors, as well as the expanding operations of existing competitors,  may
result in:

·
·
·
·

interest rate changes to various types of accounts
a decrease in the amounts of the Bank's loans and deposits
reduced spreads between loan rates and deposit rates
Loan terms that are less favorable to the bank.

Any of these results could have a material 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;

17

●

●

●

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.

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 4, 2019,
federal  regulators  issued  final  rules  effective  January  1, 2020  that  provide  certain  banks  and  their  holding  companies  with  the
option  to  elect  out  of  complying  with  the  Basel  III  Capital  Rules.  Under  this  new  rule,  a  qualifying  community  banking
organization  is  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  final  rule  is  described  in  more  detail  above  under  the  section  entitled
"Regulatory Capital Requirements." As of December 31, 2020, the Company and the Bank each qualified to elect the community
bank leverage ratio framework because they had a CBLR of greater than 9%

18

and satisfied the other requirements. Hawthorn has not opted in to CBLO. The Company does not have immediate plans to elect
to use the community bank leverage ratio framework but may make such an election in the future. Under the CARES Act and
regulations  issued  by  federal  banking  agencies  thereunder,  effective  October  1,  2020,  the  community  bank  leverage  ratio  has
been temporarily reduced to 8% percent for 2020 and 8.5% for 2021 and is reset at 9% beginning January 1, 2022.

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 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

19

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.

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.

20

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
data processing
automation

·
·
·

internet-based banking
telebanking
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;

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;

21

●

●

●

●

●

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.

22

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.

Location

8127 East 171st Street, Belton, MO
910 West Buchanan Street, California, MO
102 North Second Street, Clinton, MO
1400 East Ohio Street, Clinton, MO
1712 East Ohio Street, Clinton, MO (inside a Walmart store)
803 E. Walnut St, Columbia, MO
1110 Club Village Drive, Columbia, MO
115 South 2nd Street, Drexel, MO
100 Plaza Drive, Harrisonville, MO
17430 East 39th Street, Independence, MO
220 West White Oak, Independence, MO
132 East High Street, Jefferson City, MO
3701 West Truman Blvd, Jefferson City, MO
211 West Dunklin Street, Jefferson City, MO
800 Eastland Drive, Jefferson City, MO
3600 Amazonas Drive, Jefferson City, MO
300 S.W. Longview Blvd, Lee's Summit, MO
5 Victory lane, Suite 203 & 204, Liberty, MO
335 Chestnut, Osceola, MO
595 VFW Memorial Drive, St. Robert, MO
321 West Battlefield, Springfield, MO
200 West Main Street, Warsaw, MO
1891 Commercial Drive, Warsaw, MO
12250 Weber Hill Rd Suite 125, St. Louis, MO

Approximate

  Square Footage
13,000
2,270
11,524
13,551
540
9,698
5,000
4,000
4,000
4,070
1,800
34,800
21,000
2,500
4,100
26,000
11,700
1,667
1,580
2,236
12,500
8,900
11,000
2,253

Owned or
Leased
$
Owned
$
Owned
$
Owned
Owned
$
Leased (1)$
Leased (2)$
$
Owned
$
Owned
$
Owned
$
Owned
$
Owned
$
Owned
$
Owned
$
Owned
$
Owned
$
Owned
Owned
$
Leased (3)$
$
Owned
$
Owned
$
Owned
$
Owned
Owned
$
Leased (4)$

Net Book
Value at
12/31/2020
(in thousands)

 1,460
 318
 1,201
 2,503
 40
 1,087
 1,246
 91
 390
 509
 37
 2,397
 344
 1,425
 590
 2,153
 1,751
N/A
 68
 59
 1,065
 77
 1,357
N/A

(1) The term of this lease began in February 2019 and ends in January 2024.
(2) The term of this lease began in July 2018 and ends in July 2028.
(3) The term of this lease began in May 2019 and ends in April 2021.
(4) The term of this lease began in November 2020 and ends in December 2023.

Management believes that the current condition of each of the Bank's facilities 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  19,  Commitments  and  Contingencies, in  the  Company's

consolidated financial statements.

Item 4. Mine Safety Disclosures.

Not applicable

23

    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

David T. Turner

Stephen E. Guthrie
Kathleen L. Bruegenhemke

Age
64

64
55

Position

Chairman, Chief Executive Officer, President and
Director
Senior Vice President and Chief Financial Officer
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.

Stephen E. Guthrie has served as Senior Vice President and Chief Financial Officer of the Company and of Hawthorn
Bank since May 2020. Prior to joining the Company, he most recently served as Executive Vice President and Chief Financial
Officer  of  Landmark  Bank  in  Columbia,  Missouri,  the  wholly-owned  subsidiary  of  The  Landrum  Company.  The  Landrum
Company  was  recently  acquired  by  Simmons  First  National  Corporation,  holding  company  for  Simmons  Bank.  Mr.  Guthrie
served  as  Senior  Vice  President,  Internal  Audit  and  Risk  &  Controls  for  Capmark  Finance  Inc.  from  September  2006  to  May
2010. From 2003 to 2006, Mr. Guthrie served as Vice President, Internal Audit and Corporate Security for AT&T Corp. From
2000  to  2003,  Mr.  Guthrie  served  as  Vice  President,  Auditing  Services  for  Pharmacia  Corporation.  From  1979  to  2000  Mr.
Guthrie served in various capacities with Monsanto Company, serving as Chief Financial Officer of Monsanto Canada, Inc. from
1999 to 2000. Mr. Guthrie is a licensed CPA.

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,
 Insurance  Corporation.
Ms.
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.

 Bruegenhemke  served  as  a  Commissioned  Bank  Examiner  for  the  Federal

 Deposit

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 2020 Annual Report to Shareholders.

24

    
    
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.

The Company's Purchases of Equity Securities

The following table summarizes the purchases made by or on behalf of the Company or certain affiliated purchasers of

shares of the Company's common stock during the fourth quarter of the year ended December 31, 2020:

(a) Total Number of
Shares (or Units)
Purchased

(b) Average Price
Paid per Share (or
Unit)

     (d) Maximum Number (or

(c) Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced Plans
or Programs

Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs *

 — $
 — $
 — $
 — $

 —  
 —  
 —  
 —  

$
 — $
 — $
 — $
 — $

 2,402,688
 2,402,688
 2,402,688
 2,402,688
 2,402,688

Period

October 1-31, 2020
November 1-30, 2020
December 1-31, 2020
Total

 ​

 ​

*

In the third quarter  of 2020, the Company’s Board of Directors  authorized  the purchase  of up to $2.5 million  market
value of the Company’s common stock. Management was given discretion to determine the number and pricing of the
shares to be purchased, as well as, the timing of any such purchases. During the three months ended December 31, 2020,
no shares of the Company's common stock were purchased by or on behalf of the Company or affiliated purchasers and
$2.4 million remained for share repurchase pursuant to that authorization.

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 2020 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 2020 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.

25

    
    
    
 
 
 
 
​
​
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,

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,  2020,  the  Company's  rate  shock  scenario  models  indicated  that  annual  net  interest  income  could
change by as much as 0.73% or (1.81)% 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
2020 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 2020 Annual Report to Shareholders.

26

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

None.

Item 9A. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures.

As  of  the  end  of  the  period  covered  by  this  annual  report,  the  Company's  management,  including  the  Chief
Executive  Officer  and  Chief  Financial  Officer,  evaluated  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).
Based  on  that  evaluation,  the  Company's  management,  including  the  Chief  Executive  Officer  and  Chief  Financial
Officer, concluded that, as of December 31, 2020, the Company's disclosure controls and procedures were effective.

Internal Controls Over Financial Reporting.

(b) 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, 2020, 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, 2020, 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,
2020, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which
is included in this Annual Report on Form 10-K.

Remediation of Material Weakness - The Company and its Board of Directors are committed to maintaining a
strong  internal  control  environment.  Following  the  identification  of  the  material  weakness  described  in  our  Annual
Report  on  Form  10-K  for  the  year  ended  December  31,  2019,  related  to  the  design  of  internal  controls  over  the
completeness  and  accuracy  of  the  information  used  to  determine  the  qualitative  component  of  the  allowance  for  loan
losses estimate,  we initiated  remediation measures to address the material weakness. Management believes that it has
completed  its  updates  to  the  design  and  implementation  of  internal  controls  to  remediate  the  material  weakness  and
enhance  the  Company’s  internal  control  environment.  As previously  reported,  the remediation  plan  was implemented
during the first quarter of 2020 to update our design and implementation  of controls to remediate the aforementioned
deficiency and enhance the Company's internal control environment. Management believes that such enhanced controls
have been designed to address the material weakness. We completed our remediation activities by testing the operating
effectiveness of the enhanced controls and found them to be effective. Based on the implementation work and results of
testing  performed,  we  have  concluded  that  the  previously  identified  material  weakness  has  been  remediated  as  of
December 31, 2020.

(c) Changes in Internal Controls.

There has been no changes in the Company's internal control over financial reporting (as defined in Rules 13a-

15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2020

27

that  has  materially  affected,  or  is  reasonably  likely  to  materially  affect,  the  Company's  internal  control  over  financial
reporting other than for the remediation of the material weakness noted in paragraph (b) above.

Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Hawthorn Bancshares, Inc. and Subsidiaries:

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, 2020, 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, 2020, 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,  2020  and  2019,  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, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated March
12, 2021 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.

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.

28

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 12, 2021

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)

(ii)

(iii)

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  2021  Annual  Meeting  of
Shareholders to be filed pursuant to Regulation 14A;

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  2021  Annual  Meeting  of  Shareholders  to  be  filed  pursuant  to
Regulation 14A;

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  2021
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;

(v)

(vi)

(vii)

the  information  under  the  caption  "Delinquent  Section  16(a)  Reports"  in  the  Company's  definitive  Proxy
Statement for its 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

the  information  under  the  caption  "Corporate  Governance  and  Board  Matters--Consideration  of  Director
Nominees"  in  the  Company's  definitive  Proxy  Statement  for  its  2021  Annual  Meeting  of  Shareholders  to  be
filed pursuant to Regulation 14A; and

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 2021 Annual Meeting of Shareholders to be
filed pursuant to Regulation 14A.

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
 website
functions.
(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

 posted  on  the

 and  Ethics

 Company's

 Business

 Conduct

 internet

 Code

 This

 of

 is

29

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.

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)

(ii)

the information under the caption "Executive Compensation and Related Matters" in the Company's definitive
Proxy Statement for its 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and

the information under the caption "Corporate Governance and Board Matters--Director Compensation" in the
Company's  definitive  Proxy  Statement  for  its  2021  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 2021 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, 2020 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)

(ii)

(iii)

the information  under the caption "Related Party Transactions" in the Company's definitive  Proxy Statement
for its 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

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  2021  Annual  Meeting  of
Shareholders to be filed pursuant to Regulation 14A; and

the information under the caption "Corporate Governance and Board Matters--Committees of the Board" in the
Company's  definitive  Proxy  Statement  for  its  2021  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 2021 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

30

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a)

1.

Exhibits, Financial Statements and Financial Statement Schedules:

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, 2020 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, 2020 and 2019.

Consolidated Statements of Income for the years ended December 31, 2020, 2019, and 2018.

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019, and 2018.

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020, 2019, and 2018.

Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019, and 2018.

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

3.2

4.1

4.2

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).

Amended and Restated Bylaws of the Company (filed as Exhibit 3.1 to the Company's current report on Form 8-
K on January 27, 2021 and incorporated herein by reference).

Description of the Company's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of
1934 (filed as Exhibit 4.0 to the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2019 and incorporated herein by reference).

Specimen certificate representing shares of the Company's $1.00 par value Common Stock (filed as Exhibit 4.1
to the Company's current report on Form 8-K/A on June 23, 2017 and incorporated herein by reference).

31

    
Exhibit No.

Description

10.1

10.2

13

14

21

23

24

31.1

31.2

32.1

32.2

Form of Change of Control Agreement and schedule of parties thereto (filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarterly period March 31, 2005 and incorporated herein by reference). *

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). *

The Company's 2020 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).

Code of Business Conduct and Ethics of the Company (filed as Exhibit 14 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2018 and incorporated herein by reference).

List of Subsidiaries (filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2018 and incorporated herein by reference).

Consent of Independent Registered Public Accounting Firm.

Power of Attorney (included on the signature page to this Annual Report on Form 10-K).

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended.

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.

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.INS

Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document).

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

* 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 identified above under Item 15(a)2, if any.

32

    
HIDDEN_ROW

Exhibit No.

Description

     Page No.

EXHIBIT INDEX

13

23

24

31.1

31.2

32.1

32.2

101.INS

101.SCH

101.CAL

101.DEF

The  Company's  2020  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).

Consent of Independent Registered Public Accounting Firm.

Power of Attorney (included on the signature page to this Annual Report on Form 10-K).

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the
Securities Exchange Act, as amended.

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.

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.

Inline XBRL Instance Document (the instance document does not appear in the Interactive
Data File because its XBRL tags are embedded within the Inline XBRL document).

Inline XBRL Taxonomy Extension Schema Document.

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

* 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

    
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 12, 2021 

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  Stephen  E.  Guthrie,  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

March 12, 2021

March 12, 2021

March 12, 2021

March 12, 2021

March 12, 2021

March 12, 2021

March 12, 2021

March 12, 2021

Signature and Title

/s/ David T. Turner
David T. Turner, Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)

/s/ Stephen E. Guthrie
Stephen E. Guthrie, Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)

/s/ Kathleen L. Bruegenhemke
Kathleen L. Bruegenhemke, Director

/s/ Frank E. Burkhead
Frank E. Burkhead, Director

/s/ Philip D. Freeman
Philip D. Freeman, Director

/s/ Kevin L. Riley
Kevin L. Riley, Director

/s/ Gus S. (Jack) Wetzel III
Gus S. (Jack) Wetzel III, Director

/s/ Jonathan D. Holtaway
Jonathan D. Holtaway, Director

34

Exhibit 13

2020

ANNUAL REPORT

TO

SHAREHOLDERS

HAWTHORN BANCSHARES, INC.

Jefferson City, Missouri

March 12, 2021

Dear Shareholders:

By  any  measure,  2020  was  a  very  challenging  year.  I  hope  this  letter  finds  you  healthy,  safe,  and  if  you  have  been  impacted  by  the  COVID-19
pandemic; on the path to a full recovery. We appreciate the confidence and trust you have demonstrated as an investor in our bank, and once again
thank you.

I am happy to report the bank performed very well in 2020.

Hawthorn Bancshares Inc. reported net income of $14.3 million, or $2.20 per diluted share, for the year ended December 31, 2020, compared to
$16.1 million, or $2.47 per diluted share, for the prior year. The 2020 net income was negatively impacted by $3.5 million, or $0.54 per diluted share
for additional provision expense related to the COVID-19 pandemic.

Our  commercial  lenders  were  very  much  focused  in  2020  on  addressing  the  needs  in  the  communities  we  serve,  not  the  least  of  which  included
providing pandemic relief-related lending or loan modifications. We assisted in over $88 million of lending with the origination of over 1,275 SBA-
approved loans through the SBA Paycheck Protection Program (“PPP”). Year-over-year, loans grew $118 million, or 10.1%, from $1.2 billion as of
December 31, 2019, primarily driven by origination of PPP loans. In addition, as of December 31, 2020 we provided over $296 million in total loan
modifications under the CARES Act to our COVID-19 stressed borrowers.

As  I  mentioned  in  my  2020  Letter  to  Shareholders,  we  continued  to  expand  our  mortgage  lending  team  in  2020  and  they  delivered  exceptional
production of mortgage loans which were primarily sold to secondary market investors. Gain on sale of mortgage loans was $7.1 million in 2020,
compared  to  $0.8  million  in  the  prior  year;  incredible  first-year  results  from  this  newly-formed  team.  Total  2020  non-interest  income  was  $14.6
million. This represents a 64% increase from 2019 non-interest income and was driven by gain on sale of mortgage loans.  

Total non-interest expense in 2020 increased to $44.7 million, a $6.0 million, or 15.4%, increase from non-interest expense in 2019. Most of the
increase in non-interest expense was due to the increased costs for our mortgage lending team.

The bank continues to maintain a strong capital position and finished the year with 10.19% in leverage capital and 14.97% in total risk-based capital,
far exceeding the minimum regulatory requirements.

Cash dividends paid in 2020 of $0.48 per share increased $0.04 per share, or 9%, compared to $0.44 per share in 2019. The Company’s Board of
Directors approved the Company’s quarterly dividend of $0.13 per common share for the first quarter of 2021, payable April 1, 2021 to shareholders
as of record March 15, 2021.

I remain committed to further improving earnings performance, sustaining sound and proper capital levels, and paying regular dividends.

As we begin 2021 with a strong capital base and coming off a year of exceptional earnings, we look forward to providing accessible and competitive
banking services in the communities we serve. The Hawthorn Bank services delivery teams, management, Board of Directors and Advisory Board
members are committed to continuing the growth of our strong community bank presence and delivering long-term value to our shareholders.

We appreciate your support and the referrals you give prospective customers to your bank.

Sincerely,

David T. Turner,
Chairman, CEO & President

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,
changes may occur in the securities markets and,
effects of the COVID-19 pandemic, or other adverse external events.

We have described under the caption Risk Factors in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, 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 $1.7 billion in assets at December 31,
2020, 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, St. Louis, and the greater Kansas City metropolitan area.

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

The success of the Company's growth strategy depends primarily on the ability of 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  and  brokerage
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.

Significant Developments and Transactions

Each item listed below materially affects the comparability of our results of operations for each of the years in the five-years ended December 31,
2020, and our financial condition as of and December 31 for each of the five-years ended, and may affect the comparability of financial information
we report in future fiscal periods.

Impact of COVID-19. The progression of the COVID-19 pandemic in the United States has had an adverse impact on our financial condition and
results  of  operations  as  of  and  for  the  year  ended  December  31,  2020,  and  is  expected  to  have  a  complex  and  significant  adverse  impact  on  the
economy, the banking industry and our Company in future fiscal periods, all subject to a high degree of uncertainty.

Effects on Our Market Areas. Our commercial and consumer banking products and services are delivered primarily in Missouri, where individual
and governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity beginning in March 2020. In Missouri,
the Director of the Missouri Department of Health and Senior Services issued an order that individuals stay at home and that businesses abide by
certain limitations on gathering sizes. This order was effective from April 6, 2020 and extended through May 3, 2020. Effective May 4, 2020, the
governor of Missouri announced a partial relaxation of these limitations by lifting the stay at home order for individuals and allowing businesses to
reopen subject to social distancing guidelines. The Bank and its branches remained open during

3

these orders because banking is deemed an essential business, although it did suspend lobby access at its branches from March 18, 2020 until May 4,
2020. Effective June 16, 2020, the governor of Missouri rescinded all COVID-19 related statewide public health orders. He announced it would be
the responsibility of local officials to put further measures and regulations in place.

Policy  and Regulatory  Developments.  Federal,  state  and  local  governments  and  regulatory  authorities  have  enacted  and  issued  a  range  of  policy
responses to the COVID-19 pandemic, including the following:

●

The Federal Reserve decreased the range for the federal funds target rate by 0.50% on March 3, 2020, and by another 1.0% on March 16,
2020, reaching a range of 0.0% – 0.25%.

● On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act contains
provisions to assist individuals and businesses, including the SBA’s Paycheck Protection Program (“PPP”). The PPP provided $349 billion
in guaranteed loans that are forgivable if certain requirements are met. On April 24, 2020, an additional $310 billion was added to the PPP.
In addition, on December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900 billion COVID-19 relief
package that included an additional $284 billion in PPP funding.

On April 7, 2020, the U.S. banking agencies issued Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working
with  Customers  Affected  by  the  Coronavirus  (Revised).  The  statement  describes  accounting  for  COVID-19-related  loan  modifications,  including
clarifying  the  interaction  between  current  accounting  rules  and  the  temporary  relief  provided  by  the  CARES  Act.  The  statement  also  encourages
institutions to work constructively with borrowers affected by COVID-19 and states the agencies will not criticize supervised institutions for prudent
loan modifications. Both the CARES Act and the interagency statement provide relief from the accounting and reporting implications of troubled
debt restructurings.

Effects on Our Business. The COVID-19 pandemic and the specific developments referred to above will continue to have a significant impact on our
business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the hotel, restaurant, gaming, long-term healthcare and
retail industries will continue to endure significant economic distress, which has caused, and will continue to cause, them to draw on their existing
lines of credit and adversely affect  their ability to repay existing indebtedness, and is expected to adversely  impact the value of collateral.  These
developments,  together  with  economic  conditions  generally,  are  also  expected  to  impact  our  commercial  real  estate  portfolio,  particularly  with
respect to real estate with exposure to these industries, our consumer loan business and loan portfolio, and the value of certain collateral securing our
loans. As a result, we anticipate that our financial condition, capital levels and results of operations will be adversely affected, as described in further
detail below.

Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:

●

To  protect  the  health  and  safety  of  our  employees  and  customers,  on  March  18,  2020,  we  closed  our  banking  center  lobbies  but
continued to serve clients by appointment or through our drive-up lanes.

●

To meet the financial needs of our customers, we have instituted the following measures:

o

o

The Bank participated, as a lender, in the Small Business Administration ("SBA") Payroll Protection Program ("PPP") and began
taking applications on the first day of the program. Through December 31, 2020, the Bank had processed $88.4 million in PPP
loans that had been approved by the SBA. At December 31, 2020, the balance of these loans totaled $65.1 million.

To account for the probable increased losses inherent in the loan portfolio due to current economic conditions resulting from the
COVID-19 pandemic, Management recorded additional provision for loan losses for the year ended December 31, 2020.

Disaster  relief  payment  modifications  granted  to-date  include  approximately  595  loans  totaling  $296.9  million.  At  December  31,  2020,  38  loans
totaling $86.7 million, or 6.7% of total loans, remained in some form of a modification. These loan modifications include $37.6 million, or 43.4%,
on interest only, $44.0 million, or 50.7%, on full deferral, and $5.1 million, or 5.9%, on extended amortization. Of the total remaining $86.7 million
loan modifications under the CARES Act, $29.5 million, included in the $44.0 million on full deferral, were determined to be on nonaccrual status
as December 31, 2020.

4

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,  2020.  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.

Selected Financial Data

Income Statement Data
(In thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Investment securities gains (losses), net
Gain on branch sale, net
Non-interest expense
Income before income taxes
Income tax expense
Net income

Per Share Data

Basic earnings per share
Diluted earnings per share
Cash dividends paid on common stock
Common stock dividend
Book value per share
Market price per share
Basic weighted average shares of common stock outstanding
Diluted weighted average shares of common stock outstanding

$

$

$

2020
 62,985
 9,722
 53,263
 5,800
 47,463
 14,649
 61
 —
 44,697
 17,476
 3,183
 14,293

 2.20
 2.20
 3,030
 3,829
 20.12
 21.90
 6,489,799
 6,489,799

$

$

$

2019
 63,970
 15,232
 48,738
 1,150
 47,588
 8,937
 (40)
 2,183
 38,731
 19,937
 3,823
 16,114

 2.47
 2.47
 2,684
 5,795
 17.63
 24.52
 6,525,684
 6,525,684

$

$

$

2018
 57,779
 13,186
 44,593
 1,475
 43,118
 9,341
 255
 —
 40,332
 12,382
 1,668
 10,714

 1.64
 1.64
 1,993
 5,014
 15.25
 19.44
 6,518,772
 6,524,226

2017
 50,935 $
 8,007  
 42,928  
 1,765  
 41,163  
 8,950  
 5  
 —
 38,802  
 11,316  
 7,902  
 3,414 $

2016
 46,010
 5,663
 40,347
 1,425
 38,922
 8,315
 602
 —
 36,807
 11,032
 3,750
 7,282

 0.52 $
 0.52  
 1,474  
 4,166  
 13.94  
 18.45  
 6,552,246  
 6,558,192  

 1.10
 1.10
 1,097
 3,149
 13.80
 15.13
 6,593,138
 6,593,138

$

$

$

5

   
   
   
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
Balance Sheet Data (at year end)
Total assets
Loans held for investment
Loans held for sale
Investment securities
Total deposits
Federal Home Loan Bank advances and other borrowings
Subordinated notes
Total stockholders' equity
Balance Sheet Data (average balances)
Total assets
Loans held for investment
Loans held for sale
Investment securities
Total deposits
Federal Home Loan Bank advances and other borrowings
Subordinated notes
Total stockholders' equity

2020

2019

2018

2017

2016

$  1,733,731
 1,286,967
 5,099
 204,383
 1,383,606
 106,674
 49,486
 130,589

$  1,628,708
 1,243,971
 7,876
 198,619
 1,287,715
 117,214
 49,486
 121,772

$  1,492,962
 1,168,797
 428
 180,901
 1,186,521
 96,919
 49,486
 115,038

$  1,479,035
 1,153,486
 992
 205,598
 1,185,216
 97,443
 49,486
 109,103

$  1,481,682
 1,146,044
 583
 223,880
 1,198,468
 95,153
 49,486
 99,414

$  1,446,160
 1,096,599
 785
 242,806
 1,169,243
 81,945
 49,486
 93,615

$  1,429,216
 1,068,049
 383
 237,579
 1,125,812
 121,382
 49,486
 91,371

$  1,352,343
 1,023,273
 937
 226,911
 1,068,487
 98,383
 49,486
 95,116

$  1,287,048
 973,867
 162
 224,308
 1,010,666
 93,392
 49,486
 91,017

$  1,251,741
 912,239
 934
 243,169
 997,514
 67,212
 49,486
 91,401

Key Ratios
Earnings Ratios
Return on average total assets
Return on average common stockholders' equity
Efficiency ratio (3)
Net interest spread
Net interest margin

Asset Quality Ratios
Allowance for loan losses to loans
Non-performing loans to loans (1)
Non-performing assets to loans (2)
Non-performing assets to assets (2)
Allowance for loan losses to non-performing loans
Net loan charge-offs to average loans

Capital Ratios
Average stockholders' equity to average total assets
Period-end stockholders' equity to period-end assets
Total risk-based capital ratio
Tier 1 risk-based capital ratio
Common equity Tier 1 capital
Tier 1 leverage ratio

 0.88 %   

 11.74
 65.82
 3.25
 3.48

 1.41 %   
 2.69
 3.64
 2.70
 52.39
 0.01

 7.48 %   
 7.53
 14.97
 13.37
 10.00
 10.19

 1.09 %   
 14.77
 67.15
 3.20
 3.51

 0.74 %   
 11.45
 74.78
 3.06
 3.31

 0.25 %   
 3.59
 74.79
 3.24
 3.41

 0.58 %
 7.97
 75.64
 3.36
 3.48

 1.07 %   
 0.43
 1.53
 1.20
 246.09
 0.03

 1.02 %   
 0.49
 1.68
 1.30
 208.97
 0.06

 1.02 %   
 0.56
 1.80
 1.34
 180.87
 0.08

 1.02 %
 0.36
 1.81
 1.37
 282.94
 0.02

 7.38 %   
 7.71
 14.89
 13.04
 9.86
 10.73

 6.47 %   
 6.71
 13.28
 11.21
 8.48
 9.55

 7.03 %   
 6.39
 12.93
 10.72
 8.04
 9.33

 7.30 %
 7.07
 13.88
 11.42
 8.61
 9.87

(1) Non-performing loans consist of nonaccrual loans, non-performing troubled debt restructurings and loans contractually past due 90 days or more and still accruing

interest.

(2) Non-performing 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. In 2019, these measures
include the adjustment to exclude the impact of the gain on the sale of the Company's Branson branch that closed during the quarter ended March
31, 2019, which is non-recurring and not considered indicative of underlying earnings performance. In 2017, 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.

6

    
    
    
    
    
 
 
   
   
   
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 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)
Net income − GAAP
Effect of net deferred tax asset adjustments (a)
Effect of net gain on branch sale (b)
Net income − non-GAAP

Per Share Data
Basic earnings per share − GAAP
Effect of net deferred tax asset adjustments (a)
Effect of net gain on branch sale (b)
Basic earnings per share − non-GAAP
Diluted earnings per share − GAAP
Effect of net deferred tax asset adjustments (a)
Effect of net gain on branch sale (b)
Diluted earnings per share − non-GAAP

2020
$  14,293
 —
 —  

$  14,293

2019
$  16,114
 —
 (1,725)
$  14,389

2018
$  10,714
 —
 —  

2017
$  3,414
 4,105

$  10,714

$  7,519

 —  

2016
$  7,282
 —
 —
$  7,282

$

$
$

$

$

 2.20
 —
 —  
$
$

 2.20
 2.20
 —
 —  
$

 2.20

 2.47
 —
 (0.26)
 2.21
 2.47
 —
 (0.26)
 2.21

$

$
$

$

$

 1.64
 —
 —  
$
$

 1.64
 1.64
 —
 —  
$

 1.64

 0.52
 0.63

$

 —  
$
$

 1.15
 0.52
 0.63

 —  
$

 1.15

 1.10
 —
 —
 1.10
 1.10
 —
 —
 1.10

Key Ratios
Return on average total assets − GAAP
Effect of net deferred tax asset adjustments (a)
Effect of net gain on branch sale (b)
Return on average total assets − non-GAAP
Return on average stockholders' equity − GAAP
Effect of net deferred tax asset adjustments (a)
Effect of net gain on branch sale (b)
Return on average stockholders' equity − non-GAAP
(a) Calculated using the difference in combined statutory rates of 38% for 2017 and 21% for subsequent years.
(b) The pre-tax gain on the sale of the Branson Branch was $2.2 million and $1.7 million after tax for the year ended December 31, 2019.

 0.74 %   
 — %
 — %   
 0.74 %   
 11.45 %   
 — %
 — %   
 11.45 %   

 0.88 %   
 — %
 — %   
 0.88 %   
 11.74 %   
 — %
 — %   
 11.74 %   

 1.09 %   
 — %
 (0.12)%   
 0.97 %   
 14.77 %   
 — %
 (1.58)%   
 13.19 %   

 0.25 %   
 0.31 %

 — %   
 0.56 %   
 3.59 %   
 4.32 %

 — %   
 7.91 %   

 0.58 %
 — %
 — %
 0.58 %
 7.97 %
 — %
 — %
 7.97 %

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

7

    
    
    
    
 
    
    
    
    
    
  
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
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 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.

(In thousands)
Net interest income
Provision for loan losses
Non-interest income
Investment securities gains (losses), net
Gain on branch sale, net
Non-interest expense
Income before income taxes
Income tax expense
Net income

2020
$  53,263
 5,800
   14,649
 61
 —
   44,697
   17,476
 3,183
$  14,293

2019
$  48,738
 1,150
 8,937
 (40)
 2,183
   38,731
   19,937
 3,823
$  16,114

'19-'18     

'20-'19     

2018
$  4,525
$  44,593
 4,650
 1,475
 5,712
 9,341
 101
 255
 —  (2,183)
 5,966
 (2,461)
 (640)

$  4,145
 (325)
 (404)
 (295)
 2,183
 (1,601)
 7,555
 2,155
$  (1,821) $  5,400

   40,332
   12,382
 1,668
$  10,714

$ Change

% Change

'20-'19
 9.3 %  

'19-'18

 9.3 %

 404.3  
 63.9  
 (252.5) 
 (100.0)
 15.4  
 (12.3) 
 (16.7) 
 (11.3)%  

 (22.0)
 (4.3)
 (115.7)
 100.0
 (4.0)
 61.0
 129.2

 50.4 %

Consolidated net income decreased $1.8 million to $14.3 million, or $2.20 per diluted share, for the year ended December 31, 2020 compared to
$16.1 million, or $2.47 per diluted share, for the year ended December 31, 2019. For the year ended December 31, 2020, the return on average assets
(ROA) was 0.88%, the return on average stockholders' equity (ROE) was 11.74%, and the efficiency ratio was 65.82%.

Consolidated net income increased $5.4 million to $16.1 million, or $2.47 per diluted share, for the year ended December 31, 2019 compared to
$10.7 million, or $1.64 per diluted share, for the year ended December 31, 2018. For the year ended December 31, 2019, the return on average assets
(ROA) was 1.09%, the return on average stockholders' equity (ROE) was 14.77%, and the efficiency ratio was 67.15%.

Net  interest  income  was  $53.3  million  for  the  year  ended  December  31,  2020  compared  to  $48.7  million  and  $44.6  million  for  the  years  ended
December  31,  2019  and  2018,  respectively.  The  net  interest  margin  was  3.48%  for  the  year  ended  December  31,  2020  compared  to  3.51%  and
3.31% for the years ended December 31, 2019 and 2018, respectively.

A $5.8 million provision for loan losses was recorded for the year ended December 31, 2020 compared to a $1.2 million and $1.5 million provision
for  the  years  ended  December  31,  2019  and  2018,  respectively.  The  increase  in  the  provision  was  primarily  due  to  current  economic  conditions
resulting from the COVID-19 pandemic.

The Company's net charge-offs for the year ended December 31, 2020, were $164,000, or 0.01% of average loans compared to $325,000, or 0.03%
of average loans for the year ended December 31, 2019, and $675,000, or 0.06% of average loans for the year ended December 31, 2018.

Non-performing  loans totaled  $34.6 million,  or 2.69% of total loans, at December  31, 2020 compared  to $5.1 million,  or 0.43% of total  loans at
December 31, 2019, and $5.6 million, or 0.49% of total loans, at December 31, 2018.

Non-interest income increased $5.7 million, or 63.9%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, and
decreased $404,000, or 4.3%, for the year ended December 31, 2019 compared to the year ended December 31, 2018. These changes are discussed
in greater detail below under Non-interest Income.

8

    
 
    
    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities gains (losses), net of $61,000 were recorded for the year ended December 31, 2020 compared to $(40,000) and $255,000 for
the years ended December 31, 2019 and 2018, respectively. Securities 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.

Gain on branch sale, net 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. The Company sold the land and building for $3.5 million with a net book
value of $1.7 million and transferred approximately $10.6 million in deposits. The sale resulted in a pre-tax gain of approximately $2.2 million, or
$1.7 million after tax, for the year ended December 31, 2019.

Non-interest expense increased $6.0 million, or 15.4%, for the year ended December 31, 2020 compared to the year ended December 31, 2019, and
decreased  $1.6  million,  or  4.0%,  for  the  year  ended  December  31,  2019  compared  to  the  year  ended  December  31,  2018.  These  changes  are
discussed in greater detail below under Non-interest Expense.

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,
2020, 2019, and 2018, respectively.

9

(In thousands)
ASSETS
Loans: (2) (3)
Commercial
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment and other consumer
Total loans
Loans held for sale
Investment securities:
U.S. Treasury
U.S. government and federal agency obligations
Obligations of states and political subdivisions
Mortgage-backed securities
Other debt securities
Total investment securities
Other investment securities
Federal funds sold and interest bearing deposits
in other financial institutions
Total interest earning assets
All other assets
Allowance for loan losses
Total assets
LIABILITIES AND STOCKHOLDERS'
EQUITY
NOW accounts
Savings
Interest checking
Money market
Time deposits
Total interest bearing deposits
Federal funds purchased and securities sold under
agreements to repurchase
Federal Home Loan Bank advances and other
borrowings
Subordinated notes
Total borrowings
Total interest bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and stockholders' equity
Net interest income (FTE)
Net interest spread
Net interest margin

$

 1,792
 39,572
 44,410
 97,905
 8,294
$  191,973
 6,646

 110,117
$ 1,560,583
 83,896
 (15,771)
$ 1,628,708

$  196,895
 117,598
 53,090
 279,071
 301,676
$  948,330

 34,026

 117,214
 49,486
$  200,726
$ 1,149,056
 339,385
 18,495
   1,506,936
 121,772
$ 1,628,708

2020
Interest
Income/

Rate
Earned/

Average
Balance

Average
    Expense(1)     Paid(1)      Balance

2019
Interest
Income/

Rate
Earned/

    Expense(1)     Paid(1)     

2018
Interest
Income/

Rate  
Earned/ 
    Expense(1)     Paid(1)  

Average
Balance

$  264,160
 26,184
 85,132
 252,898
 586,188  
 29,409  

$ 1,243,971
 7,876
$

$  13,012
 1,360
 4,004
 11,933
 27,103  
 1,232  
$  58,644  
$

 120

 4.93 %  $  201,062
 25,953
 5.19
 116,944
 4.70
 247,695
 4.72
 530,091  
 4.62  
 4.19  
 31,741  
 4.71 %  $ 1,153,486
 992
 1.52 %  $

$  11,051
 1,553
 6,086
 12,697
 25,939  
 1,393  
$  58,719  
$

 —

 5.50 %   $  199,448
 29,481
 5.98
 103,880
 5.20
 244,952
 5.13
 485,911  
 4.89  
 4.39  
 32,927  
 5.09 %   $ 1,096,599
 785

 — %  

$  10,039
 1,562
 5,072
 11,850
 22,704  
 1,285  
$  52,512  

 —

$

$

 24  
 779  
 1,285  
 1,688  
 426  
 4,202  
 343  

 667  
$  63,976  

 1,866
 1.34 %  $
 40,425
 1.97
 34,916
 2.89
 118,197
 1.72
 5.14
 4,380
 2.19 %  $  199,784
 5,814
 5.16

$

$

 40  
 780  
 978  
 2,487  
 251  
 4,536  
 272  

 13,092
 2.14 %   $
 53,856
 1.93
 41,807
 2.80
 124,492
 2.10
 5.73
 4,455
 2.27 %   $  237,702
 5,104
 4.68

$

$

 215  
 951  
 1,122  
 2,631  
 247  
 5,166  
 218  

 1,125  
$  64,652  

 0.61
 47,967
 4.10 %  $ 1,408,043
 82,975
 (11,983)
$ 1,479,035

 2.35
 32,142
 4.59 %   $ 1,372,332
 85,049
 (11,221)
$ 1,446,160

 699  
$  58,595  

 5.03 %
 5.30  
 4.88  
 4.84  
 4.67
 3.90
 4.79 %
 — %

 1.64 %
 1.77
 2.68
 2.11
 5.54
 2.17 %
 4.27

 2.17
 4.27 %

$

$

$
$

 659  
 55  

 401
 743  
 3,994  
 5,852  

 0.33 %  $  199,323
 96,621
 0.05
 18,561
 0.76
 278,429
 0.27
 1.32
 331,882
 0.62 %  $  924,816

$

 1,978  
 89  
 330
 2,845  
 5,155  
$  10,397  

 0.99 %   $  218,328
 94,964
 0.09
 3,249
 1.78
 295,982
 1.02
 1.55
 310,381
 1.12 %   $  922,904

$

$

 2,131  
 48  
 34
 3,220  
 3,419  
 8,852  

 0.98 %
 0.05
 1.05
 1.09
 1.10
 0.96 %

 146  

 0.43

 22,528

 140  

 0.62

 39,564

 603  

 1.52

 2,338  
 2,376  
$
 4,854  
$  15,251  

 2,199  
 1,527  
 3,872  
 9,724  

 97,443
 1.88
 3.09
 49,486
 1.93 %  $  169,457
 0.85 %  $ 1,094,273
 260,400
 15,259
   1,369,932
 109,103
$ 1,479,035

 81,945
 2.40
 4.80
 49,486
 2.86 %   $  170,995
 1.39 %   $ 1,093,899
 246,339
 12,307
   1,352,545
 93,615
$ 1,446,160

 1,517  
 2,229  
$
 4,349  
$  13,201  

 1.85
 4.50
 2.54 %
 1.21 %

$  54,252

$  49,401  

$  45,394  

 3.25 %  
 3.48 %  

 3.20 %  
 3.51 %  

 3.06 %  
 3.31 %  

(1)

Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 21%, net of nondeductible interest expense for
the years ended December 31, 2020, 2019 and 2018, respectively. Such adjustments totaled $991,000, $682,000 and $816,000 for the years ended December 31, 2020,
2019, and 2018, respectively.

(2) Non-accruing loans are included in the average amounts outstanding.
(3) Fees and costs on loans are included in interest income.

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, 2020, compared to

10

 
  
  
  
  
  
  
  
  
   
 
  
 
   
  
 
  
 
   
  
 
  
 
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
  
 
 
   
  
 
 
 
   
  
 
 
   
  
 
   
  
 
   
  
 
  
 
   
  
 
  
 
   
  
 
  
 
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   
  
 
 
   
  
 
 
 
   
  
 
 
   
  
 
   
  
 
   
  
 
 
 
   
  
 
 
   
  
 
   
  
 
   
  
  
  
 
 
   
 
   
 
 
   
 
   
December  31,  2019,  and  for  the  years  ended  December  31,  2019  compared  to  December  31,  2018.  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.

2020

Change due to

2019

Change due to

(In thousands)
Interest income on a fully taxable equivalent basis: (1)
Loans: (2) (3)
Commercial
Real estate construction - residential
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment and other consumer
Loans held for sale
Investment securities:
U.S. Treasury
U.S. government and federal agency obligations
Obligations of states and political subdivisions
Mortgage-backed securities
Other debt securities
Other investment securities
Federal funds sold and interest bearing deposits in other financial institutions
Total interest income
Interest expense:
NOW accounts
Savings
Interest checking
Money market
Time deposits
Federal funds purchased and securities sold under agreements to repurchase
Federal Home Loan Bank advances and other borrowings
Subordinated notes
Total interest expense
Net interest income on a fully taxable equivalent basis

Total

Average
     Change      Volume

  Average  
     Rate

Total

Average
     Change      Volume

  Average
     Rate

$

$  1,961
 (193)
   (2,082)
 (764)
 1,164
 (161)
 120

 (16)
 (1)
 307
 (799)
 175
 71
 (458)
 (676)

 3,197
 14
 (1,538)
 263
 2,646
 (99)
 —

 (2)
 (16)
 274
 (389)
 203
 41
 770
 5,364

$  (1,236)
 (207)
 (544)
   (1,027)
   (1,482)
 (62)
 120

 (14)
 15
 33
 (410)
 (28)
 30
   (1,228)
   (6,040)

$

$  1,012
 (9)
 1,014
 847
 3,235
 108
 —

 (175)
 (171)
 (144)
 (144)
 4
 54
 426
 6,057

 82
 (199)
 666
 134
 2,128
 (47)
 —

 (226)
 (253)
 (191)
 (132)
 (4)
 32
 367
 2,357

$

 930
 190
 348
 713
 1,107
 155
 —

 51
 82
 47
 (12)
 8
 22
 59
 3,700

   (1,319)
 (34)
 71
   (2,102)
   (1,161)
 6
 (139)
 (849)
   (5,527)
$  4,851

$

 (24)
 16
 344
 7
 (443)
 57
 424
 —  
 381
 4,983

   (1,295)
 (50)
 (273)
   (2,109)
 (718)
 (51)
 (563)
 (849)
   (5,908)
$  (132)

 (153)
 41
 296
 (375)
 1,736
 (463)
 821
 147
 2,050
$  4,007

$

 (189)
 1
 258
 (185)
 251
 (195)
 320
 —  
 261
 2,096

 36
 40
 38
 (190)
 1,485
 (268)
 501
 147
 1,789
$  1,911

(1)

Interest income and yields are presented on a fully taxable equivalent basis using the Federal statutory income tax rate of 21%, net of nondeductible interest expense for
the years ended December 31, 2020, 2019 and 2018, respectively. Such adjustments totaled $991,000, $682,000 and $816,000 for the years ended December 31, 2020,
2019, and 2018, 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, 2020 compared to the year ended December 31, 2019 reflected an increase in net interest income,
on  a  tax  equivalent  basis,  of  $4.9  million,  or  9.8%,  and  financial  results  for  the  year  ended  December  31,  2019  compared  to  the  year  ended
December 31, 2018 reflected an increase of $4.0 million, or 8.8%.

Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) was 3.48% for the year
ended December 31, 2020, compared to 3.51% and 3.31% for the years ended December 31, 2019 and 2018, respectively.

The increase in net interest income for 2020 over 2019 was primarily due to a decrease in rates paid on average interest bearing liabilities, while the
decrease in the net interest margin was primarily due to a decrease in the rates earned on the significant increase in average earning assets resulting
from PPP loans, real estate mortgage loan activity and excess liquidity in Federal funds sold. Contributing to this decrease in net interest margin was
the reversal of $1.1 million of interest income previously recorded on approximately $30 million of loans modified under the CARES Act which
were moved to non-accrual in the fourth quarter.

The increase in net interest income and net interest margin for 2019 over 2018 was primarily due to an increase in average balances and rates earned
on loans. The prime rate was 3.25% at December 31, 2020 compared to 4.75% and 5.50% at December 31, 2019 and 2018, respectively.

11

 
    
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average interest-earning assets increased $152.5 million, or 10.8%, to $1.56 billion for the year ended December 31, 2020 compared to $1.41 billion
for the year ended December 31, 2019, and average interest bearing liabilities increased $54.8 million, or 5.0%, to $1.15 billion for the year ended
December 31, 2020 compared to $1.09 billion for the year ended December 31, 2019.

Average interest-earning assets increased $35.7 million, or 2.6%, to $1.41 billion for the year ended December 31, 2019 compared to $1.37 billion
for  the  year  ended  December  31,  2018,  and  average  interest  bearing  liabilities  increased  $374,000,  or  0.03%,  to  $1.09  billion  for  the  year  ended
December 31, 2019 compared to $1.09 billion for the year ended December 31, 2018.

Total interest income (expressed on a fully taxable equivalent basis) decreased to $64.0 million for the year ended December 31, 2020 compared to
$64.7  million  and  $58.6  million  for  the  years  ended  December  31, 2019  and  2018, respectively.  The  Company's  rates  earned  on interest  earning
assets  were  4.10%  for  the  year  ended  December  31,  2020  compared  to  4.59%  and  4.27%  for  the  years  ended  December  31,  2019  and  2018,
respectively.

Interest  income  on loans held for investment  decreased  to  $58.6  million  for  the  year  ended  December  31,  2020 compared  to  $58.7 million  and
$52.5  million  for  the  years  ended  December  31,  2019  and  2018,  respectively.  As  mentioned  above,  $1.1  million  of  interest  income  previously
recorded was reversed on approximately $30 million of loans modified under the CARES Act which were moved to non-accrual in the fourth quarter
of 2020. Also included in income was $0.5 million in fees earned on loans associated with the government-sponsored Main Street Lending Program
(”MSLP”) and $1.8 million in SBA PPP loan fees.

Average loans outstanding increased $90.5 million, or 7.8%, to $1.24 billion for the year ended December 31, 2020 compared to $1.15 billion for the
year ended December 31, 2019. The average yield on loans receivable decreased to 4.71% during the year ended December 31, 2020 compared to
5.09% for the year ended December 31, 2019.

Average loans outstanding increased $56.9 million, or 5.2%, to $1.15 billion for the year ended December 31, 2019 compared to $1.10 billion for the
year ended December 31, 2018. The average yield on loans receivable increased to 5.09% during the year ended December 31, 2019 compared to
4.79% for the year ended December 31, 2018. See the Lending and Credit Management section for further discussion of changes in the composition
of the lending portfolio.

Interest income on available-for-sale securities decreased to $4.2 million for the year ended December 31, 2020 compared to $4.5 million and $5.2
million for the years ended December 31, 2019 and 2018, respectively.

Average securities decreased $7.8 million, or 3.9%, to $192.0 million for the year ended December 31, 2020 compared to $199.8 million for the year
ended December 31, 2019. The average yield on securities decreased to 2.19% for the year ended December 31, 2020 compared to 2.27% for the
year ended December 31, 2019.

Average securities decreased $37.9 million, or 16.0%, to $199.8 million for the year ended December 31, 2019 compared to $237.7 million for the
year ended December 31, 2018. The average yield on securities increased to 2.27% for the year ended December 31, 2019 compared to 2.17% for
the year ended December 31, 2018. See the Liquidity Management section for further discussion

Total interest expense was $9.7 million for the year ended December 31, 2020 compared to $15.3 million and $13.2 million for the years ended
December  31, 2019 and 2018, respectively.  The Company's rates paid on interest bearing  liabilities  was 0.85% for the year ended December  31,
2020  compared  to  1.39%  and  1.21%  for  the  years  ended  December  31,  2019  and  2018,  respectively.  See  the  Liquidity  Management  section for
further discussion.

Interest expense on deposits was $5.9 million for the year ended December 31, 2020 compared to $10.4 million and $8.85 million for the years
ended December 31, 2019 and 2018, respectively.

Average interest bearing deposits increased $23.5 million, or 2.5%, to $948.3 million for the year ended December 31, 2020 compared to $924.8
million for the year ended December 31, 2019. The average cost of deposits decreased to 0.62% during the year ended December 31, 2020 compared
to 1.12% for the year ended December 31, 2019. Although offering rates remain low in response to lower market interest rates, growth in deposits
was positively impacted in part by customers who deposited PPP loan proceeds.

Average  interest  bearing  deposits  increased  $1.9  million,  or  0.2%,  to  $924.8  million  for  the  year  ended  December  31,  2019  compared  to  $922.9
million for the year ended December 31, 2018. The average cost of deposits increased to 1.12% during the year ended December 31, 2019 compared
to 0.96% for the year ended December 31, 2018.

12

Interest expense on borrowings was $3.9 million for year ended December 31, 2020 compared to $4.9 million and $4.3 million for the years ended
December 31, 2019 and 2018, respectively. Average borrowings were $200.7 million for the year ended December 31, 2020 compared to $169.5
million and $171.0 million for the years ended December 31, 2019 and 2018, respectively.

Average borrowings increased $31.3 million, or 18.5%, to $200.7 million for the year ended December 31, 2020 compared to $169.5 million for the
year ended December 31, 2019. The average cost of borrowings decreased to 1.93% for the year ended December 31, 2020 compared to 2.86% for
the year ended December 31, 2019. The decrease in cost of funds primarily resulted from lower market interest rates.

Average borrowings decreased $1.5 million, or 0.9%, to $169.5 million for the year ended December 31, 2019 compared to $171.0 million for the
year ended December 31, 2018. The average cost of borrowings increased to 2.86% for the year ended December 31, 2019 compared to 2.54% for
the year ended December 31, 2018.

The  increase  in  average  borrowings  for  the  year  ended  2020  was  primarily  due  to  an  increase  in  FHLB  advances  to  fund  liquidity  needs  as
refinancing  activity  increased  when  rates  dropped  during  the  first  quarter  of  2020.  This  in  turn  was  offset  beginning  in  April  of  2020  when  the
Company had an increase in liquidity due to participation in the CARES Act economic stimulus programs. The Company experienced significant
deposit growth primarily due to stimulus checks, proceeds from PPP loan funding, deferral of income tax payments, and customers holding on to
savings due to uncertain times. See the Liquidity Management section for further discussion.

Non-interest Income and Expense

Non-interest income for the years ended December 31, 2020, 2019, and 2018 was as follows:

(In thousands)
Non-interest income
Service charges and other fees
Bank card income and fees
Trust department income
Real estate servicing fees, net
Gain on sales of mortgage loans, net
Other
Total non-interest income

2020

2019     

2018     

'20-'19      '19-'18     

'20-'19

'19-'18

`

$ Change

% Change

$  2,954
 3,201
 1,185
 (49)
 7,109
 249
$  14,649

$  3,611
   3,061
   1,237
 39
 771
 218
$  8,937

$  3,736
   2,754
   1,166
 794
 721
 170
$  9,341

$  (657) $  (125) 
 307  
 71  
   (755) 
 50  
 48  
$  (404) 

 140
 (52)
 (88)
   6,338
 31
$  5,712

 (18.2)%  
 4.6  
 (4.2) 
 (225.6) 
 822.0  
 14.2  
 63.9 %  

 (3.3)%
 11.1
 6.1
 (95.1)
 6.9
 28.2
 (4.3)%

Non-interest income as a % of total revenue *
* Total revenue is calculated as net interest income plus non-interest income.

 21.6 %   

 15.5 %   

 17.3 %   

Total non-interest income increased $5.7 million, or 63.9%, to $14.6 million for the year ended December 31, 2020 compared to the year ended
December 31, 2019, and decreased $404,000, or 4.3%, to $8.9 million for the year ended December 31, 2019 compared to the year ended December
31, 2018.

Service  charges  and  fees decreased  $657,000,  or  18.2%,  to  $3.0  million  for  the  year  ended  December  31,  2020  compared  to  the  year  ended
December 31, 2019, and decreased $125,000, or 3.3%, to $3.6 million for the year ended December 31, 2019 over the year ended December 31,
2018. The decrease in fees in 2020 was primarily due to a decrease in nonsufficient fund service charges (NSF) resulting from both a decrease in
volume, in addition to temporary fee waivers for customers related to the COVID-19 pandemic.

Bank  card  income  and  fees  increased  $140,000,  or  4.6%,  to  $3.2  million  for  the  year  ended  December  31,  2020  compared  to  the  year  ended
December 31, 2019, and increased $307,000, or 11.1%, to $3.1 million for the year ended December 31, 2019 compared to the year ended December
31, 2018. The increase in all years presented was mainly the result of higher transaction volume in debit and credit card fees.

Real estate servicing fees, net of  the  change  in  valuation  of  mortgage  serving  rights  (MSRs)  decreased  $88,000  to  $(49,000)  for  the  year  ended
December  31, 2020 compared  to the year  ended  December  31, 2019, and decreased  $755,000 to $39,000 for the year  ended December  31, 2019
compared to the year ended December 31, 2018.

Mortgage loan servicing fees earned on loans sold were $854,000 for the year ended December 31, 2020 compared to $778,000 and $821,000 for the
years ended 2019 and 2018, respectively. The Company was servicing $292.7 million of mortgage loans at December 31, 2020 compared to $271.4
million and $279.9 million at December 31, 2019 and 2018, respectively. The decreases year over year were primarily due to decreases in fair value
of the MSRs from increased loan prepayments assumptions resulting from lower market interest rates. The

13

 
    
   
   
  
 
   
   
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
   
   
  
dramatic drop in market interest rates from December 31, 2018 to December 31, 2020, created an economic incentive for borrowers to refinance
their existing home mortgage loans.

Gain  on  sales  of  mortgage  loans  increased  $6.3  million  to  $7.1  million  for  the  year  ended  December  31,  2020  compared  to  the  year  ended
December 31, 2019, and increased $50,000, to $771,000 for the year ended December 31, 2019 compared to the year ended December 31, 2018. The
Company sold loans totaling $195.9 million for the year ended December 31, 2020 compared to $44.3 million and $37.0 million for the years ended
December  31,  2019  and  2018,  respectively.  During  the  fourth  quarter  of  2019,  the  Company  focused  on  the  creation  and  development  of  a  new
mortgage loan department and began offering new mortgage loan products in addition to Freddie and Fannie loans that are sold to the secondary
market.

Other income increased $31,000, or 14.2%, to $249,000 for the year ended December 31, 2020 compared to the year ended December 31, 2019, and
increased $48,000, or 28.2%, to $218,000 for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase in
the  year  ended  2020  over  the  year  ended  2019  was  primarily  due  to  increased  brokerage  income,  partially  offset  by  a  decrease  in  insurance
commissions, rental income from other real estate owned, and income earned on bank owned life insurance policies due to one of the Company's
polices being redeemed in the third quarter of 2019. The increase in the year ended 2019 over 2018 was primarily due to an increase in rental income
received from other real estate owned.  

Investment securities (losses) gains, net for the years ended December 31, 2020, 2019, and 2018 was as follows:

(in thousands)
Investment securities gains (losses), net
Available for sale securities:
Gains realized on sales
Losses realized on sales
Other-than-temporary impairment recognized
Other investment securities:
Fair value adjustments, net
Investment securities gains (losses), net

2020

2019

2018

$

$

$

 49
 (8)
 —  

 20
 61

$

$

 6
 (46)
 —  

 —  
$
 (40)

 253
 —
 —

 2
 255

During  the  year  ended  December  31,  2020,  the  Company  received  $5.8  million  proceeds  from  the  sale  of  available  for  sale  debt  securities  and
recognized net securities gains, which include the unrealized net gains related to equity securities, of $61,000. This is compared to $21.5 million and
$77.2 million proceeds from the sale of available debt securities and recognized net gains (losses) of $(40,000) and $255,000 for the years ended
December 31, 2019 and 2018, respectively.

The sale transaction in 2020 was 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.  The  sale  transaction  in  2019  provided  liquidity  necessary  to  fund  the
replacement of a major deposit account relationship. During 2018, the Company entered into a sale of a series of short term U.S. Treasury securities
purchased with repurchase agreements in order to generate capital gains to offset capital losses that were to expire during 2018 and 2019.

14

    
    
    
    
 
   
   
  
 
   
   
  
 
 
 
 
 
  
 
  
 
  
 
 
Non-interest expense for the years ended December 31, 2020, 2019, and 2018 was as follows:

(In thousands)
Non-interest expense
Salaries
Employee benefits
Occupancy expense, net
Furniture and equipment expense
Processing, network and bank card expense
Legal, examination, and professional fees
Advertising and promotion
Postage, printing, and supplies
Loan expense
Other
Total non-interest expense

Efficiency ratio*
Number of full-time equivalent employees
*

2020

2019

2018

'20-'19     

19-'18

'20-'19

19-'18

$ Change

% Change

$  19,765
 6,386
 3,069
 2,939
 3,864
 1,458
 1,095
 897
 917
 4,307
$  44,697

$  15,876
 5,721
 3,122
 2,847
 3,882
 1,211
 1,256
 871
 625
 3,320
$  38,731

$  17,109
 5,995
 2,957
 3,001
 3,484
 1,223
 1,233
 996
 612
 3,722
$  40,332

$  3,889
 665
 (53)
 92
 (18)
 247
 (161)
 26
 292
 987
$  5,966

$  (1,233) 
 (274) 
 165  
 (154) 
 398  
 (12) 
 23  
 (125) 
 13
 (402) 
$  (1,601) 

 24.5 %  
 11.6  
 (1.7) 
 3.2  
 (0.5) 
 20.4  
 (12.8) 
 3.0  

 46.7
 29.7  
 15.4 %  

 (7.2)%
 (4.6)
 5.6
 (5.1)
 11.4
 (1.0)
 1.9
 (12.6)
 2.1
 (10.8)
 (4.0)%

 65.8 %   
 299

 67.2 %   
 278

 74.8 %   
 288

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 $6.0 million, or 15.4%, to $44.7 million for the year ended December 31, 2020 compared to the year ended
December  31,  2019,  and  decreased  $1.6  million,  or  4.0%,  to  $38.7  million  for  the  year  ended  December  31,  2019  compared  to  the  year  ended
December 31, 2018.

Salaries increased $3.9 million, or 24.5%, to $19.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019,
and decreased $1.2 million, or 7.2%, to $15.9 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The
increase  for  the  year  ended  2020  over  the  year  ended  2019  was  primarily  due  to  adding  25  full-time  equivalent  (FTE)  employees  to  expand  the
Company's new mortgage loan department that formed in late 2019. The decrease for the year ended 2019 over the year ended 2018 was primarily
due to a reduction of FTE employees during the year. FTE staff decreased 55, or 16.5%, since December 31, 2017.  

Employee benefits increased $665,000, or 11.6%, to $6.4 million for the year ended December 31, 2020 compared to the year ended December 31,
2019, and decreased $274,000, or 4.6%, to $5.7 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The
increase for the year ended 2020 over the year ended 2019 was primarily due to higher pension cost due to lower annual discount rate assumptions
compared to the prior year's assumptions, an increase in payroll taxes due to an increase in FTE mentioned above, and an increase in 401(k) plan
contributions. The decrease for the year ended 2019 over the year ended 2018 was primarily due to a reduction in medical plan premiums due to a
reduction of staff mentioned above, and a reduction in the periodic pension cost due to a higher assumed discount rate, partially offset by an increase
in the 401(k) and profit-sharing contribution.  

Processing, network, and bank card expense decreased $18,000, or 0.5%, to $3.9 million for the year ended December 31, 2020 compared to the
year  ended  December  31,  2019,  and  increased  $398,000,  or  11.4%,  to  $3.9  million  for  the  year  ended  December  31,  2019  compared  to  the  year
ended December 31, 2018. The decrease for the year ended 2020 over the year ended 2019 was primarily due to decreases in ATM and debit card
processing expense. The increase for the year ended 2019 over the year ended 2018 was primarily due to a credit card software conversion and an
increase in debit and credit card processing expenses.

Legal, examination, and professional fees increased $247,000, or 20.4%, to $1.5 million for the year ended December 31, 2020 compared to the
year ended December 31, 2019, and decreased $12,000, or 1.0%, to $1.2 million for the year ended December 31, 2019 compared to the year ended
December 31, 2018. The increase for the year ended 2020 over the year ended 2019 was primarily related to an increase in legal fees related to one
pending lawsuit that is in its early stages, in addition to an increase in consulting expenses. The decrease for the year ended 2019 over the year ended
2018 was primarily related to a decrease in consulting fees partially offset by an increase in legal fees.

Loan expense increased $292,000, or 46.7%, to $917,000 for the year ended December 31, 2020 compared to the year ended December 31, 2019,
and increased $13,000, or 2.1%, to $625,000 for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase
for  the  year  ended  2020  over  the  year  ended  2019  was  primarily  related  to  increases  in  real  estate  loan  expenses  related  to  the  growth  in  loan
volume, partially offset by real estate foreclosure (gain) expense. In the second quarter of 2020, the Company sold an out-of-service branch building
being held as other real estate owned (OREO) to a non-profit organization. This transaction consisted of a $266,000

15

 
  
    
    
    
    
   
   
   
   
   
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
   
   
  
 
 
 
 
  
 
   
   
  
donation expense and the company realized a net gain of $210,000. The increase for the year ended 2019 over the year ended 2018 was primarily
related to an increase in home equity loan expenses driven by a 2019 promotion, partially offset by decreases in real estate foreclosure, real estate,
and commercial loan expenses.  

Other  non-interest  expense  increased  $987,000,  or  29.7%,  to  $4.3  million  for  the  year  ended  December  31,  2020  compared  to  the  year  ended
December  31,  2019,  and  decreased  $402,000,  or  10.8%,  to  $3.3  million  for  the  year  ended  December  31,  2019  compared  to  the  year  ended
December 31, 2018. The increase in the year ended 2020 over the year ended 2019 was primarily due to increases in donations, FDIC assessment
expense, and credit card fraud charge-offs. In the second quarter of 2020, the Company sold an out-of-service branch building being held as other
real estate owned (OREO) to a non-profit organization. This transaction consisted of a $266,000 donation expense and the company realized a net
gain of $210,000. During the third quarter of 2020 the Company recognized approximately $150,000 of disputed credit card fraud losses from prior
years. The decrease for the year ended 2019 over the year ended 2018 was primarily related to a FDIC assessment credit that began reducing the
quarterly assessment in the third quarter of 2019 and continued through the first quarter of 2020.

Income taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 18.2% for the year ended
December 31, 2020 compared to 19.2% and 13.5% for the years ended December 31, 2019 and 2018, respectively.

The  decrease  in  the  effective  tax  rate  for  the  year  ended  December  31,  2020  compared  to  the  year  ended  December  31,  2019  was  primarily
attributable to tax-free revenues having a greater impact on pre-tax income due to the reduced level of earnings in 2020. The increase in the effective
tax  rate  for  the  year  ended  December  31,  2019  compared  to  the  year  ended  December  31,  2018  was  primarily  attributable  to  a  one-time  benefit
recorded in 2018 associated with the finalization of the Company’s analysis of the Tax Cuts and Jobs Act (Tax Act), a one-time benefit recorded in
2018 associated with the Company’s state tax planning initiatives, and the increased earnings and branch sale gain in 2019.

Lending and Credit Management

Interest  earned  on  the  loan  portfolio  is  a  primary  source  of  interest  income  for  the  Company.  Net  loans  represented  73.2%  of  total  assets  as  of
December 31, 2020 compared to 77.5% as of December 31, 2019.

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)
Commercial, financial, and agricultural (a)
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer
Total loans
Percent of categories to total loans:
Commercial, financial, and agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total

(a)

Includes $63.3 million SBA PPP loans, net

$

2020
 272,918
 29,692
 78,144
 262,339
 617,133
 26,741
$  1,286,967

$

2019
 199,022
 23,035
 84,998
 252,643
 576,635
 32,464
$  1,168,797

$

2018
 207,720
 28,610
 106,784
 240,934
 529,536
 32,460
$  1,146,044

$

2017
 192,238
 26,492
 98,340
 246,371
 472,455
 32,153
$  1,068,049

2016
$  182,881
 18,907
 55,653
 259,738
 426,470
 30,218
$  973,867

 21.2 %   

 2.3
 6.1
 20.4
 48.0
 2.1
 100.0 %   

 17.0 %   
 2.0
 7.3
 21.6
 49.3
 2.8
 100.0 %   

 18.1 %   
 2.5
 9.3
 21.0
 46.2
 2.8
 100.0 %   

 18.0 %   

 2.5
 9.2
 23.1
 44.2
 3.0
 100.0 %   

 18.8 %
 1.9
 5.7
 26.7
 43.8
 3.1
 100.0 %

16

    
    
    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2020 and the composition of those loans between fixed rate and floating rate loans are
as follows:

(In thousands)
Commercial, financial, and agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer
Total loans

Loans with fixed rates
Loans with floating rates
Total loans

Principal Payments Due
Over One

  One Year   Year Through 
     Or Less

$  57,567
 25,318
 28,409
 16,920
 72,524
 3,006
$  203,744

$

     Five Years
 135,151
 2,962
 20,296
 35,109
 280,488
 19,486
 493,492

$

Over
Five
Years
$  80,200
 1,412
 29,439
 210,310
 264,121
 4,249
$  589,731

$

Total
 272,918
 29,692
 78,144
 262,339
 617,133
 26,741
$  1,286,967

   107,446
 96,298
$  203,744

 438,339
 55,153
 493,492

 147,649
 442,082
$  589,731

 693,434
 593,533
$  1,286,967

$

The  Company generally  does not  retain  long-term  fixed  rate  residential  mortgage  loans in  its portfolio.  Fixed  rate  loans  conforming  to  standards
required by the secondary market are offered to qualified borrowers, but are not funded until the Company has a non-recourse purchase commitment
from the secondary market at a predetermined price. For the year ended December 31, 2020, the Company sold approximately $195.9 million of
loans to investors compared to $44.3 million and $37.0 million for the years ended December 31, 2019 and 2018, respectively. At December 31,
2020, the Company was servicing approximately $292.7 million of loans sold to the secondary market compared to $271.4 million at December 31,
2019, and $279.9 million at December 31, 2018.

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;  loss  emergence  factors;  lending  policies  and  procedures;  economic  conditions;  the  nature,  volume  and  terms  of  the
portfolio; lending staff and management; nonaccrual loans; the loan review system; collateral values; concentrations of credit; and external factors.
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.

17

 
    
 
 
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonperforming Assets

The following table summarizes nonperforming assets at the dates indicated:

(In thousands)
Nonaccrual loans:

Commercial, financial, and agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total
Loans contractually past - due 90 days or more and still
accruing:

Real estate mortgage - residential
Installment and other consumer

Total
Total non-performing loans (a)
Other real estate owned and repossessed assets
Total non-performing assets

$

$

$

$

$

2020

2019

2018

2017

2016

 6,717
 192
 200
 2,105
 25,314
 31
 34,559

$

$

 — $
 17
 17
 34,576
 12,291
 46,867

$

$

 982

$
 —  

 137
 2,135
 1,359
 141
 4,754

 304
 12
 316
 5,070
 12,781
 17,851

$

$

$

$

 1,857

$
 —  
 153
 2,720
 474
 210
 5,414

$

 2,507

$
 —  
 97
 1,956
 936
 176
 5,672

$

 982
 —
 50
 1,888
 420
 89
 3,429

 156
 6
 162
 5,576
 13,691
 19,267

$

$

$

 28
 23
 328
 6,000
 13,182
 19,182

$

$

 54
 11
 65
 3,494
 14,162
$  17,656

Loans held for investment
Allowance for loan losses to loans
Non-performing loans to loans (a)
Non-performing assets to loans (b)
Non-performing assets to assets (b)
Allowance for loan losses to non-performing loans
(a) Non-performing loans include loans 90 days past due and accruing, nonaccrual loans, and non-performing TDRs included in nonaccrual loans and 90 days past due.
(b) Non-performing assets include non-performing loans and other real estate owned and repossessed assets.

 1.07 %   
 0.43 %   
 1.53 %   
 1.20 %   
 246.09 %   

 1.02 %   
 0.49 %   
 1.68 %   
 1.30 %   
 208.97 %   

 1.02 %   
 0.56 %   
 1.80 %   
 1.34 %   
 180.87 %   

 1.41 %   
 2.69 %   
 3.64 %   
 2.70 %   
 52.39 %   

$  1,146,044

$  1,068,049

$  1,286,967

$  1,168,797

 1.02 %
 0.36 %
 1.81 %
 1.37 %
 282.94 %

$  973,867

Total non-performing assets were $46.9 million, or 3.64% of total loans, at December 31, 2020 compared to $17.9 million, or 1.53% of total loans,
at December 31, 2019.

Total  non-accrual  loans  at  December  31,  2020  increased  $29.8  million  to  $34.6  million  compared  to  $4.8  million  at  December  31,  2019.  The
increase in non-accrual loans primarily consisted of six commercial and commercial real estate loan relationships totaling $30.8 million that moved
to nonaccrual status during the fourth quarter of 2020. Of this increase, $29.5 million was related to loan modifications under the CARES Act.

Loans past due 90 days and still accruing interest at December 31, 2020, were $17,000 compared to $316,000 at December 31, 2019. Other real
estate owned and repossessed assets at December 31, 2020 were $12.3 million compared to $12.8 million at December 31, 2019. During the year
ended  December  31,  2020,  $73,000  of  non-accrual  loans,  net  of  charge-offs  taken,  moved  to  other  real  estate  owned  and  repossessed  assets
compared to $452,000 for the year ended December 31, 2019.

As of December 31, 2020, approximately $6.0 million compared to $9.0 million at December 31, 2019, of loans classified as substandard, which
include  performing  TDRs,  and  are  not  included  in  the  non-performing  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, 2020 and December 31, 2019, respectively.

18

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

(In thousands)
Performing TDRs
Commercial, financial and agricultural
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer
Total performing TDRs
Non-performing TDRs
Commercial, financial and agricultural
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer
Total non-performing TDRs
Total TDRs

December 31, 2020

December 31, 2019

    Number of     Recorded      Specific     Number of     Recorded      Specific
contracts   Investment  Reserves

contracts   Investment  Reserves

 7
 5
 2
 5
 19

$

 835
 1,521
 343
 77
$  2,776

$

 90
 28
 7
 10
$  135

$

$

 1
 8
 —  
 —
 9
 28

 4
 895
 —  
 —
 899
$
$  3,675

 1
 78
 —
 —
 79
$
$  214

 5
 6
 2
 2
 15

 6
 6
 2
 2
 16
 31

$

 532
 1,615
 352
 36
$  2,535

$

 496
 782
 266
 72
$  1,616
$  4,151

$  177
 33
 7
 2
$  219

$

 99
 117
 —
 7
$  223
$  442

At December 31, 2020, loans classified as TDRs totaled $3.7 million, with $214,000 of specific reserves compared to $4.1 million of loans classified
as  TDRs,  with  $442,000  of  specific  reserves  at  December  31,  2019.  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,  2019  to  December  31,  2020  was  primarily  due  to  approximately  $753,000  of
payments received on TDRs, partially offset by $224,000 of new loans designated as TDRs during the year ended December 31, 2020.

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)
Allocation of allowance for loan losses at end of period:

Commercial, financial, and agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer
Unallocated
Total

2020

2019

2018

2017

2016

$  5,121
 213
 475
 2,679
 9,354
 264
 7
$  18,113

$  2,918
 64
 369
 2,118
 6,547
 381
 80
$  12,477

$  3,237
 140
 757
 2,071
 4,914
 334
 199
$  11,652

$  3,325
 170
 807
 1,689
 4,437
 345
 79
$  10,852

$  2,753
 108
 413
 2,385
 3,793
 274
 160
$  9,886

The allowance for loan losses was $18.1 million, or 1.41%, of loans outstanding at December 31, 2020 compared to $12.5 million, or 1.07%, of
loans outstanding at December 31, 2019. The ratio of the allowance for loan losses to non-performing loans was 52.39% at December  31, 2020,
compared to 246.09% at December 31, 2019.

19

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

(In thousands)
Allocation of allowance for loan losses:

Individually evaluated for impairment − specific reserves
Collectively evaluated for impairment − general reserves

Total

2020

2019

2018

2017

2016

$  5,113
 13,000
$  18,113

$

 615
 11,862
$  12,477

$  1,194
 10,458
$  11,652

$  1,333
 9,519
$  10,852

$  1,080
 8,806
$  9,886

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, 2020, $5.1 million of the Company's
allowance for loan losses was allocated to impaired loans totaling approximately $37.3 million compared to $615,000 of the Company's allowance
for loan losses allocated to impaired loans totaling approximately $7.4 million at December 31, 2019. Management determined that $11.9 million, or
32%, of total impaired loans required no reserve allocation at December 31, 2020 compared to $2.6 million, or 35%, at December 31, 2019 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 asset 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; loss emergence factors; lending policies and procedures; economic conditions; the nature,
volume  and  terms  of  the  portfolio;  lending  staff  and  management;  nonaccrual  loans;  the  loan  review  system;  collateral  values;  concentrations  of
credit; and external factors. In the first quarter 2019, management adjusted the look-back period to begin with loss history in the first quarter 2012 as
the starting point through the current quarter and it will continue to include this starting point going forward. At that time, management determined
that with the extended current economic recovery, the look-back period should be expanded to include the current economic cycle. The look-back
period will continue to be evaluated and will be adjusted once a sustained loss producing downturn is recognized and found to be representative of
historical losses expected for the current portfolio.

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.

Due to the COVID-19 pandemic that surfaced in the first quarter of 2020, management reassessed the calculation of the allowance for loan loss by
increasing  the  economic  qualitative  factor  in  order  to  capture  the  impact  on  the  credit  risk  present  in  the  loan  portfolio  given  the  economic
environment that existed at that time. The unemployment rate was considered the best indicator of risk compared to the other factors previously used
measured on a quarter lag and would not exhibit the effects of COVID-19 for possibly several quarters. While these lagging indicators have been
very  reliable  for  some  time,  they  did  not  accurately  capture  the  risk  that  has  been  brought  about  by  rapid  changes  in  the  economy  due  to  the
pandemic. As of the fourth quarter of 2020, management again reassessed the qualitative factor and economic indicators. Enough time had passed so
that  data  after  the  outbreak  would  be  available  and  a  better  interpretation  of  the  impact  of  the  virus  on  the  economy.  As  of  December  31,  2020,
management determined that the local market and economy has been able to transition to a functional level while adapting to the new requirements
aimed at stopping the spread of the virus and decreased the qualitative adjustment according to the Company's methodology.

The  more  significant  changes  from  December  31,  2019  to  December  31,  2020  in  the  allocations  of  the  allowance  for  loan  losses  to  the  loan
portfolios  listed  above  was  primarily  attributed  to  the  additional  economic  qualitative  factor  adjustment  resulting  from  the  COVID-19  pandemic
during the first quarter through the third quarter of 2020.

20

    
    
    
    
    
 
   
   
   
   
  
 
 
 
 
 
Additionally, the funding of $88.4 million in PPP loans during the second and third quarter required management to assess the methodology that
would be adopted in regard to the allowance for loan loss applicable to these loans. As the SBA PPP loans are expected to be mostly paid off in the
next six to twelve months and carry a 100% credit guarantee from the SBA, management determined that no allowance for loan loss was deemed
necessary for these loans. At December 31, 2020 the balance of these loans totaled $65.1 million.

Provision

A $5.8 million provision for loan losses was required for the year ended December 31, 2020 compared to $1.2 million for the year ended December
31, 2019, and $1.5 million for the year ended December 31, 2018. The increase in the provision was primarily due to current economic conditions
resulting from the COVID-19 pandemic.

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

(In thousands)
Analysis of allowance for loan losses:
Balance beginning of period
Charge-offs:

Commercial, financial, and agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total charge-offs

Recoveries:

Commercial, financial, and agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total recoveries

Net charge-offs
Provision for loan losses
Balance end of period

Net Loan Charge-offs

2020

2019

2018

2017

2016

$  12,477

$  11,652

$  10,852

$  9,886

$  8,604

 207

 —  
 —  
 52
 39
 211
 509

 295
 —  
 —  
 277
 25
 196
 793

 484
 48
 30
 186
 38
 255
 1,041

 649
 —  
 —  
 219
 45
 268
 1,181

 389
 —
 1
 495
 147
 258
 1,290

 169
 64
 —  
 45
 8
 59
 345
 164
 5,800
$  18,113

 144
 50
 —  
 129
 40
 105
 468
 325
 1,150
$  12,477

 100
 62
 —  
 52
 58
 94
 366
 675
 1,475
$  11,652

 74
 88
 —  
 83
 32
 105
 382
 799
 1,765
$  10,852

 299
 —
 502
 60
 140
 146
 1,147
 143
 1,425
$  9,886

The Company's net loan charge-offs were $164,000, or 0.01% of average loans, for the year ended December 31, 2020 compared to net charge-offs
of  $325,000,  or  0.03%  of  average  loans,  for  the  year  ended  December  31,  2019,  and  $675,000,  or  0.06%  of  average  loans  for  the  year  ended
December 31, 2018.

The net decrease in the Company's net charge-offs for the year ended December 31, 2020 compared to the years ended December 31, 2019 and 2018
was primarily due to a decrease in commercial,  financial,  and agricultural, and real estate mortgage – residential  loan charge-offs. The Company
recovered  commercial  deposit  fraud  charge-offs  through  the  Company's  insurance  captive  during  the  second  quarter  of  2020,  two  real  estate
construction  –  residential  recoveries,  and  one  real  estate  mortgage  –  residential  recovery  obtained  in  a  settlement.  This  is  compared  to  one  large
commercial loan relationship recovery and one real estate mortgage – residential recovery received during the first quarter of 2019.

Loans Held For Sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company carries them at the lower of cost or
fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and other various secondary market investors. At December 31,
2020, the carrying amount of these loans was $5.1 million compared to $428,000 at December 31, 2019. A contributing factor for the increase in
balance of loans held for sale at December 31, 2020 was due to the significant increase in real estate mortgage

21

    
    
    
    
    
   
   
   
   
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
originations, as compared to the capability of the relatively recently formed mortgage lending department to sell the mortgages to investors (as more
fully described in the following paragraph.)

In the fourth quarter of 2019 the Company expanded its current home loan program to better serve our customers. This expansion began with hiring
new mortgage lending personnel and expanding the bank’s available loan products and upgrading the Company's operating systems. New home loan
programs  for  its  customers  include  VA  loans,  designed  for  military  families  and  veterans;  USDA  loans  for  those  buying  homes  in  rural
communities; and FHA loans, which offer low down payments and flexible underwriting guidelines. In addition, we have added several secondary
market investors, allowing us to sell loans on the secondary market versus servicing them at the Company. This provides us with the ability to offer
clients more aggressive pricing and at the same time improve the Company's financial return.

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,  2020,  the  investment  portfolio  classified  as  available-for-sale  represented  11.4%  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.

Available for sale securities

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

(In thousands)
U.S. Treasury
U.S. government and federal agency obligations
U.S. government-sponsored enterprises
Obligations of states and political subdivisions
Mortgaged-backed securities
Other debt securities (a)
Bank issued trust preferred securities (a)
Total available for sale debt securities, at fair value

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

As of December 31, 2020, the maturity of debt securities in the investment portfolio was as follows:

     Over One      Over Five     

2020

 2,798
 11,929
 22,874
 58,744
 90,112
 10,344
 1,229
 198,030

$

$

2019

 995
 8,047
 22,283
 33,789
 105,616
 3,053
 1,310
 175,093

$

$

(In thousands)
U.S. Treasury
U.S. government and federal agency obligations
U.S. government-sponsored enterprises
States and political subdivisions (2)
Mortgage-backed securities (1)
Other debt securities
Bank issued trust preferred securities
Total available-for-sale debt securities

Weighted average yield

  One Year  
Or Less

Through  
Five Years  
 2,798
 2,624

 — $
 —  

 1,513
 1,827
 5,381
 —
 —  

 —  

 13,663
 84,328
 2,986

 —  

$

$

Through  
Ten Years  
$

 — $

Over
Ten Years  

 — $

 5,874

 —  

 3,431
 21,361
 7,420
 403
 7,358

 —  

 35,834
 —
 —
 1,229
$  42,937

Total
 2,798  
 11,929  
 22,874  
 58,744  
 90,112
 10,344
 1,229  
$  198,030  

$  106,399

$  39,973

 8,721
 2.06 %   

 1.80 %   

 2.85 %   

 2.60 %   

 2.20 %  

     Weighted
Average
Yield

 0.68 %
 1.63
 2.12
 2.69
 1.65
 5.37
 2.54
 2.20 %

(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, 2020 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.

22

    
    
 
 
 
 
 
 
 
 
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
(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,  2020,  $17.8  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)
Federal Home Loan Bank of Des Moines stock
Midwest Independent Bank stock
Equity securities with readily determinable fair values
Total other investment securities

Liquidity and Capital Resources

Liquidity Management

2020

2019

$

$

 6,170
 151
 32
 6,353

$

$

 5,644
 151
 13
 5,808

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)

Federal funds sold and other interest-bearing deposits
Certificates of deposit in other banks
Available-for-sale investment securities
Total

2020
 161,128
 9,376
 198,030
 368,534

$

$

2019
 55,545
 10,862
 175,093
 241,500

$

$

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 $198.0 million at December 31, 2020 and included an unrealized net gain of $4.2 million. The portfolio
includes projected maturities  and mortgage-backed  securities pay-downs of approximately  $8.6 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  as  collateral  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 $44.1 million and $35.3 million at December 31, 2020 and
2019, respectively.

23

    
    
 
 
 
 
    
    
 
 
 
 
Total investment securities pledged for these purposes were as follows:

(In thousands)
Investment securities pledged for the purpose of securing:

Federal Reserve Bank borrowings
Federal funds purchased and securities sold under agreements to repurchase
Other deposits
Total pledged, at fair value

2020

2019

$

$

 9,115
 59,695
 85,130
 153,940

$

$

 9,385
 38,238
 92,189
 139,812

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. Such deposits totaled $1.25 billion and represented 90.3%
of  the  Company's  total  deposits  at  December  31,  2020,  compared  to  $1.03  billion  and  represented  87.0%  of  the  Company's  total  deposits  at
December  31,  2019.  These  core  deposits  are  normally  less  volatile  and  are  often  tied  to  other  products  of  the  Company  through  long  lasting
relationships.

Core deposits at December 31, 2020 and 2019 were as follows:

(In thousands)
Core deposit base:

Non-interest bearing demand
Interest checking
Savings and money market
Other time deposits
Total

2020

2019

$

$

 382,492
 292,375
 391,248
 183,072
 1,249,187

$

$

 261,166
 227,662
 346,593
 197,089
 1,032,510

Time  deposits  and  certificates  of  deposit  of  $250,000  and  greater  at  December  31,  2020  and  2019  were  $91.3  million  and  $104.3  million,
respectively. The Company had brokered deposits totaling $40.2 million and $45.2 million at December 31, 2020 and 2019, 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, 2020, under agreements with these unaffiliated banks, the Bank may borrow up to $50.0 million in federal funds on an
unsecured  basis and $15.7 million  on a secured  basis.  There  were  no federal  funds purchased  outstanding  at December  31, 2020. 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, 2020, there were $45.2 million in repurchase agreements. The Company may periodically borrow additional short-term funds from the Federal
Reserve Bank through the discount window; although no such borrowings were outstanding at December 31, 2020.

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, 2020, the Bank had $106.7 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5
million at December 31, 2020 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the
trusts.

Borrowings outstanding at December 31, 2020 and 2019 were as follows:

(In thousands)
Borrowings:

Federal funds purchased and securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated notes
Other borrowings
Total

24

2020

2019

$

$

 45,154
 106,660
 49,486
 14
 201,314

$

$

 27,272
 96,895
 49,486
 24
 173,677

    
    
 
   
  
 
 
 
 
    
    
 
 
 
 
 
 
    
    
    
 
 
 
 
 
 
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.

2020

     Federal
Funds

2019

     Federal
Funds

(In thousands)
Advance equivalent
Letters of credit
Advances outstanding
Total available

FHLB
$  300,633
   (123,000)
   (106,660)
$  70,973

Federal
Reserve Bank 
$

 8,898

  Purchased

Lines
$  56,835

 —  
 —  

Total
$  366,366
 —    (123,000)
 —    (106,660)
$  136,706

FHLB
$  284,813
   (115,000)
 (96,895)
$  72,918

Federal
Reserve Bank 
$

 9,190

  Purchased

Lines
$  56,839

 —  
 —  

Total
$  350,842
 —    (115,000)
 (96,895)
 —  
$  138,947

$

 8,898

$  56,835

$

 9,190

$  56,839

At December 31, 2020, loans of $589.4 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit. At
December 31, 2020, investments with a market value of $18.1 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 $180.4 million at December 31, 2020 compared to $78.1 million at December 31, 2019. The $102.2 million increase
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, 2020. Cash flow provided from operating activities consists
mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $20.2 million for the year ended December 31,
2020.

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  $138.7  million.  The  cash  outflow  primarily  consisted  of  $118.4  million  increase  in  loans  and  $100.2  million  purchase  of
investment securities, partially offset by $80.1 million from maturities, calls, and sales of investment securities. The increase in loans was primarily
a result of $63.3 million (net of PPP deferred fees at December 31, 2020) increase in commercial loans due to customers who participated in the
PPP.

Financing activities provided cash of $220.8 million, resulting primarily from a $121.3 million increase in demand deposits, and a $109.5 million
increase in interest-bearing transaction accounts. The growth in deposits was positively impacted by customers who deposited PPP loan proceeds
into demand accounts. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2021.

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  $441.6  million  in  unused  loan
commitments and standby letters of credit as of December 31, 2020. 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  $3.0  million  and  $2.7  million  for  the  years  ended  December  31,  2020  and  2019,
respectively.  A  large  portion  of  the  Company's  liquidity  is  obtained  from  the  Bank  in  the  form  of  dividends.  The  Bank  declared  and  paid  $4.0
million and $8.0 million in dividends to the Company during the years ended December 31, 2020 and 2019, respectively. At December 31, 2020 and
2019, the Company had cash and cash equivalents totaling $2.0 million and $2.6 million, respectively.

25

 
    
    
    
    
    
    
 
 
 
 
 
 
 
 
 
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 to the higher  requirements,  the Basel  III  Rules established  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 began being phased in over four years beginning in 2016. On January 1, 2016, the first phase of the requirement
went into effect at 0.625% of risk-weighted assets, and increased each subsequent year by an additional 0.625 percentage points, to reach its final
level of 2.5% of risk weighted assets on January 1, 2019. At December 31, 2019, the capital conservation buffer requirement of 2.5%, effectively
raised the minimum required risk-based capital ratios to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully
phased-in basis.

Under the Basel III requirements, at December 31, 2020, 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:

2020

2019

2018

2017

2016

  Minimum Capital
  Required - Basel III
Fully Phased-In *

Minimum Required     

to be Considered
Well-Capitalized  
Under Prompt
Corrective Action  
Banks

Risk-based capital ratios:
Total capital ratio
Tier 1 capital ratio
Common Equity Tier 1 capital ratio
Tier 1 leverage ratio
*At December 31, 2019 the Basel III capital conservation buffer requirement of 2.5% had been fully phased-in.

 14.89 %  
 13.04  
 9.86  
 10.73  

 13.28 %  
 11.21  
 8.48  
 9.55  

 12.93 %  
 10.72  
 8.04  
 9.33  

 14.97 %  
 13.37  
 10.00  
 10.19  

 13.88 %  
 11.42  
 8.61  
 9.87  

 10.5 %
 8.5
 7.0
 4.0

 10.0 %
 8.0  
 6.5  
 5.0  

Stock Dividend For the twelfth consecutive year, on July 1, 2020, the Company distributed a four percent stock dividend to common shareholders of
record at the close of business on June 15, 2020. For all periods presented, share information, including basic and diluted earnings per share, has
been adjusted retroactively to reflect the stock dividend.

Repurchase Program In the third quarter of 2020, the Company's Board of Directors authorized the purchase of up to $2.5 million market value of
the Company's common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as, the
timing of any such purchases. As of December 31, 2020, $2.4 million remained for share repurchase pursuant to that authorization.

26

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

The required payments of time deposits and other borrowed money, not including interest, at December 31, 2020 are as follows:

(In thousands)
Time deposits
Federal Home Loan Bank advances and other borrowed money
Subordinated notes
Operating lease liabilities
Total

Total
$  277,306
   106,674
 49,486
 2,137
   433,466

3-5

     Years

Less than 1
Year
$  191,565
 29,241
 —
 374
 220,806

Payments due by Period
1-3
Years
$  83,127
 20,433
 —
 733
 104,293

$  2,614
 26,000
 —
 515
 29,129

Over 5
     Years

$

 —
 31,000
 49,486
 515
 81,001

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, 2020 are as follows:

(In thousands)
Unused loan commitments
Commitments to originate residential first and second mortgage loans
Standby letters of credit
Total

Total
$  264,528
 51,270
   125,800
$  441,598

3-5

     Years

Amount of Commitment Expiration per Period
  Less than 1  
1-3
Year
$  193,696
 51,270
 125,800
$  370,766

 —  
 —  

 —  
 —  

$  7,813

$  28,958

$  7,813

$  28,958

     Years

Over 5
     Years

$  34,061
 —
 —
$  34,061

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.

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.

27

 
    
    
    
 
 
 
 
 
 
 
 
 
 
 
    
    
 
 
 
 
 
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, 2020 and 2019.

Hypothetical shift in interest rates
(bps)
200
100
(100)
(200)

% Change in projected net interest income
December 31, 

2020

2019

 0.73 %
 0.10 %  
 (1.28)%
 (1.81)%

 1.07 %
 1.61 %
 0.78 %
 (0.51)%

The change in our interest rate risk exposure from December 31, 2019 to December 31, 2020 was primarily due to the significant decrease in market
rates over this period that has caused the yields for both interest-bearing liabilities and earning assets to be lower. In addition, the increase in Federal
funds sold and the PPP loan program have caused an overall shortening of the balance sheet, creating a larger asset sensitive position in a rising rate
environment.  These  factors  have  caused  the  Company’s  balance  sheet  to  become  more  asset  sensitive  in  the  next  12  months,  where  interest  rate
increases translate into higher net interest income. Management believes the change in projected net interest income from interest rate shifts of up
200 bps and down 200 bps is an acceptable level of interest rate risk.

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

Effects of Inflation

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

Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal
rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on the Company's
operations for the three months ended December 31, 2020.

Impact of New Accounting Standards

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, 2022. 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 by assessing different credit risk models. In 2019 and 2020, the Company modeled the various methods prescribed in the ASU against the
identified loan segments. The Company will continue to run parallel computations as it continues to evaluate the impact of adoption of this ASU on
January 1, 2023.

Rate Reform In March  2020,  the  FASB issued  ASU 2020-04,  Reference  Rate Reform (Topic 848) - Facilitation  of the Effects  of Reference  Rate
Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in
accounting  for  (or  recognizing  the  effects  of)  reference  rate  reform  on  financial  reporting.  It  provides  optional  expedients  and  exceptions  for
applying  generally  accepted  accounting  principles  to  contract  modifications  and  hedging  relationships,  subject  to  meeting  certain  criteria,  that
reference LIBOR or another reference rate expected to be discontinued. The amendments in this update are effective for all entities as of March 12,
2020  through  December  31,  2022.  The  Company  is  currently  evaluating  the  impact  of  the  reference  rate  reform  on  the  Company’s  consolidated
financial statements.

28

    
    
 
 
CONSOLIDATED FINANCIAL STATEMENTS

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

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for each of the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Stockholders' Equity for each of the years ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for each of the years ended December 31, 2020, 2019, and 2018
Notes to the Consolidated Financial Statements

Page

30
322
33
34
35
366
377

29

Report of Independent Registered Public Accounting Firm

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

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,
2020 and 2019, 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,  2020,  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, 2020 and 2019,
and  the  results  of  its  operations  and  its  cash  flows  for  each  of  the  years  in  the  three-year  period  ended  December  31,  2020,  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,  2020,  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  12,  2021
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.

Critical Audit Matter

The  critical  audit  matter  communicated  below  is  a  matter  arising  from  the  current  period  audit  of  the  consolidated  financial  statements  that  was
communicated  or  required  to  be  communicated  to  the  audit  committee  and  that:  (1)  relates  to  accounts  or  disclosures  that  are  material  to  the
consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical
audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the
critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for loan losses related to loans collectively evaluated for impairment

As  discussed  in  Notes  1  and  2  to  the  consolidated  financial  statements,  the  Company’s  allowance  for  loan  losses  related  to  loans  collectively
evaluated for impairment (collective ALL) was $13.0 million of a total allowance for loan losses (ALL) of $18.1 million as of December 31, 2020.
The methodology used to estimate the collective ALL consists of both quantitative and qualitative loss components. The quantitative portion of the
collective ALL estimates loss rates developed using internal historical loan loss experience by loan type over a defined look-back period.  The 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 qualitative portion of the collective ALL uses qualitative risk factors to adjust estimates of losses based
on the most recent information available and to address other limitations in the quantitative component.

We  identified  the  assessment  of  the  collective  ALL  as  a  critical  audit  matter.  A  high  degree  of  audit  effort,  including  specialized  skills  and
knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ALL because of significant measurement
uncertainty. Specifically, the assessment encompassed an evaluation of the ALL methodology, including for the collective

30

ALL (1) the methods used to estimate the loss rates and the key assumptions of pooling of loans by loan type, the look-back period, and the loss
emergence periods, and (2) the qualitative risk factors.

The  following  are  the  primary  procedures  we  performed  to  address  this  critical  audit  matter.  We  evaluated  the  design  and  tested  the  operating
effectiveness of certain internal controls related to the collective ALL process, including controls related to the:

●
●
●
●

development of the ALL methodology
identification and determination of the key assumptions used in developing the loss rates
development of the qualitative risk factors, including the judgments used in the determination of those factors
analysis of the ALL results, trends, and ratios.

We evaluated the process to develop the collective ALL by testing certain sources of data, factors, and assumptions, and considered the relevance
and reliability of such data, factors, and assumptions. We analyzed trends in the  ALL, including the qualitative risk factors, for consistency with
trends  in  loan  portfolio  growth  (attrition)  and  credit  performance.  In  addition,  we  involved  credit  risk  professionals  with  specialized  skills  and
knowledge, who assisted in:

●
●

●

●

●

evaluating the ALL methodology for compliance with U.S. generally accepted accounting principles.
evaluating the pooling of loans by loan type by assessing similar characteristics of the loan portfolio, including levels of delinquencies,
nonperforming loans, and net charge-offs.
assessing  the  method,  including  the  relevance  of  sources  of  internal  and  external  data  used  to  develop  the  look  back  period  by
evaluating (1) if loss data in the look back period was representative of the credit characteristics of the current portfolio and (2) the
sufficiency of loss data within the look back period.
assessing the loss emergence periods by considering the Company’s credit risk policies and evaluating the method used to develop the
loss emergence periods, including identifying and evaluating the loss triggers for certain loan charge-offs.
reviewing the qualitative factor framework and related judgments by (1) assessing the maximum qualitative factor adjustment based on
the highest losses over a rolling six quarter period during the historical loss period, (2) evaluating the metrics, including the relevance
of sources of data and assumptions, used to determine the qualitative risk factor adjustments, and (3) analyzing the determination of
each qualitative risk factor adjustment.

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

St. Louis, Missouri 
March 12, 2021

/s/ KPMG LLP

31

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

(In thousands, except per share data)
ASSETS
Cash and due from banks
Federal funds sold and other interest-bearing deposits
Cash and cash equivalents
Certificates of deposit in other banks
Available-for-sale debt securities, at fair value
Other investments
Total investment securities
Loans held for investment
Allowance for loan losses
Net loans
Loans held for sale, at lower of cost or fair value
Premises and equipment - net
Mortgage servicing rights, at fair value
Other real estate owned - net
Accrued interest receivable
Cash surrender value - life insurance
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand
Savings, interest checking and money market
Time deposits $250,000 and over
Other time deposits
Total deposits
Federal funds purchased and securities sold under agreements to repurchase
Federal Home Loan Bank advances and other borrowings
Subordinated notes
Operating lease liabilities
Accrued interest payable
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock, $1 par value, authorized 15,000,000 shares; issued 6,769,322 and 6,519,874 shares, respectively
Surplus
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Treasury stock; 289,214, and 243,638 shares, at cost, respectively
Total stockholders’ equity
Total liabilities and stockholders’ equity

See accompanying notes to the consolidated financial statements.

December 31, 

2020

2019

$

$

$

$

19,235
161,128
180,363
9,376
198,030
6,353
204,383
1,286,967
(18,113)
1,268,854
5,099
34,561
2,445
12,291
6,640
2,451
7,268
1,733,731

382,492
723,808
91,263
186,043
1,383,606
45,154
106,674
49,486
2,137
837
15,248
1,603,142

6,769
59,307
68,935
1,528
(5,950)
130,589
1,733,731

$

$

$

$

22,576
55,545
78,121
10,862
175,093
5,808
180,901
1,168,797
(12,477)
1,156,320
428
35,388
2,482
12,781
6,481
2,398
6,800
1,492,962

261,166
614,331
104,262
206,762
1,186,521
27,272
96,919
49,486
2,224
1,136
14,366
1,377,924

6,520
55,727
61,590
(3,755)
(5,044)
115,038
1,492,962

32

    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income

(In thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans
Interest and fees on loans held for sale
Interest on investment securities:

Taxable
Nontaxable

Federal funds sold, other interest-bearing deposits, and certificates of deposit in other banks
Dividends on other investments
Total interest income
INTEREST EXPENSE
Interest on deposits:

Savings, interest checking and money market
Time deposit accounts $250,000 and over
Time deposits

Total interest expense on deposits
Interest on federal funds purchased and securities sold under agreements to repurchase
Interest on Federal Home Loan Bank advances
Interest on subordinated notes
Total interest expense on borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
NON-INTEREST INCOME
Service charges and other fees
Bank card income and fees
Trust department income
Real estate servicing fees, net
Gain on sale of mortgage loans, net
Other
Total non-interest income
Investment securities gains (losses), net
Gain on branch sale, net
NON-INTEREST EXPENSE
Salaries and employee benefits
Occupancy expense, net
Furniture and equipment expense
Processing, network, and bank card expense
Legal, examination, and professional fees
Advertising and promotion
Postage, printing, and supplies
Loan expense
Other
Total non-interest expense
Income before income taxes
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share

See accompanying notes to the consolidated financial statements.

33

Years Ended December 31, 
2019

2018

2020

$

$
$
$

58,129
120

3,038
688
667
343
62,985

1,858
1,351
2,641
5,850
146
2,199
1,527
3,872
9,722
53,263
5,800
47,463

2,954
3,201
1,185
(49)
7,109
249
14,649
61
—

26,151
3,069
2,939
3,864
1,458
1,095
897
917
4,307
44,697
17,476
3,183
14,293
2.20
2.20

$

$
$
$

58,414
—

3,623
536
1,125
272
63,970

5,242
2,110
3,026
10,378
140
2,338
2,376
4,854
15,232
48,738
1,150
47,588

3,611
3,061
1,237
39
771
218
8,937
(40)
2,183

21,597
3,122
2,847
3,882
1,211
1,256
871
625
3,320
38,731
19,937
3,823
16,114
2.47
2.47

$

$
$
$

52,151
—

4,114
597
699
218
57,779

5,433
1,272
2,132
8,837
603
1,517
2,229
4,349
13,186
44,593
1,475
43,118

3,736
2,754
1,166
794
721
170
9,341
255
—

23,104
2,957
3,001
3,484
1,223
1,233
996
612
3,722
40,332
12,382
1,668
10,714
1.64
1.64

    
    
    
  
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income

(In thousands)
Net income
Other comprehensive income, net of tax
Investment securities available-for-sale:

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

Defined benefit pension plans:

Net gains (losses) arising during the year, net of tax
Amortization of prior service cost included in net periodic pension cost, net of tax

Total other comprehensive income (loss)
Total comprehensive income

See accompanying notes to the consolidated financial statements.

34

$

$

Years Ended December 31, 
2019
16,114

$

$

2020
14,293

3,408
(32)

1,738
169
5,283
19,576

$

3,400
32

(1,150)
62
2,344
18,458

$

2018
10,714

(955)
—

345
173
(437)
10,277

    
    
    
 
  
 
  
 
  
 
 
 
 
 
 
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity

(In thousands)
Balance, December 31, 2017
Net income
Other comprehensive loss
Issuance of stock under equity compensation plan
Purchase of treasury stock
Stock dividend ($0.04 per share)
Cash dividends declared, common stock ($0.37 per share)
Balance, December 31, 2018
Net income
Other comprehensive income
Stock dividend ($0.04 per share)
Cash dividends declared, common stock ($0.46 per share)
Balance, December 31, 2019
Net income
Other comprehensive income
Purchase of treasury stock
Stock dividend ($0.04 per share)
Cash dividends declared, common stock ($0.49 per share)
Balance, December 31, 2020

See accompanying notes to the consolidated financial statements.

  Common
Stock  

     Accumulated     
Other
  Retained   Comprehensive   Treasury  

Surplus   Earnings  

$ 45,442

Income (Loss)  
$

Stock

Total
Stock -
holders'
Equity

$ 6,047
  —  
  —  
  —  
  —  
232
  —  
$ 6,279
  —  
  —  
241
  —  
$ 6,520
  —  
  —  
  —  
249
  —  
$ 6,769

$ 50,595
—   10,714
—  
(51)
—  

—  
—  
—  

—  

—  

(5,014)
(2,190)
$ 54,105
—   16,114
—  

—  

(5,795)
(2,834)
$ 61,590
—   14,293
—  
—  

—  
—  

4,782

$ 50,173

5,554

$ 55,727

3,580

—  

(3,829)
(3,119)
$ 68,935

$ 59,307

$

$

$

(437)

—  

—  

—  
—  
—  
—  

(5,662) $ (5,051) $
—  
—  
186
(179)

—  
—  
(6,099) $ (5,044) $
—  
—  
—
—  

91,371
10,714
(437)
135
(179)
—
(2,190)
99,414
16,114
2,344
—
(2,834)
(3,755) $ (5,044) $ 115,038
14,293
5,283
(906)
—
(3,119)
$ (5,950) $ 130,589

2,344
—
—  

—  
—  
—  

—  
—  

—  
—  

—  

1,528

5,283

(906)

35

    
    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses
Depreciation expense
Net amortization of investment securities, premiums, and discounts
Change in fair value of mortgage servicing rights
Investment securities (gains) losses, net
(Gains) losses on sales and dispositions of premises and equipment
Gain on sales and dispositions of other real estate
Gain on branch sale, net
Provision for other real estate owned
Increase in accrued interest receivable
Increase in cash surrender value - life insurance
Decrease in other assets
Operating lease liabilities
(Decrease) increase in accrued interest payable
Increase (decrease) in other liabilities
Origination of mortgage loans held for sale
Proceeds from the sale of mortgage loans held for sale
Gain on sale of mortgage loans, net
Other, net

Net cash provided by operating activities
Cash flows from investing activities:
Purchase of certificates of deposit in other banks
Proceeds from maturities of certificates of deposit in other banks
Net increase in loans
Purchase of available-for-sale debt securities
Proceeds from maturities of available-for-sale debt securities
Proceeds from calls of available-for-sale debt securities
Proceeds from sales of available-for-sale debt securities
Purchases of FHLB stock
Proceeds from sales of FHLB stock
Purchases of premises and equipment
Proceeds from sales of premises and equipment
Proceeds from Bank owned life insurance policy
Payment for branch sale, net
Proceeds from sales of other real estate and repossessed assets
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Net increase in demand deposits
Net increase in interest-bearing transaction accounts
Net decrease in time deposits
Net increase in federal funds purchased and securities sold under agreements to repurchase
Repayment of FHLB advances and other borrowings
FHLB advances
Issuance of stock under equity compensation plan
Purchase of treasury stock
Cash dividends paid - common stock
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures of cash flow information:
Cash paid during the year for:

Interest
Income taxes

Noncash investing and financing activities:
Other real estate and repossessed assets acquired in settlement of loans
Net deposits and fixed assets transferred to other assets related to the Branson branch sale
Right of use assets obtained in exchange for new operating lease liabilities
Stock dividends

See accompanying notes to the consolidated financial statements.

36

Year Ended December 31, 

2020

2019

2018

$

14,293

$

16,114

$

10,714

5,800
2,265
1,493
903
(61)
(104)
(224)

—  
5
(159)
(53)
9
(87)
(299)
1,907
(193,488)
195,926
(7,109)
(866)
20,151

(980)
2,466
(118,407)
(100,206)
52,962
21,285
5,845
(2,018)
1,492
(1,828)
178
—
—
516
(138,695)

121,325
109,477
(33,717)
17,882
(59,245)
69,000

—  

(906)
(3,030)
220,786
102,242
78,121
180,363

10,023
2,305

73
—
169
3,829

$

$
$

$
$
$
$

$

$
$

$
$
$
$

1,150
2,062
1,386
739
40
48
(122)
(2,183)
49
(319)
(78)
1,158
(201)
101
(718)
(43,355)
44,281
(771)
(290)
19,091

(988)
2,373
(23,530)
(31,106)
39,467
16,165
21,503
(6,522)
6,390
(2,168)
17
222
(6,700)
1,435
16,558

3,999
3,548
(8,865)
2,625
(176,708)
178,474

—  
—  

(2,684)
389
36,038
42,083
78,121

15,150
3,620

452
(8,885)
2,424
5,795

$

$
$

$

$

1,475
1,797
1,506
27
(255)
3
(14)
—
26
(535)
(58)
854
—
481
667
(36,469)
36,990
(721)
(186)
16,302

(8,787)
—
(79,298)
(103,078)
34,586
1,685
77,168
(4,713)
5,591
(2,326)
13
—
—
585
(78,574)

17,477
29,572
25,607
(2,913)
(220,542)
194,313
135
(179)
(1,993)
41,477
(20,795)
62,878
42,083

12,719
241

1,106
—
—
5,014

    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(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, St.
Louis,  and  the  greater  Kansas  City  metropolitan  area.  The  Company  is  subject  to  competition  from  other  financial  and  nonfinancial  institutions
providing financial products. Additionally, the Company and its subsidiaries are subject to the regulations of certain regulatory agencies and undergo
periodic examinations by those regulatory agencies.

The accompanying  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 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 $5.1 million at December 31, 2020 compared to $428,000
at December 31, 2019.

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.

37

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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. Consumer loans and real estate
loans secured by one-to-four family residential properties are exempt from these non-accrual guidelines. These loans are placed on non-accrual after
120  days  past  due.  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 look-back period beginning January 1, 2012 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.

38

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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.

39

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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.

40

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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.

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, 2020, 2019, and 2018.

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.

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, 2020, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on
June 15, 2020. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect
this change.

41

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

CARES  Act  On  March  27,  2020,  the  Coronavirus  Aid,  Relief  and  Economic  Security  Act  ("CARES  Act")  was  signed  into  law,  which,  in  part,
established a loan program administered through the U.S. Small Business Administration ("SBA"), referred to as the Paycheck Protection Program
("PPP").  Under  the  PPP,  small  businesses,  sole  proprietorships,  independent  contractors,  non-profit  organizations  and  self-employed  individuals
could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations
and eligibility criteria. The Company is participating as a lender in the PPP program. All loans have a 1% interest rate and the Company earns a fee
that is based upon a tiered schedule corresponding with the amount of the loan to the borrower, which is deferred and recognized over the life of the
loan. Based upon the borrower meeting certain criteria as defined by the CARES Act, the loan may be forgiven by the SBA. The Company reports
these loans at their principal amount outstanding, net of unearned income, unamortized deferred loan fee income and loan origination costs. Interest
is accrued as earned and loan origination fees and direct costs are deferred and accreted or amortized into interest income, as an adjustment to the
yield,  over  the  life  of  the  loan  using  the  level  yield  method.  When  a  PPP  loan  is  paid  off  or  forgiven  by  the  SBA,  the  remaining  unaccreted  or
unamortized net origination fees or costs are immediately recognized into income.

Reclassifications Certain prior year information has been reclassified to conform to the 2020 presentation.

The following represents significant new accounting principles adopted in 2020:

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.  The  ASU  did  not  have  a  material  impact  on  the
Company's Consolidated Financial Statements.

Fair  Value  Measurement In  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 ASU did not have a material impact on the Company's Consolidated Financial
Statements.

Pension In August 2018, the FASB issued ASU 2018-14,  Compensation - Retirement Benefits - Defined Benefit Plans -General (Subtopic 715-20)
Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans. These amendments modify the disclosure requirements
for employers that sponsor defined benefit pension or other postretirement plans. ASU 2018-14 is effective for annual reporting periods beginning
after December 15, 2020 and is not expected to have a significant impact on the Company’s consolidated financial statements. The ASU did not
have a material impact on the Company's Consolidated Financial Statements and disclosures.

42

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(2)   Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company's loan portfolio, at December 31, 2020 and 2019 is as follows:

(in thousands)
Commercial, financial, and agricultural (a)
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer
Total loans held for investment
(a)

Includes $63.3 million SBA PPP loans, net

2020

272,918
29,692
78,144
262,339
617,133
26,741
1,286,967

$

$

2019

199,022
23,035
84,998
252,643
576,635
32,464
1,168,797

$

$

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson
City, Columbia, Clinton, Warsaw, Springfield, St. Louis, and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes
in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and
other  consumer loans consist  primarily  of the financing  of vehicles.  At December  31, 2020, $589.4 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, 2019
New loans
Amounts collected
Balance at December 31, 2020

$

$

5,601
1,081
(1,603)
5,079

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.

43

    
    
 
 
 
 
 
 
 
 
 
 
    
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

Allowance for loan losses

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

Commercial,
Financial, & Construction -

Real Estate

Real Estate

Real Estate Real Estate
Construction - Mortgage - Mortgage -

Installment
and other

Un-

(in thousands)
Balance at December 31, 2017
Additions:

Provision for loan losses

Deductions:

Loans charged off
Less recoveries on loans

Net loans charged off
Balance at December 31, 2018
Additions:

Provision for loan losses

Deductions:

Loans charged off
Less recoveries on loans

Net loans charged off
Balance at December 31, 2019
Additions:

Provision for loan losses

Deductions:

Loans charged off
Less recoveries on loans

Net loans charged off
Balance at December 31, 2020

     Agricultural      Residential
170

3,325

$

$

     Commercial
807

$

     Residential     Commercial     Consumer     allocated     Total
$

4,437

1,689

$ 10,852

345

79

$

$

$

296

484
(100)
384
3,237

(168)

295
(144)
151
2,918

2,241

207
(169)
38
5,121

$

$

$

$

$

$

(44)

48
(62)
(14)
140

$

(20)

516

457

150

120

1,475

30
—  
30
757

$

186
(52)
134
2,071

$

38
(58)
(20)
4,914

$

255
(94)
161
334

  —  
  —  
  —  
199
$

1,041
(366)
675
$ 11,652

(126)

(388)

195

1,618

138

(119)

1,150

—  
(50)
(50)
64

$

—  
—  
—  
$
369

277
(129)
148
2,118

$

25
(40)
(15)
6,547

196
(105)
91
381

  —  
  —  
  —  
80
$

793
(468)
325
$ 12,477

85

106

568

2,838

35

(73)

5,800

—  
(64)
(64)
213

$

—  
—  
—  
$
475

52
(45)
7
2,679

$

39
(8)
31
9,354

$

211
(59)
152
264

  —  
  —  
  —  
$

509
(345)
164
$ 18,113

7

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.

In  the  first  quarter  of  2019,  management  adjusted  the  look-back  period  to  begin  with  loss  history  in  the  first  quarter  2012  as  the  starting  point
through  the  current  quarter  and  it  will  continue  to  include  this  starting  point  going  forward.  At  that  time,  Management  determined  that  with  the
extended economic recovery then existing, the look-back period should be expanded to include the current economic cycle. The look-back period
will  continue  to  be  evaluated  and  will  be  adjusted  once  a  sustained  loss  producing  downturn  is  recognized  and  found  to  be  representative  of
historical losses expected for the current portfolio.  

Due to the COVID-19 pandemic that surfaced in the first quarter of 2020, management reassessed the calculation of the allowance for loan loss by
increasing  the  economic  qualitative  factor  in  order  to  capture  the  impact  on  the  credit  risk  present  in  the  loan  portfolio  given  the  economic
environment that existed at that time. The unemployment rate was considered the best indicator of risk compared to the other factors previously used
measured on a quarter lag and would not exhibit the effects of COVID-19 for possibly several quarters. While these lagging indicators have been
very  reliable  for  some  time,  they  did  not  accurately  capture  the  risk  that  has  been  brought  about  by  rapid  changes  in  the  economy  due  to  the
pandemic. As of the fourth quarter of 2020, management again reassessed the qualitative factor and economic indicators. Enough time had passed so
that data after the outbreak would be available and a better interpretation of the impact of

44

 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

the virus on the economy. As of December 31, 2020, management determined that the local market and economy has been able to transition to a
functional level while adapting to the new requirements aimed at stopping the spread of the virus and decreased the qualitative adjustment according
to the Company's methodology.

Additionally, the funding of $88.4 million in PPP loans during the second and third quarter required management to assess the methodology that
would be adopted in regard to the allowance for loan loss applicable to these loans. As the SBA PPP loans are expected to be mostly paid off in the
next six to twelve months and carry a 100% credit guarantee from the SBA, management determined that no allowance for loan loss was deemed
necessary for these loans. At December 31, 2020 the balance of these loans totaled $65.1 million.

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

Commercial,
Real Estate Real Estate
Financial, and Construction - Construction - Mortgage - Mortgage -

Real Estate

Real Estate

Installment
and Other

Un-

(in thousands)
December 31, 2020
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment

Total

Loans outstanding:
Individually evaluated for impairment
Collectively evaluated for impairment

Total

December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment
Collectively evaluated for impairment

Total

Loans outstanding:
Individually evaluated for impairment
Collectively evaluated for impairment

Total

Impaired loans

     Agricultural      Residential

     Commercial      Residential     Commercial     Consumer      allocated     

Total

$

$

$

$

$

$

$

$

2,187
2,934
5,121

7,552
265,366
272,918

311
2,607
2,918

1,514
197,508
199,022

$

$

$

$

$

$

$

$

27
186
213

192
29,500
29,692

$

$

$

$

28
447
475

$

$

263
2,416
2,679

200
77,944
78,144

$

3,626
258,713
$ 262,339

— $
64
64

$

— $
369
369

$

264
1,854
2,118

— $

23,035
23,035

$

137
84,861
84,998

$

3,856
248,787
$ 252,643

$

$

$

$

$

$

$

$

2,594
6,760
9,354

25,657
591,476
617,133

23
6,524
6,547

1,711
574,924
576,635

$

$

$

$

$

$

$

$

14
250
264

108
26,633
26,741

17
364
381

177
32,287
32,464

$

$

$

$

$

$

$

$

— $

7
7

$

5,113
13,000
18,113

— $
37,335
—   1,249,632
— $ 1,286,967

— $
80
80

$

615
11,862
12,477

— $
7,395
—   1,161,402
— $ 1,168,797

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 $37.3 million and $7.4 million at December 31, 2020
and  2019,  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, 2020, $32.2 million of impaired loans were evaluated based on the fair value
less estimated  selling costs of the loans' collateral  compared to $3.0 million at December 31, 2019. Once the impairment  amount is calculated,  a
specific reserve allocation is recorded. At December 31, 2020, $5.1 million of the Company's allowance for loan losses was allocated to impaired
loans totaling $37.3 million compared to $615,000 of the Company's allowance for loan losses allocated to impaired loans totaling approximately
$7.4 million at December 31, 2019. Management determined that $11.9 million, or 32%, of total impaired loans required no reserve allocation at
December 31, 2020 compared to $2.6 million, or 35%, at December 31, 2019 primarily due to adequate collateral values, acceptable payment history
and adequate cash flow ability.

45

 
 
 
   
   
   
   
   
   
   
  
 
   
   
   
   
   
   
   
  
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

The categories of impaired loans at December 31, 2020 and 2019 are as follows:

(in thousands)
Non-accrual loans
Non-performing TDRs - 90 days past due
Performing TDRs

Total impaired loans

2020

2019

$

$

34,559
—
2,776
37,335

$

$

4,754
106
2,535
7,395

The following tables provide additional information about impaired loans at December 31, 2020 and 2019, respectively, segregated between loans
for which an allowance has been provided and loans for which no allowance has been provided.

(in thousands)
December 31, 2020
With no related allowance recorded:

Commercial, financial and agricultural
Real estate mortgage − residential
Real estate mortgage − commercial

Total

With an allowance recorded:

Commercial, financial and agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total
Total impaired loans

(in thousands)
December 31, 2019
With no related allowance recorded:

Commercial, financial and agricultural
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total

With an allowance recorded:

Commercial, financial and agricultural
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total
Total impaired loans

Recorded
Investment

Unpaid
Principal
Balance

Specific
Reserves

$

$

$

$
$

$

$

$

$
$

1,703
1,300
8,943
11,946

5,849
192
200
2,326
16,714
108
25,389
37,335

Recorded
Investment

342
137
697
1,388
12
2,576

1,172
3,159
323
165
4,819
7,395

$

$

$

$
$

$

$

$

$
$

1,731
1,395
8,943
12,069

6,180
192
251
2,786
16,787
112
26,308
38,377

Unpaid
Principal
Balance

487
173
784
1,433
12
2,889

1,470
3,482
425
189
5,566
8,455

$

$

$

$
$

$

$

$

$
$

—
—
—
—

2,187
27
28
263
2,594
14
5,113
5,113

Specific
Reserves

—
—
—
—
—
—

311
264
23
17
615
615

46

    
    
 
 
    
    
    
 
   
   
  
 
 
 
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
    
    
    
 
   
   
  
 
   
   
  
 
 
 
 
 
 
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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, 2020 and 2019:

(in thousands)
With no related allowance recorded:

Commercial, financial and agricultural
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total

With an allowance recorded:

Commercial, financial and agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total
Total impaired loans

2020

2019

Average
Recorded
Investment

Interest
Recognized
For the
Period Ended

Average
Recorded
Investment

Interest
Recognized
For the
Period Ended

$

$

$

$
$

1,629
162
1,692
2,975
6
6,464

2,395
48
367
2,564
4,830
113
10,317
16,781

$

$

$

$
$

144
—
28
13
—
185

48
—
—
45
22
8
123
308

$

$

$

$
$

805
145
685
1,062
6
2,703

1,097
—
—
3,583
334
199
5,213
7,916

$

$

$

$
$

—
—
—
6
—
6

40
—
—
88
28
3
159
165

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 $308,000 and $165,000, for the years ended December 31, 2020 and 2019, 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.  Subsequent interest  payments received  on non-accrual loans are applied to principal if any doubt exists as to the collectability  of such
principal;  otherwise,  such  receipts  are  recorded  as  interest  income  on  a  cash  basis.  Non-accrual  loans  are  returned  to  accrual  status  when,  in  the
opinion of management, the financial condition of the borrower indicates that the timely collectability of interest and principal is probable and the
borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six
months.

47

    
    
    
    
   
   
   
  
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

The following table provides aging information for the Company's past due and non-accrual loans at December 31, 2020 and 2019.

(in thousands)
December 31, 2020
Commercial, Financial, and Agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and Other Consumer

Total

December 31, 2019
Commercial, Financial, and Agricultural
Real estate construction − residential
Real estate construction − commercial
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and Other Consumer

Total

     Current or     
Less Than
30 Days
Past Due

30 - 89 Days
Past Due

     90 Days     
Past Due
And Still
Accruing Non-Accrual

Total

$

265,821
29,500
77,944
259,688
591,815
26,576
$ 1,251,344

$

197,828
22,468
84,861
249,516
575,140
32,179
$ 1,161,992

$

$

$

$

380
$
—  
—  
546
4
117
1,047

$

$

212
567
—  
688
136
132
1,735

$

— $
—  
—  
—  
—  
17
17

$

— $
—  
—  

304

—  
12
316

$

6,717
192
200
2,105
25,314
31
34,559

$

272,918
29,692
78,144
262,339
617,133
26,741
$ 1,286,967

$
982
—  
137
2,135
1,359
141
4,754

199,022
23,035
84,998
252,643
576,635
32,464
$ 1,168,797

The Company's past due and non-accrual loans at December 31, 2020 do not include $57.1 million of loans accepting forbearance under the CARES
Act. Their delinquency status will not change through the forbearance period as they are fulfilling the agreement they have made with the Company.
Of the total remaining $86.7 million loan modifications under the CARES Act, $29.5 million, were determined to be on nonaccrual status during the
fourth quarter of 2020.

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed
on watch status when one or more weaknesses are identified that may result in the borrower being unable to meet repayment terms or the Company’s
credit  position  could  deteriorate  at  some  future  date.  Loans  classified  as  substandard are  inadequately  protected  by  the  current  sound  worth  and
paying  capacity  of  the  obligor  or  by  the  collateral  pledged,  if  any.  Loans  so  classified  may  have  a  well-defined  weakness  or  weaknesses  that
jeopardize  the  repayment  of  the  debt.  Such  loans  are  characterized  by  the  distinct  possibility  that  the  Company  may  sustain  some  loss  if  the
deficiencies are not corrected. A loan is classified as a 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 that are accruing interest are classified as performing TDRs. Loans classified as TDRs that are not accruing interest or is
90  days  past  due  are  classified  as  nonperforming  TDRs.  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.

48

    
 
   
   
   
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

The following table presents the risk categories by class at December 31, 2020 and 2019.

    Commercial,     Real Estate      Real Estate     Real Estate     Real Estate      Installment     

(in thousands)
At December 31, 2020
Watch
Substandard
Performing TDRs
Non-accrual loans (a)

Total

At December 31, 2019
Watch
Substandard
Performing TDRs
Non-performing TDRs - 90 days past due (a)
Non-accrual loans (a)

Total

Financial, & Construction - Construction - Mortgage - Mortgage -
Agricultural

and other
Residential Commercial Consumer

Commercial

Residential

Total

$

$

$

$

9,649
598
835
6,717
17,799

16,288
3,249
532
—
982
21,051

$

$

$

$

$
545
—  
—  
192
737

$

763
$
—  
—  
—
—  
$
763

10,806

—  
—  

200
11,006

8,484
273

—  
—
137
8,894

$ 15,835
1,002
1,521
2,105
$ 20,463

$ 15,280
2,291
1,615
106
2,135
$ 21,427

$ 66,936
1,662
343
25,314
$ 94,255

$ 37,271
677
352
—
1,359
$ 39,659

$

$

$

$

— $ 103,771
3,262
—  
2,776
77
34,559
31
$ 144,368
108

— $ 78,086
6,490
—  
2,535
36
106
—
4,754
141
$ 91,971
177

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

Troubled Debt Restructurings

At December 31, 2020, loans classified as TDRs totaled $3.7 million, of which $900,000 were classified as non-performing TDRs and $2.8 million
were classified as performing TDRs. At December 31, 2019, loans classified as TDRs totaled $4.1 million, of which $1.6 million were classified as
non-performing TDRs and $2.5 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 $214,000 and $442,000 related to TDRs were allocated to the allowance for loan losses at December 31, 2020 and 2019, respectively.

The CARES Act provides all banks with the option to elect either or both of the following from March 1, 2020 until the earlier of December 31,
2020 or the date that is 60 days after the termination of the national emergency:

(i)  to  suspend  the  requirements  under  GAAP  for  loan  modifications  related  to  the  COVID–19  pandemic  that  would  otherwise  be
categorized as a TDR; and/or

(ii)  to  suspend  any  determination  of  a  loan  modified  as  a  result  of  the  effects  of  the  COVID–19  pandemic  as  being  a  TDR,  including
impairment for accounting purposes.

If a bank elects a suspension noted above, the suspension (i) will be effective for the term of the loan modification, but solely with respect to any
modification, including a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or
delays  the  payment  of  principal  or  interest,  that  occurs  during  the  applicable  period  for  a  loan  that  was  not  more  than  30  days  past  due  as  of
December 31, 2019; and (ii) will not apply to any adverse impact on the credit of a borrower that is not related to the COVID–19 pandemic.

As provided for by the CARES Act, the Company offered payment modifications to borrowers. Disaster relief payment modifications granted to-
date include approximately 578 loans totaling $296.9 million, or 23.1% of the total loan portfolio. At December 31, 2020, 38 loans totaling $86.7
million, or 6.7% of total  loans, remained in some form of a modification.  (See table below titled – Loan Modifications under the CARES Act by
NAICS Code.)

49

 
   
   
   
   
   
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

Total Remaining Loan Modifications under the CARES Act by NAICS Code as of December 31, 2020

Industry Category
Real Estate and Rental and Leasing
Accommodations and Food Services
Construction
Churches
Lands and lots
Cinemas
Health Care and Social Assistance
Arts, Entertainment, Recreation
Non-NAICS (Consumer)
Total modifications

Interest
Only
$ 5,166  
19,859
144
263
2,005
—
—
10,165
—
$ 37,602

% of
Total Remaining
Loan
Modifications

6.0 % $
22.9
0.2
0.3
2.3
—
—
11.7
0.0
43.4 % $

Full 
Deferral
(1)
6,338
32,486
-
-
-
4,691
208
-
232
43,955

% of
Total Remaining
Loan
Modifications

7.3 % $
37.5
—
—
—
5.4
0.2
—
0.3
50.7 % $

Extended
Amortizations
501
4,621
—
—  
—
—
—
—
—
5,122

Remaining loan modifications under the CARES Act as a percent of the total loan portfolio
Total loan modifications under the CARES Act to date
Total loan modifications under the CARES Act to date as a percent of the total loan portfolio

% of
Total Remaining
Loan
Modifications

0.6 % $
5.3
—
—
—
—
—
—
—
5.9 % $

 6.7%

 $296,890

 23.1%

Totals

12,005
56,966
144
263
2,005
4,691
208
10,165
232
86,679

(1) Of the $44.0 million loan modifications on full deferral, $29.5 million, or 34.1% of the total remaining loan modifications, were determined to be on nonaccrual

status during the fourth quarter of 2020.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2020 and 2019.

(in thousands)
Troubled Debt Restructurings
Commercial, financial and agricultural
Real estate mortgage − residential
Real estate mortgage − commercial
Installment and other consumer

Total

2020
Recorded Investment (1)

2019
Recorded Investment (1)

Number of

Pre-

Post-

Number of

Pre-

Post-

     Contracts      Modification      Modification      Contracts      Modification      Modification

— $
2
—  
1
3

$

— $
209
—  
6    
$

215

—  
211  
—  
4  
215  

2
$
—  
2
—  
$
4

80
$
—  
267
—  
$
347

58
—
266
—
324

(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, 2020, three
loans meeting the TDR criteria were modified compared to four loans during the year ended December 31, 2019.

The Company considers a TDR to be in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or it is in the
process of foreclosure. There were no loans modified as a TDR, where a concession was made and subsequently defaulted during the year ended
December  31,  2020,  within  twelve  months  of  its  modification  date.  This  is  compared  to  one  commercial  TDR  with  a  $7,000  balance,  where  a
concession was made and subsequently defaulted and was moved to non-accrual status and some collateral was liquidated to pay down the balance
during the year ended December 31, 2019, within twelve months of its modification date. See Lending and Credit Management section for further
information.  

Loans Held For Sale

The Company designates certain long-term fixed rate personal real estate loans as held for sale, and the Company carries them at the lower of cost or
fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and other various secondary market investors. At December 31,
2020, the carrying amount of these loans was $5.1 million compared to $428,000 at December 31, 2019.

50

  
    
 
 
 
 
 
 
 
 
   
   
   
   
   
  
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(3)     Other Real Estate Acquired in Settlement of Loans

(in thousands)
Commercial
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Total
Less valuation allowance for other real estate owned
Total other real estate owned

Changes in the net carrying amount of other real estate owned for the years indicated:

Balance at December 31, 2018
Additions
Proceeds from sales
Charge-offs against the valuation allowance for other real estate owned, net
Net gain on sales
Balance at December 31, 2019
Additions
Proceeds from sales
Charge-offs against the valuation allowance for other real estate owned, net
Donation
Net gain on sales
Total other real estate owned
Less valuation allowance for other real estate owned
Balance at December 31, 2020

2020

2019

$

$

$

920
10,986
201
2,798
14,905
(2,614)
12,291

$

$

$

$

$

$

$

1,155
11,553
230
2,799
15,737
(2,956)
12,781

16,693
452
(1,435)
(95)
122
15,737
73
(516)
(347)
(266)
224
14,905
(2,614)
12,291

At  December  31,  2020,  $287,000  of  consumer  mortgage  loans  secured  by  residential  real  estate  properties  were  in  the  process  of  foreclosure
compared to $252,000 of consumer mortgage loans in the process of foreclosure at December 31, 2019.

Activity in the valuation allowance for other real estate owned in settlement of loans for the years indicated:

(in thousands)
Balance, beginning of period
Provision for other real estate owned
Charge-offs
Balance, end of period

2020

2019

2018

$

$

2,956
5
(347)
2,614

$

$

3,002
49
(95)
2,956

$

$

3,221
26
(245)
3,002

51

    
 
 
 
 
 
 
 
 
 
 
    
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(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, 2020 and
2019 were as follows:

(in thousands)
December 31, 2020
U.S. Treasury
U.S. government and federal agency obligations
U.S. government-sponsored enterprises
Obligations of states and political subdivisions
Mortgage-backed securities
Other debt securities (a)
Bank issued trust preferred securities (a)
Total available-for-sale securities

December 31, 2019
U.S. Treasury
U.S. government and federal agency obligations
U.S. government-sponsored enterprises
Obligations of states and political subdivisions
Mortgage-backed securities
Other debt securities (a)
Bank issued trust preferred securities (a)
Total available-for-sale securities

Total
Amortized
Cost

$

2,772
11,732
22,495
56,943
88,357
10,000
1,486
$ 193,785

$

987
8,124
22,300
33,704
105,522
3,000
1,486
$ 175,123

Gross Unrealized

Gains

Losses

Fair
Value

$

$

$

$

$

26
197
379
1,801
1,809
358

—  
$

4,570

$
8
—  
41
144
522
53
—  
$

768

— $
—  
—  
—  
(54)
(14)
(257)
(325)

2,798
11,929
22,874
58,744
90,112
10,344
1,229
$ 198,030

— $
(77)
(58)
(59)
(428)

—  

(176)
(798)

995
8,047
22,283
33,789
105,616
3,053
1,310
$ 175,093

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

The Company's investment securities are classified as available for sale. Agency bonds and notes, 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 $153.9 million and $139.8 million at December 31, 2020 and December 31, 2019,
respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by
law.

52

    
    
    
    
 
   
   
   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2020, 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.

(in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Total
Mortgage-backed securities
Total available-for-sale securities

Other investment securities

Amortized
Cost

3,323
21,829
38,404
41,872
105,428
88,357
193,785

$

$

Fair
Value

3,340
22,071
39,570
42,937
107,918
90,112
198,030

$

$

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)
Other securities:
FHLB stock
MIB stock
Equity securities with readily determinable fair values
Total other investment securities

2020

2019

$

$

6,170
151
32
6,353

$

$

5,644
151
13
5,808

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, 2020 and December 31, 2019 were as follows:

(in thousands)
At December 31, 2020
U.S. Treasury
Mortgage-backed securities
Other debt securities
Bank issued trust preferred securities

Total

(in thousands)
At December 31, 2019
U.S. government and federal agency obligations
U.S. government-sponsored enterprises
Obligations of states and political subdivisions
Mortgage-backed securities
Bank issued trust preferred securities

Total

Less than 12 months

Fair
Value

     Unrealized     
Losses

12 months or more
Fair
Value

     Unrealized     
Losses

Total
Fair
Value

Total

     Unrealized

Losses

$

$ 1,015
7,494
2,987

—  
$

$ 11,496

— $
— $
—
(54)
—
(14)
—  
1,229
(68) $ 1,229

$

— $ 1,015
7,494
—
2,987
—
(257)
1,229
(257) $ 12,725

$

$ 6,238
5,949
  10,729
5,444

—  
$

$ 28,360

(69) $ 1,809
7,488
(47)
1,931
(53)
40,120
(37)
1,310
—  
(206) $ 52,658

$

$

(8) $ 8,047
  13,437
(11)
  12,660
(6)
45,564
(391)
(176)
1,310
(592) $ 81,018

$

$

$

$

—
(54)
(14)
(257)
(325)

(77)
(58)
(59)
(428)
(176)
(798)

The total available for sale portfolio consisted of approximately 308 securities at December 31, 2020. The portfolio included 10 securities having an
aggregate fair value of $12.7 million that were in a loss position at December 31, 2020. Securities identified as temporarily

53

    
    
 
 
 
 
 
 
 
 
 
 
    
    
 
   
  
 
 
 
 
    
 
   
   
   
   
   
  
 
 
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

impaired which had been in a loss position for 12 months or longer totaled $1.2 million at fair value at December 31, 2020. The $325,000 aggregate
unrealized loss included in accumulated other comprehensive loss at December 31, 2020 was caused by interest rate fluctuations.

The total available for sale portfolio consisted of approximately 322 securities at December 31, 2019. The portfolio included 128 securities having
an aggregate fair value of $81.0 million that were in a loss position at December 31, 2019. Securities identified as temporarily impaired which had
been in a loss position for 12 months or longer had a fair value of $52.7 million  at December  31, 2019. The $798,000 aggregate unrealized  loss
included in accumulated other comprehensive loss at December 31, 2019 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, 2020 and 2019, 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)
Investment securities gains (losses), net
Available for sale securities:
Gains realized on sales
Losses realized on sales
Other-than-temporary impairment recognized
Other investment securities:
Fair value adjustments, net
Investment securities gains (losses), net

2020

2019

2018

$

$

$

49
(8)
—  

20
61

$

$

6
(46)
—  

—  
$
(40)

253
—
—

2
255

During  the  year  ended  December  31,  2020,  the  Company  received  $5.8  million  proceeds  from  the  sale  of  available  for  sale  debt  securities  and
recognized net securities gains, which include the unrealized net gains related to equity securities, of $61,000. This is compared to $21.5 million and
$77.2 million proceeds from the sale of available debt securities and recognized net gains (losses) of $(40,000) and $255,000 for the years ended
December 31, 2019 and 2018, respectively.

(5)      Premises and Equipment

A summary of premises and equipment at December 31, 2020 and 2019 is as follows:

(in thousands)
Land and land improvements
Buildings and improvements
Furniture and equipment
Operating leases - right of use asset
Construction in progress
Total
Less accumulated depreciation
Premises and equipment, net

2020

2019

9,452
35,520
13,570
2,594
268
61,404
26,843
34,561

$

$

9,433
34,926
14,081
2,425
77
60,942
25,554
35,388

$

$

Depreciation expense for the years ended December 31, 2020, 2019, and 2018 was as follows:

(in thousands)
Depreciation expense

2020

2019

2018

$

2,265

$

2,062

$

1,797

54

    
    
    
 
   
   
  
 
   
   
  
 
 
 
 
 
  
 
  
 
  
 
 
    
    
 
 
 
 
 
 
 
 
 
 
    
    
    
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(6)      Intangible Assets

Mortgage Servicing Rights

At December 31, 2020 the Company was servicing $292.7 million of loans sold to the secondary market compared to $271.4 million and $279.9
million at December 31, 2019 and 2018, respectively. Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold
and serviced for others were $854,000, $778,000, and $821,000, for the years ended December 31, 2020, 2019, and 2018, respectively.

The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2020, 2019, and 2018.

(in thousands)
Balance at beginning of period
Originated mortgage servicing rights
Changes in fair value:

Due to changes in model inputs and assumptions (1)
Other changes in fair value (2)

Total changes in fair value
Balance at end of period

2020

2,482
866

(422)
(481)
(903)
2,445

$

$

2019

2,931
290

(434)
(305)
(739)
2,482

$

$

2018

2,713
245

286
(313)
(27)
2,931

$

$

(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, 2020
and 2019:

Weighted average constant prepayment rate
Weighted average note rate
Weighted average discount rate
Weighted average expected life (in years)

(7)      Deposits

2020

2019

15.74 %  
3.55 %  
7.75 %  
4.8  

13.42 %
3.93 %
8.61 %
4.8

The  aggregate  amount  of time  deposits  with balances  that  met  or  exceeded  the  Federal  Deposit  Insurance  Corporation  (FDIC) insurance  limit  of
$250,000 was $91.3 million and $104.3 million at December 31, 2020 and 2019, respectively. The Company had brokered deposits totaling $40.2
million and $45.2 million at December 31, 2020 and 2019, respectively.

55

    
    
    
 
 
 
 
  
 
  
 
  
 
 
 
 
 
 
 
    
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

The scheduled maturities of total time deposits at December 31, 2020 were as follows:

(in thousands)
Due within:

2021
2022
2023
2024
2025
Thereafter
Total

$

$

191,565
63,025
20,102
1,025
1,589
—
277,306

The Federal Reserve Bank required the Bank to maintain cash or balances of zero at December 31, 2020 compared to $1.3 million at December 31,
2019 to satisfy reserve requirements. Average compensating balances held at correspondent banks were $1.5 million at both December 31, 2020 and
2019. 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:

(in thousands)
2020

Federal funds purchased
Short-term repurchase agreements - Bank

Total

2019

Federal funds purchased
Short-term repurchase agreements - Bank

Total

     Year End      Average     
Weighted Weighted

Rate

Rate

Average
Balance
Outstanding

     Maximum     
Outstanding at
any Month End

Balance at
December 31,

0.36 %  
0.24

2.00 %  
0.45

0.26 %  $
0.43

$

2.65 %  $
0.59

$

— $

— $

34,026
34,026

329
22,198
22,527

$

$

$

45,154
45,154

1,950
27,272
29,222

$

$

$

—
45,154
45,154

—
27,272
27,272

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 $50.0
million on an unsecured basis and $15.7 million on a secured basis at December 31, 2020.

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

56

    
 
  
 
 
 
 
 
 
   
   
   
   
  
 
 
   
  
 
   
  
 
  
 
  
 
  
 
 
   
  
                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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

(in thousands)
At December 31, 2020
U.S. government and federal agency obligations
U.S. government-sponsored enterprises
Mortgage-backed securities

Total

At December 31, 2019
U.S. Treasury
U.S. government-sponsored enterprises
Mortgage-backed securities

Total

(9)      Leases

Remaining Contractual Maturity of the Agreements

     Overnight

and
continuous

Less
than
90 days

     Greater

than
90 days

Total

$

$

$

$

2,728
15,533
26,893
45,154

754
12,853
13,665
27,272

$

$

$

$

— $
—
—  
— $

— $
—  
—  
— $

— $
—
—  
— $

2,728
15,533
26,893
45,154

— $
—  
—  
— $

754
12,853
13,665
27,272

The Company's leases primarily consist of office space and bank branches with remaining lease terms of generally 1 to 10 years. As of December
31,  2020,  operating  right-of-use  (ROU)  assets  and  liabilities  were  $2.1  million  and  $2.1  million,  respectively.  As  of  December  31,  2020,  the
weighted-average remaining lease term on these operating leases is approximately 7.3 years and the weighted-average discount rate used to measure
the lease liabilities is approximately 4.0%.

Operating leases in which the Company is the lessee are recorded as operating lease right-of-use assets and operating lease liabilities. Currently, the
Company does not have any finance leases. The ROU assets are included in premises and equipment, net on the consolidated balance sheets.

Operating lease ROU assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent
the  Company's  obligation  to  make  lease  payments  arising  from  the  lease.  ROU  assets  and  operating  lease  liabilities  are  recognized  at  lease
commencement  based  on  the  present  value  of  the  remaining  lease  payments  using  a  discount  rate  that  represents  the  Company's  incremental
borrowing rate at the lease commencement date.

Operating  lease  cost,  which  is  comprised  of  amortization  of  the  ROU  asset  and  the  implicit  interest  accreted  on  the  operating  lease  liability,  is
recognized  on  a  straight-line  basis  over  the  lease  term,  and  is  recorded  in  net  occupancy  expense  in  the  consolidated  statements  of  income.  The
operating lease cost was $348,000 and $288,000 for the years ended December 31, 2020 and 2019, respectively.

At  adoption  of  ASU  2016-02  on  January  1,  2019,  lease  and  non-lease  components  of  new  lease  agreements  are  accounted  for  separately.  Lease
components  include  fixed  payments  including  rent,  real  estate  taxes  and  insurance  costs  and  non-lease  components  include  common-area
maintenance costs. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for
these leases on a straight-line  basis over the lease term. Operating lease expense for these leases was $108,000 for the year ended December 31,
2020 compared to $163,000 for the year ended December 31, 2019.

57

    
       
  
 
   
   
   
  
 
 
 
  
 
  
 
  
 
  
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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

Lease payments due in:
(in thousands)
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less imputed interest
Total lease liabilities, as reported

(10)      Borrowings

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

Operating
Lease

374
367
366
258
257
830
2,452
(315)
2,137

$

$

(in thousands)
FHLB advances

Borrower

  The Bank

Maturity
Date

2020
2021
2022
2023
2024
2025
Thereafter

2020

2019

    Year End
Year End Weighted
Balance

Rate

     Year End
Year End Weighted  
Balance

Rate

$

—  
29,241  
9,419  
11,000  
11,000  
15,000  
31,000

— %  $ 49,236  
2.54 %    29,241  
4,418  
1.33 %   
3,000  
1.05 %   
3,000  
1.17 %   
8,000
1.17 %   
—
1.50 %  

2.61 %
2.52 %
2.14 %
1.90 %
1.93 %
2.15 %
— %  

4.00 %

Other borrowings
Total Bank

2022

14  
   $ 106,674  

4.00 %   

24  
$ 96,919  

Subordinated notes

  The Company  

Total Company

2034
2035

$ 25,774  
23,712  

$ 49,486

2.93 %  $ 25,774  
2.06 %    23,712  

4.60 %
3.73 %

$ 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, 2020, the Bank had $106.7 million in outstanding borrowings with
the FHLB. Based upon the collateral pledged to the FHLB at December 31, 2020, the Bank could borrow up to an additional $71.0 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  (2.06%  at
December 31, 2020). The TPS can be prepaid without penalty at any time after five years from the issuance date.

58

    
 
 
 
 
 
    
    
    
    
 
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
  
 
   
  
 
   
  
 
   
 
 
   
  
  
 
   
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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 (2.93% at December 31, 2020). 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,  2020  and  2019  was  $49.5  million,  respectively.  The
Company  has  recorded  the  investments  in  the  common  securities  issued  by  the  Exchange  Statutory  Trusts  aggregating  $1.2  and  $1.3  million  at
December  31,  2020  and  2019,  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.

(11)    Income Taxes

The composition of income tax expense for the years ended December 31, 2020, 2019, and 2018 was as follows:

(in thousands)
Current:
Federal
State

Total current
Deferred:
Federal
State

Total deferred
Total income tax expense

2020

2019

2018

$

4,268

$
—  

3,830

$
—  

4,268

3,830

1,175
(181)
994

(1,085)

—  

(1,085)
3,183

$

$

(7)
—  
(7)
3,823

$

674
—
674
1,668

59

    
    
    
 
   
   
  
 
 
 
 
 
  
 
  
 
  
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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, 2020, 2019, and 2018 are as follows:

(in thousands)
Income before provision for income tax expense
Tax at statutory federal income tax rate
Tax Cuts and Jobs Act
State restructuring
Tax-exempt income, net
State income tax, net of federal tax benefit
Other, net
Provision for income tax expense

2020

2019
     Amount      %      Amount      %      Amount      %  

2018

$ 17,476  
$ 3,670  
—  
—  
(487) 
—  
—  
$ 3,183  

—  
—  

$ 19,937  
21.00 %  $ 4,187  
—  
—  
(408) 
—  
44  
18.21 %  $ 3,823  

—  
—  

(2.79)

21.00 %  $
—  
—  

(2.04)

—  

0.22

19.18 %  $

$ 12,382  
2,600  
(343) 
(143) 
(432) 
—  
(14) 
1,668  

21.00 %
(2.77)
(1.16)
(3.49)
—
(0.11)
13.47 %

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 18.2% for the year ended
December 31, 2020 compared to 19.2% and 13.5% for the years ended December 31, 2019 and 2018, respectively.

The  decrease  in  the  effective  tax  rate  for  the  year  ended  December  31,  2020  compared  to  the  year  ended  December  31,  2019  was  primarily
attributable to tax-free revenues having a greater impact on pre-tax income due to the reduced level of earnings in 2020.

The  increase  in  the  effective  tax  rate  for  the  year  ended  December  31,  2019  compared  to  the  year  ended  December  31,  2018  was  primarily
attributable to a one-time benefit recorded in 2018 associated with the finalization of the Company’s analysis of the Tax Cuts and Jobs Act (Tax
Act), a one-time benefit recorded in 2018 associated with the Company’s state tax planning initiatives, and the increased earnings and branch sale
gain in 2019.  

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  in  2018 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 and a $180,000 benefit attributable to various accounting method changes made on the Company's
2017 tax return.

60

 
  
  
  
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

The components of deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019 were as follows:

(in thousands)
Deferred tax assets:

Allowance for loan losses
Pension
Other real estate owned
Deferred loan fees
Lease liability
Intangible assets
Accrued / deferred compensation
Other

Total deferred tax assets
Deferred tax liabilities:

Premises and equipment
Mortgage servicing rights
Deferred loan costs
Right-of-use asset
Prepaid expenses
Securities
Other

Total deferred tax liabilities
Net deferred tax assets

2020

2019

$

$

$

$

2,927
1,233
550
563
449
22
530
368
6,642

553
514
288
443
359
900
8
3,065
3,577

$

$

$

$

2,564
1,747
621
131
467
103
399
95
6,127

625
521
273
465
328
9
10
2,231
3,896

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, 2020. Management arrived at this conclusion based upon the level of historical taxable income and projections for future taxable income of the
appropriate character over the periods in which the deferred tax assets are deductible. The Company follows ASC Topic 740, Income Taxes, which
addresses the accounting for uncertain tax positions.

The  Company  follows  ASC  Topic  740,  Income  Taxes,  which  addresses  the  accounting  for  uncertain  tax  positions. For  each  of  the  years  ended
December 31, 2020 and 2019, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

61

    
    
 
   
  
 
 
 
 
 
 
 
 
 
 
 
  
 
  
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(12)    Stockholders' Equity

Accumulated Other Comprehensive Income (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.

(in thousands)
Balance, December 31, 2018
Other comprehensive income, before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Other comprehensive income (loss), before tax
Income tax (expense) benefit
Other comprehensive income (loss), net of tax
Balance, December 31, 2019
Other comprehensive income, before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Other comprehensive income, before tax
Income tax expense
Other comprehensive income, net of tax
Balance, December 31, 2020

Unrealized 
Income (Loss)
     on Securities (1)     

Unrecognized Net
Pension and
Postretirement
Costs (2)

Accumulated
Other
Comprehensive
Income (Loss)

$

$

$

(3,455)
4,304
40
4,344
(912)
3,432
(23)
4,315
(41)
4,274
(898)
3,376
3,353

$

$

$

(2,644)
79
(1,455)
(1,376)
288
(1,088)
(3,732)
214
2,200
2,414
(507)
1,907
(1,825)

$

$

$

(6,099)
4,383
(1,415)
2,968
(624)
2,344
(3,755)
4,529
2,159
6,688
(1,405)
5,283
1,528

(1) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) income are included in gains (losses) on sale of investment securities

in the consolidated statements of income.

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

Note 13.

(13)    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)
Payroll taxes
Medical plans
401(k) match and profit sharing
Periodic pension cost
Other
Total employee benefits

2020

2019

2018

$

$

1,273
1,854
1,586
1,614
59
6,386

$

$

1,112
1,826
1,290
1,430
63
5,721

$

$

1,156
2,109
956
1,707
67
5,995

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  years
shown. In addition, employees were able to make additional tax-deferred contributions.

62

    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
    
    
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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 December 31, 2020, the accrued liability was $960,000 and the expense for this plan of $320,000 for both the years ended December 31, 2020
and 2019, respectively, was accrued and recognized over the required service period.

Pension

The  Company  provides  a  noncontributory  defined  benefit  pension  plan  for  all  full-time  employees.  Beginning  January  1,  2018  and  for  all
retrospective periods presented, the Company adopted the guidance under ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost
and Net Periodic Postretirement Benefit Cost. Under the new guidance, only the service cost component of the net periodic benefit cost is reported
in  the  same  income  statement  line  item  as  salaries  and  benefits,  and  the  remaining  components  are  reported  as  other  non-interest  expense.  An
employer  is  required  to  recognize  the  funded  status  of  a  defined  benefit  postretirement  plan  as  an  asset  or  liability  in  its  balance  sheet  and  to
recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy
for  the  defined  benefit  pension  plan,  contributions  are  made  to  a  trust  as  necessary  to  provide  for  current  service  and  for  any  unfunded  accrued
actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be
made  in  a  particular  year.  The  Company  made  a  pension  contribution  of  $500,000  on  March  25,  2020.  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)
Change in projected benefit obligation:
Balance, January 1
Service cost
Interest cost
Actuarial loss
Benefits paid
Balance, December 31, 
Change in plan assets:
Fair value, January 1
Actual return on plan assets
Employer contribution
Expenses paid
Benefits paid
Fair value, December 31, 
Funded status at end of year
Accumulated benefit obligation

Amounts recognized in the statement of financial position consist of the following:
(in thousands)
Noncurrent assets
Current liabilities
Noncurrent liabilities
Net liability at end of year

63

2020

2019

$ 34,009   $ 26,892
1,430
1,169
5,164
(646)
$ 36,957   $ 34,009

1,614  
1,127  
933  
(726) 

4,725  
500  
(104) 
(726) 

$ 25,689   $ 19,672
5,164
1,610
(111)
(646)
$ 30,084   $ 25,689
$ (6,873)  $ (8,320)
$ 30,156   $ 26,380

2020

2019

$

—   $
—  
(6,873) 

—
—
(8,320)
$ (6,873)  $ (8,320)

    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
    
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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)
Service cost - benefits earned during the year
Interest costs on projected benefit obligations (a)
Expected return on plan assets (a)
Expected administrative expenses (a)
Amortization of prior service cost (a)
Amortization of unrecognized net loss (a)
Net periodic pension cost

2020

1,614
1,127
(1,598)
110
50
164
1,467

$

$

$

$

2019

2018

$

1,430
1,169
(1,467)
122
79
—  
$

1,333

1,707
1,037
(1,327)
93
79
140
1,729

(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) income at December 31, 2020 and
2019 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

(in thousands)
Prior service costs
Net accumulated actuarial net loss
Accumulated other comprehensive loss
Net periodic benefit cost in excess of cumulative employer contributions
Net amount recognized at December 31,  balance sheet

Net actuarial gain (loss) arising during period
Prior service cost amortization
Amortization of net actuarial loss
Total recognized in other comprehensive income (loss)

Total recognized in net periodic pension cost and other comprehensive (loss) income

2020

2019

$

$

$

$

$

— $

(2,311)
(2,311)
(4,562)
(6,873)

2,200
50
164
2,414

(947)

$

$

$

$

(49)
(4,675)
(4,724)
(3,596)
(8,320)

(1,455)
79
—
(1,376)

2,709

The 2020 actuarial gain was primarily the result of the actual return on assets exceeding the expected asset return and updated assumptions. The 2019 actuarial
loss was primarily the result of the decrease in the discount rate.

64

    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
    
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

Assumptions utilized to determine benefit obligations as of December 31, 2020, 2019, and 2018 and to determine pension expense for the years then
ended are as follows:

Determination of benefit obligation at year end:

Discount rate
Annual rate of compensation increase

Determination of pension expense for year ended:

Discount rate for the service cost
Annual rate of compensation increase
Expected long-term rate of return on plan assets

2020     

2019     

2018

2.80 % 3.45 % 4.40 %
4.50 % 4.00 % 4.00 %

3.45 % 4.40 % 3.75 %
4.00 % 4.00 % 4.00 %
6.75 % 6.75 % 6.75 %

The assumed overall expected long-term rate of return on pension plan assets used in calculating 2020 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: 19.7% in 2020, 25.8% in 2019, (6.2)% in 2018, 17.4% in 2017, and 8.2% in 2016. 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  a  decrease  in  the  discount  rate  used  in  the  actuarial  calculation  of  plan  income,  the  Company  expects  to  incur  $1.1  million  of
expense in 2021 compared to $1.8 million 2020.

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, 2020 and 2019 by asset category was as follows:

(in thousands)
December 31, 2020
Cash equivalents

U.S government agency obligations
Equity securities
Mutual funds
Total

December 31, 2019
Cash equivalents

U.S government agency obligations
Corporate bonds
Equity securities
Mutual funds
Total

Fair Value Measurements

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Other

Significant

Observable Unobservable

Inputs
(Level 2)

Inputs
(Level 3)

     Fair Value     

666
$
—  

1,473
27,634
29,773

$

1,940

$
—  
—
1,436
21,706
25,082

$

— $
311  
—
—  
311 $

— $
300  
307
—
—  
607 $

—
—
—
—
—

—
—
—
—
—
—

$

666
311
1,473
27,634
$ 30,084

$

1,940
300
307
1,436
21,706
$ 25,689

$

$

$

$

65

    
 
 
 
 
   
   
  
 
 
 
    
    
 
 
    
    
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

The following future benefit payments are expected to be paid:

Year
(in thousands)
2021
2022
2023
2024
2025
2026 to 2030

  $

Pension
benefits

871
1,007
1,034
1,037
1,102
7,403

(14)    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:

Outstanding, beginning of year
Granted
Exercised
Forfeited or expired
Outstanding, end of year
Exercisable, end of year

Number of shares
December 31, 
2019

2020

—  
—  
—  
—  
—  
—  

—  
—  
—  
—  
—  
—  

2018
22,615

$
—  

(22,615)

—  
— $
— $

Weighted average
exercise price
December 31, 
2019

2020

— $
—  
—  
—  
— $
— $

— $
—  
—  
—  
— $
— $

2018

13.13
—
13.13
—
—
—

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2020.

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
22,615 options to purchase common shares were exercised at a weighted average price of $13.13 per share.

(15)    Earnings per Share

Stock  Dividend  On  July  1,  2020,  the  Company  paid  a  special  stock  dividend  of  four  percent  to  common  shareholders  of  record  at  the  close  of
business  on  June  15,  2020.  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.

66

    
 
 
 
 
 
    
    
    
    
    
    
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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)
Basic earnings per share:
Net income available to shareholders
Average shares outstanding
Basic earnings per share
Diluted earnings per share:
Net income available to shareholders
Average shares outstanding
Effect of dilutive stock options
Average shares outstanding including dilutive stock options
Diluted earnings per share

$

$

$

$

14,293
6,489,799
2.20

14,293
6,489,799

$

$

$

—  

6,489,799
2.20

16,114   $

6,525,684  

2.47   $

10,714
6,518,772
1.64

16,114   $

6,525,684  
—  
6,525,684  

$

2.47   $

10,714
6,518,772
5,454
6,524,226
1.64

2020

2019

2018

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 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. There were no shares
for the year ended December 31, 2020 that were omitted from the computation of diluted earnings per share as a result of being considered anti-
dilutive.

Repurchase Program

In  the  third  quarter  of  2020,  the  Company's  Board  of  Directors  authorized  the  purchase  of  up  to  $2.5  million  market  value  of  the  Company's
common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as, the timing of any
such purchases. As of December 31, 2020, $2.4 million remained for share repurchase pursuant to that authorization.

(16)    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 began being phased in over four years beginning in

67

    
    
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

2016. On January 1, 2016, the first phase of the requirement went into effect at 0.625% of risk-weighted assets, and increased each subsequent year
by an additional  0.625 percentage  points, to reach its final level of 2.5% of risk weighted assets on January 1, 2019. At December  31, 2019, the
capital conservation buffer of 2.5%, effectively raised the minimum required risk-based capital ratios to 7% Common Equity Tier 1 Capital, 8.5%
Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.

Under  the  Basel  III  requirements,  at  December  31,  2020  and  December  31,  2019,  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:

(in thousands)
December 31, 2020
Total Capital (to risk-weighted assets):
Company
Bank
Tier 1 Capital (to risk-weighted assets):
Company
Bank
Common Equity Tier 1 Capital (to risk-weighted assets):
Company
Bank
Tier 1 leverage ratio (to adjusted average assets):
Company
Bank

December 31, 2019
Total Capital (to risk-weighted assets):
Company
Bank
Tier 1 Capital (to risk-weighted assets):
Company
Bank
Common Equity Tier 1 Capital (to risk-weighted assets)
Company
Bank
Tier 1 leverage ratio:
Company
Bank

Actual 

Minimum Capital
Required - Basel III
Fully Phased-In

Required to be
Considered Well-
Capitalized

     Amount 

     Ratio      Amount 

     Ratio      Amount 

     Ratio

  $ 193,220
191,504

14.97 %$ 135,518
135,186
14.87

10.50 %$
10.50

—
128,748

N.A %

10.00

  $ 172,591
175,384

13.37 %$ 109,705
109,436
13.62

8.50 %$
8.50

—
102,999

  $ 129,061
175,384

10.00 %$
13.62

90,345
90,124

7.00 %$
7.00

—
83,686

  $ 172,591
175,384

10.19 %$
10.41

67,724
67,394

4.00 %$
4.00

—
84,243

N.A %
8.00

N.A %
6.50

N.A %
5.00

  $ 179,430
175,459

14.89 %$ 126,511
126,165
14.60

10.50 %$
10.50

—
120,158

N.A %

10.00

  $ 157,139
162,822

13.04 %$ 102,414
102,134
13.55

8.50 %$
8.50

—
96,126

  $ 118,793
162,822

9.86 %$

13.55

84,341
84,110

7.00 %$
7.00

—
78,102

  $ 157,139
162,822

10.73 %$
11.18

58,562
58,280

4.00 %$
4.00

—
72,850

N.A %
8.00

N.A %
6.50

N.A %
5.00

68

 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(17)    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. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows. During the year ended
December 31, 2020 there were no transfers into or out of Levels 1-3.

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. A quoted price in an active market provides the
most  reliable  evidence  of  fair  value  and  is  used  to  measure  fair  value  whenever  available.  A  contractually  binding  sales  price  also  provides
reliable evidence of fair value.

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

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

In accordance  with fair value accounting  guidance,  the Company measures,  records, and reports various types of assets and liabilities  at fair
value  on  either  a  recurring  or  non-recurring  basis  in  the  Consolidated  Financial  Statements.  Nonfinancial  assets  measured  at  fair  value  on  a
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.

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  that  are  not
actively traded are classified in level 2.

69

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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

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.

(in thousands)
December 31, 2020

Assets:

U.S. Treasury
U.S. government and federal agency obligations
U.S. government-sponsored enterprises
Obligations of states and political subdivisions
Mortgage-backed securities
Other debt securities
Bank-issued trust preferred securities
Equity securities
Mortgage servicing rights

Total

December 31, 2019

Assets:

U.S. Treasury
U.S. government and federal agency obligations
U.S. government-sponsored enterprises
Obligations of states and political subdivisions
Mortgage-backed securities
Other debt securities
Bank-issued trust preferred securities
Equity securities
Mortgage servicing rights

Total

Fair Value Measurements

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Other

Significant

Observable Unobservable

Inputs
(Level 2)

Inputs
(Level 3)

     Fair Value     

$

2,798
11,929
22,874
58,744
90,112
10,344
1,229
32
2,445
$ 200,507

$

995
8,047
22,283
33,789
  105,616
3,053
1,310
13
2,482
$ 177,588

$

$

$

2,798  
—  
—  
—  
—  
—
—
32
—  

—   $

11,929  
22,874  
58,744  
90,112  
10,344
1,229
—
—  

2,830

$ 195,232   $

995  
—  
—  
—  
—  
—
—
13
—  

—   $

8,047  
22,283  
33,789  
105,616  
3,053
1,310
—
—  

$

1,008

$ 174,098   $

—
—
—
—
—
—
—
—
2,445
2,445

—
—
—
—
—
—
—
—
2,482
2,482

70

 
 
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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

(in thousands)
Balance at December 31, 2018
Total (losses) or gains (realized/unrealized):

Included in earnings
Included in other comprehensive income

Purchases
Sales
Issues
Settlements
Balance at December 31, 2019
Balance at beginning of period
Total (losses) or gains (realized/unrealized):

Included in earnings
Included in other comprehensive income

Purchases
Sales
Issues
Settlements
Balance at December 31, 2020

Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Mortgage Servicing Rights

2,931

(739)
—
—
—
290
—
2,482

(903)
—
—
—
866
—
2,445

$

$

$

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, 2020, the Company identified $32.2 million in impaired loans that had specific allowances for losses aggregating $4.7
million. Related to these loans, there were $164,000 in charge-offs recorded during the year ended December 31, 2020. As of December 31,
2019, the Company identified $3.0 million in impaired loans that had specific allowances for losses aggregating $316,000. Related to these
loans, there were $207,000 in charge-offs recorded during the year ended December 31, 2019.

71

    
    
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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.

(in thousands)
December 31, 2020
Assets:
Collateral dependent impaired loans:

Commercial, financial, & agricultural
Real estate mortgage - residential
Real estate mortgage - commercial
Installment and other consumer

Total

Other real estate and repossessed assets

December 31, 2019
Assets:
Collateral dependent impaired loans:

Commercial, financial, & agricultural
Real estate construction - commercial
Real estate mortgage - residential
Real estate mortgage - commercial
Installment and other consumer

Total

Other real estate and repossessed assets

Fair Value Measurements Using

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

Total
    Fair Value    

Other

Significant

Observable Unobservable

Inputs
(Level 2)

Inputs
(Level 3)

Total Gains
(Losses)*

$

$ 4,505
417
  22,581

—  
$
$

$ 27,503
$ 12,291

$

379
137
1,028
1,119
12
$ 2,675
$ 12,781

$

$
$

— $
—  
—  
—  
— $
— $

— $
—  
—  
—  
—  
— $
— $

— $
—  
—  
—  
— $
— $

4,505   $
417  
22,581  
—  
27,503   $
12,291   $

— $
—  
—  
—  
—  
— $
— $

379   $
137  
1,028  
1,119  
12  
2,675   $
12,781   $

(52)
(52)
(39)
(21)
(164)
219

(132)
—
(45)
(18)
(12)
(207)
(157)

*

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.  

(18)    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

72

 
 
 
 
    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

loans, or exit price, is estimated by using the future value of discounted cash flows using comparable market rates for similar types of loan
products  and  adjusted  for  market  factors.  The discount  rates  used  are  estimated  using comparable  market  rates  for  similar  types of loan
products adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.

Loans Held for Sale

Loans originated and intended to be sold in the secondary market, generally 1-4 family residential mortgage loans, are carried, in aggregate,
at the lower of cost or estimated fair value. The estimated fair value measurements of loans held for sale are management's best estimate of
market value, which is primarily based on quoted market prices for similar loans in the secondary market.

Investment Securities

A detailed description of the fair value measurement of the debt instruments in the available-for-sale sections of the investment security
portfolio  is  provided  in  the  Fair  Value  Measurement  section  above.  A  schedule  of  investment  securities  by  category  and  maturity  is
provided in the notes on Investment Securities.

Other investment securities

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have
readily determinable fair values. Investments in 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 that are
not actively traded are classified in level 2.

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

Federal Funds Sold, Cash, and Due from Banks

The carrying amounts of short-term federal funds sold 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 which is equal to
fair value.  

Cash Surrender Value – Life Insurance

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

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.

73

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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.

Operating Lease Liabilities

The  fair  value  of  operating  lease  liabilities  are  recognized  at  lease  commencement  based  on  the  present  value  of  the  remaining  lease
payments using a discount rate that represents the Company's incremental borrowing rate at the lease commencement date.

74

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

A summary of the carrying amounts and fair values of the Company's financial instruments at December 31, 2020 and 2019 is as follows:

December 31, 2020
Fair Value Measurements

(in thousands)
Assets:
Cash and due from banks
Federal funds sold and overnight interest-
bearing deposits
Certificates of deposit in other banks
Available for sale securities
Other investment securities
Loans, net
Loans held for sale
Cash surrender value - life insurance
Accrued interest receivable

Total

Liabilities:
Deposits:

Non-interest bearing demand
Savings, interest checking and money
market
Time deposits

Federal funds purchased and securities
sold under agreements to repurchase
Federal Home Loan Bank advances and
other borrowings
Subordinated notes
Operating lease liabilities
Accrued interest payable

Total

December 31, 2020

Carrying
amount

Fair
value

Quoted Prices
in Active
  Markets for  
Identical
Assets
(Level 1)

Other

Net
Significant

  Observable   Unobservable

Inputs
(Level 2)

Inputs
(Level 3)

$

19,235

$

19,235

$

19,235

$

—   $

—

161,128
9,376
198,030
6,353
  1,268,854
5,099
2,451
6,640
$ 1,677,166

161,128
9,376
198,030
6,353
  1,288,677
5,279
2,451
6,640
$ 1,697,169

161,128
9,376
2,798
32
—  
—
—  

—  
—  
  195,232  
6,321  
—  
—
2,451  
—  

—
—
—
—
1,288,677
5,279
—
—
$ 204,004   $ 1,293,956

6,640
199,209

$

$

382,492

$

382,492

$

382,492

$

—   $

—

723,808
277,306

723,808
279,569

723,808

—  

45,154

45,154

45,154

—  
—  

—  

—
279,569

—

—
—

—   110,121  
40,929  
—  
2,137

837
$ 1,152,291

—  

$ 153,187   $

—
279,569

106,674
49,486
2,137
837
$ 1,587,894

110,121
40,929
2,137
837
$ 1,585,047

75

 
 
 
 
 
 
 
 
 
 
 
    
    
    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

December 31, 2019
Fair Value Measurements

(in thousands)
Assets:
Cash and due from banks
Federal funds sold and overnight interest-
bearing deposits
Certificates of deposit in other banks
Available-for-sale securities
Other investment securities
Loans, net
Loans held for sale
Cash surrender value - life insurance
Accrued interest receivable

Liabilities:
Deposits:

Non-interest bearing demand
Savings, interest checking and money
market
Time deposits

Federal funds purchased and securities sold
under agreements to repurchase
Federal Home Loan Bank advances and
other borrowings
Subordinated notes
Operating lease liabilities
Accrued interest payable

December 31, 2019

Carrying
amount

Fair
value

Quoted Prices
in Active
  Markets for  
Identical
Assets
(Level 1)

Other

Net
Significant

     Observable      Unobservable

Inputs
(Level 2)

Inputs
(Level 3)

$

22,576

$

22,576

$

22,576

$

—   $

—

55,545
10,862
175,093
5,808
  1,156,320
428
2,398
6,481
$ 1,435,511

55,545
10,862
175,093
5,808
  1,148,339
435
2,398
6,481
$ 1,427,537

55,545
10,862
995
13
—  
—
—  

—  
—  
  174,098  
5,795  
—  
—
2,398  
—  

—
—
—
—
1,148,339
435
—
—
$ 182,291   $ 1,148,774

6,481
96,472

$

$

261,166

$

261,166

$

261,166

$

—   $

—

614,331
311,024

614,331
311,489

614,331

—  

27,272

27,272

27,272

96,919
49,486
2,224
1,136
$ 1,363,558

97,833
43,640
2,224
1,136
$ 1,359,091

$

—  
—  
—
1,136
903,905

$ 143,697   $

—  
—  

—  

97,833  
43,640  
2,224

—  

—
311,489

—

—
—
—
—
311,489

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.

76

 
 
 
 
    
 
 
 
 
 
    
    
    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(19)    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, 2020, 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, 2020 and 2019 is as follows:

(in thousands)
Commitments to extend credit
Commitments to originate residential first and second mortgage loans
Standby letters of credit

Total

Commitments

$

2020
264,528
51,270
125,800
441,598

$

2019
240,758
3,980
97,348
342,086

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, 2020.

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.

(20)    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.

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,

77

    
    
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

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:

●

Service charges on deposit accounts - represents fees generated from a variety of deposit products and services provided to customers under
a day-to-day contract. These fees are recognized on a daily or monthly basis.

● Bank card income and fees – represents fees, exchange, and other service charge revenue earned from merchant, debit and credit cards that

are recognized when the services are rendered or upon completion. These fees are recognized on a daily or monthly basis.

● Gain on sale of other real estate - represents income recognized at the time of control of a property is transferred to the buyer.

(21)    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

(in thousands)
Assets
Cash and due from bank subsidiaries
Investment in bank-issued trust preferred securities
Investment in subsidiaries
Deferred tax asset
Other assets
Total assets

Liabilities and Stockholders’ Equity
Subordinated notes
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity

December 31, 

2020

2019

$

2,013   $
1,229  
  183,020  
1,496  
1,076  

2,576
1,310
  167,196
1,928
1,329
$ 188,834   $ 174,339

49,486
$ 49,486   $
9,815
8,759  
  130,589  
  115,038
$ 188,834   $ 174,339

78

    
    
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

Condensed Statements of Income

Income
Interest and dividends received from subsidiaries
Other
Total income
Expenses
Interest on subordinated notes
Other
Total expenses
Income before income tax benefit and equity in undistributed income of
subsidiaries
Income tax benefit
Equity in undistributed income of subsidiaries
Net income

Condensed Statements of Cash Flows

(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:

Equity in undistributed income of subsidiaries
Decrease (Increase) in deferred tax asset
Other, net

Net cash provided by operating activities
Cash flows from investing activities:
Decrease in investment in subsidiaries, net
Net cash provided by investing activities
Cash flows from financing activities:
Cash dividends paid - common stock
Issuance of stock under equity compensation plan
Purchase of treasury stock
Net cash used in financing activities
Net increase (decrease) in cash and due from banks
Cash and due from banks at beginning of year
Cash and due from banks at end of year

79

For the Years Ended December 31, 
2019

2020

2018

$ 4,946
—
4,946

$ 8,071   $
—
8,071  

1,527
2,692
4,219

2,376  
2,461  
4,837  

5,067
428
5,495

2,229
3,461
5,690

727
876
  12,690
$ 14,293

3,234  
(195)
1,001  
1,397
9,512
  11,879  
$ 16,114   $ 10,714

For the Years Ended December 31, 
2018
2019

2020

$ 14,293

$ 16,114   $ 10,714

(12,690)
432
1,031
3,066

307
307

$

$
$

(11,879) 
(319) 
10  
3,926   $

(9,512)
370
(116)
1,456

—   $
—   $

500
500

(3,030) $
—
(906)
(3,936) $
(563)
2,576
2,013

$

—
—  

(2,684)  $ (1,993)
135
(179)
(2,684)  $ (2,037)
1,242  
(81)
1,415
1,334  
1,334
2,576   $

$

$
$

$

$

$

    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    
    
    
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2020, 2019, and 2018

(22)    Quarterly Financial Information (Unaudited)

(In thousands except per share data)
Year Ended December 31, 2020
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Investment gains (losses), net
Noninterest expense
Income tax expense
Net income
Net income per share:

Basic earnings per share
Diluted earnings per share

Year Ended December 31, 2019
Interest income
Interest expense
Net interest income
Provision for loan losses
Noninterest income
Investment gains (losses), net
Gain on branch sale, net
Noninterest expense
Income tax expense
Net income
Net income per share:

Basic earnings per share
Diluted earnings per share

First

Second  

Third

Fourth  

     quarter      quarter      quarter      quarter     

Year
to
Date

$ 15,808
3,282
  12,526
3,300
2,248
(1)
  10,448
157
868

$

$ 15,721
2,382
  13,339
900
2,633
7
  11,047
750
3,282

$

$ 15,958
2,116
  13,842
1,200
5,075
12
  11,616
1,153
4,960

$

1,942  
  13,556  
400  
4,693  
43

$ 15,498   $ 62,985
9,722
  53,263
5,800
  14,649
61
  44,697
  11,586  
1,123  
3,183
5,183   $ 14,293

$

$

$

0.13
0.13

$

0.50
0.50

$

0.77
0.77

0.80   $
0.80  

2.20
2.20

$ 15,915
4,286
  11,629
150
2,091
1
2,074
9,888
1,091
4,666

$

$ 16,184
4,027
  12,157
250
2,121
—
—
9,671
837
3,520

$

$ 15,925
3,564
  12,361
450
2,424
(40)
109
9,590
954
3,860

$

3,355  
  12,591  
300  
2,301  
(1)
—
9,582  
941  

$ 15,946   $ 63,970
  15,232
  48,738
1,150
8,937
(40)
2,183
  38,731
3,823
4,068   $ 16,114

$

$

$

0.72
0.72

0.54
0.54

$

$

0.59
0.59

0.62   $
0.62  

2.47
2.47

80

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 2020 and 2019 in which the stock was
traded.

2020

2019

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

First Quarter
Second Quarter
Third Quarter
Fourth Quarter

Shares Outstanding

High

Low

 17.84   $
 20.78   $
 18.94   $
 22.57   $

 16.82
 18.91
 18.35
 21.72

 21.72   $
 26.20   $
 23.41   $
 24.52   $

 21.49
 25.12
 22.71
 24.28

$
$
$
$

$
$
$
$

As of December 31, 2020, the Company had issued 6,769,322 shares of common stock, of which 6,480,108 shares were outstanding. The
outstanding shares were held of record by approximately 1,392 shareholders.

Dividends

The following table sets forth information on dividends paid by the Company in 2020 and 2019.

Month Paid
January, 2020
April, 2020
July, 2020
October, 2020
Total for 2020

January, 2019
April, 2019
July, 2019
October, 2019
Total for 2019

     Dividends Paid

Per Share

$

$

$

$

 0.12
 0.12
 0.12
 0.12
 0.48

 0.10
 0.10
 0.12
 0.12
 0.44

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.

81

    
    
 
 
 
 
 
 
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,  2015,  through  December  31,  2020.  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, 2015.  The  performance  graph
assumes  that  the  value  of  an  investment  in  the  Company's  common  stock  and  each  index  was  $100  at  December  31,  2015  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:

Year Ending

$ 100.00
Hawthorn Bancshares, Inc.
Nasdaq Composite (U.S. Companies)
$ 100.00
Index of financial institutions ($1 billion to $5 billion) $ 100.00

     12/31/15      12/31/16      12/31/17      12/31/18      12/31/19      12/31/20
$ 185.33
$ 271.64
$ 138.81

$ 118.50
$ 108.87
$ 143.87

$ 202.38
$ 187.44
$ 163.50

$ 157.50
$ 137.12
$ 134.37

$ 146.38
$ 141.13
$ 153.37

82

    
Name

Position with the Company

Position with Subsidiary Bank

Principal Occupation

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

David T. Turner

Chairman, Chief Executive Officer,
President and Director -Class III

Chairman, Chief Executive Officer,
President and Director

Kathleen L.

Bruegenhemke

Senior Vice President, Chief Risk
Officer, Corporate Secretary, and
Director-Class I

Senior Vice President, Chief Operating
Officer, Chief Risk Officer, Corporate
Secretary, and Director

Stephen E. Guthrie

Senior Vice President and Chief 
Financial Officer 

Senior Vice President and Chief Financial
Officer

Kevin L. Riley

Director-Class III

Director

Frank E. Burkhead

Director-Class II

Director

Philip D. Freeman

Director-Class I

Director

Gus S. (Jack) Wetzel III

Director-Class II

Director

Jonathan D. Holtaway

Director – Class I

Director

83

Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank

Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank

Position with Hawthorn
Bancshares, Inc. and
Hawthorn Bank

Co-owner, Riley Chevrolet,
Buick, GMC, Cadillac,
Toyota, Inc., Riley Brothers,
LLC, and Riley Brothers II,
LLC, Jefferson City,
Missouri

Owner, Burkhead Wealth
Management, Co-owner,
Burkhead & Associates,
LLC, Pro 356, LLC, and
FACT Properties, LLC,
Jefferson City, Missouri

Owner, Freeman Properties,
JCMO, LLC, Jefferson City,
Missouri

Co-owner, Meadows
Construction Co, Inc.,
Meadows Contracting LLC,
Meadows Development Co,
Village Park Investments,
LLC, Meadows Property,
LLC, TWC Enterprise, LLC,
Wetzel Investments Ltd.,
and GCSL, LLC all of
Clinton, Missouri

Co-owner, Ategra GP, LLC,
and Ategra Capital
Management LLC, and
Managing Member of
Ategra LS500, LP and
Ategra Community
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,  2020,  as  filed  with  the  Securities  and  Exchange
Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2021 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.

84

Consent of Independent Registered Public Accounting Firm

Exhibit 23

The Board of Directors
Hawthorn Bancshares, Inc. and Subsidiaries:

We consent to the incorporation by reference in the registration statement (No. 333-136477) on Form S-8 and the registration statement (No.
333-101415) on Form S-3D of Hawthorn Bancshares, Inc., of our reports dated March 12, 2021, with respect to the consolidated balance sheets
of  Hawthorn  Bancshares,  Inc.  and  Subsidiaries  (the  Company)  as  of  December  31,  2020  and  2019,  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, 2020,
the  related  notes,  and  the  effectiveness  of  internal  control  over  financial  reporting  as  of  December  31,  2020,  which  reports  appear  in  the
December 31, 2020 annual report on Form 10-K of the Company.

St. Louis, Missouri
March 12, 2021

/s/ KPMG LLP

Exhibit 31.1

I, David T. Turner, certify that:

CERTIFICATIONS

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 12, 2021

/s/ David T. Turner
David T. Turner
Chairman of the Board, CEO, & President

Exhibit 31.2

I, Stephen E. Guthrie, certify that:

1.  I have reviewed this report on Form 10-K of Hawthorn Bancshares, Inc.;

CERTIFICATIONS

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 12, 2021

/s/ Stephen E. Guthrie
Stephen E. Guthrie
Chief Financial Officer

Certification of Chief Executive Officer

Exhibit 32.1

In connection with the Annual Report of Hawthorn Bancshares, Inc. (the Company) on Form 10-K for the period ended December 31,
2020 as filed with the Securities and Exchange Commission (the Report), I, David T. Turner, Chairman of the Board, Chief Executive Officer,
and President 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 12, 2021

/s/ David T. Turner
David T. Turner
Chairman of the Board, CEO, & President

“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.”

Certification of Chief Financial Officer

Exhibit 32.2

In connection with the Annual Report of Hawthorn Bancshares, Inc. (the Company) on Form 10-K for the period ended December 31,
2020  as  filed  with  the  Securities  and  Exchange  Commission  (the  Report),  I,  Stephen  E.  Guthrie,  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 12, 2021

/s/ Stephen E. Guthrie
Stephen E. Guthrie
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.”