Hawthorn Bancshares, Inc.
Annual Report 2023

Plain-text annual report

2023 ANNUAL REPORT TO SHAREHOLDERS HAWTHORN BANCSHARES, INC. Jefferson City, Missouri March 18, 2024 Dear Shareholders: Transition and teamwork describe 2023 at Hawthorn Bancshares, Inc., and Hawthorn Bank. In April, after 45 years with the company, David Turner announced his retirement, and I was fortunate to be named Chief Executive Officer of this strong and storied community banking organization. Mr. Turner led the company through much of its growth and successfully guided it through some very difficult economic periods. I’m pleased that he will continue his commitment to the company as Chairman of the Board and that Gregg Bexten will step into the President role to ensure continuity of executive leadership. Transition of executive leadership is never easy, but the industry uncertainty and volatility caused by three significant bank failures added to our challenge. The teamwork displayed by everyone at the company to navigate the executive leadership transition while supporting the needs of our clients and communities during uncertain times was remarkable. We demonstrated our strength and stability provided by a healthy balance sheet anchored with the clients and partnerships in the communities we serve. Despite it being a year of transition and turbulence, the board and management collaborated on many initiatives to lay the groundwork to successfully navigate 2024 and beyond. I would like to mention five of these areas. 1. Added three experienced industry executives to complement the existing strong executive team. 2. Developed a strategic plan and identified the initiatives and priorities to deliver sustainable above average performance over time. 3. Launched “One Hawthorn”, an initiative to develop a culture that fosters higher levels of employee engagement, cohesiveness, accountability, and performance. 4. Reduced personnel and branches as part of an overall focus on expense management and resource allocation. 5. Repositioned the balance sheet to provide improved earnings accretion, net interest margin, and return on assets in future periods. The year ahead is likely to include continued economic uncertainty and an interest rate environment which is difficult to predict, but I’m confident in our community-based banking approach that has served us well for over 150 years. We will rely on the proven principles of safe and sound banking as we strive to be the progressive and innovative community banking option for businesses and families throughout our footprint. I would be remiss if I did not take this opportunity to thank all our employees for their dedication and effort during extraordinary times. Together, we are focused on delivering value to our clients, communities, and shareholders. Thank you for your investment in our company. We appreciate your trust and support. Sincerely, Brent M. Giles, Chief Executive Officer A WORD CONCERNING FORWARD-LOOKING STATEMENTS This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, strategy, future performance and business of the Company, Hawthorn Bancshares, Inc. (the “Company”), and its subsidiaries, including, without limitation: • statements that are not historical in nature, and • statements preceded by, followed by or that include the words believes, expects, may, will, should, could, anticipates, estimates, intends or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors: • competitive pressures among financial services companies may increase significantly, • changes in the interest rate environment may reduce interest margins, • general economic conditions, either nationally or in Missouri, may be less favorable than expected and may adversely affect the quality of our loans and other assets, • increases in non-performing assets in the Company’s loan portfolios and adverse economic conditions may necessitate increases to our provisions for credit losses, • costs or difficulties related to any integration of any business of the Company and its acquisition targets may be greater than expected, • legislative, regulatory or tax law changes may adversely affect the business in which the Company and its subsidiaries are engaged, • credit and market risks relating to increasing inflation, • economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine conflict, and the Israel-Hamas conflict, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate changes or other catastrophic events, • changes may occur in the securities markets, • changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for credit losses, including as a result of the implementation of the credit impairment model for Current Expected Credit Losses (CECL), • technological changes, including potential cyber-security incidents and other disruptions, or innovations to the financial services industry, including as a result of the increased telework environment, and • our ability to maintain sufficient liquidity, primarily through deposits, in light of recent events in the banking industry. In addition to the disclosure in this report, we have described additional factors that could cause actual results to be materially different from those described in the forward-looking statements under the caption Risk Factors in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, and in other reports filed by us with the Securities and Exchange Commission (“SEC”) from time to time. Other factors that have not been identified in this report or such other reports 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 $1.9 billion in assets at December 31, 2023, provides a broad range of commercial and personal banking services. The Bank’s specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration (“SBA”) loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services. The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area. The Company’s primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company’s business is commercial, commercial real estate development, and residential mortgage lending. The Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity. The success of the Company’s growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company’s financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company’s growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control. The Company’s subsidiary bank is a full-service bank that conducts 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. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The following accounting policies are considered most critical to the understanding of the Company’s financial condition and results of operations. These critical accounting policies and estimates 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 and estimates 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 Credit Losses Management has identified the accounting policy related to the allowance for credit losses (“ACL”) 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. 3 The Company’s ACL represents management’s best estimate of losses inherent in the portfolio. The policy is designed to maintain the allowance at a level sufficient to absorb reasonably estimated and probable losses within the portfolio. A mathematical calculation of an estimate is made to assist in determining the adequacy and reasonableness of management’s recorded ACL. The Company’s methodology includes qualitative risk factors that allow management to adjust modeled historical losses and to address other limitations in the quantitative component that is based on modeled 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, other external factors, the nature, volume and terms of loans in the portfolio, the volume and severity of past due loans, concentrations, trends in collateral values, the quality of the Company’s internal loan review department, lending management, and lending policies and procedures. At December 31, 2023, the ACL on loans included a qualitative adjustment of approximately $10.9 million. The ending result of this process is a recorded consolidated ACL that represents management’s best estimate of the total modeled losses included in the portfolio considering available information from internal and external sources, relevant to assessing exposure to credit loss over the contractual term of the instrument. While management utilizes its best judgment and information available, the ultimate adequacy of the ACL is dependent upon a variety of factors beyond the Company’s control, including the performance of its portfolios, the economy, and changes in interest rates. As such, significant downturns in circumstances relating to instrument quality and economic conditions could result in a requirement for additional allowance. Likewise, an upturn in instrument quality and improved economic conditions may allow a reduction in the required allowance. In either instance, unanticipated changes could have a significant impact on the Company’s provision for credit losses and ACL reported in its Consolidated Income Statements and Consolidated Balance Sheets, respectively. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the Company’s business operations is provided in Note 1 to the Company’s consolidated financial statements and is also discussed in the Lending and Credit Management section below. Executive Summary The Company has prepared all of the consolidated financial information in this report in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and the rules of the SEC. In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates. (In thousands, except per share amounts) Statement of income information: For the years ended December 31, 2023 2022 2021 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,968 $ 69,256 $ 64,454 Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (release of) credit losses (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pre-tax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,826 59,142 2,340 7,536 (11,547) 52,359 432 (524) 10,493 58,763 (900) 13,978 (14) 48,538 25,089 4,338 5,909 58,545 (1,700) 16,786 149 48,966 28,214 5,697 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 956 $ 20,751 $ 22,517 0.14 0.14 $ $ 78.5% 3.29% 2.94 2.94 $ $ 66.7% 3.53% 3.15 3.15 65.0% 3.62% 4 As of and for the years ended December 31, 2023 2022 2021 Key financial ratios: Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19.33 Market price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25.37 Cash dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,649 Common stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,005 $ $ $ $ 18.04 20.57 4,240 6,865 $ 20.84 $ 23.98 $ 3,616 $ 5,385 Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average stockholders’ equity to average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 0.05% 0.76% 6.68% 1.16% 15.94% 7.27% 1.30% 16.46% 7.89% (1) (2) Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue is calculated as net interest income plus non-interest income. Prior to adoption of ASU No 2016-13 on January 1, 2023, credit losses were estimated using the incurred loss approach. (In thousands, except per share amounts) Asset Quality Ratios As of and for the years ended December 31, 2023 2022 2021 Net-charge-offs (recoveries) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Classified assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 302 6,413 31,298 $ $ $ 415 18,701 40,262 $ $ $ (490) 25,473 49,791 Allowance for credit losses to total loans (2) . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing loans to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets to loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets to assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.54% 0.42% 0.53% 0.43% 1.02% 1.23% 1.81% 1.43% 1.30% 1.96% 2.76% 1.97% Allowance for credit losses to non-performing loans . . . . . . . . . . . . . . . . . . . . 370.25% 83.35% 66.36% Capital Ratios Stockholders’ equity to assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total risk-based capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 risk-based capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common equity Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 leverage ratio (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.26% 13.99% 12.59% 9.73% 10.29% 6.62% 13.85% 12.52% 9.89% 10.76% 8.13% 14.79% 13.59% 10.22% 11.01% Balance sheet information: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for investment Allowance for credit losses (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,450 $ 1,875,350 1,539,147 (23,744) 3,884 195,042 1,570,844 136,085 $ 83,720 $ 1,923,540 1,521,252 (15,588) 591 257,100 1,632,079 127,411 $ 159,909 $ 1,831,550 1,302,133 (16,903) 2,249 316,278 1,516,820 148,956 (1) (2) Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets. Prior to adoption of ASU No 2016-13 on January 1, 2023, credit losses were estimated using the incurred loss approach. 5 Results of Operations Highlights Consolidated net income decreased $19.8 million to $1.0 million, or $0.14 per diluted share, for the year ended December 31, 2023 compared to $20.8 million, or $2.94 per diluted share, for the year ended December 31, 2022. For the year ended December 31, 2023, the return on average assets (ROA) was 0.05%, the return on average stockholders’ equity (ROE) was 0.76%, and the efficiency ratio was 78.5%. Consolidated net income decreased $1.8 million to $20.8 million, or $2.94 per diluted share, for the year ended December 31, 2022 compared to $22.5 million, or $3.15 per diluted share, for the year ended December 31, 2021. For the year ended December 31, 2022, the return on average assets (ROA) was 1.16%, the return on average stockholders’ equity (ROE) was 15.94%, and the efficiency ratio was 66.7%. Net interest income was $59.1 million for the year ended December 31, 2023 compared to $58.8 million and $58.5 million for the years ended December 31, 2022 and 2021, respectively. The net interest margin was 3.29% for the year ended December 31, 2023 compared to 3.53% and 3.62% for the years ended December 31, 2022 and 2021, respectively. Provision for (release of) credit losses For the year ended December 31, 2023, the Company recognized a provision for credit losses on loans and unfunded commitments of $2.3 million compared to a $0.9 million and $1.7 million release of provision expense for the years ended December 31, 2022 and 2021, respectively. The release of provision expense for 2022 and 2021 was driven in part from the release of specific reserves due to returning significant loan balances to accruing from non-accrual status or other collateral valuation adjustments. Non-interest income decreased $6.4 million, or 46.1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, and decreased $2.8 million, or 16.7%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. These changes are discussed in greater detail below under Non-interest Income. Non-interest expense increased $3.8 million, or 7.9%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, and decreased $0.4 million, or 0.9%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. These changes are discussed in greater detail below under Non-interest Expense. Balance Sheet Highlights Cash and cash equivalents — Cash and cash equivalents increased $9.7 million, or 11.6%, to $93.5 million as of December 31, 2023 compared to $83.7 million as of December 31, 2022, and decreased $76.2 million, or 47.6%, to $83.7 million as of December 31, 2022 compared to $159.9 million as of December 31, 2021. See the Liquidity Management section for further discussion. Loans — Loans held for investment increased $17.9 million, or 1.2%, to $1.5 billion as of December 31, 2023 compared to December 31, 2022, and increased $219.1 million, or 16.8%, to $1.5 billion as of December 31, 2022 compared to $1.3 billion as of December 31, 2021. Asset quality — Non-performing loans decreased $12.3 million to $6.4 million, or 0.42% of total loans, at December 31, 2023 compared to $18.7 million, or 1.23% of total loans, at December 31, 2022, and decreased $6.8 million to $18.7 million, or 1.23% of total loans, at December 31, 2022 compared to $25.5 million, or 1.96% of total loans, at December 31, 2021. The reduction in non-performing loans was primarily due to non-accrual loan relationships returning to accrual status in both 2023 and 2022. On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), which provides for the CECL credit loss model. The adoption of the standard resulted in an increase to the allowance for credit losses of $5.8 million and a liability for unfunded commitments totaling $1.3 million. These one-time cumulative adjustments resulted in a $5.6 million tax-effected decrease to retained earnings. The allowance for credit losses to total loans was 1.54% at December 31, 2023, compared to the allowance for loan losses of 1.02% at December 31, 2022 and 1.30% at December 31, 2021. The Company’s net charge-offs for the year ended December 31, 2023, were $0.3 million, or 0.02% of average loans compared to $0.4 million, or 0.03% of average loans for the year ended December 31, 2022, and net recoveries of $0.5 million, or 0.04% of average loans for the year ended December 31, 2021. See Lending and Credit Management below for further discussion. Deposits — Total deposits decreased $61.2 million, or 3.8%, equal to $1.6 billion as of December 31, 2023 compared to December 31, 2022, and increased $115.3 million, or 7.6%, to $1.6 billion as of December 31, 2022 compared to $1.5 billion as of December 31, 2021. 6 Federal Home Loan Bank (“FHLB”) advances and other borrowings — Total FHLB advances and other borrowings increased $9.0 million, or 9.2%, to $107.0 million as of December 31, 2023 compared to $98.0 million as of December 31, 2022, and increased $20.6 million, or 26.6%, to $98.0 million as of December 31, 2022 compared to $77.4 million as of December 31, 2021. Capital — On January 1, 2023, the Company adopted Accounting Standard Update (ASU) 2016-13 and recorded a one-time cumulative effect adjustment to retained earnings totaling $5.6 million after-tax. Total shareholder’s equity was $136.1 million and the common equity to assets ratio was 7.26% at December 31, 2023 as compared to 6.62% and 8.13% at December 31, 2022 and December 31, 2021, respectively. Regulatory capital ratios remain “well-capitalized,” with a tier 1 leverage ratio of 10.29% and a total risk-based capital ratio of 13.99% at December 31, 2023. 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 ended December 31, 2023, 2022, and 2021, respectively. The average balances used in this table and other statistical data were calculated using average daily balances. 7 (In thousands) 2023 Interest Income/ Expense(1) Average Balance Rate Earned/ Paid(1) Average Balance 2022 Interest Income/ Expense(1) Rate Earned/ Paid(1) Average Balance 2021 Interest Income/ Expense(1) Rate Earned/ Paid(1) Assets Loans: (2) Commercial . . . . . . . . . . . . . . . . . . $ 230,988 50,497 . . . . Real estate construction – residential 136,455 Real estate construction – commercial . . . 370,024 Real estate mortgage – residential . . . . . . 734,657 . . . . . Real estate mortgage – commercial 22,307 Installment and other consumer . . . . . . . Total loans . . . . . . . . . . . . . . . . . . $ 1,544,928 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,609 4,200 107,482 96,649 11,787 Total investment securities . . . . . . . . . . $ 244,950 6,973 . . . . . . . . . Other investment securities Federal funds sold . . . . . . . . . . . . . . 44 Interest bearing deposits in other financial institutions . . . . . . . . . . . . . . . . . . 25,437 $ $ $ $ 14,401 3,707 7,511 19,862 37,957 1,056 84,494 6.23% $ 7.34 5.50 5.37 5.17 4.73 236,228 24,766 115,424 313,926 692,712 23,237 5.47% $ 1,406,293 160 4.43% $ 1,738 176 4.19% $ 3,538 $12,320 1,296 5,307 13,736 29,881 847 $63,387 $ $ 90 40 5.22% $ 5.23 4.60 4.38 4.31 3.65 245,779 34,357 78,068 267,722 631,612 24,681 4.51% $ 1,282,219 5.18% $ 3,947 1.13% $ 3,088 $ $ $ $ 15,527 1,662 3,577 11,461 26,665 979 59,871 102 6.32% 4.84 4.58 4.28 4.22 3.97 4.67% 2.58% 18 0.58% 24,832 436 1.76 25,709 362 1.41 22,562 364 3,374 2,038 696 6,720 441 2 $ 3.14 2.11 5.90 2.74% $ 6.32 4.55 115,132 116,061 12,889 273,329 5,627 1,724 4,112 1,996 644 $ 7,154 270 6 3.57 1.72 5.00 2.62% $ 4.80 0.35 97,632 127,225 11,985 262,492 5,911 10,150 $ 2,953 1,719 578 5,632 301 8 1,239 4.87 31,955 413 1.29 103,719 337 Total interest earning assets . . . . . . . . . $ 1,825,941 $ 93,056 5.10% $ 1,720,666 $71,320 4.14% $ 1,668,438 $ 66,251 All other assets . . . . . . . . . . . . . . . . Allowance for credit losses . . . . . . . . . . 89,071 (20,737) Total assets . . . . . . . . . . . . . . . . . . $ 1,894,275 Liabilities and Stockholders’ Equity Savings NOW accounts . . . . . . . . . . . . . . . . Interest checking . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 182,870 199,234 167,157 282,924 329,091 86,985 (15,581) $ 1,792,070 85,014 (18,751) $ 1,734,701 $ 1,026 2,280 7,648 5,842 8,988 0.56% $ 1.14 4.58 2.06 2.73 180,122 252,842 64,473 297,153 261,833 $ 61 1,627 1,786 1,535 2,140 $ 0.03% $ 0.64 2.77 0.52 0.82 157,549 231,742 42,067 281,254 255,289 Total interest bearing deposits . . . . . . . . $ 1,161,276 $ 25,784 2.22% $ 1,056,423 $ 7,149 0.68% $ 967,901 $ 54 536 188 335 2,021 3,134 Federal funds purchased and securities sold under agreements to repurchase . . . . . . . Federal Home Loan Bank advances and other borrowings . . . . . . . . . . . . . . . Subordinated notes . . . . . . . . . . . . . . 112,271 49,486 Total borrowings . . . . . . . . . . . . . . . $ 167,010 Total interest bearing liabilities . . . . . . . $ 1,328,286 Demand deposits . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . 426,739 12,719 1,767,744 126,531 Total liabilities and stockholders’ equity . . . $ 1,894,275 5,253 115 2.19 7,982 51 0.64 34,449 87 3,255 3,774 7,144 2.90 7.63 80,867 49,486 4.28% $ 138,335 32,928 2.48% $ 1,194,758 $ $ 1,268 2,072 $ 3,391 $10,540 1.57 4.19 92,259 49,486 2.45% $ 176,194 0.88% $ 1,144,095 $ $ 1,461 1,227 2,775 5,909 454,931 12,170 1,661,859 130,211 $ 1,792,070 436,434 17,347 1,597,876 136,825 $ 1,734,701 Net interest income (FTE) . . . . . . . . . . $ 60,128 $60,780 $ 60,342 Net interest spread (FTE) Net interest margin (FTE) . . . . . . . . . . . . . . . . . . . . 2.62% 3.29% 3.26% 3.53% (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, 2023, 2022 and 2021, respectively. Such adjustments totaled $1.1 million, $2.1 million and $1.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. (2) Non-accruing loans are included in the average amounts outstanding. 8 1.61 3.02 1.35 4.82 2.15% 5.09 0.08 0.32 3.97% 0.03% 0.23 0.45 0.12 0.79 0.32% 0.25 1.58 2.48 1.57% 0.52% 3.45% 3.62% 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, 2023 compared to December 31, 2022, and for the years ended December 31, 2022 compared to December 31, 2021. 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. (In thousands) Interest income on a fully taxable equivalent basis: (1) Loans: (2) 2023 Change due to 2022 Change due to Total Change Average Volume Average Rate Total Change Average Volume Average Rate Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,081 $ (279) $ 2,360 $ (3,207) $ (584) $ (2,623) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing deposits in other financial institutions . . . . . . . . 2,411 2,204 6,126 8,076 209 70 136 74 (738) 42 52 171 (4) 826 1,737 1,059 2,700 1,893 (35) 85 9 (13) (262) (366) (58) 73 (11) (100) (366) (493) 674 1,145 3,426 6,183 244 (15) 127 87 1,730 2,275 3,216 (132) (12) 22 (2) (476) 1,159 408 110 98 7 926 277 66 (31) (2) 76 1,718 2,017 2,625 (55) (78) 3 47 577 (161) 45 (14) (11) (364) 127 12 258 591 (77) 66 19 (49) 582 438 21 (17) 9 440 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,736 $ 6,432 $ 15,304 $ 5,069 $ 5,272 $ (203) Interest expense: Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 965 653 5,862 4,307 6,848 64 1,987 1,702 1 (402) 4,160 (77) 677 (23) 624 — 964 1,055 1,702 4,384 6,171 87 1,363 1,702 7 1,091 1,598 1,200 119 (36) (193) 845 Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,388 $ 4,960 $ 17,428 $ 4,631 $ 8 53 149 20 53 (101) (179) — 3 Net interest income on a fully taxable equivalent basis . . . . . . . . . $ (652) $ 1,472 $ (2,124) $ 438 $ 5,269 (1) 1,038 1,449 1,180 66 65 (14) 845 $ $ 4,628 (4,831) (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, 2023, 2022 and 2021, respectively. Such adjustments totaled $1.1 million, $2.1 million and $1.8 million for the years ended December 31, 2023, 2022, and 2021, respectively. (2) Non-accruing loans are included in the average amounts outstanding. Financial results for the year ended December 31, 2023 compared to the year ended December 31, 2022 reflected a decrease in net interest income, on a fully taxable equivalent basis, of $0.7 million, or 1.1%, and financial results for the year ended December 31, 2022 compared to the year ended December 31, 2021 reflected an increase of $0.4 million, or 0.7%. Measured as a percentage of 9 average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) was 3.29% for the year ended December 31, 2023, compared to 3.53% and 3.62% for the years ended December 31, 2022 and 2021, respectively. The decrease in net interest income and net interest margin for 2023 compared to 2022, resulted from higher interest expense on both deposits and borrowings. While interest income on a fully taxable equivalent basis increased $21.7 million for 2023 compared to 2022, interest expense increased $22.4 million for 2023 compared to 2022. The increase in net interest income and decrease in net interest margin for 2022 compared to 2021 primarily resulted from higher interest income from growth in average loans of 9.7%, and a 4.1% increase in the investment portfolio, offset by higher interest expense for interest bearing liabilities and a reduction of fee income from loans under the SBA’s Paycheck Protection Program. Average interest-earning assets increased $105.3 million, or 6.1%, to $1.83 billion for the year ended December 31, 2023 compared to $1.72 billion for the year ended December 31, 2022, and average interest bearing liabilities increased $133.5 million, or 11.2%, to $1.33 billion for the year ended December 31, 2023 compared to $1.19 billion for the year ended December 31, 2022. Average interest-earning assets increased $52.2 million, or 3.1%, to $1.72 billion for the year ended December 31, 2022 compared to $1.67 billion for the year ended December 31, 2021, and average interest bearing liabilities increased $50.7 million, or 4.4%, to $1.19 billion for the year ended December 31, 2022 compared to $1.14 billion for the year ended December 31, 2021. Total interest income (expressed on a fully taxable equivalent basis) increased to $93.1 million for the year ended December 31, 2023 compared to $71.3 million and $66.3 million for the years ended December 31, 2022 and 2021, respectively. The Company’s rates earned on interest earning assets were 5.10% for the year ended December 31, 2023 compared to 4.14% and 3.97% for the years ended December 31, 2022 and 2021, respectively. Interest income on loans held for investment increased to $84.5 million for the year ended December 31, 2023 compared to $63.4 million and $59.9 million for the years ended December 31, 2022 and 2021, respectively. Average loans outstanding increased $138.6 million, or 9.9%, to $1.54 billion for the year ended December 31, 2023 compared to $1.41 billion for the year ended December 31, 2022. The average yield on loans receivable increased to 5.47% during the year ended December 31, 2023 compared to 4.51% for the year ended December 31, 2022. The increase in yield as of December 31, 2023 compared to the prior year is reflective of recent market conditions where most loan types have seen an increase in yield, consistent with recent increases in the prime rate. Contributing to the increase in yield was interest accreted into income on three loans returning to accruing status in 2023. Average loans outstanding increased $124.1 million, or 9.7%, to $1.41 billion for the year ended December 31, 2022 compared to $1.28 billion for the year ended December 31, 2021. The average yield on loans receivable decreased to 4.51% during the year ended December 31, 2022 compared to 4.67% for the year ended December 31, 2021. 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 $6.7 million for the year ended December 31, 2023 compared to $7.2 million for the year ended December 31, 2022 and increased to $7.2 million for the year ended December 31, 2022 compared o $5.6 million for the year ended December 31, 2021. Average securities decreased $28.4 million, or 10.4%, to $245.0 million for the year ended December 31, 2023 compared to $273.3 million for the year ended December 31, 2022. The average yield on securities increased to 2.74% for the year ended December 31, 2023 compared to 2.62% for the year ended December 31, 2022. The Company proactively elected a strategy to begin repositioning its balance sheet during the fourth quarter of 2023 by selling $83.7 million in book value of investment securities, with an average yield of 1.57%, which is expected to be accretive to earnings, net interest margin and return on assets in future periods. Average securities increased $10.8 million, or 4.1%, to $273.3 million for the year ended December 31, 2022 compared to $262.5 million for the year ended December 31, 2021. The average yield on securities increased to 2.62% for the year ended December 31, 2022 compared to 2.15% for the year ended December 31, 2021. See the Liquidity Management section for further discussion. Total interest expense was $32.9 million for the year ended December 31, 2023 compared to $10.5 million and $5.9 million for the years ended December 31, 2022 and 2021, respectively. The Company’s rate paid on interest bearing liabilities was 2.48% for the year ended December 31, 2023 compared to 0.88% and 0.52% for the years ended December 31, 2022 and 2021, respectively. See the Liquidity Management section for further discussion. 10 Interest expense on deposits was $25.8 million for the year ended December 31, 2023 compared to $7.1 million and $3.1 million for the years ended December 31, 2022 and 2021, respectively. Average interest bearing deposits increased $104.9 million, or 9.9%, to $1.16 billion for the year ended December 31, 2023 compared to $1.06 billion for the year ended December 31, 2022. The average cost of deposits increased to 2.22% during the year ended December 31, 2023 compared to 0.68% for the year ended December 31, 2022. Average interest bearing deposits increased $88.5 million, or 9.1%, to $1.06 billion for the year ended December 31, 2022 compared to $0.97 billion for the year ended December 31, 2021. The average cost of deposits increased to 0.68% during the year ended December 31, 2022 compared to 0.32% for the year ended December 31, 2021. Interest expense on borrowings was $7.1 million for the year ended December 31, 2023 compared to $3.4 million and $2.8 million for the years ended December 31, 2022 and 2021, respectively. Average borrowings were $167.0 million for the year ended December 31, 2023 compared to $138.3 million and $176.2 million for the years ended December 31, 2022 and 2021, respectively. The Company utilizes funding capacity with the FHLB to meet its short-term liquidity needs. The average cost of borrowings increased to 4.28% for the year ended December 31, 2023 compared to 2.45% and 1.57% for the years ended December 31, 2022, and 2021, respectively. The increase in cost of funds is from higher market interest rates. See the Liquidity Management section for further discussion. Non-interest Income and Expense Non-interest income for the years ended December 31, 2023, 2022, and 2021 was as follows: $ Change % Change (In thousands) 2023 2022 2021 2023 vs 2022 2022 vs 2021 2023 vs 2022 2022 vs 2021 Service charges and other fees . . . . . . $ 2,942 $ 3,002 $ 3,094 $ Bank card income and fees . . . . . . . . Trust department income . . . . . . . . . Real estate servicing fees, net . . . . . . Gain on sales of mortgage loans, 4,028 1,090 (584) 4,083 1,184 1,004 3,957 1,324 580 $ (60) (55) (94) (1,588) (92) 126 (140) 424 (2.0)% (3.0)% (1.3) (7.9) (158.2) 3.2 (10.6) 73.1 net . . . . . . . . . . . . . . . . . . . . . . . 2,560 2,661 7,165 (101) (4,504) (3.8) (62.9) (Losses) gains on other real estate owned, net . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . (4,429) 1,929 289 1,755 (871) 1,537 (4,718) 174 1,160 218 NM 9.9 (133.2) 14.2 Total non-interest income . . . . . . . . . $ 7,536 $ 13,978 $ 16,786 $ (6,442) $ (2,808) (46.1)% (16.7)% Non-interest income as a % of total revenue * . . . . . . . . . . . . . . . . . . 11.3% 19.2% 22.3% Total revenue is calculated as net interest income plus non-interest income. * NM = not meaningful Total non-interest income decreased $6.4 million, or 46.1%, to $7.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, and decreased $2.8 million, or 16.7%, to $14.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. Real estate servicing fees, net of the change in valuation of mortgage servicing rights (“MSRs”) was $(0.6) million for the year ended December 31, 2023 compared to $1.0 million and $0.6 million for the years ended December 31, 2022 and 2021, respectively. In the fourth quarter of 2023, the Company recognized a $1.1 million mortgage servicing rights valuation write-down upon accepting a letter of intent to sell the Company’s servicing portfolio during the first quarter of 2024. During 2022, mortgage rates and the discount rates used in the MSRs valuation increased as yields and risk increased contributing to increase in the valuation of MSRs in 2022 compared to 2021. Mortgage loan servicing fees earned on loans sold were $0.6 million for the year ended December 31, 2023 compared to $0.8 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively. The Company was servicing $220.7 million of mortgage loans at December 31, 2023 compared to $240.5 million and $270.0 million at December 31, 2022 and 2021, respectively. 11 Gain on sales of mortgage loans was $2.6 million for the year ended December 31, 2023 compared to $2.7 million and $7.2 million for the years ended December 31, 2022 and 2021, respectively. The Company sold loans totaling $106.2 million for the year ended December 31, 2023 compared to $87.2 million and $206.6 million for the years ended December 31, 2022 and 2021, respectively. (Losses) Gains on other real estate owned, net was $(4.4) million, for the year ended December 31, 2023 compared to $0.3 million and $(0.9) million for the years ended December 31, 2022 and 2021, respectively. During 2023 the Company recorded a $4.7 million valuation write-down primarily related to two foreclosed property relationships. Investment Securities (Losses) Gains, Net The following table presents the gross realized gains and losses from sales and calls of available-for-sale securities, as well as gains and losses on equity securities from fair value adjustments which have been recognized in earnings for the years ended December 31, 2023, 2022, and 2021: (in thousands) Available-for-sale securities: 2023 2022 2021 Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 122 Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,562) Other-than-temporary impairment recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment securities: Fair value adjustments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit: Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 32 — (17) — — (14) — — — — 27 — — Investment securities (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11,547) $ (14) $ 149 The Company proactively elected a strategy to begin repositioning its balance sheet during the fourth quarter of 2023 by selling $83.7 million in book value of investment securities, with an average yield of 1.57%, for an after-tax realized loss of $9.1 million. Non-interest expense for the years ended December 31, 2023, 2022, and 2021 was as follows: $ Change % Change (In thousands) 2023 2022 2021 2023 vs 2022 2022 vs 2021 2023 vs 2022 2022 vs 2021 Salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,273 $ 20,612 $ 20,717 $ 2,661 $ (105) 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 . . . . . . . . . . . . . . . . . . . . . . . 5,698 3,247 3,009 5,151 2,508 1,487 846 941 6,446 3,175 3,054 4,788 1,630 1,494 878 576 6,940 3,075 3,067 4,751 3,024 1,227 838 823 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,199 5,885 4,504 (748) 72 (45) 363 878 (7) (32) 365 314 (494) 100 (13) 37 (1,394) 267 40 (247) 1,381 12.9% (11.6) 2.3 (1.5) 7.6 53.9 (0.5) (3.6) 63.4 5.3 (0.5)% (7.1) 3.3 (0.4) 0.8 (46.1) 21.8 4.8 (30.0) 30.7 Total non-interest expense . . . . . . . . . . . . . . . . $ 52,359 $ 48,538 $ 48,966 $ 3,821 $ (428) 7.9% (0.9)% Efficiency ratio* . . . . . . . . . . . . . . . . . . . . . . 78.5% 66.7% 65.0% Number of full-time equivalent employees . . . . . 281 304 298 * Efficiency ratio is calculated as non-interest expense as a percentage of total revenue. Total revenue is calculated as net interest income plus non-interest income. Total non-interest expense increased $3.8 million, or 7.9%, to $52.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, and decreased $0.4 million, or 0.9%, to $48.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. 12 Salaries increased $2.7 million, or 12.9%, to $23.3 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, and decreased $0.1 million, or 0.5%, to $20.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase for the year ended December 31, 2023 over the year ended December 31, 2022 was primarily due to the payment of severance due to the reduction in 35 full-time employees during the fourth quarter of 2023, payroll accruals, and annual merit increases. The decrease for the year ended December 31, 2022 over the year ended December 31, 2021 was primarily due to decreases in incentive pay and deferred loan costs related to loan volume. Employee benefits decreased $0.7 million, or 11.6%, to $5.7 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, and decreased $0.5 million, or 7.1%, to $6.4 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease for the year ended December 31, 2023 over the year ended December 31, 2022 was primarily due to a decrease in 401(k) plan contributions and pension cost due to lower annual discount rate assumptions compared to the prior year’s annual assumptions. The decrease for the year ended December 31, 2022 over the year ended December 31, 2021 was primarily due to a decrease in 401(k) plan contributions, medical premiums, and pension cost due to lower annual discount rate assumptions compared to the prior year’s annual assumptions. Legal, examination, and professional fees increased $0.9 million, or 53.9%, to $2.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, and decreased $1.4 million, or 46.1%, to $1.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The changes for 2023 over 2022 primarily related to a write off of consulting fees related to a digital account opening project that was canceled during the fourth quarter of 2023. The changes for 2022 over 2021 was related to $1.5 million in legal fees accrued for as of December 31, 2021 for a lawsuit that was resolved in January 2022. Loan expense increased $0.4 million, or 63.4%, to $0.9 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, and decreased $0.2 million, or 30.0%, to $0.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The changes for 2023 over 2022 was primarily due to the recognition of an adjustment to an unearned dealers reserve related to prior years’ activity in the first quarter of 2023. Income Taxes (Benefit) Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were (121.5)% for the year ended December 31, 2023 compared to 17.3% and 20.2% for the years ended December 31, 2022 and 2021, respectively. The decrease in the effective tax rate for the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily attributable to the decrease in earnings, increase in tax-exempt income, and the benefit recorded pertaining to a historical tax credit. The increase in the effective tax rate for the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily attributable to an increase in earnings and an increase in state taxes attributed to elevated earnings. The effective tax rate for each of the years ended December 31, 2023, 2022, and 2021, respectively, is lower than the U.S. federal statutory rate of 21% primarily due to tax-free income. Lending and Credit Management Interest earned on the loan portfolio is a primary source of interest income for the Company. Loans held for investment represented 80.8% of total assets as of December 31, 2023 compared to 78.3% as of December 31, 2022. Lending activities are conducted pursuant to an established loan policy approved by the Bank’s Board of Directors. The Bank’s credit review process is overseen by market 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. 13 Major classifications within the Company’s held-for-investment loan portfolio as of the dates indicated are as follows: (In thousands) December 31, 2023 2022 Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 226,275 $ 244,549 Real estate construction – residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate construction – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage – residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,347 130,296 372,391 731,024 20,814 32,095 137,235 361,025 722,729 23,619 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,539,147 $ 1,521,252 Percent of categories to total loans: Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.7% 16.1% Real estate construction – residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate construction – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage – residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 8.5 24.2 47.5 1.3 2.1 9.0 23.7 47.5 1.6 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% The Company extends credit to its local community market through traditional real estate mortgage products. The Company does not participate in credit extensions 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 non-accrual, past due, or restructured loans if such assets were loans. 14 The contractual maturities of loan categories at December 31, 2023 and the composition of those loans between fixed rate and floating rate loans are as follows: (In thousands) Principal Payments Due One Year Or Less Over One Year Through Five Years Over Five Years Through 15 Years Over 15 Years Total Commercial, financial, and agricultural . . . . . . . . . . . . . . $ 63,382 $ 89,253 $ 45,393 $ 28,247 $ 226,275 Real estate construction – residential . . . . . . . . . . . . . . . . Real estate construction – commercial . . . . . . . . . . . . . . . Real estate mortgage – residential . . . . . . . . . . . . . . . . . . Real estate mortgage – commercial . . . . . . . . . . . . . . . . . Installment and other consumer . . . . . . . . . . . . . . . . . . . 24,080 22,043 14,185 40,218 3,270 10,138 80,433 49,099 411,199 15,472 1,114 24,871 66,836 134,270 2,072 23,015 2,949 242,271 145,337 — 58,347 130,296 372,391 731,024 20,814 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 167,178 $ 655,594 $ 274,556 $ 441,819 $ 1,539,147 Loans with fixed rates Commercial, financial, and agricultural . . . . . . . . . . . . . $ 14,837 $ 84,767 $ 24,693 $ — $ 124,297 Real estate construction – residential . . . . . . . . . . . . . . Real estate construction – commercial . . . . . . . . . . . . . Real estate mortgage – residential . . . . . . . . . . . . . . . . . Real estate mortgage – commercial . . . . . . . . . . . . . . . . Installment and other consumer . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,791 14,133 6,073 32,600 1,631 80,065 Loans with floating rates Commercial, financial, and agricultural . . . . . . . . . . . . . $ 48,545 $ Real estate construction – residential . . . . . . . . . . . . . . 13,289 Real estate construction – commercial . . . . . . . . . . . . . Real estate mortgage – residential . . . . . . . . . . . . . . . . . Real estate mortgage – commercial . . . . . . . . . . . . . . . . Installment and other consumer . . . . . . . . . . . . . . . . . . 7,910 8,112 7,618 1,639 1,712 72,686 44,489 351,463 15,472 570,589 4,486 8,426 7,747 4,610 59,736 — 705 20,758 21,804 44,827 2,072 — — 43,759 6,211 — 114,859 49,970 13,208 107,577 116,125 435,101 19,175 815,483 $ 20,700 $ 28,247 $ 101,978 409 4,113 45,032 89,443 — 23,015 2,949 198,512 139,126 — 45,139 22,719 256,266 295,923 1,639 723,664 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,113 85,005 159,697 391,849 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 167,178 $ 655,594 $ 274,556 $ 441,819 $ 1,539,147 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, 2023, the Company sold approximately $106.2 million of loans to investors compared to $87.2 million and $206.6 million for the years ended December 31, 2022 and 2021, respectively. At December 31, 2023, the Company was servicing approximately $220.7 million of loans sold to the secondary market compared to $240.5 million at December 31, 2022, and $270.0 million at December 31, 2021. Risk Elements of the Loan Portfolio Management, internal loan review and the senior loan committee formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Loans in excess of $2.0 million in the aggregate and all adversely classified credits identified by management are reviewed by the senior loan committee. In addition, all other loans are reviewed on a risk weighted selection process. The senior loan committee reviews and reports to the Board of Directors, at scheduled meetings: past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. Management follows the guidance provided in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 326-20-30-2. If management determines 15 that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is individually analyzed and in conjunction with current economic conditions and loss experience, reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and collectively analyzed. Under ASC 326-20-30-2 and ASC 326-20-55-5, the Company should aggregate financial assets based on similar risk characteristics. Management determined that segmenting loans not individually analyzed by the federal call report codes represents the most prudent way to consolidate loans by their associated risk qualities. General reserves are recorded for collectively analyzed loans using a consistent methodology. Two different models are used for calculating the general reserve. The Discounted Cash Flow model considers quantitative peer group historic loss experience, forecasts over the estimated life of the loan pools, industry data, and qualitative or environmental factors, such as: lending policies and procedures; economic conditions; the nature, volume and terms of the portfolio; lending staff and management; past due loans; the loan review system; collateral values; concentrations of credit; and external factors. The Remaining Life model applies a long-term average loss rate calculated using peer data that is adjusted for qualitative or environmental factors such as those previously noted. The model used depends on the loan portfolio segment. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Non-Performing Assets The following table summarizes non-performing assets: (In thousands) Non-accrual loans: December 31, 2023 2022 Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,228 $ 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 432 69 587 2,978 — 6,294 115 4 119 6,413 1,744 8,157 $ $ $ $ 121 — 87 685 17,801 6 18,700 — 1 1 18,701 8,795 27,496 Loans held for investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accrual loans to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing loans to loans (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets to loans (b) Non-performing assets to assets (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses to non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (a) Non-performing loans include loans 90 days past due and accruing, non-accrual loans, and 90 days past due. (b) Non-performing assets include non-performing loans and other real estate owned and repossessed assets. $ 1,539,147 $ 1,521,252 1.54% 0.41% 0.42% 0.53% 0.43% 377.25% 370.25% 1.02% 1.23% 1.23% 1.81% 1.43% 83.36% 83.35% Total non-performing assets were $8.2 million, or 0.53% of total loans, at December 31, 2023 compared to $27.5 million, or 1.81% of total loans, at December 31, 2022. 16 Total non-accrual loans at December 31, 2023 decreased $12.4 million to $6.3 million compared to $18.7 million at December 31, 2022. The decrease in non-accrual loans was primarily due to three large commercial real-estate non-accrual loan relationships returning to accrual status. Loans past due 90 days and still accruing interest at December 31, 2023, were $119,387 compared to $1,248 at December 31, 2022. Other real estate owned and repossessed assets at December 31, 2023 were $1.7 million compared to $8.8 million at December 31, 2022. During the year ended December 31, 2023, $0.1 million of non-accrual loans, net of charge-offs taken, moved to other real estate owned and repossessed assets compared to $0.2 million for the year ended December 31, 2022. Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Commitments Allowance for Credit Losses On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326), which provides for the CECL credit loss model. The adoption of the standard resulted in an increase to the allowance for credit losses of $5.8 million and a liability for unfunded commitments totaling $1.3 million. These one-time cumulative adjustments resulted in a $5.6 million tax-effected decrease to retained earnings. The following table is a summary of the allocation of the allowance for credit losses: (In thousands) Allocation of allowance for credit losses at end of period: December 31, 2023 2022 % of loans in each category to total loans Amount % of loans in each category to total loans Amount Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,208 14.7% $ 2,735 16.1% Real estate construction – residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate construction – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage – residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043 3,273 5,264 Real estate mortgage – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,537 Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 187 3.8 8.5 24.2 47.5 1.3 — 157 875 3,329 8,000 326 166 2.1 9.0 23.7 47.5 1.6 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,744 100.0% $ 15,588 100.0% The allowance for credit losses was $23.7 million, or 1.54%, of loans outstanding at December 31, 2023 compared to $15.6 million, or 1.02%, of loans outstanding at December 31, 2022. The ratio of the allowance for credit losses to non-performing loans was 370.25% at December 31, 2023, compared to 83.35% at December 31, 2022. Provision for (Release of) Credit Losses / Loan Losses (In thousands) 2023 2022 2021 Provision for (release of) credit / loan losses on loans, respectively . . . . . . . . . . . . . . . . . . . $ 2,665 $ (900) $ (1,700) Provision for (release of) credit losses for off-balance sheet commitments . . . . . . . . . . . . . . (325) — — Total Provision for (release of) credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,340 $ (900) $ (1,700) The Company recognized a provision for credit losses of $2.3 million for the year ended December 31, 2023 compared to a $0.9 million and $1.7 million release of provision for loan losses for the years ended December 31, 2022 and 2021, respectively. The increase in the provision in the fourth quarter of 2023 resulted from a $1.3 million increase in a specific reserve resulting from the downgrade of one commercial loan relationship. The release of provision expense for 2022 was driven in part from the release of specific reserves totaling $2.8 million in the first quarter of 2022 due to returning significant commercial real-estate loan balances to accruing from non-accrual status or other collateral valuation adjustments. 17 The following table is a summary of net charge-offs to average loans: (In thousands) December 31, 2023 December 31, 2022 Net Charge-offs (Recoveries) Average Loans Net Charge-offs (Recoveries) / Average Loans Net Charge-offs (Recoveries) Average Loans Net Charge-offs (Recoveries) / Average Loans Commercial, financial, and agricultural . . . . $ (31) $ 230,988 (0.01)% $ Real estate construction – residential . . . . . . Real estate construction – commercial . . . . . Real estate mortgage – residential . . . . . . . . Real estate mortgage – commercial . . . . . . . Installment and other consumer . . . . . . . . . — (22) 65 28 262 50,497 136,455 370,024 734,657 22,307 — (0.02) 0.02 — 1.17 79 — (22) (45) 170 233 $ 236,228 0.03% 24,766 115,424 313,926 692,712 23,237 — (0.02) (0.01) 0.02 1.00 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 302 $ 1,544,928 0.02% $ 415 $ 1,406,293 0.03% Net Loan Charge-offs The Company’s net loan charge-offs were $0.3 million, or 0.02% of average loans, for the year ended December 31, 2023 compared to net charge-offs of $0.4 million, or 0.03% of average loans, for the year ended December 31, 2022. Loans Held For Sale The Company designates certain long-term fixed rate personal real estate loans as held for sale. These loans are initially measured at fair value under the fair value option election with subsequent changes in fair value recognized in mortgage banking income. The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and other various secondary market investors. At December 31, 2023, the carrying amount of these loans was $3.9 million compared to $0.6 million at December 31, 2022. Investment Portfolio The Company’s investment portfolio consists of securities classified as available-for-sale, equity or other. Available-for-sale debt securities, the largest component, 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 was to purchase and hold debt instruments until maturity unless special circumstances existed. 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 now classified as available-for-sale. At December 31, 2023, the investment portfolio classified as available-for-sale represented 10.1% of total consolidated assets. Future levels of investment securities can be expected to vary depending upon liquidity and interest sensitivity needs as well as other factors. 18 Available- for-Sale Securities The following table presents the composition of the investment portfolio and related fair value by major category: (In thousands) 2023 2022 U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,978 $ 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427 21,822 106,885 45,640 10,821 1,169 2,152 559 23,777 109,440 102,699 10,943 1,177 Total available-for-sale debt securities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 188,742 $ 250,747 (a) Certain hybrid instruments possessing characteristics typically associated with debt obligations. As of December 31, 2023, the expected maturity and tax-equivalent yield in the investment portfolio was as follows: (In thousands) U.S. Treasury . . . . . . . . . U.S. government and federal agency obligations U.S. government- sponsored enterprises States and political subdivisions (1) . . . . . . . . Mortgage-backed . . . securities (2) . . . . . . . . Other debt securities . . . . Bank issued trust preferred securities . . . . . Total available-for-sale 1 Year Or Less $ 1,978 Yield 5.24% $ Over 1 Through 5 Years Yield — —% $ Over 5 Through 10 Years Yield — —% $ Over 10 Years Yield — —% $ Total 1,978 Yield 5.24% — — 427 2.20 — — — — 427 2.20 — — 20,049 5.09 1,773 2.14 — — 21,822 4.85 124 3.28 4,868 2.19 11,186 2.12 90,707 2.17 106,885 2.17 1.87 18 — — 1,926 2.08 — — 5,786 10,821 2.29 4.93 37,910 2.30 — — 45,640 10,821 2.29 4.93 — — — — — — 1,169 7.95 1,169 7.10 debt securities . . . . . . . $ 2,120 5.10% $ 27,270 4.31% $ 29,566 3.18% $ 129,786 1.88% $ 188,742 2.70% Equity securities Federal Agriculture Mortgage Corporation . $ — —% $ — —% $ — —% $ 78 3.77% $ 78 3.77% (1) 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%. (2) Mortgage-backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio experience during the 12 months ended December 31, 2023 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. The tax equivalent yield is calculated on amortized cost using a level yield method and a 21% tax rate. At December 31, 2023, $13.3 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 FHLB stock, and Midwest Independent BankersBank (“MIB”) stock, that do not have readily determinable fair values, are required for membership in those organizations. 19 (In thousands) 2023 2022 FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,071 $ 6,156 MIB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities with readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 78 151 46 Total other investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,300 $ 6,353 Liquidity and Capital Resources Liquidity Management The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal demands 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, 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) 2023 2022 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 46 Other interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,775 Certificates of deposit in other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 65,013 2,955 Available-for-sale investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188,742 250,747 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 266,517 $ 318,761 Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $188.7 million at December 31, 2023 and included an unrealized net loss of $27.2 million. The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $2.1 million over the next 12 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 $99.5 million and $139.2 million at December 31, 2023 and 2022, respectively. Total investment securities pledged for these purposes were as follows: (In thousands) Investment securities pledged for the purpose of securing: 2023 2022 Federal Reserve Bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,048 $ 8,563 Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . — Other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,175 8,601 94,432 Total pledged, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 89,223 $111,596 20 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 $1.5 billion and represented 93.1% of the Company’s total deposits at December 31, 2023, compared to $1.5 billion and 91.7% of the Company’s total deposits at December 31, 2022. 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, 2023 and 2022 were as follows: (In thousands) Core deposit base: 2023 2022 Non-interest bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 402,241 $ 453,443 Interest checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387,242 459,049 214,004 440,611 442,856 160,175 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,462,536 $ 1,497,085 Maturities of uninsured time deposits with balances over $250,000 as of December 31, 2023 were as follows: (in thousands) Due within: Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,593 Over three through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over six through 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,077 40,152 2,325 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108,147 Estimated uninsured deposits totaled $387.1 million, including $108.1 million of certificates of deposit, at December 31, 2023, compared to $420.3 million, including $94.9 million of certificates of deposit, at December 31, 2022. The Company had brokered deposits totaling $0.2 million and $40.1 million at December 31, 2023 and 2022, respectively. Included in the uninsured deposits at December 31, 2023 and December 31, 2022 are public fund deposits greater than $250,000, which are collateralized by the Company totaling $137.7 million and $111.6 million, respectively. The estimated uninsured and uncollateralized deposits ratio to total deposits at December 31, 2023 and December 31, 2022 was 15% and 19%, respectively. Other components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, FHLB 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, 2023, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $8.6 million on a secured basis. There were no federal funds purchased outstanding at December 31, 2023. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio. The Company elected to discontinue the repurchase agreement product during 2023 and customers were moved to reciprocal deposit products within the Company’s deposit mix. 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, 2023. As a member of the FHLB, the Bank has access to credit products of the FHLB. As of December 31, 2023, the Bank had $107.0 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million at December 31, 2023 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts. 21 Borrowings outstanding at December 31, 2023 and 2022 were as follows: (In thousands) Borrowings: 2023 2022 Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . $ — $ 5,187 Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,000 49,486 98,000 49,486 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 156,486 $ 152,673 The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and 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. (In thousands) FHLB 2023 Federal Reserve Bank Federal Funds Purchased Lines 2022 Total FHLB Federal Reserve Bank Federal Funds Purchased Lines Total Advance equivalent . . $ 425,367 $ 8,563 $ 35,000 $ 468,930 $ 355,391 $ 8,058 $ 60,000 $ 423,449 Letters of credit . . . . (107,500) Advances outstanding . . . . . . . (107,000) — — — — (107,500) (47,500) (107,000) (98,000) — — — — (47,500) (98,000) Total available . . . . $ 210,867 $ 8,563 $ 35,000 $ 254,430 $ 209,891 $ 8,058 $ 60,000 $ 277,949 At December 31, 2023, loans of $708.3 million were pledged to the FHLB as collateral for borrowings and letters of credit. At December 31, 2023, investments with a market value of $9.0 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 $93.5 million at December 31, 2023 compared to $83.7 million at December 31, 2022. The $9.7 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, 2023. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of $17.6 million for the year ended December 31, 2023. Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, provided total cash of $54.2 million. The cash inflow primarily consisted of $74.5 million from sales of securities and $24.4 million from maturities and calls of securities, respectively. This was partially offset by a $29.5 million purchase of securities and a net increase in loans held for investment of $18.3 million. The Company proactively elected a strategy to begin repositioning its balance sheet during the fourth quarter of 2023 by selling $83.7 million in book value of investment securities, with an average yield of 1.57%, for an after-tax realized loss of $9.1 million. This is expected to be accretive to earnings, net interest margin and return on assets in future periods. Financing activities used cash of $62.1 million, resulting primarily from a $128.4 million decrease in demand and interest-bearing transaction accounts. This was partially offset by a $67.1 million increase in time deposits. The Company utilized funding capacity with the FHLB by drawing advances of $346.8 million and repaying $337.8 million to meet its short-term liquidity needs during the year. In the normal course of business, the Company enters into certain forms of off-balance-sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance-sheet transactions in its evaluation of the Company’s 22 liquidity. The Company had $406.0 million in unused loan commitments and standby letters of credit as of December 31, 2023. Although the Company’s current liquidity sources are adequate to fund this commitment level, many of the unused commitments are expected to expire or be partially used, and does not necessarily represent future cash requirements. 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 $4.6 million and $4.2 million for the years ended December 31, 2023 and 2022, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $9.0 million and $10.5 million in dividends to the Company during the years ended December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, the Company had cash and cash equivalents totaling $6.8 million and $2.5 million, respectively. Capital Management The Company is subject to various regulatory capital requirements administered by federal and state banking agencies. Under the Basel III Capital Rules, at December 31, 2023, 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: 2023 2022 2021 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.99% 13.85% 14.79% 10.5% Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.59% 12.52% 13.59% Common Equity Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . 9.73% 9.89% 10.22% Tier 1 leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.29% 10.76% 11.01% 8.5% 7.0% 4.0% 10.0% 8.0% 6.5% 5.0% Commitments, Contractual Obligations, and Off-Balance-Sheet Arrangements The required payments of time deposits and other borrowed money, not including interest, at December 31, 2023 are as follows: (In thousands) Payments due by Period Total Less than 1 Year 1-3 Years 3-5 Years Over 5 Years Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 322,151 $ 292,731 $ 22,025 $ 7,395 $ — FHLB advances and other borrowed money . . . . . . . . . . . . . . Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating lease liabilities 107,000 49,486 1,213 26,000 — 253 53,000 — 516 17,500 10,500 — 49,486 (82) 526 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 479,850 $ 318,984 $ 75,541 $ 25,421 $59,904 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. 23 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, 2023 are as follows: (In thousands) Amount of Commitment Expiration per Period Total Less than 1 Year 1-3 Years 3-5 Years Over 5 Years Unused loan commitments . . . . . . . . . . . . . . . . . . . . . . . . $ 286,939 $ 175,855 $ 29,540 $ 18,672 $ 62,872 Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . 3,694 3,779 3,694 3,779 Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . 111,631 111,631 — — — — — — — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 406,043 $ 294,959 $ 29,540 $ 18,672 $ 62,872 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 quarterly to review, among other things, the sensitivity of the Company’s assets and liabilities to interest rate changes, local and national market conditions and rates. The Asset Liability Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company. Instantaneous parallel rate-shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows. Management analyzes the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer-term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 200 and 100 basis point decrease in interest rates on net interest income in year one based on the interest rate risk model at December 31, 2023 and 2022. Hypothetical shift in interest rates (bps) 200 100 (100) (200) 24 % Change in projected net interest income December 31, 2023 2022 5.92% 6.12% 7.08% 7.05% 3.01% 3.78% 5.20% 5.80% The change in the Company’s interest rate risk exposure from December 31, 2022 to December 31, 2023 was primarily due to higher rates on interest bearing assets projected to reprice in the next 12 months and projected repricing speeds on interest bearing assets and liabilities. In an immediate and sustained shock, interest bearing assets and liabilities are projected to reprice at relatively the same pace. In down rate scenarios, interest bearing liabilities are projected to reprice faster than interest bearing assets providing increased net interest income in a falling rate market. Management believes the change in projected net interest income from interest rate shifts of up 200 bps and down 200 bps is an acceptable level of interest rate risk. Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates. Effects of Inflation The effects of inflation on financial institutions are different from the effects on other commercial enterprises because 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, 2023. Impact of New Accounting Standards Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) — Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The amendments in this update were effective for all entities from March 12, 2020 through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” which was effective upon issuance and deferred the sunset date in Topic 848 from December 31, 2022 to December 31, 2024. The trust-preferred subordinated debentures transitioned to an adjusted Secured Overnight Financing Rate (SOFR) index in accordance with the Federal Reserve’s final rule implementing the Adjustable Interest Rate Act. The Company also identified its products that utilize LIBOR and has implemented enhanced fallback language to facilitate the transition to alternative reference rates, such as SOFR. The Company evaluated its systems and is offering alternative rates and is no longer offering LIBOR-indexed rates on newly originated loans. The Company completed its transition from LIBOR during the first quarter of 2023. Disclosure Improvements The FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”, in October 2023. The amendments in this update modify the disclosure or presentation requirements of a variety of topics in the codification. Certain amendments represent clarifications to or technical corrections of the current requirements. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The adoption is not expected to have a significant effect on the Company’s consolidated financial statements. Income Taxes The FASB issued ASU 2023-09, “Income Taxes (Topic 740) — Improvements to Income Tax Disclosures”, in December 2023. The amendments in this update require additional disclosures regarding the rate reconciliation and income taxes paid. This Update also removed certain existing disclosure requirements. This Update is effective for annual periods beginning January 1, 2025. Early adoption is permitted. The amendments in this Update should be applied on a prospective basis, though retrospective application is permitted. Other than the inclusion of additional disclosures, the adoption is not expected to have a significant effect on the Company’s consolidated financial statements. 25 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, 2023 and 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income for each of the years ended December 31, 2023, 2022, and 2021 . . . . . . . . . . . . . Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2023, 2022, and 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity for each of the years ended December 31, 2023, 2022, and 2021 . . . Consolidated Statements of Cash Flows for each of the years ended December 31, 2023, 2022, and 2021 . . . . . . . . . . Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 27 30 31 32 33 34 35 26 KPMG LLP Suite 900 10 South Broadway St. Louis, MO 63102-1761 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Hawthorn Bancshares, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Hawthorn Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, 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, 2023, 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 18, 2024 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. KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. 27 Allowance for credit losses for loans evaluated on a collective basis As discussed in Notes 1 and 2 to the consolidated financial statements, the allowance for credit losses related to loans evaluated on a collective basis (the collective ACL) was $10.9 million of a total allowance for credit losses of $23.7 million as of December 31, 2023. The allowance for credit losses is measured using a lifetime expected loss model that incorporates relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecast that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses on loans is measured on a collective (pool) basis where loans are aggregated into pools based on similar risk characteristics. The collective ACL is calculated as the difference between the amortized cost basis and the amount expected to be collected on the instrument. For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using relevant peer historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and the Company’s outstanding loan balances during a lookback period. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecast. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of a single macroeconomic variable, which is the civilian unemployment rate. The adjustments are based on results from various regression models projecting the impact of the selected macroeconomic variable to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the loans over the remaining contractual lives, adjusted for expected prepayments. Additionally, the allowance for credit losses considers other qualitative factors not included in historical loss rates or macroeconomic forecast such as changes in portfolio composition, underwriting practices, or significant unique events or conditions. We identified the assessment of the December 31, 2023, collective ACL 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. Specifically, this assessment encompassed the evaluation of the conceptual soundness of the lifetime expected loss model used to estimate the collective ACL, including the following key methods and assumptions (1) selection of the macroeconomic variable for use in the reasonable and supportable forecast, (2) prepayment and curtailment rates, and (3) loss given default (LGD) and probability of default (PD), as well as the qualitative factor framework, and related qualitative adjustments for current economic conditions and other external factors. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The following are the primary procedures we performed to address the critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s measurement of the collective ACL estimate, including controls over the (1) development and approval of the collective ACL methodology, (2) validation of the collective ACL methodology and model, (3) continued use and appropriateness of changes made to the collective ACL methodology and model, (4) identification and determination of the key methods and assumptions used to estimate the collective ACL, (5) development of qualitative adjustments, and (6) analysis of the collective ACL results, trends, and ratios. We evaluated the Company’s process to develop the collective ACL estimate by testing certain sources of data, methods, and assumptions, and considered the relevance and reliability of such data, methods, and assumptions. We evaluated whether the historical losses are representative of the credit characteristics of the current portfolio. We involved credit risk professionals with specialized skills and knowledge, who assisted in: • Evaluating the Company’s collective ACL methodology for compliance with U.S. generally accepted accounting principles • Assessing the collective ACL methodology and model for conceptual soundness by inspecting the methodology and model documentation to determine whether the methodology and model are suitable for intended use • Evaluating the appropriateness of the PD, LGD, prepayment rate and curtailment rate assumptions by comparing them to relevant Company-specific metrics and trends, and the applicable industry and regulatory practices. • Assessing the selection of the macroeconomic variable for use in the reasonable and supportable forecast by comparing it to the Company’s business environment and relevant industry practices • Evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ACL compared with changes in internal and external conditions relevant to the entity and identified limitations of the underlying quantitative model 28 We assessed the sufficiency of the audit evidence obtained related to the Company’s collective ACL by evaluating the cumulative results of the audit procedures, qualitative aspects of the Company’s accounting practices, and potential bias in the accounting estimates. We have served as the Company’s auditor since 1993. St. Louis, Missouri March 18, 2024 29 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except per share data) ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 credit losses (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liability for unfunded commitments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity: Common stock, $1 par value, authorized 15,000,000 shares; issued 7,554,893 and 7,284,151 shares, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock; 515,570 shares at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2023 2022 $ 15,675 — 77,775 93,450 — 188,742 6,300 195,042 1,539,147 (23,744) 1,515,403 3,884 32,047 1,738 1,744 8,661 2,624 20,757 $ 1,875,350 $ 18,661 46 65,013 83,720 2,955 250,747 6,353 257,100 1,521,252 (15,588) 1,505,664 591 32,856 2,899 8,795 7,953 2,567 18,440 $ 1,923,540 $ 402,241 846,452 108,147 214,004 1,570,844 — 107,000 49,486 1,213 1,772 947 8,003 1,739,265 $ 453,443 923,602 94,859 160,175 1,632,079 5,187 98,000 49,486 1,533 902 — 8,942 1,796,129 7,555 76,818 76,464 (13,762) (10,990) 136,085 $ 1,875,350 7,284 71,042 91,789 (31,714) (10,990) 127,411 $ 1,923,540 (1) December 31, 2023 amounts include the impacts of the January 1, 2023 adoption of ASU 2016-13. See Note 2 for details. See accompanying notes to the consolidated financial statements. 30 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 (release of) credit losses on loans and unfunded commitments (1) . . . . . . . . . . . Net interest income after provision for (release of) credit losses on loans and unfunded Years Ended December 31, 2022 2021 2023 $ 84,187 160 $ 62,888 90 $ 59,248 102 3,450 2,489 2 1,239 441 91,968 16,796 4,317 4,569 25,682 115 3,255 3,774 7,144 32,826 59,142 2,340 3,150 2,439 6 413 270 69,256 5,009 1,059 1,034 7,102 51 1,268 2,072 3,391 10,493 58,763 (900) 2,798 1,660 8 337 301 64,454 1,113 575 1,446 3,134 87 1,461 1,227 2,775 5,909 58,545 (1,700) commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,802 59,663 60,245 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Losses) gains on other real estate owned, net Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities (losses) gains, 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 (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,942 4,028 1,090 (584) 2,560 (4,429) 1,929 7,536 (11,547) 28,971 3,247 3,009 5,151 2,508 1,487 846 941 6,199 52,359 432 (524) 956 0.14 0.14 $ $ $ $ $ $ 3,002 4,083 1,184 1,004 2,661 289 1,755 13,978 (14) 27,058 3,175 3,054 4,788 1,630 1,494 878 576 5,885 48,538 25,089 4,338 20,751 2.94 2.94 $ $ $ 3,094 3,957 1,324 580 7,165 (871) 1,537 16,786 149 27,657 3,075 3,067 4,751 3,024 1,227 838 823 4,504 48,966 28,214 5,697 22,517 3.15 3.15 (1) Prior to adoption of ASU No 2016-13 on January 1, 2023, credit losses were estimated using the incurred loss approach. See accompanying notes to the consolidated financial statements. 31 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (In thousands) Years Ended December 31, 2023 2022 2021 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 956 $ 20,751 $ 22,517 Other comprehensive income (loss), net of tax Investment securities available-for-sale: Unrealized gains (losses) on investment securities available-for-sale, net of tax . . . . Adjustment for losses (gains) on sale of investment securities, net of tax . . . . . . . . 6,048 9,148 (37,019) — (2,895) (96) Defined benefit pension plans: Net gains arising during the year, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,262 2,012 4,466 Amortization of net (gains) losses cost included in net periodic pension cost, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (506) — Total other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,952 (35,007) 290 1,765 Total comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,908 $ (14,256) $ 24,282 See accompanying notes to the consolidated financial statements. 32 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity (In thousands) Common Stock Surplus Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stock - holders’ Equity Balance, December 31, 2020 . . . . . . . . . . $ 6,769 $ 59,307 $ 68,935 $ 1,528 $ (5,950) $ 130,589 Net income . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . Stock dividend ($0.04 per share) . . . . . . . Cash dividends declared, common stock ($0.58 per share) . . . . . . . . . . . . . . . . . . — — — 255 — — — — 22,517 — — 5,130 (5,385) — (3,767) — 1,765 — — — — — (2,148) — — 22,517 1,765 (2,148) — (3,767) Balance, December 31, 2021 . . . . . . . . . . $ 7,024 $ 64,437 $ 82,300 $ 3,293 $ (8,098) $ 148,956 Net income . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . Stock dividend ($0.04 per share) . . . . . . . Cash dividends declared, common stock ($0.66 per share) . . . . . . . . . . . . . . . . . . — — — 260 — — — — 20,751 — — 6,605 (6,865) — (4,397) — (35,007) — — — — — (2,892) — — 20,751 (35,007) (2,892) — (4,397) Balance, December 31, 2022 . . . . . . . . . . $ 7,284 $ 71,042 $ 91,789 $ (31,714) $ (10,990) $ 127,411 Adoption of ASU 2016-13 . . . . . . . . . . . Balance, January 01, 2023 . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . Share-based compensation expense . . . . . Stock dividend ($0.04 per share) . . . . . . . Cash dividends declared, common stock ($0.68 per share) . . . . . . . . . . . . . . . . . . — 7,284 — — — 271 — — 71,042 (5,581) 86,208 — — (31,714) (10,990) — — 42 956 — — 5,734 (6,005) — (4,695) — 17,952 — — — — — — — — (5,581) 121,830 956 17,952 42 — (4,695) Balance, December 31, 2023 . . . . . . . . . . $ 7,555 $ 76,818 $ 76,464 $ (13,762) $ (10,990) $ 136,085 See accompanying notes to the consolidated financial statements. 33 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 from operating activities: Provision for (release of) for credit losses on loans and unfunded commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . Net amortization of investment securities, premiums, and discounts Change in fair value of mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities losses (gains), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Gains) losses on sales and dispositions of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sales and dispositions of other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . Provision for (release of) valuation allowance for other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Increase) decrease in accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in cash surrender value – life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease in operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) 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 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 sales of other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities: Net (decrease) increase in demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in interest-bearing transaction accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net decrease in federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . Repayment of FHLB advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid – common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used in) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,059 1,925 $ Noncash investing and financing activities: Other real estate and repossessed assets acquired in settlement of loans . . . . . . . . . . . . . . . . . . . . . . . . . . Stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 71 6,005 See accompanying notes to the consolidated financial statements. 34 Year Ended December 31, 2022 2021 2023 $ 956 $ 20,751 $ 22,517 2,340 2,106 1,008 1,200 11,547 (133) (298) 4,729 42 (708) (57) (4,894) (320) 870 2,553 (106,978) 106,206 (2,560) 17,609 — 2,219 (18,267) (29,512) 23,780 615 74,506 (14,672) 14,757 (2,097) 172 2,691 54,192 (51,202) (77,150) 67,117 (5,187) (337,840) 346,840 — (4,649) (62,071) 9,730 83,720 $ 93,450 (900) 2,141 1,358 (176) 14 (160) (255) (29) — (1,332) (58) (1,413) (304) 620 (1,522) (83,012) 87,217 (2,661) 20,279 (735) 2,966 (219,646) (21,282) 30,899 2,295 — (13,334) 12,375 (2,566) 317 2,176 (206,535) 377 105,244 9,638 (18,642) (315,399) 335,981 (2,892) (4,240) 110,067 (76,189) 159,909 83,720 (1,700) 2,283 1,743 186 (149) 29 (27) 965 — 19 (58) (2,222) (300) (555) 4,981 (196,924) 206,589 (7,165) 30,212 (245) 4,436 (15,449) (178,576) 38,386 16,515 5,420 (362) 1,334 (591) 46 1,551 (127,535) 70,574 94,550 (31,910) (21,325) (29,256) — (2,148) (3,616) 76,869 (20,454) 180,363 $ 159,909 9,919 4,307 162 6,865 $ $ $ $ 6,464 4,729 723 5,385 $ $ $ $ $ HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (1) Summary of Significant Accounting Policies Hawthorn Bancshares, Inc. (the “Company”) through its subsidiary, Hawthorn Bank (the “Bank”), provides a broad range of banking services to individual and corporate customers located within the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, 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 United States 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 credit losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements other than what is disclosed in the Pending Litigation section below. 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, the Bank, the Real Estate Company, and the Insurance Captive. The Insurance Captive was dissolved December 1, 2023. 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 credit 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 The Company designates certain long-term fixed rate personal real estate loans as held for sale. These loans are initially measured at fair value under the fair value option election with subsequent changes in fair value recognized in mortgage banking income. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and various other secondary market investors. The Company sells loans with servicing retained or released depending on pricing and market conditions. Mortgage loans held for sale were $3.9 million at December 31, 2023 compared to $0.6 million at December 31, 2022. Non-Accrual Loans Loans are placed on non-accrual 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 35 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 process of collection. 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 status after they become 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 non-accrual 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. Allowance for Credit Losses The allowance for credit losses is measured using a lifetime expected loss model that incorporates relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis. The allowance for credit losses is a valuation account that is deducted from loans amortized cost basis to present the net amount expected to be collected on the instrument. Expected recoveries are included in the allowance and do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Loans are charged off against the allowance for credit losses when management believes the balance has become uncollectible. For loans evaluated for credit losses on a collective basis, average historical loss rates are calculated for each pool using relevant peer historical net charge-offs (combined charge-offs and recoveries by observable historical reporting period) and the Company’s outstanding loan balances during a lookback period. The Company chose to use relevant peer loan loss data due to statistical relevance concerns, low observation counts, historical data limitations, and the inability to secure through the cycle loan-level data. Lookback periods can be different based on the individual pool and represent management’s credit expectations for the pool of loans over the remaining contractual life. The calculated average net charge-off rate is then adjusted for current conditions and reasonable and supportable forecasts. These adjustments increase or decrease the average historical loss rate to reflect expectations of future losses given a single path economic forecast of a single macroeconomic variable, which is the civilian unemployment rate. The adjustments are based on results from various regression models projecting the impact of the selected macroeconomic variable to loss rates. The forecast is used for a reasonable and supportable period before reverting back to historical averages using a straight-line method. The forecast adjusted loss rate is applied to the loans over the remaining contractual lives, adjusted for expected prepayments and curtailments. The contractual term excludes expected extensions, renewals and modifications. Credit cards and certain similar consumer lines of credit do not have stated maturities and therefore, for these loan classes, remaining contractual lives are determined by estimating future cash flows expected to be received from customers until payments have been fully allocated to outstanding balances. Agriculture loans also use the remaining life methodology for estimating life of loan losses. Additionally, the allowance for credit losses considers qualitative or environmental factors, such as: lending policies and procedures; economic conditions; the nature, volume and terms of the portfolio; lending staff and management; past due loans; the loan review system; collateral values; concentrations of credit; and external factors. Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures The Company maintains a separate allowance for credit losses for off-balance-sheet credit exposures, including unfunded loan commitments, unless the associated obligation is unconditionally cancellable by the Company. This allowance is included in other liabilities on the consolidated balance sheets with associated expense recognized as a component of the provision for credit losses on the consolidated statements of income. The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded. 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 insurance coverage under the Federal Deposit Insurance Corporation (“FDIC”), that are carried at cost which approximates fair values. 36 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 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 impairment in accordance with guidance provided by the Financial Accounting Standards Board (“FASB”) under Accounting Standards Codification (“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 of Des Moines (“FHLB”) stock, and Midwest Independent BankersBank (“MIB”) 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 FHLB 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 FHLB in an amount equal to 6 basis points of the Bank’s year-end total assets plus 4.50% of advances from the FHLB to the Bank. These investments are recorded at cost, which represents redemption value. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improvements and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such lives are estimated to be five to 40 years for buildings and improvements and three to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred. Derivative Assets and Liabilities The Company recognizes derivatives as either assets or liabilities in the balance sheet, and measures those instruments at fair value. Loan commitments related to the origination or acquisition of mortgage loans that will be held for sale are accounted for as derivative instruments. The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). The Company also enters into forward sales commitments for the mortgage loans underlying the rate lock commitments. 37 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The Company uses derivative instruments to manage the fair value changes in interest rate lock commitments and loan portfolios which are exposed to interest rate risk. The Company does not use derivative instruments for trading or speculative purposes. Certain derivative financial instruments are generally entered into as economic hedges against changes in the fair value of a recognized asset or liability and are not designated as hedges for accounting purposes. These non-designated derivatives are intended to provide interest rate protection but do not meet hedge accounting treatment. Changes in the fair value of these instruments are recorded in non-interest income and non-interest expense related to the other asset or other liability in the consolidated statements of income. Management has determined these derivatives do not have a material effect on the Company’s financial position, results of operations or cash flows. 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 (“MSRs”) are carried at fair value in the consolidated balance sheet with changes in the fair value recognized in earnings. Because 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 records 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 credit 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 and eligible employees. The benefits are based on age, years of service and the level of compensation during the respective employee’s 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 38 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 trends when it is appropriate to do so. The Company believes that the assumptions utilized in recording its obligations under its plan are reasonable based on its experience and market conditions. The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation — Retirement Plans under the subtopic Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the funded status of a plan as of the date of its fiscal year-end, with limited exceptions. Additional disclosures are required to provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures. Investments in Historic Tax Credits. The Company has a noncontrolling financial investment in a private investment fund and partnership that finances the rehabilitation and re-use of historic buildings. This unconsolidated investment may generate a return through the realization of federal income tax credits, as well as other tax benefits, such as tax deductions from net operating losses of the investments over a period of time. Investments in historic tax credits are accounted for under the equity method of accounting and the Company’s recorded investment in these entities is carried in other assets on the Consolidated Balance Sheets with any unfunded commitment recorded in other liabilities. The tax credits and other net tax benefits received are recognized as a component of income tax expense in the Consolidated Statements of Income. 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 that 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, 2023, 2022, and 2021. 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, and cash and due from banks. 39 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 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 previous gains, otherwise charged to retained earnings. Stock Dividend On July 1, 2023, the Company paid a special stock dividend of four percent to shareholders of record at the close of business on June 15, 2023. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change. Reclassifications Certain prior year information has been reclassified to conform to the 2023 presentation. Recently Adopted Accounting Pronouncements Trouble Debt Restructurings. On January 1, 2023, the effective date of the guidance, the Company adopted Accounting Standards Update (ASU) 2022-02, “Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”, on a prospective basis. ASU 2022-02 eliminated the accounting guidance for troubled debt restructurings (TDRs), while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. For entities that have already adopted ASU 2016-13, the amendments in ASU 2022-02 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Effective January 1, 2023, the Company adopted the amendments within ASU 2022-02, using the prospective transition method. ASU 2022-02 did not have a material impact on the Company’s consolidated financial statements. ASU 2016-13. On January 1, 2023, the Company adopted ASU 2016-13, “Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which replaces the incurred loss methodology with an expected loss methodology commonly referred to as the current expected credit losses (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities. The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. The Company recorded an after-tax decrease to retained earnings of $5.6 million as of January 1, 2023 for the cumulative effect of adopting this standard. 40 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The following table illustrates the impact of adoption of ASU 2016-13: (in thousands) Assets: December 31, 2022 Impact of Adoption January 1, 2023 Allowance for credit losses on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,588 3,267 $ 5,793 1,483 $ 21,381 4,750 Liabilities: Liability for unfunded commitments . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,272 1,272 Shareholders’ Equity Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,789 (5,581) 86,208 (2) Loans and Allowance for Credit Losses Loans Major classifications within the Company’s held for investment loan portfolio at December 31, 2023 and 2022 were 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 held for investment $ 2023 226,275 58,347 130,296 372,391 731,024 20,814 $ 1,539,147 2022 244,549 32,095 137,235 361,025 722,729 23,619 1,521,252 $ $ The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, 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. Accrued interest on loans totaled $7.2 million and $6.4 million at December 31, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company’s consolidated balance sheets. The total amount of accrued interest is excluded from the amortized cost basis of loans presented above. Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivable. At December 31, 2023, $708.3 million of loans were pledged to the FHLB 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, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,415 New loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts collected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,373 (4,191) Balance at December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,597 41 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral requirements, as those prevailing at the same time for comparable transactions with other persons, and did not involve more than the normal risk of collectability or present unfavorable features. Allowance for Credit Losses The allowance for credit losses is measured using a lifetime expected loss model that incorporates relevant information about past events, including historical credit loss experience on loans with similar risk characteristics, current conditions, and reasonable and supportable forecasts that affect the collectability of the remaining cash flows over the contractual term of the loans. The allowance for credit losses is measured on a collective (pool) basis. Loans are aggregated into pools based on similar risk characteristics including borrower type, collateral type and expected credit loss patterns. Loans that do not share similar risk characteristics, primarily large loans on non-accrual status, are evaluated on an individual basis. The allowance for credit losses is a valuation account that is deducted from loans amortized cost basis to present the net amount expected to be collected on the instrument. Expected recoveries are included in the allowance and do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Loans are charged off against the allowance for credit losses when management believes the balance has become uncollectible. Allowance for Credit Losses on Off-Balance-Sheet Credit Exposures The Company maintains a separate allowance for credit losses for off-balance-sheet credit exposures, including unfunded loan commitments, unless the associated obligation is unconditionally cancellable by the Company. This allowance is included in other liabilities on the consolidated balance sheets with associated expense recognized as a component of the provision for credit losses on the consolidated statements of income. The liability for unfunded lending commitments utilizes the same model as the allowance for credit losses on loans, however, the liability for unfunded lending commitments incorporates an assumption for the portion of unfunded commitments that are expected to be funded. Sensitivity in the Allowance for Credit Loss Model The allowance for credit losses is an estimate that requires significant judgment including projections of the macroeconomic environment. The forecasted macroeconomic environment continuously changes, which can cause fluctuations in estimated expected losses. On January 1, 2023, the Company’s adoption of the CECL methodology resulted in an increase to the allowance for credit losses of $5.8 million and a liability for unfunded commitments totaling $1.3 million. 42 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The following table illustrates the changes in the allowance for credit losses by portfolio segment: (in thousands) Allowance for Credit Losses on Loans Commercial, Financial, & Agricultural Real Estate Construction - Residential Real Estate Construction - Commercial Real Estate Mortgage - Residential Real Estate Mortgage - Commercial Installment and other Consumer Un- allocated Total $ 2,679 $ 9,354 $ 264 $ 7 $ 18,113 Balance at, December 31, 2020 . . . . . . . . $ 5,121 $ 213 $ Charge-offs . . . . . . . . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . . . . . . . (194) 221 Provision for (release of) credit losses . . (2,431) — 13 (89) 475 — 475 (362) (22) 190 (365) (43) 3 1,348 Balance at, December 31, 2021 . . . . . . . . $ 2,717 $ 137 $ 588 $ 2,482 $ 10,662 $ Charge-offs . . . . . . . . . . . . . . . . . . . (135) Recoveries . . . . . . . . . . . . . . . . . . . Provision for (release of) credit losses . . 56 97 Balance at, December 31, 2022 . . . . . . . . $ 2,735 $ Adoption of ASU 2016-13 (1) . . . . . . . . Balance at January 1, 2023 . . . . . . . . . . Charge-offs . . . . . . . . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . . . . . . . Provision for (release of) credit losses . . Balance at, December 31, 2023 . . . . . . . . $ Liability for Unfunded Commitments (649) 2,086 (161) 192 1,091 3,208 — — 20 157 291 448 — — 595 $ — 22 265 875 2,894 3,769 — 22 (518) — 45 802 (181) 11 (2,492) $ 3,329 $ 8,000 $ 1,890 5,219 (88) 23 110 1,613 9,613 (32) 4 952 $ 1,043 $ 3,273 $ 5,264 $ 10,537 $ (229) 76 145 256 (321) 88 303 326 (80) 246 (347) 85 248 232 $ — — 54 61 — — 105 (488) 978 (1,700) $ 16,903 (637) 222 (900) $ 166 $ 15,588 (166) — — — 187 5,793 21,381 (628) 326 2,665 $ 187 $ 23,744 Balance at, December 31, 2022 . . . . . . . . $ — $ — $ — $ — $ — $ — $ — $ Adoption of ASU 2016-13 (1) . . . . . . . . Balance at January 1, 2023 . . . . . . . . . . Provision for (release of) credit losses on unfunded commitments . . . . . . . . . . . Balance at, December 31, 2023 . . . . . . . . $ Total allowance for credit losses on loans 104 104 93 197 341 341 569 569 (68) (324) $ 273 $ 245 and liability for unfunded commitments . . $ 3,405 $ 1,316 $ 3,518 107 107 (4) 103 $ 150 150 (40) 110 5,367 $ 10,647 1 1 — 1 — — 18 18 $ 233 $ 205 $ $ $ $ $ $ — 1,272 1,272 (325) 947 24,691 (1) Beginning January 1, 2023, calculation is based on CECL methodology. Prior to January 1, 2023, calculation was based on probable incurred loss methodology. Collateral — Dependent Loans Collateral-dependent loans are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Under the CECL methodology, for collateral-dependent loans, the Company has adopted the practical expedient to measure the allowance on the fair value of collateral. The allowance is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and the loan’s amortized cost. If the fair value of the collateral exceeds the loan’s amortized cost, no allowance is necessary. The Company’s policy is to obtain appraisals on any significant pieces of collateral. Higher discounts are applied in determining fair value for real estate collateral in industries that are undergoing significant stress, or for properties that are specialized use or have limited marketability. 43 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The amortized cost of collateral-dependent loans by class as of December 31, 2023 was as follows: (in thousands) December 31, 2023 Commercial, financial, and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate construction − residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage − residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage − commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Impaired Loans The following impaired loans disclosures were superseded by ASU 2016-13. Collateral Type Real Estate Other Allowance Allocated $ $ — $ 2,221 — — — 2,221 432 46 2,369 2,847 $ $ 1,300 164 19 — $ 1,483 The following table illustrates the allowance for loan losses and recorded investment by portfolio segment based on the impairment method: Commercial, Financial, and Agricultural Real Estate Construction - Residential Real Estate Construction - Commercial Real Estate Mortgage - Residential Real Estate Mortgage - Commercial Installment and other Consumer Un- allocated Total (in thousands) December 31, 2022 Allowance for loan losses: Individually evaluated for impairment . . $ Collectively evaluated for impairment . . Total . . . . . . . . . . . . . . . . . . . . . . $ Loans outstanding: Individually evaluated for impairment . . $ Collectively evaluated for impairment . . 295 244,254 Total . . . . . . . . . . . . . . . . . . . . . . $ 244,549 $ $ $ 36 2,699 2,735 — $ 157 157 $ 11 $ 864 875 $ 148 $ 3,181 3,329 $ 62 $ 7,938 8,000 $ 1 $ 325 326 $ — $ 166 166 $ 258 15,330 15,588 — $ 87 $ 1,863 $ 137,148 359,162 18,110 $ 704,619 6 $ 23,613 $ 137,235 $ 361,025 $ 722,729 $ 23,619 $ 32,095 $ 32,095 20,361 — $ — 1,500,891 — $ 1,521,252 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 $20.4 million at December 31, 2022 and were 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, internal evaluations, or by discounting the total expected future cash flows. At December 31, 2022, $17.7 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans’ collateral. The categories of impaired loans at December 31, 2022 were as follows: (in thousands) Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 $ 18,700 1,661 $ 20,361 The following tables provide additional information about impaired loans at December 31, 2022, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided. 44 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (in thousands) December 31, 2022 With no related allowance recorded: Recorded Investment Unpaid Principal Balance Specific Reserves Average Recorded Investment Real estate mortgage − residential . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage − commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total With an allowance recorded: Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . Real estate construction − commercial . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage − residential . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage − commercial . . . . . . . . . . . . . . . . . . . . . . . . Installment and other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ — $ — $ 17,664 17,664 295 87 1,863 446 6 2,697 20,361 $ $ $ $ 18,975 18,975 330 127 2,080 535 6 3,078 22,053 $ $ $ $ — $ — — $ 36 11 148 62 1 258 258 $ $ $ 1 16,230 16,231 319 93 2,189 428 90 3,119 19,350 Credit Quality The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. • Pass — loans that are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell in a timely manner, of any underlying collateral. • Watch — loans that have one or more weaknesses identified that may result in the borrower being unable to meet repayment terms or when the Company’s credit position could deteriorate at some future date. • Substandard — loans that are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. • Non-accrual — loans that are delinquent for 90 days or more and the ultimate collectability of interest or principal is no longer probable. (The majority of the Company’s non-accrual loans have a substandard risk grade) • Doubtful — loans that have all the weaknesses inherent in loans classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions, and values. In the following tables, consumer loans are generally assigned a risk grade similar to the classifications described above; however, upon reaching 90 days and 120 days past due, they are generally downgraded to non-accrual status, in accordance with the Federal Financial Institutions Examination Counsel’s Retail Credit Classification Policy. 45 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The following table presents the recorded investment by risk categories at December 31, 2023: Term Loans Amortized Cost Basis by Origination Year and Risk Grades 2022 2021 2020 2019 Prior Revolving Loans Converted to Term Loans Amortized Cost Basis Revolving Loans Amortized Cost Basis Total 43,082 $ 2,505 3,758 96 49,441 $ 1 17,259 $ — — — 17,259 $ — 53,058 $ 17 — — 53,075 $ — 121,430 $ 251 — 23 121,704 $ — 2023 40,103 $ . . . . . . . . . . . . . . . . . . . . $ . . . . . . . . . . . . . . . . . . . . $ . . . . . . . . . . . . . . . . . . . . $ 1 371 159 40,634 $ — 39,847 $ — — 432 40,279 $ — 49,041 $ 934 710 — 50,685 $ — (in thousands) December 31, 2023 Commercial, Financial, & Agricultural Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Real Estate Construction − Residential Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Real Estate Construction − Commercial Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Real Estate Mortgage – Residential Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Real Estate Mortgage – Commercial Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Installment and other Consumer Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Total Portfolio Pass . . . . . . . . . . . . . . . . . . . . . $ 300,974 $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . . Total Total Gross YTD charge-offs . . . . . . . . . . . . . . . . . . . . $ 321,352 $ 84 $ 65,472 $ 179 16 — 65,667 $ — 7,430 $ — — — 7,430 $ 84 . . . . . . . . . . . . . . . . . . . . $ 116,657 $ 99,081 $ 15,759 — 1,817 . . . . . . . . . . . . . . . . . . . . $ . . . . . . . . . . . . . . . . . . . . $ 16,873 1,097 2,408 . . . . . . $ — 212,350 5,911 5,786 2,228 226,275 161 57,915 — — 432 58,347 — 128,463 1,054 710 69 130,296 — 368,995 2,538 271 587 372,391 88 680,676 30,877 16,493 2,978 731,024 32 20,814 — — — 20,814 347 32,812 $ 32 19 317 33,180 $ — 30,965 $ 586 16 — 31,567 $ — 4,774 $ 3 — 7 4,784 $ — 5,022 $ 282 — — 5,304 $ 160 55,379 2,502 323 1,649 59,853 — $ 213 — 1,299 — $ 1,512 — $ $ 634 $ — — — 634 $ — 24,371 $ — — — 24,371 $ — 62,998 $ 411 — 93 63,502 $ — 175 $ — — — 175 $ — 1,040 $ — — — 1,040 $ — 47,884 $ 293 129 135 48,441 $ 75 — $ — — — — $ — 31 $ — — — 31 $ — — $ — — — — $ — 735 $ — — 69 804 $ — 7,242 $ 19,193 $ 71 — — 1,310 126 246 7,313 $ 20,875 $ — — — $ — $ — — — — $ — $ — — — — — 187 103 — — 290 — 44,574 23 — 90 44,687 13 16,059 70 — 100 16,229 — $ $ $ $ $ $ — $ — — — — $ — $ $ $ $ 202 — — — 202 — 659 — — — 659 — 208,699 $ 10,978 215 54 204,789 $ 2,737 15,944 712 219,946 $ 224,182 $ — — 91 — 212 84,363 $ 27,085 $ 39,941 $ 345 45 83 84,666 $ 27,558 $ 41,127 $ — 897 289 — 32 — 6,497 $ — — — 6,497 $ 23 2,720 $ — — — 2,720 $ 7 1,287 $ — — — 1,287 $ — 987 $ — — — 987 $ — 1,803 $ — — — 1,803 $ 232 90 — — — 90 1 $ — $ — — — $ — $ — 116,289 2,698 323 1,839 121,149 14 450,025 $ 328,324 $ 165,714 $ 40,119 $ 66,694 $ 970 145 347 419 45 90 2,489 415 315 167,176 $ 40,673 $ 69,913 $ 424 $ 75 $ — $ 13,751 3,973 173 3,180 15,963 1,122 467,922 $ 348,589 $ 7 $ 24 $ 46 $ 1,074 — 1,299 — $ 2,373 $ $ 1,469,213 40,380 23,260 6,294 $ 1,539,147 628 — $ 37,994 $ 756 24 — 38,774 $ — 6,479 $ 150 — 26 6,655 $ — 4,050 $ 48 152 95 4,345 $ — 2,718 $ 251 — — 2,969 $ — 63,869 3,155 1,820 — 68,844 — $ 504 1,527 — — $ 2,031 — $ $ HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The following table presents the recorded investment by risk categories at December 31, 2022: Term Loans Amortized Cost Basis by Origination Year and Risk Grades 2021 2020 2019 2018 Prior 40,681 $ 296 58 — 41,035 $ — 1,248 $ — — — 1,248 $ — 67,977 $ 321 — — 68,298 $ — 68,380 $ 429 136 — 68,945 $ — 203,033 $ 14,029 2,673 13,180 2022 . . . . . . . . . . . . . . . . . . . . $ . . . . . . . . . . . . . . . . . . . . $ . . . . . . . . . . . . . . . . . . . . $ 73,654 $ 1,228 5,014 — 79,896 $ 135 60,318 $ 2,239 686 — 63,243 $ — 29,289 $ — — — 29,289 $ — (in thousands) December 31, 2022 Commercial, Financial, & Agricultural Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accrual loans Total Gross YTD charge-offs . . . . . . . . . . Real Estate Construction – Residential Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Real Estate Construction – Commercial Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Real Estate Mortgage – Residential Pass . . . . . . . . . . . . . . . . . . . . . $ 147,130 $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accrual loans Total . . . . . . . . . . . . . . . . . . . . $ 148,415 $ Gross YTD charge-offs . . . . . . . . . . Real Estate Mortgage – Commercial Pass . . . . . . . . . . . . . . . . . . . . . $ 248,529 $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . $ 267,459 $ Gross YTD charge-offs . . . . . . . . . . Installment and other Consumer Pass . . . . . . . . . . . . . . . . . . . . . $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . Total Gross YTD charge-offs . . . . . . . . . . Total Portfolio Pass . . . . . . . . . . . . . . . . . . . . . $ 570,090 $ Watch . . . . . . . . . . . . . . . . . . . . Substandard . . . . . . . . . . . . . . . . Non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 599,474 $ Total 504 $ Total Gross YTD charge-offs 11,170 $ — — 2 . . . . . . . . . . . . . . . . . . . . $ 18,742 5,960 4,682 14,049 260 4,621 11,172 $ 268 1,226 — 59 . . . . . . $ 101 — 769 $ — — — 769 $ — 2,249 $ — — — 2,249 $ — 53,322 $ 1,511 820 144 55,797 $ — 449 $ — — — 449 $ — 78 $ — — — 78 $ — — $ — — — — $ — 676 $ — — — 676 $ — — $ — — — — $ — 656 $ 14 — 87 757 $ — 8,013 $ 145 — — 8,158 $ — 4,981 $ 25,590 $ 215 10 — 2,015 712 386 5,206 $ 28,703 $ — — 99,989 $ 31,341 $ 21,354 $ 38,317 $ 16,863 — — 811 306 — 897 — — 842 48 — 232,915 $ 116,852 $ 32,231 $ 22,251 $ 39,434 $ — — — — 5,183 $ — — 3 5,186 $ 10 2,891 $ — — — 2,891 $ 5 2,016 $ — — 1 2,017 $ 21 459 $ — — — 459 $ 1 80 88 $ — — — 88 $ — Revolving Loans Converted to Term Loans Amortized Cost Basis Revolving Loans Amortized Cost Basis Total 229,949 7,411 7,068 121 244,549 135 32,095 — — — 32,095 — 133,785 2,677 686 87 137,235 — 353,121 5,541 1,678 685 361,025 — 653,552 48,041 3,335 17,801 722,729 181 23,613 — — 6 23,619 321 340 — — — 340 — 1,831 103 — — 1,934 — 45,182 — — 96 45,278 — 10,868 149 — — 11,017 — 1,806 — — — 1,806 16 $ $ $ $ $ $ $ $ $ $ — $ — — — — $ — — $ — — — — $ — $ $ $ $ 523 — — — 523 — 121 401 48 — 570 — — $ — — — — $ — 197,214 $ 48,376 $ 31,520 $ 67,369 $ 123,896 386,502 $ 3,407 1,160 19,130 15,075 1,820 162 844 2,867 13,183 96 95 144 417,627 $ 217,332 $ 49,588 $ 32,937 $ 71,951 $ 129,219 16 3,091 1,018 473 1,137 48 27 10 $ 80 $ 21 $ 1 $ 5 $ 47 $ 1,148 1,928 48 — $ 3,124 $ $ 1,426,115 63,670 12,767 18,700 $ 1,521,252 637 — $ HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 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 status when they become 90 days or more past due. However, management considers many factors before placing a loan on non-accrual status, including the delinquency status of the loan, the overall financial condition of the borrower, the progress of management’s collection efforts and the value of the underlying collateral. Subsequent interest payments received on non-accrual loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial condition of the borrower indicates that timely collectability of interest and principal is probable and the borrower demonstrates the ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months. The following tables present the recorded investment in non-accrual loans and loans past due over 90 days still on accrual by class of loans as of December 31, 2023 and 2022. (in thousands) December 31, 2023 Non-accrual with no Allowance Non-accrual with Allowance Total Non-accrual (1) 90 Days Past Due And Still Accruing Total Non- performing Loans Commercial, Financial, and Agricultural . . . . . . . . . . . . . $ — $ 2,228 $ 2,228 $ — $ 2,228 Real estate construction − residential . . . . . . . . . . . . . . . Real estate construction − commercial . . . . . . . . . . . . . . Real estate mortgage − residential . . . . . . . . . . . . . . . . . Real estate mortgage − commercial . . . . . . . . . . . . . . . . Installment and Other Consumer . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2022 Commercial, Financial, and Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate construction − commercial . . . . . . . . . . . . . . . . . Real estate mortgage − residential Real estate mortgage − commercial . . . . . . . . . . . . . . . . Installment and Other Consumer . . . . . . . . . . . . . . . . . . — — — 2,368 — 432 69 587 610 — $ $ $ $ 2,368 $ 3,926 — $ — — 17,664 — 121 87 685 137 6 432 69 587 2,978 — 6,294 — — 115 — 4 432 69 702 2,978 4 $ 119 $ 6,413 121 $ — $ 121 87 685 17,801 6 — — — 1 1 87 685 17,801 7 $ 18,701 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,664 $ 1,036 $ 18,700 $ (1) Includes $0.2 million and $0.3 million of restructured loans at December 31, 2023 and 2022, respectively. No material amount of interest income was recognized on non-accrual loans during the year ended December 31, 2023. 48 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The following table provides aging information for the Company’s past due and non-accrual loans at December 31, 2023 and 2022. (in thousands) December 31, 2023 Current or Less Than 30 Days Past Due 30 – 89 Days Past Due 90 Days Past Due And Still Accruing Non-Accrual Total Commercial, Financial, and Agricultural . . . . . . . . . . . . . . $ 223,845 $ Real estate construction − residential . . . . . . . . . . . . . . . . . Real estate construction − commercial . . . . . . . . . . . . . . . . Real estate mortgage − residential . . . . . . . . . . . . . . . . . . . Real estate mortgage − commercial . . . . . . . . . . . . . . . . . . Installment and Other Consumer . . . . . . . . . . . . . . . . . . . 57,568 130,227 368,956 728,029 20,607 202 347 — 2,733 17 203 $ — $ 2,228 $ 226,275 — — 115 — 4 432 69 587 2,978 — 58,347 130,296 372,391 731,024 20,814 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,529,232 $ 3,502 $ 119 $ 6,294 $ 1,539,147 December 31, 2022 Commercial, Financial, and Agricultural . . . . . . . . . . . . . . $ 244,392 $ Real estate construction − residential . . . . . . . . . . . . . . . . . Real estate construction − commercial . . . . . . . . . . . . . . . . Real estate mortgage − residential . . . . . . . . . . . . . . . . . . . Real estate mortgage − commercial . . . . . . . . . . . . . . . . . . Installment and Other Consumer . . . . . . . . . . . . . . . . . . . 32,095 137,148 359,672 704,925 23,506 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,501,738 $ 36 — — 668 3 106 813 $ — $ 121 $ 244,549 — — — — 1 1 $ — 87 685 17,801 6 32,095 137,235 361,025 722,729 23,619 $ 18,700 $ 1,521,252 Loan Modifications for Borrowers Experiencing Financial Difficulty Subsequent to the Adoption of ASU 2022-02 In the normal course of business, the Company may execute loan modifications with borrowers. These modifications are analyzed to determine whether the modification is considered concessionary, long-term and made to a borrower experiencing financial difficulty. The Company’s modifications generally include interest rate adjustments, principal reductions, and amortization and maturity date extensions. If a loan modification is determined to be made to a borrower experiencing financial difficulty, the loan is considered collateral-dependent and evaluated as part of the allowance for credit losses as described above in the Allowance for Credit Losses section of this note. For the year ended December 31, 2023, the Company did not modify any loans made to borrowers experiencing financial difficulty. The Company monitors loan payments on an on-going basis to determine if a loan is considered to have a payment default. Determination of payment default involves analyzing the economic conditions that exist for each customer and their ability to generate positive cash flows during the loan term. The following table presents information regarding modifications to borrowers experiencing financial difficulty as of December 31, 2023: 49 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (Dollars in thousands) December 31, 2023 Number of contracts Recorded Investment % to Total Loans Commercial, financial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage − residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage − commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 6 2 $ 160 980 270 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 $ 1,410 0.01% 0.06% 0.02% 0.09% Troubled Debt Restructurings (TDRs) Prior to Adoption of ASU 2022-02 Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR. See “Note 1 Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 for more information on our TDR policy, and “Note 1, Summary of Significant Accounting Policies” in this report for more information on the adoption of ASU 2022-02. At December 31, 2022, loans classified as TDRs totaled $1.9 million, of which $0.3 million were classified as non-performing TDRs and $1.7 million were classified as performing TDRs. Both performing and non-performing TDRs are considered impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs. Accordingly, specific reserves of $136,000 related to TDRs were allocated to the allowance for loan losses at December 31, 2022. For the year ended December 31, 2022, the Company had two new loans meeting the TDR criteria and there were no TDRs for which there was a payment default within the 12 months following the restructure date. Loans Held For Sale The Company designates certain long-term fixed rate personal real estate loans as held for sale. These loans are initially measured at fair value under the fair value option election with subsequent changes in fair value recognized in mortgage banking income. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and various other secondary market investors. At December 31, 2023, the carrying amount of these loans was $3.9 million compared to $0.6 million at December 31, 2022. (3) Other Real Estate and Other Assets Acquired in Settlement of Loans (in thousands) Real estate construction – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage – residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate mortgage – commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repossessed assets Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less valuation allowance for other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 7,668 20 — 6 $ 10,094 179 1,186 — 7,694 $ 11,459 (5,950) (2,664) 1,744 $ 8,795 $ $ $ 50 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Changes in the net carrying amount of other real estate owned for the years indicated: Balance at December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,436 Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charge-offs against the valuation allowance for other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 (2,176) (218) 255 Balance at December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,459 Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charge-offs against the valuation allowance for other real estate owned, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less valuation allowance for other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 (2,691) (1,443) 298 7,694 (5,950) 1,744 $ $ At December 31, 2023, $0.1 million consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to $0.2 million of consumer mortgage loans in the process of foreclosure at December 31, 2022. Activity in the valuation allowance for other real estate owned in settlement of loans for the years December 31, as indicated: (in thousands) 2023 2022 2021 Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Provision for (release of) other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,664 4,729 Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,443) $ 2,911 $ 2,614 (29) (218) 965 (668) Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,950 $ 2,664 $ 2,911 During 2023 the Company recorded a $4.7 valuation write-down primarily related to two foreclosed property relationships. 51 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (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, 2023 and 2022 were as follows: (in thousands) December 31, 2023 Total Amortized Cost Gross Unrealized Gains Losses Fair Value U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,977 $ 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446 22,042 126,396 51,736 11,825 1,486 1 — 16 55 27 22 — $ — $ 1,978 (19) (236) 427 21,822 (19,566) 106,885 (6,123) (1,026) (317) 45,640 10,821 1,169 Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,908 $ 121 $ (27,287) $ 188,742 December 31, 2022 U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,198 $ — $ (46) $ 2,152 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591 26,499 134,994 119,556 11,825 1,486 Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 297,149 $ — — — 7 — — 7 (32) (2,722) (25,554) (16,864) (882) (309) 559 23,777 109,440 102,699 10,943 1,177 $ (46,409) $ 250,747 (a) Certain hybrid instruments possessing characteristics typically associated with debt obligations. The Company’s investment securities are classified as available-for-sale. Agency bonds and notes, SBA-guaranteed loan certificates, residential and commercial agency mortgage-backed securities, and agency collateralized mortgage obligations include securities issued by the Government National Mortgage Association, a U.S. government agency, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the FHLB, which are U.S. government-sponsored enterprises Debt securities with carrying values aggregating approximately $89.2 million and $111.6 million at December 31, 2023 and December 31, 2022, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2023, by contractual maturity are shown below. Accrued interest on investments totaled $1.4 million and $1.5 million at December 31, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company’s consolidated balance sheets. The total amount of accrued interest is excluded from the amortized cost basis of investments presented below. Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivable. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties. 52 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (in thousands) Amortized Cost Fair Value Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,102 $ 2,102 Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after five years through ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,465 26,216 110,389 164,172 51,736 25,346 23,779 91,875 143,102 45,640 Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 215,908 $ 188,742 Other Investment Securities Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in FHLB stock and MIB stock, that do not have readily determinable fair values, are required for membership in those organizations. (in thousands) Other securities: 2023 2022 FHLB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,071 $ 6,156 MIB stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities with readily determinable fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 78 151 46 Total other investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,300 $ 6,353 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, 2023 and December 31, 2022 were as follows: (in thousands) At December 31, 2023 Less than 12 months 12 months or more Fair Value Unrealized Losses Fair Value Unrealized Losses Total Fair Value Total Unrealized Losses 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 . . . . . . . . . . . . . . . . . . . . . . . 997 $ — 11,995 1,501 2,935 — Bank issued trust preferred securities . . . . . . . . . . . — — $ — (8) (158) (40) — — — $ 427 1,772 103,283 39,793 8,799 1,169 — $ (19) (228) (19,408) (6,083) (1,026) 997 $ 427 13,767 104,784 42,728 8,799 (317) 1,169 — (19) (236) (19,566) (6,123) (1,026) (317) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,428 $ (206) $ 155,243 $ (27,081) $ 172,671 $ (27,287) 53 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (in thousands) At December 31, 2022 Less than 12 months 12 months or more Fair Value Unrealized Losses Fair Value Unrealized Losses Total Fair Value Total Unrealized Losses U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,908 $ (41) $ 244 $ (5) $ 2,152 $ 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 . . . . . . . . . . . 559 7,066 79,396 33,334 7,557 — (32) (933) (15,421) (3,124) (443) — — 16,711 29,370 68,911 3,386 1,177 — (1,789) (10,133) (13,740) (439) (309) 559 23,777 108,766 102,245 10,943 1,177 (46) (32) (2,722) (25,554) (16,864) (882) (309) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129,820 $ (19,994) $ 119,799 $ (26,415) $ 249,619 $ (46,409) The total available-for-sale portfolio consisted of approximately 385 securities at December 31, 2023. The portfolio included 370 securities having an aggregate fair value of $172.7 million that were in a loss position at December 31, 2023. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $155.2 million at fair value at December 31, 2023. The $27.3 million aggregate unrealized loss included in accumulated other comprehensive income at December 31, 2023 was caused by interest rate fluctuations. The total available-for-sale portfolio consisted of approximately 439 securities at December 31, 2022. The portfolio included 436 securities having an aggregate fair value of $249.6 million that were in a loss position at December 31, 2022. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer had a fair value of $119.8 million at December 31, 2022. The $46.4 million aggregate unrealized loss included in accumulated other comprehensive income at December 31, 2022 was caused by interest rate fluctuations. Because the decline in fair value is attributable to changes in interest rates and not credit quality, these investments were not considered other-than-temporarily impaired at December 31, 2023 and 2022, respectively. In the absence of changes in credit quality of these investments, the fair value is expected to recover on all debt securities as they approach their maturity date, or re-pricing date or if market yields for such investments decline. In addition, the Company does not have the intent to sell these investments over the period of recovery, and it is not more likely than not that the Company will be required to sell such investment securities. 54 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The following table presents the gross realized gains and losses from sales and calls of available-for-sale securities, as well as gains and losses on equity securities from fair value adjustments which have been recognized in earnings: (in thousands) Available-for-sale securities: 2023 2022 2021 Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ 122 Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,562) Other-than-temporary impairment recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investment securities: Fair value adjustments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit: Gross realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross realized losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 32 — (17) — — (14) — — — — 27 — — Investment securities (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11,547) $ (14) $ 149 (5) Premises and Equipment A summary of premises and equipment at December 31, 2023 and 2022 is as follows: (in thousands) 2023 2022 Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,683 $ 9,576 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating leases – right of use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,195 13,214 2,073 2,103 62,268 30,221 35,330 13,245 2,539 1,475 62,165 29,309 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,047 $ 32,856 Depreciation expense for the years ended December 31, 2023, 2022, and 2021 was as follows: (in thousands) 2023 2022 2021 Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,106 $ 2,141 $ 2,283 (6) Intangible Assets Mortgage Servicing Rights At December 31, 2023 the Company was servicing $220.7 million of loans sold to the secondary market compared to $240.5 million and $270.0 million at December 31, 2022 and 2021, respectively. Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold and serviced for others were $0.6 million, $0.8 million, and $0.8 million, for the years ended December 31, 2023, 2022, and 2021, respectively. 55 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The table below presents changes in mortgage servicing rights for the years ended December 31, 2023, 2022, and 2021. (in thousands) 2023 2022 2021 Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,899 $ 2,659 $ 2,445 Originated mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 64 400 Changes in fair value: Due to changes in model inputs and assumptions (1) . . . . . . . . . . . . . . . . . . . . . . . . . Other changes in fair value (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (939) (261) Total changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,200) 479 (303) 176 258 (444) (186) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,738 $ 2,899 $ 2,659 (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. The fourth quarter of 2023 includes a $1.1 million MSR valuation write-down upon accepting a letter of intent to sell the Company’s servicing portfolio during the first quarter of 2024. (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. In the fourth quarter of 2023, the Company recognized a $1.1 million mortgage MSR valuation write-down upon accepting a letter of intent to sell the Company’s servicing portfolio which closed during the first quarter of 2024. Prior to the fourth quarter of 2023, valuation assumptions were reviewed with a third party specialist. The following key data and assumptions were used in estimating the fair value of the Company’s MSRs as of December 31, 2023 and 2022: Weighted average constant prepayment rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.55% 6.61% Weighted average note rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.52% 3.43% Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.00% 11.25% Weighted average expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 7.2 2023 2022 (7) Deposits The table below represents the aggregate amount of time deposits with balances that met or exceeded the FDIC insurance limit of $250,000 and brokered deposits as of December 31, 2023 and 2022: (aggregate amounts in thousands) December 31, 2023 December 31, 2022 Time deposits with balances > $250,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,147 Brokered deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 161 $ 94,859 $ 40,135 56 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The scheduled maturities of total time deposits at December 31, 2023 were as follows: (aggregate amounts in thousands) Due within: 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 292,731 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,488 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,537 4,440 2,955 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 322,151 Average compensating balances held at correspondent banks were $0.4 million and $0.5 million at December 31, 2023 and 2022, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks. (8) Federal Funds Purchased and Securities Sold Under Agreements to Repurchase Information relating to federal funds purchased and repurchase agreements is as follows: (in thousands) 2023 Year End Weighted Rate Average Weighted Rate Average Balance Outstanding Maximum Outstanding at any Month End Balance at December 31, Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.75% 6.32% $ 25 Short-term repurchase agreements – Bank . . . . . . . . . . . . . . . — 2.16 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,228 $ 5,253 2022 Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.71% 3.82% $ 32 Short-term repurchase agreements – Bank . . . . . . . . . . . . . . . 1.47 0.63 7,950 $ $ $ — 6,482 6,482 — 22,048 $ $ $ — — — — 5,187 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,982 $ 22,048 $ 5,187 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 $35.0 million on an unsecured basis and $8.6 million on a secured basis at December 31, 2023. The Company elected to discontinue the repurchase agreement product during 2023 and customers were moved to reciprocal deposit products within the Company’s deposit mix. Prior to the fourth quarter of 2023, the Company offered a sweep account program whereby amounts in excess of an established limit are “swept” from the customer’s demand deposit account on a daily basis into retail repurchase agreements pursuant to individual repurchase agreements between the Company and its customers. Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral pledged for the repurchase agreements with customers is maintained by a designated third party custodian. The collateral amounts pledged to repurchase agreements by remaining maturity in the table below are limited to the outstanding balances of the related asset or liability; thus amounts of excess collateral are not shown. 57 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Repurchase Agreements Remaining Contractual Maturity of the Agreements Overnight and continuous Less than 90 days Greater than 90 days Total (in thousands) At December 31, 2022 U.S. government-sponsored enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,187 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,187 $ — $ — $ — $ — $5,187 $5,187 (9) Leases The Company’s leases primarily consist of office space and bank branches with remaining lease terms of generally 1 to 10 years. As of December 31, 2023, operating right-of-use (ROU) assets and liabilities were $1.2 million and $1.2 million, respectively. As of December 31, 2023, the weighted-average remaining lease term on these operating leases is approximately 5.2 years and the weighted-average discount rate used to measure the lease liabilities is approximately 4%. 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 $0.4 million for each of the years ended December 31, 2023 and 2022. 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 $0.1 million for each of the years ended December 31, 2023 and 2022. The table below summarizes the maturity of remaining operating lease liabilities: Lease payments due in: (in thousands) Operating Lease 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 257 259 262 264 44 1,339 (126) Total lease liabilities, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,213 58 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (10) Borrowings Federal Home Loan Bank and other borrowings of the Company consisted of the following: (in thousands) Borrower Maturity Date Year End Balance Year End Weighted Rate Year End Balance Year End Weighted Rate 2023 2022 FHLB advances . . . . . . . . . . . . . . . . . . . . . . The Bank Total Bank . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated notes . . . . . . . . . . . . . . . . . . . . The Company Total Company . . . . . . . . . . . . . . . . . . . . . . . 2023 2024 2025 2026 2027 2028 $ — —% $21,000 26,000 30,000 23,000 17,500 3.47% 16,000 2.89% 20,000 2.53% 13,000 3.28% 17,500 — —% — Thereafter 10,500 1.61% 10,500 2034 2035 $ 107,000 $ $ 25,774 23,712 49,486 $98,000 8.34% $25,774 7.47% 23,712 $49,486 2.64% 2.30% 1.99% 1.09% 3.28% —% 1.61% 7.44% 6.57% 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, 2023, the Bank had $107.0 million in outstanding borrowings with the FHLB. Based upon the collateral pledged to the FHLB at December 31, 2023, the Bank could borrow up to an additional $210.9 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 the three-month CME Term SOFR rate plus 1.83% and reprices quarterly (7.47% at December 31, 2023). The TPS can be prepaid without penalty at any time after five years from the issuance date. The TPS represent preferred interests in the trust. The Company invested approximately $0.7 million 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 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 CME Term SOFR rate plus 2.70% and reprices quarterly (8.34% at December 31, 2023). 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 $0.8 million 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, 59 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 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, 2023 and 2022 was $49.5 million, respectively. The Company has recorded the investments in the common securities issued by the Exchange Statutory Trusts aggregating $1.2 million as of both December 31, 2023 and 2022, 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 (Benefit) The composition of income tax (benefit) for the years ended December 31, 2023, 2022, and 2021 was as follows: (in thousands) Current: 2023 2022 2021 Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 793 $ 4,591 $ 5,351 State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 860 Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,384) State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,384) (134) 4,457 (119) — (119) 630 5,981 (284) — (284) Total income tax (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (524) $ 4,338 $ 5,697 Applicable income tax expense (benefit) 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, 2023, 2022, and 2021 are as follows: 2023 2022 2021 (in thousands) Amount % Amount % Amount % Income before provision for income tax (benefit) . . . . . . . . Tax at statutory federal income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt income, net State income tax (benefit), net of federal tax benefit . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 432 91 (509) 53 (159) $ 25,089 $ 28,214 21.00% $ 5,269 21.00% $ 5,925 21.00% (117.88) 12.25 (36.86) (821) (106) (4) (3.27) (0.42) (0.02) (733) 498 7 (2.60) 1.76 0.03 Provision for income tax expense (benefit) . . . . . . . . . . . . $ (524) (121.49)% $ 4,338 17.29% $ 5,697 20.19% Income tax (benefit) expense as a percentage of earnings before income taxes (benefit) as reported in the consolidated financial statements was (121.5)% for the year ended December 31, 2023 compared to 17.3% and 20.2% for the years ended December 31, 2022 and 2021, respectively. The effective tax rate for each of the years ended December 31, 2023, 2022, and 2021, respectively, is lower than the U.S. federal statutory rate of 21% primarily due to tax-free revenues. Included in the effective tax rate is a $0.1 million benefit associated with a historic tax credit investment for each of the years ended December 31, 2023 and 2022. The investment is expected to generate a $0.3 million tax benefit over the life of the project and is being recognized under the deferral method of accounting. 60 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The components of deferred tax assets and deferred tax liabilities at December 31, 2023 and 2022 were as follows: (in thousands) Deferred tax assets: 2023 2022 Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,669 $ 3,267 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liability for Unfunded Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued / deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,653 199 1,250 437 255 835 393 9,714 — 559 462 322 668 438 Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,691 $ 15,430 Deferred tax liabilities: Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 319 365 444 Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,180 Right-of-use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 187 38 427 609 422 378 313 456 9 Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,779 2,614 Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,912 $ 12,816 The deferred tax asset associated with the unrealized losses on securities is mainly a result of changes in interest rates, and the unrealized losses are considered to be temporary as the fair value is expected to recover as the securities approach their respective maturity dates. The issuers of the securities are of high credit quality and all principal amounts are expected to be paid when the securities mature. The Company does not intend to sell and it is likely that the Company will not be required to sell the securities prior to their anticipated recovery. 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, 2023. Management arrived at this conclusion based upon the level of historical taxable income and projections for future taxable income of the appropriate character over the periods in which the deferred tax assets are deductible. The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. For each of the years ended December 31, 2023 and 2022, 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, 2023, 2022, and 2021 (12) Stockholders’ Equity, Stock-Based Compensation and Accumulated Other Comprehensive Income (Loss) Equity-Based Compensation Plan At the 2023 Annual Meeting of Shareholders, held on June 6, 2023, the Company’s shareholders approved the Hawthorn Bancshares, Inc. Equity Incentive Plan (the “Equity Plan”), which was previously approved by the Company’s Board of Directors. The purpose of the Equity Plan is to allow eligible participants of the Company and its subsidiaries to acquire or increase a proprietary and vested interest in the growth and performance of the Company. The Equity Plan is also designed to assist the Company in attracting and retaining selected service providers by providing them with the opportunity to participate in the success and profitability of the Company. The terms of the Equity Plan provide for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, other equity-based awards and cash awards. Subject to certain adjustments, the maximum number of shares of the Company’s common stock that may be delivered pursuant to awards under the Equity Plan is 203,000 shares. Eligible participants under the Equity Plan include all employees, non-employee directors and consultants of the Company or its subsidiaries. The Equity Plan is currently administered by the Compensation Committee of the Board of Directors. In connection with the approval of the Equity Plan, the Compensation Committee adopted a form of restricted stock unit award agreement (service-based vesting). The Company issues restricted share units (“RSUs”) to provide additional incentives to key officers, employees, and non-employee directors. Awards are granted as determined by the Compensation Committee. The service- based RSUs typically vest in equal amounts over three years. The service-based RSUs vest, and shares of common stock are issued, in equal installments on the first, second, and third anniversaries of the date of grant. The following table summarizes the status of the Company’s RSUs for the year ended December 31, 2023: (in thousands, except per share amounts) RSUs 2023 Weighted-Average Grant Date Fair Value Per share Quantity Non-vested beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,277 Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — $ — 20.63 — — Non-vested end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,277 $ 20.63 The fair value of the RSUs units is determined using the Company’s stock price on the date of grant. Total share-based compensation expense recognized in the year ended December 31, 2023 for these RSUs was $42,000. No share-based compensation expense was recognized in the years ended December 31, 2022 and 2021, respectively. Forfeitures will be recognized as they occur. At December 31, 2023 there was $0.3 million of total unrecognized compensation expense related to RSUs that are expected to be recognized over a weighted-average period of 3 years. Changes in Issued and Outstanding Shares of Common Stock The following table shows the changes in shares of common stock issued and common stock held as treasury shares for the years ended December 31, 2023, 2022, and 2021. 62 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (in thousands, except per share amounts) Common Stock Issued Treasury Stock Held Common Stock Outstanding Balance at, December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,769 $ (289) $ 6,480 Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255 — — (118) 255 (118) Balance at, December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,024 $ (407) $ 6,617 Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260 — — (109) 260 (109) Balance at, December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,284 $ (516) $ 6,768 Stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 — 271 Balance at, December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,555 $ (516) $ 7,039 Accumulated Other Comprehensive Income (Loss) The following table summarizes the change in the components of the Company’s accumulated other comprehensive income (loss) for the years ended December 31, as indicated. (in thousands) Unrealized Income (Loss) on Securities (1) Unrecognized Net Pension and Postretirement Costs (2) Accumulated Other Comprehensive Income (Loss) Balance, December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 362 $ 2,931 $ 3,293 Other comprehensive income (loss), before reclassifications . . . . . . . . . . . . . . . (46,860) 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 . . . . . . . . . . . . . . . . . . . . . . . . — (46,860) 9,841 (37,019) Balance, December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (36,657) $ Other comprehensive income (loss), before reclassifications . . . . . . . . . . . . . . . Amounts reclassified from accumulated other comprehensive income (loss) . . . . Other comprehensive income (loss), before tax . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . . . . . . . . 10,087 9,148 19,235 (4,039) 15,196 Balance, December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (21,461) $ — 2,547 2,547 (535) 2,012 4,943 (640) 4,129 3,489 (733) 2,756 7,699 (46,860) 2,547 (44,313) 9,306 (35,007) $ (31,714) 9,447 13,277 22,724 (4,772) 17,952 $ (13,762) (1) (2) The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in gains (losses) on sale of investment securities in the consolidated statements of income. The pre-tax amounts reclassified from accumulated other comprehensive income (loss) are included in the computation of net periodic pension cost. See Note 13. 63 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (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) 2023 2022 2021 Payroll taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,585 $ 1,443 $ 1,403 Medical plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401(k) match and profit sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,841 1,167 1,061 44 1,771 1,574 1,608 50 1,860 1,829 1,796 52 Total employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,698 $ 6,446 $ 6,940 The Company’s profit-sharing plan includes a matching 401(k) portion, in which the Company matches the first 3% of eligible employee contributions. The Company made annual contributions for the discretionary portion in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the years shown. In addition, employees were able to make additional tax-deferred contributions. Other Plans On November 7, 2018, the Board of Directors of the Company adopted a supplemental executive retirement plan (SERP), effective on January 1, 2018. The SERP provides select employees who satisfy certain eligibility requirements with certain benefits upon retirement, termination of employment or death. As of December 31, 2023, the accrued liability was $1.8 million and the expense for this plan was $39,000 and $0.4 million for the years ended December 31, 2023 and 2022, respectively, and is recognized over the required service period. Pension The Company provides a noncontributory defined benefit pension plan for all full-time and eligible employees. Beginning January 1, 2018 and for all retrospective periods presented, the Company adopted the guidance under ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under the 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 did not elect to make a pension contribution in 2023. 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. 64 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Obligations and Funded Status at December 31, 2023 and 2022 (in thousands) Change in projected benefit obligation: 2023 2022 Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,131 $ 38,661 Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 946 1,428 49 (931) 30,623 30,932 6,350 — (109) (931) 36,242 5,619 25,897 $ $ $ $ $ 1,491 1,174 (11,301) (894) 29,131 37,416 (6,475) 1,000 (115) (894) 30,932 1,801 24,265 $ $ $ $ $ Amounts recognized in the statement of financial position consist of the following: (in thousands) 2023 2022 Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,619 $ 1,801 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — Net asset (liability) at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,619 $ 1,801 65 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Components of Net Pension Cost and Other Amounts Recognized in Accumulated Other Comprehensive Income (Loss) The following items are components of net pension cost for the years ended December 31, as indicated: (in thousands) 2023 2022 2021 Service cost – benefits earned during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 946 $ 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 (gain) loss (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,428 (2,178) 115 — (640) $ 1,491 1,174 1,692 1,072 (2,282) (1,843) 118 — — 104 — 367 Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (329) $ 501 $ 1,392 (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 income (loss) at December 31, 2023 and 2022 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis. (in thousands) 2023 2022 Net accumulated actuarial net gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,745 $ Accumulated other comprehensive gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net periodic benefit cost in excess of cumulative employer contributions . . . . . . . . . . . . . . . . . . . . . Net amount recognized at December 31, balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net actuarial gain arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total recognized in other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total recognized in net periodic pension cost and other comprehensive income (loss) . . . . . . . . . . . . . . . $ $ $ $ 66 9,745 (4,126) 5,619 4,129 (640) 3,489 $ $ $ 6,256 6,256 (4,455) 1,801 2,547 — 2,547 (3,818) $ (2,046) HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Assumptions utilized to determine benefit obligations as of December 31, 2023, 2022, and 2021 and to determine pension expense for the years then ended are as follows: Determination of benefit obligation at year end: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.95% 5.10% 3.10% Annual rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50% 4.50% 4.50% Determination of pension expense for year ended: Discount rate for the service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.10% 3.10% 2.80% Annual rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.50% 4.50% 4.50% Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75% 6.75% 6.75% 2023 2022 2021 The assumed overall expected long-term rate of return on pension plan assets used in calculating 2023 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: (in thousands) Plan Assets: 2023 2022 2021 2020 2019 Actual rate of return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.1% (17.0)% 22.1% 19.7% 25.8% 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 $0.4 million of income in 2024 compared to $0.3 million of income in 2023. 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. 67 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The fair value of the Company’s pension plan assets at December 31, 2023 and 2022 by asset category was as follows: (in thousands) December 31, 2023 Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Fair Value Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ U.S government agency obligations . . . . . . . . . . . . . . . . . . . . . . . . Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2022 Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S government agency obligations . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ 1,521 2,587 32,134 36,242 1,772 491 1,518 27,151 1,521 $ — $ — $ $ — 32,134 33,655 1,772 — 1,518 27,151 2,587 — — — 2,587 $ — — $ — 491 — — — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,932 $ 30,441 $ 491 $ — The following future benefit payments are expected to be paid: Year (in thousands) Pension benefits 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,061 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028 to 2032 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,109 1,194 1,335 1,460 9,450 (14) Earnings per Share Stock Dividend On July 1, 2023, the Company paid a stock dividend of four percent to common shareholders of record at the close of business on June 15, 2023. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change. The following table displays a reconciliation of the information used in calculating basic and diluted earnings per common share for the years ended December 31, 2023, 2022, and 2021, which have been restated for stock dividends. Diluted earnings per common share incorporates the potential impact of contingently issuable shares, including awards which require future service as a condition of delivery of the underlying common stock. 68 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (dollars in thousands, except per share data) 2023 2022 2021 Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . . . $ 956 $ 20,751 $ 22,517 Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 7,039,323 7,063,054 7,148,144 Effect of dilutive equity-based awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — Weighted average dilutive common shares outstanding . . . . . . . . . . . . . . . . . 7,039,323 7,063,054 7,148,144 Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.14 0.14 $ $ 2.94 2.94 $ $ 3.15 3.15 The dilutive effect of restricted share units is reflected in diluted earnings per share unless the impact is anti-dilutive, by application of the treasury stock method. Repurchase Program Pursuant to the Company’s 2019 Repurchase Plan, as amended, management is given discretion to determine the number and pricing of the shares to be purchased by the Company from time to time, as well as the timing of any such purchases. The Company did not repurchase any shares during 2023. As of December 31, 2023, $5.0 million remained available for share repurchases pursuant to the plan. (15) Capital Requirements The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. The Basel III regulatory capital reforms adopted by U.S. federal regulatory authorities (the “Basel III Capital Rules”), among other things, (i) establish the capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 Capital” instruments meeting stated requirements, (iii) require that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) define the scope of the deductions/ adjustments to the capital measures. Additionally, the Basel III Capital Rules require that the Company maintain a 2.50% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of December 31, 2023, that the Company and the Bank meet all capital adequacy requirements to which they are subject. Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company’s capital ratios exceeded the regulatory definition of adequately capitalized as of December 31, 2023 and 2022. Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well-capitalized. The regulatory authorities can apply changes in 69 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 classification of assets and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations. In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%. Because the Bank had less than $15 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue to classifying its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital. Under the Basel III requirements, at December 31, 2023 and December 31, 2022, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of years indicated: (in thousands) December 31, 2023 Total Capital (to risk-weighted assets): Actual Minimum Capital Required – Basel III Fully Phased-In Required to be Considered Well- Capitalized Amount Ratio Amount Ratio Amount Ratio Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 221,586 13.99% $ 166,266 10.50% $ — N.A% Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,043 13.91% 165,369 10.50% 157,494 10.00% Tier 1 Capital (to risk-weighted assets): Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,395 12.59% $ 134,596 8.50% $ — N.A% Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,490 12.67% 133,870 8.50% 125,995 8.00% Common Equity Tier 1 Capital (to risk-weighted assets): Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,033 9.73% $ 110,844 7.00% $ — N.A% Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,490 12.67% 110,246 7.00% 102,371 6.50% Tier 1 leverage ratio (to adjusted average assets): Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 199,395 10.29% $ Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199,490 10.31% 77,492 77,411 4.00% $ — N.A% 4.00% 96,763 5.00% December 31, 2022 Total Capital (to risk-weighted assets): Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 Capital (to risk-weighted assets): $ 222,873 221,066 13.85% $ 13.78% 169,025 168,431 10.50% $ 10.50% 160,410 — N.A% 10.00% Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201,595 205,318 12.52% $ 12.80% 136,830 136,349 8.50% $ 8.50% 128,328 — N.A% 8.00% Common Equity Tier 1 Capital (to risk-weighted assets) Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 159,125 9.89% $ 112,684 7.00% $ — N.A% Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,318 12.80% 112,287 7.00% 104,267 6.50% Tier 1 leverage ratio: Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201,595 10.76% $ Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205,318 10.85% 74,936 75,678 4.00% $ — N.A% 4.00% 94,598 5.00% 70 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (16) Fair Value Measurements Fair value represents the amount expected to be received to sell an asset or paid to transfer a liability in its principal or most advantageous market in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation methodologies and assumptions to estimate fair value. The measurement of fair value under U.S. GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows. During the year ended December 31, 2023 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 Assets and Liabilities Measured at Fair Value on a Recurring Basis Following is a description of the Company’s valuation methodologies used for assets and liabilities recorded at fair value on a recurring basis: Available-for-Sale Securities The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Other Investment Securities Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in FHLB stock and MIB 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. 71 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Loans Held for Sale The fair value of the commitment in forward sale agreement loans is the price at which they could be sold in the principal market at the measurement date, therefore the Company classifies as level 2. Derivative Assets and Liabilities Derivative assets and liabilities include interest rate lock commitments (“IRLCs”) and forward sale commitments. The fair values of IRLCs and forward sale commitments are determined using readily observable market data such as interest rates, prices, volatility factors, and customer credit-related adjustments. For IRLCs, the fair value is subject to the anticipated loan funding probability (pull-through rate), which is considered an unobservable factor. Factors that affect pull-through rates include origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage, stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. The Company classifies IRLCs as Level 3 due to the unobservable input of pull-through rates. Mortgage Servicing Rights The fair value of MSRs 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. In the fourth quarter of 2023, the Company recognized a $1.1 million mortgage servicing rights valuation write-down upon accepting a letter of intent to sell the Company’s servicing portfolio during the first quarter of 2024. The Company classifies its servicing rights as Level 3. 72 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (in thousands) December 31, 2023 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities: Fair Value $ 1,978 427 21,822 106,885 45,640 10,821 1,169 78 43 3,884 1,738 $ 194,485 Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . . . . . . Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $ $ 2 41 43 December 31, 2022 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . . . . . . Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $ 2,152 559 23,777 109,440 102,699 10,943 1,177 46 20 3 591 2,899 $ 254,306 Liabilities: Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . . . . . . Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total $ $ 18 3 21 73 Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) $ $ $ $ $ $ $ $ 1,978 — — — — — — 78 — — — 2,056 $ — $ 427 21,822 106,885 45,640 10,821 1,169 — — 3,884 — $ 190,648 $ — $ — — $ — $ 41 41 $ 2,152 — — — — — — 46 — — — — 2,198 $ — $ 559 23,777 109,440 102,699 10,943 1,177 — — 3 591 — $ 249,189 $ — $ — — $ — $ 3 3 $ — — — — — — — — 43 — 1,738 1,781 2 — 2 — — — — — — — — 20 — — 2,899 2,919 18 — 18 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows: (in thousands) Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Mortgage Servicing Rights Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Interest Rate Lock Commitments Balance at December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,659 $ 286 Total (losses) or gains (realized/unrealized): Included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 — — — 64 — Balance at December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,899 $ Total (losses) or gains (realized/unrealized): Included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,200) Included in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 39 — Balance at December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,738 $ (24) — — (407) 147 — 2 (35) — — (169) 243 — 41 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 loans While the overall loan portfolio is not carried at fair value, the Company periodically records non-recurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the 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 trained to perform in-house evaluations and also to review third-party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Fair values of all loan collateral are regularly reviewed by the senior loan committee. Because 74 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 many of these inputs are not observable, the measurements are classified as Level 3. As of December 31, 2023, the Company identified $5.1 million in collateral-dependent loans that had $1.5 million specific allowances for losses. Related to these loans, there were $0.3 million in charge-offs recorded during the year ended December 31, 2023. As of December 31, 2022, the Company identified $17.7 million in collateral-dependent loans that had no specific allowances for losses. Related to these loans, there were $0.1 million in charge-offs recorded during the year ended December 31, 2022. Other Real Estate Owned and Repossessed Assets Other real estate owned (“OREO”) and repossessed assets consist of loan collateral repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Subsequent to foreclosure, these assets are initially carried at fair value of the collateral less estimated selling costs. Fair value, when recorded, is generally based upon appraisals by approved, independent state certified appraisers. Appraisals on OREO may be discounted based on the Company’s historical knowledge, changes in market conditions from the time of appraisal or other information available. During the holding period, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3. Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Total Fair Value Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses)* (in thousands) December 31, 2023 Assets: Collateral dependent loans: Commercial, financial, & agricultural . . . . $ Real estate construction – residential . . . . Real estate mortgage – residential . . . . . . Real estate mortgage – commercial . . . . . . Installment and other consumer . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate and repossessed assets . . $ $ 921 268 27 2,369 — 3,585 1,744 $ — $ — $ — — — — — — — — $ 921 268 27 2,369 — (76) — (88) (32) (87) $ — $ — $ — $ — $ $ 3,585 $ (283) 1,744 $ (4,431) December 31, 2022 Assets: Collateral dependent loans: Real estate mortgage – commercial . . . . . . Installment and other consumer . . . . . . . . $ 17,664 — Total . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,664 Other real estate and repossessed assets . . $ 8,795 $ — — $ — $ — $ — — $ — $ — $ 17,664 — $ 17,664 $ 8,795 $ $ $ (51) (40) (91) 233 * 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. 75 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 (17) Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate such value: Loans Fair values are estimated for portfolios with similar financial characteristics. Loans are segregated by type, such as commercial, real estate, and consumer. Each loan category is further segmented into fixed and variable interest rate categories. The fair value of loans, or exit price, is estimated by using the future value of discounted cash flows using comparable market rates for similar types of loan products and adjusted for market factors. The discount rates used are estimated using comparable market rates for similar types of loan products adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments. 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. Deposits The fair value of deposits with no stated maturity, such as non-interest-bearing demand, Negotiable Order of Withdrawal accounts, savings accounts, and money market accounts, 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. 76 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 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. A summary of the carrying amounts and fair values of the Company’s financial instruments at December 31, 2023 and 2022 is as follows: December 31, 2023 Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Net Significant Unobservable Inputs (Level 3) December 31, 2023 Carrying amount Fair value (in thousands) Assets: Cash and due from banks . . . . . . . . . . . . . . . . . . . . $ 15,675 $ 15,675 $ 15,675 $ — $ Federal funds sold and overnight interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available for sale securities . . . . . . . . . . . . . . . . . . . . Other investment securities . . . . . . . . . . . . . . . . . . . 77,775 188,742 6,300 77,775 188,742 6,300 Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,515,403 1,364,533 Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . Cash surrender value – life insurance . . . . . . . . . . . . Interest rate lock commitments . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . 3,884 2,624 43 8,661 3,884 2,624 43 8,661 77,775 1,978 78 — — — — 8,661 — — — — — 186,764 6,222 — 1,364,533 3,884 2,624 — — — — 43 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,819,107 $ 1,668,237 $ 104,167 $ 199,494 $1,364,576 Liabilities: Deposits: Non-interest bearing demand . . . . . . . . . . . . . . . . Savings, interest checking and money market . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 402,241 846,452 322,151 $ $ 402,241 846,452 319,929 402,241 846,452 — $ — $ — — — — 319,929 Federal Home Loan Bank advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate lock commitments . . . . . . . . . . . . . . . . Forward sale commitments . . . . . . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . . . . . . 107,000 107,245 49,486 2 41 1,772 38,939 2 41 1,772 — — — 1,772 107,245 38,939 — 41 — — — 2 — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,729,145 $ 1,716,621 $ 1,250,465 $ 146,225 $ 319,931 77 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 December 31, 2022 Fair Value Measurements Quoted Prices in Active Markets for Identical Assets (Level 1) Other Observable Inputs (Level 2) Net Significant Unobservable Inputs (Level 3) December 31, 2022 Carrying amount Fair value (in thousands) Assets: Cash and due from banks . . . . . . . . . . . . . . . . . . . . $ 18,661 $ 18,661 $ 18,661 $ — $ Federal funds sold and overnight interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit in other banks . . . . . . . . . . . . Available-for-sale securities . . . . . . . . . . . . . . . . . . . Other investment securities . . . . . . . . . . . . . . . . . . . 65,059 2,955 250,747 6,353 65,059 2,955 250,747 6,353 Loans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,505,664 1,389,018 Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . Cash surrender value – life insurance . . . . . . . . . . . . Interest rate lock commitments . . . . . . . . . . . . . . . . Forward sale commitments . . . . . . . . . . . . . . . . . . . 591 2,567 20 3 591 2,567 20 3 65,059 2,955 2,152 46 — — — — — Accrued interest receivable . . . . . . . . . . . . . . . . . . . . 7,953 7,953 7,953 — — — — — — — 248,595 6,307 — 1,389,018 591 2,567 — 3 — — — 20 — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,860,573 $ 1,743,927 $ 96,826 $ 258,063 $1,389,038 Liabilities: Deposits: Non-interest bearing demand . . . . . . . . . . . . . . . . $ 453,443 $ 453,443 $ 453,443 $ — $ Savings, interest checking and money market . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 923,602 255,034 923,602 250,433 923,602 — Federal funds purchased and securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank advances and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate lock commitments . . . . . . . . . . . . . . . . Forward sale commitments . . . . . . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . . . . . . 5,187 5,187 5,187 98,000 49,486 18 3 902 98,000 39,197 18 3 902 — — — — 902 — — — 98,000 39,197 — 3 — — — 250,433 — — — 18 — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,785,675 $ 1,770,785 $ 1,383,134 $ 137,200 $ 250,451 Off-Balance-Sheet Financial Instruments The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates. 78 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 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. (18) Commitments and Contingencies The Company issues financial instruments with off-balance-sheet risk in the normal course of business in meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company’s extent of involvement and maximum potential exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At December 31, 2023, 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, 2023 and 2022 is as follows: (in thousands) 2023 2022 Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 286,939 $ 388,264 Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forward sale commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,694 3,779 Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111,631 6,331 576 49,740 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 406,043 $ 444,911 Commitments Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate. The Company has two types of commitments related to mortgage loans held for sale: interest rate lock commitments and forward loan sale commitments. Interest rate lock commitments are commitments to extend credit to a customer that has an interest rate lock and are considered derivative instruments. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby letters of credit range from one month to five years at December 31, 2023. 79 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Pending Litigation The Company and its subsidiaries are defendants in various legal actions incidental to the Company’s past and current business activities. Based on the Company’s analysis, and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably possible that these legal actions will materially adversely affect the Company’s consolidated financial condition or results of operations in the near term. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss amount can be estimated. (19) 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 December 31, 2023 2022 Cash and due from bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Investment in bank-issued trust preferred securities . . . . . . . . . . . . . . . . . . . . . . $ 6,807 1,169 2,464 1,177 Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,273 172,752 Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 6,187 49 3,490 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189,436 $ 179,932 Liabilities and Stockholders’ Equity Subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,486 $ 49,486 Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735 3,130 — 3,035 Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,085 127,411 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 189,436 $ 179,932 80 HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements December 31, 2023, 2022, and 2021 Condensed Statements of Income (in thousands) Income For the Years Ended December 31, 2023 2022 2021 Interest and dividends received from subsidiaries . . . . . . . . . . . . . . . . $ 10,158 $ 11,497 $ 8,512 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,390 11,548 1,108 12,605 Expenses Interest on subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax benefit and equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,774 2,771 6,545 5,003 1,058 2,072 3,191 5,263 7,342 859 404 8,916 1,227 3,200 4,427 4,489 837 Equity in undistributed (loss) income of subsidiaries . . . . . . . . . . . . . (5,105) 12,550 17,191 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 956 $ 20,751 $ 22,517 Condensed Statements of Cash Flows (in thousands) Cash flows from operating activities: For the Years Ended December 31, 2023 2022 2021 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 956 $ 20,751 $ 22,517 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries . . . . . . . . . . . . . . . 5,105 (12,550) (17,191) Decrease in deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities: Decrease (increase) in investment in subsidiaries, net . . . . . . . . . . . . . Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . Cash flows from financing activities: Cash dividends paid – common stock . . . . . . . . . . . . . . . . . . . . . . . Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 (4,693) 1,417 7,575 7,575 $ $ $ $ $ $ 540 (1,060) 7,681 110 110 $ $ $ 907 (607) 5,626 (70) (70) $ (4,649) $ — (4,240) $ (2,892) (3,616) (2,148) Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,649) $ (7,132) $ (5,764) Net increase (decrease) in cash and due from banks . . . . . . . . . . . . . . Cash and due from banks at beginning of year . . . . . . . . . . . . . . . . . . 4,343 2,464 659 1,805 Cash and due from banks at end of year . . . . . . . . . . . . . . . . . . . . . . $ 6,807 $ 2,464 $ (208) 2,013 1,805 81 MARKET PRICE 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. Shares Outstanding As of December 31, 2023, the Company had issued 7,554,893 shares of common stock, of which 7,039,323 shares were outstanding. The outstanding shares were held of record by approximately 2,064 shareholders. Dividends The following table sets forth information on dividends paid by the Company in 2023 and 2022. Month Paid Dividends Paid Per Share January, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ April, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total for, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . April, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . July, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . October, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ Total for, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.17 0.17 0.17 0.17 0.68 0.15 0.15 0.17 0.17 0.64 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. 82 Name Position with the Company Position with the Bank Principal Occupation DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Brent M. Giles . . . . . . . . . . . . Chief Executive Officer, Director -Class II Chief Executive Officer, and Director Position with the Company and the Bank Kathleen L. Bruegenhemke . . Senior Vice President, Chief Risk Officer, Corporate Secretary, and Director- Class I Executive Vice President, Chief Risk Officer, Corporate Secretary, and Director Position with the Company and the Bank Chris E. Hafner . . . . . . . . . . . Senior Vice President and Chief Financial Officer Executive Vice President and Chief Financial Officer Position with the Company and the Bank Gregg A. Bexten . . . . . . . . . . . President and Director- President and Director Martin Weishaar . . . . . . . . . . Class III Executive Vice President, Chief Operations Officer, General Counsel Position with the Company and the Bank Position with the Bank John Bowers . . . . . . . . . . . . . . Executive Vice President and Chief Strategy Officer Position with the Bank Jason E. Schwartz . . . . . . . . . Senior Vice President and Chief Credit Officer Executive Vice President and Chief Credit Officer Position with the Company and the Bank Douglas T. Eden . . . . . . . . . . Director-Class I Director Principal, Eden Capital Management, LLC David T. Turner . . . . . . . . . . . Executive Chairman and Director-Class III Executive Chairman and Director Retired, Jefferson City, Missouri 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 83 Retired, 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 Name Position with the Company Position with the Bank Principal Occupation Jonathan D. Holtaway . . . . . . Director-Class I Director Jonathan L. States . . . . . . . . . Director-Class II Director Shawna M. Hettinger . . . . . . Director-Class III Director Managing Member, Ategra GP, LLC, President, Ategra Capital Management LLC, and Managing Member of Ategra LS500, LP and Ategra Community Financial Institution Fund, LP, all of Vienna, Virginia Member / owner, Little Dixie Construction, LLC, Columbia, Missouri. President & majority owner, Streetwise, Inc., Grandview, Missouri 84 ANNUAL REPORT ON FORM 10-K A copy of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote, and to beneficial owners of shares entitled to be voted, at the 2024 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. 85 

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