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



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

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

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

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

Large accelerated filer ☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

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

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

As of May 10, ~~2021,~~2022, the registrant had ~~6,362,476~~6,508,251 shares of common stock, par value $1.00 per share, outstanding.


(In thousands, except per share data)	March 31, 2022		December 31, 2021
	(Unaudited)
ASSETS
Cash and due from banks	$	22,544	$	17,287
Federal funds sold	419		7,122
Other interest-bearing deposits	27,552		135,500
Cash and cash equivalents	50,515		159,909
Certificates of deposit in other banks	4,701		5,193
Available-for-sale debt securities, at fair value	286,754		310,870
Other investments	5,490		5,408
Total investment securities	292,244		316,278
Loans held for investment	1,333,923		1,302,133
Allowance for loan losses	(14,279)		(16,903)
Net loans	1,319,644		1,285,230
Loans held for sale, at lower of cost or fair value	909		2,249
Premises and equipment - net	33,555		32,719
Mortgage servicing rights, at fair value	2,639		2,659
Other real estate owned - net	9,758		10,525
Accrued interest receivable	6,241		6,621
Cash surrender value - life insurance	2,524		2,509
Other assets	12,953		7,658
Total assets	$	1,735,683	$	1,831,550
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand	$	450,225	$	453,066
Savings, interest checking and money market	752,164		818,358
Time deposits $250,000 and over	84,692		69,075
Other time deposits	169,062		176,321
Total deposits	1,456,143		1,516,820
Federal funds purchased and securities sold under agreements to repurchase	5,514		23,829
Federal Home Loan Bank advances and other borrowings	77,357		77,418
Subordinated notes	49,486		49,486
Operating lease liabilities	1,763		1,837
Accrued interest payable	298		282
Other liabilities	10,735		12,922
Total liabilities	1,601,296		1,682,594
Stockholders’ equity:
Common stock, $1.00 par value, authorized 15,000,000 shares; issued 7,023,821 shares, respectively	7,024		7,024
Surplus	64,437		64,437
Retained earnings	87,919		82,300
Accumulated other comprehensive (loss) income, net of tax	(16,289)		3,293
Treasury stock; 430,382, and 406,846 shares, at cost, respectively	(8,704)		(8,098)
Total stockholders’ equity	134,387		148,956
Total liabilities and stockholders’ equity	$	1,735,683	$	1,831,550

March 31,

December 31,
(In thousands, except per share data)

2021

2020


(Unaudited)


ASSETS

Cash and due from banks

$
18,496

$
19,235
Federal funds sold and other interest-bearing deposits

128,207

161,128
Cash and cash equivalents

146,703

180,363
Certificates of deposit in other banks

8,897

9,376
Available-for-sale debt securities, at fair value

238,142

198,030
Other investments

6,188

6,353
Total investment securities

244,330

204,383
Loans held for investment

1,276,185

1,286,967
Allowance for loan losses

(18,361)

(18,113)
Net loans

1,257,824

1,268,854
Loans held for sale, at lower of cost or fair value

6,308

5,099
Premises and equipment - net

34,027

34,561
Mortgage servicing rights, at fair value

2,494

2,445
Other real estate owned - net

12,140

12,291
Accrued interest receivable

6,488

6,640
Cash surrender value - life insurance

2,465

2,451
Other assets

10,248

7,268
Total assets

$
1,731,924

$
1,733,731
LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits

Non-interest bearing demand

$
431,035

$
382,492
Savings, interest checking and money market

708,615

723,808
Time deposits $250,000 and over

74,406

91,263
Other time deposits

179,926

186,043
Total deposits

1,393,982

1,383,606
Federal funds purchased and securities sold under agreements to repurchase

42,018

45,154
Federal Home Loan Bank advances and other borrowings

97,614

106,674
Subordinated notes

49,486

49,486
Operating lease liabilities

2,058

2,137
Accrued interest payable

439

837
Other liabilities

15,619

15,248
Total liabilities

1,601,216

1,603,142
Stockholders’ equity:

Common stock, $1 par value, authorized 15,000,000 shares; issued 6,769,322

6,769

6,769
Surplus

59,307

59,307
Retained earnings

73,947

68,935
Accumulated other comprehensive income (loss), net of tax

(1,217)

1,528
Treasury stock; 406,846, and 289,214 shares, at cost, respectively

(8,098)

(5,950)
Total stockholders’ equity

130,708

130,589
Total liabilities and stockholders’ equity

$
1,731,924

$
1,733,731

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

Consolidated Statements of Income (unaudited)

Three Months Ended

March 31,

(In thousands, except per share amounts)

2021

2020

INTEREST INCOME





Interest and fees on loans

$
14,979

$
14,422

Interest and fees on loans held for sale

25

5

Interest on investment securities:





Taxable

667

813

Nontaxable

246

142

Federal funds sold, other interest-bearing deposits, and certificates of deposit in other banks

102

326

Dividends on other investments

83

100

Total interest income

16,102

15,808

INTEREST EXPENSE





Interest on deposits:





Savings, interest checking and money market

309

947

Time deposit accounts $250,000 and over

210

413

Time deposits

461

752

Total interest expense on deposits

980

2,112

Interest on federal funds purchased and securities sold under agreements to repurchase

26

37

Interest on Federal Home Loan Bank advances

396

632

Interest on subordinated notes

310

501

Total interest expense on borrowings

732

1,170

Total interest expense

1,712

3,282

Net interest income

14,390

12,526

Provision for loan losses

—

3,300

Net interest income after provision for loan losses

14,390

9,226

NON-INTEREST INCOME





Service charges and other fees

739

799

Bank card income and fees

860

693

Trust department income

294

379

Real estate servicing fees, net

73

(87)

Gain on sale of mortgage loans, net

2,469

419

Other

8

88

Total non-interest income

4,443

2,291

Investment securities gains (losses), net

14

(1)

NON-INTEREST EXPENSE





Salaries and employee benefits

7,146

6,121

Occupancy expense, net

771

766

Furniture and equipment expense

744

750

Processing, network, and bank card expense

1,007

976

Legal, examination, and professional fees

404

367

Advertising and promotion

243

249

Postage, printing, and supplies

204

241

Loan expense

174

123

Other

958

898

Total non-interest expense

11,651

10,491

Income before income taxes

7,196

1,025

Income tax expense

1,357

157

Net income

$
5,839

$
868

Basic earnings per share

$
0.92

$
0.13

Diluted earnings per share

$
0.92

$
0.13


	Three Months Ended March 31,
(In thousands, except per share data)		2022		2021
INTEREST INCOME
Interest and fees on loans		$	13,915	$	14,979
Interest and fees on loans held for sale		20		25
Interest on investment securities:
Taxable		788		667
Nontaxable		577		246
Federal funds sold		1		4
Other interest-bearing deposits and certificates of deposit in other banks		60		98
Dividends on other investments		75		83
Total interest income		15,436		16,102
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		316		309
Time deposit accounts $250,000 and over		113		210
Time deposits		276		461
Total interest expense on deposits		705		980
Interest on federal funds purchased and securities sold under agreements to repurchase		10		26
Interest on Federal Home Loan Bank advances		252		396
Interest on subordinated notes		324		310
Total interest expense on borrowings		586		732
Total interest expense		1,291		1,712
Net interest income		14,145		14,390
(Release of) provision for loan losses		(2,500)		—
Net interest income after (release of) provision for loan losses		16,645		14,390
NON-INTEREST INCOME
Service charges and other fees		793		739
Bank card income and fees		961		860
Trust department income		340		294
Real estate servicing fees, net		231		73
Gain on sale of mortgage loans, net		888		2,469
Other		513		137
Total non-interest income		3,726		4,572
Investment securities (losses) gains, net		(4)		14
NON-INTEREST EXPENSE
Salaries and employee benefits		6,886		7,146
Occupancy expense, net		786		771
Furniture and equipment expense		755		744
Processing, network, and bank card expense		1,142		1,007
Legal, examination, and professional fees		440		404
Advertising and promotion		293		243
Postage, printing, and supplies		190		204
Loan expense		145		174
Other		1,590		1,087
Total non-interest expense		12,227		11,780
Income before income taxes		8,140		7,196
Income tax expense		1,531		1,357
Net income		$	6,609	$	5,839
Basic earnings per share		$	1.00	$	0.88
Diluted earnings per share		$	1.00	$	0.88

See

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

Consolidated Statements of Comprehensive (Loss) Income (unaudited)

Three Months Ended

March 31,

(In thousands)

2021

2020

Net income

$
5,839

$
868

Other comprehensive income, net of tax





Investment securities available-for-sale:

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

(2,778)

2,180

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

(2)

—

Defined benefit pension plans:





Amortization of prior service cost included in net periodic pension cost, net of tax

35

53

Total other comprehensive income (loss)

(2,745)

2,233

Total comprehensive income

$
3,094

$
3,101


	Three Months Ended March 31,
(In thousands)		2022		2021
Net income		$	6,609	$	5,839
Other comprehensive (loss) income, net of tax
Investment securities available-for-sale:
Change in unrealized losses on investment securities available-for-sale, net of tax		(19,582)		(2,778)
Adjustment for gains on sale of investment securities, net of tax		—		(2)
Defined benefit pension plans:
Amortization of prior service cost included in net periodic pension cost, net of tax		0		35
Total other comprehensive loss		(19,582)		(2,745)
Total comprehensive (loss) income		$	(12,973)	$	3,094

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

Consolidated Statements of Stockholders’ Equity (unaudited)


	Three Months Ended March 31, 2022 and 2021
(In thousands, except per share data)	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stockholders' Equity
Balance, December 31, 2021	$	7,024	$	64,437	$	82,300	$	3,293	$	(8,098)	$	148,956
Net income	—		—		6,609		—		—		6,609
Other comprehensive loss	—		—		—		(19,582)		—		(19,582)
Purchase of treasury stock	—		—		—		—		(606)		(606)

Cash dividends declared, common stock ($0.15 per share)	—		—		(990)		—		—		(990)
Balance, March 31, 2022	$	7,024	$	64,437	$	87,919	$	(16,289)	$	(8,704)	$	134,387

Balance, December 31, 2020	$	6,769	$	59,307	$	68,935	$	1,528	$	(5,950)	$	130,589
Net income	—		—		5,839		—		—		5,839
Other comprehensive loss	—		—		—		(2,745)		—		(2,745)
Purchase of treasury stock	—		—		—		—		(2,148)		(2,148)

Cash dividends declared, common stock ($0.13 per share)	—		—		(827)		—		—		(827)
Balance, March 31, 2021	$	6,769	$	59,307	$	73,947	$	(1,217)	$	(8,098)	$	130,708

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

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of ~~Stockholders’ Equity~~ Cash Flows (unaudited)

For the Three Months Ended March 31, 2021 and 2020








Accumulated



Total

Other

Stock -

Common

Retained

Comprehensive

Treasury

holders'
(In thousands)

Stock

Surplus

Earnings

Income (Loss)

Stock

Equity
Balance, December 31, 2020

$
6,769

$
59,307

$
68,935

$
1,528

$
(5,950)

$
130,589
Net income

0

0

5,839

0

0

5,839
Other comprehensive loss

0

0

0

(2,745)

0

(2,745)
Purchase of treasury stock

0

0

0

0

(2,148)

(2,148)
Cash dividends declared, common stock ($0.13 per share)

0

0

(827)

0

0

(827)
Balance, March 31, 2021

$
6,769

$
59,307

$
73,947

$
(1,217)

$
(8,098)

$
130,708

Balance, December 31, 2019

$
6,520

$
55,727

$
61,590

$
(3,755)

$
(5,044)

$
115,038
Net income

0

0

868

0

0

868
Other comprehensive income

0

0

0

2,233

0

2,233
Purchase of treasury stock

0

0

0

0

(719)

(719)
Cash dividends declared, common stock ($0.12 per share)

0

0

(750)

0

0

(750)
Balance, March 31, 2020

$
6,520

$
55,727

$
61,708

$
(1,522)

$
(5,763)

$
116,670


	Three Months Ended March 31,
(In thousands)	2022		2021
Cash flows from operating activities:
Net income	$	6,609	$	5,839
Adjustments to reconcile net income to net cash provided by operating activities:
(Release of) provision for loan losses	(2,500)		—
Depreciation expense	545		578
Net amortization of investment securities, premiums, and discounts	378		418
Change in fair value of mortgage servicing rights	48		121
Investment securities losses (gains), net	4		(14)
Gain on sales and dispositions of premises and equipment	—		4
Gain on sales and dispositions of other real estate	(8)		(15)

Provision for other real estate owned	—		88
Decrease in accrued interest receivable	380		152
Increase in cash surrender value - life insurance	(15)		(14)
Decrease (increase) in other assets	329		(1,926)
Decrease in operating lease liabilities	(74)		(79)
Increase (decrease) in accrued interest payable	16		(398)
(Decrease) increase in other liabilities	(2,567)		12
Origination of mortgage loans held for sale	(26,935)		(65,012)
Proceeds from the sale of mortgage loans held for sale	29,085		66,272
Gain on sale of mortgage loans, net	(888)		(2,469)

Net cash provided by operating activities	4,407		3,557
Cash flows from investing activities:
Purchase of certificates of deposit in other banks	—		(245)
Proceeds from maturities of certificates of deposit in other banks	490		736
Net (increase) decrease in loans	(31,812)		11,000
Purchase of available-for-sale debt securities	(14,581)		(62,297)
Proceeds from maturities of available-for-sale debt securities	11,284		10,491
Proceeds from calls of available-for-sale debt securities	2,250		7,745

Purchases of FHLB stock	(178)		(327)
Proceeds from sales of FHLB stock	92		505
Purchases of premises and equipment	(1,417)		(135)
Proceeds from sales of premises and equipment	—		12


Proceeds from sales of other real estate and repossessed assets	723		108
Net cash used in investing activities	(33,149)		(32,407)
Cash flows from financing activities:
Net (decrease) increase in demand deposits	(2,841)		48,543
Net decrease in interest-bearing transaction accounts	(66,194)		(15,193)
Net increase (decrease) in time deposits	8,358		(22,974)
Net decrease in federal funds purchased and securities sold under agreements to repurchase	(18,315)		(3,136)
Repayment of FHLB advances and other borrowings	(61)		(9,060)

Purchase of treasury stock	(606)		(2148)
Cash dividends paid - common stock	(993)		(842)
Net cash used in financing activities	(80,652)		(4,810)
Net decrease in cash and cash equivalents	(109,394)		(33,660)
Cash and cash equivalents, beginning of period	159,909		180,363
Cash and cash equivalents, end of period	$	50,515	$	146,703

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

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows(unaudited)

Three Months Ended March 31,
(In thousands)

2021

2020
Cash flows from operating activities:

Net income

$
5,839

$
868
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses

0

3,300
Depreciation expense

578

562
Net amortization of investment securities, premiums, and discounts

418

312
Change in fair value of mortgage servicing rights

121

275
Investment securities (gains) losses, net

(14)

1
Losses (gains) on sales and dispositions of premises and equipment

4

(55)
Gain on sales and dispositions of other real estate

(15)

0
Provision for other real estate owned

88

12
Decrease in accrued interest receivable

152

218
Increase in cash surrender value - life insurance

(14)

(13)
Increase in other assets

(1,756)

(312)
Operating lease liabilities

(79)

(62)
Decrease in accrued interest payable

(398)

(356)
Increase (decrease) in other liabilities

12

(1,367)
Origination of mortgage loans held for sale

(65,012)

(16,609)
Proceeds from the sale of mortgage loans held for sale

66,272

13,170
Gain on sale of mortgage loans, net

(2,469)

(419)
Other, net

(170)

(67)
Net cash provided by (used in) operating activities

3,557

(542)
Cash flows from investing activities:

Purchase of certificates of deposit in other banks

(245)

(735)
Proceeds from maturities of certificates of deposit in other banks

736

491
Net decrease (increase) in loans

11,000

(11,809)
Purchase of available-for-sale debt securities

(62,297)

(43,984)
Proceeds from maturities of available-for-sale debt securities

10,491

13,860
Proceeds from calls of available-for-sale debt securities

7,745

8,935
Proceeds from sales of available-for-sale debt securities

0

681
Purchases of FHLB stock

(327)

(1,491)
Proceeds from sales of FHLB stock

505

2
Purchases of premises and equipment

(135)

(369)
Proceeds from sales of premises and equipment

12

123
Proceeds from sales of other real estate and repossessed assets

108

0
Net cash used in investing activities

(32,407)

(34,296)
Cash flows from financing activities:

Net increase in demand deposits

48,543

11,412
Net decrease in interest-bearing transaction accounts

(15,193)

(18,037)
Net decrease in time deposits

(22,974)

(325)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase

(3,136)

3,492
Repayment of FHLB advances and other borrowings

(9,060)

(58)
FHLB advances

0

37,000
Purchase of treasury stock

(2,148)

(719)
Cash dividends paid - common stock

(842)

(753)
Net cash (used in) provided by financing activities

(4,810)

32,012
Net decrease in cash and cash equivalents

(33,660)

(2,826)
Cash and cash equivalents, beginning of period

180,363

78,121
Cash and cash equivalents, end of period

$
146,703

$
75,295
Supplemental disclosures of cash flow information:

Cash paid during the period for:

Interest

$
2,109

$
3,639
Income taxes

$
0

$
0
Noncash investing and financing activities:

Other real estate and repossessed assets acquired in settlement of loans

$
30

$
0

continued


	Three Months Ended March 31,
(In thousands)	2022		2021

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,275	$	2,109
Income taxes	$	—	$	—
Noncash investing and financing activities:
Other real estate and repossessed assets acquired in settlement of loans net of (charge-offs)	$	(52)	$	30

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

(1) Summary of Significant Accounting Policies

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

The accompanying unaudited consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q, and Rule 10-01 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements and should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~

2021.

The preparation of the consolidated financial statements includes all adjustments that, in the opinion of management, are necessary in order to make those statements not misleading. Management is required to make estimates and assumptions, including the determination of the allowance for loan losses, real estate acquired in connection with foreclosure or in satisfaction of loans, and fair values of investment securities available-for-sale that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including the effects of the ~~Coronavirus Disease 2019 (“COVID-19”)~~novel coronavirus (COVID-19) pandemic or any resurgence thereof, including its potential effects on the economic environment, ~~our~~the Company's customers and ~~our~~ operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. Actual results could differ from those estimates. The Company’s management has evaluated and did not identify any subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements.

Stock Dividend On July 1, ~~2020,~~2021, the Company paid a special stock dividend of 4 percent to shareholders of record at the close of business on June 15, ~~2020.~~2021. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

~~Operating, Accounting and Reporting Considerations related to COVID-19~~

The COVID-19 pandemic has negatively impacted the global economy, including the United States. In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020. The CARES Act, along with subsequent relief programs, provided substantial funding to fight the COVID-19 pandemic and stimulate the economy by supporting individuals and businesses through loans, grants, tax changes, and other types of relief. Some of the provisions applicable to the Company include, but are not limited to:

●

~~Accounting for Loan Modifications~~ – Section 4013 of the CARES Act provides that a financial institution may elect to suspend (1) the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and (2) any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. See Note 2 ~~Loans and Leases and the Allowance for Credit Losses~~ ~~for more information.~~

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

●

~~Paycheck Protection Program~~ - The CARES Act established the Paycheck Protection Program (“PPP”), an expansion of the Small Business Administration’s (“SBA”) 7(a) loan program and the Economic Injury Disaster Loan Program (“EIDL”), administered directly by the SBA. On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law. The CAA provides several amendments to the PPP, including additional funding for first and second draws of PPP loans up to March 31, 2021. On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extends the program to May 31, 2021. The Company is a participant in the PPP. See Note 2 ~~Loans and Leases and the Allowance for Credit Losses~~ ~~for more information.~~

Also in response to the COVID-19 pandemic, the Board of Governors of the Federal Reserve System (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), the National Credit Union Administration (“NCUA”), the Office of the Comptroller of the Currency (“OCC”), and the Consumer Financial Protection Bureau (“CFPB”), in consultation with the state financial regulators (collectively, the “agencies”) issued a joint interagency statement (issued March 22, 2020; revised statement issued April 7, 2020). Some of the provisions applicable to the Company include, but are not limited to:

●

~~Accounting for Loan Modifications~~ - Loan modifications that do not meet the conditions of the CARES Act may still qualify as a modification that does not need to be accounted for as a TDR. The agencies confirmed with FASB staff that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or insignificant delays in payment. See Note 2 ~~Loans and Leases and the Allowance for Credit Losses~~ ~~for more information.~~

●

~~Past Due Reporting~~ - With regard to loans not otherwise reportable as past due, financial institutions are not expected to designate loans with deferrals granted due to COVID-19 as past due because of the deferral. A loan’s payment date is governed by the due date stipulated in the legal agreement. If a financial institution agrees to a payment deferral, these loans would not be considered past due during the period of the deferral.

●

~~Nonaccrual Status and Charge-offs~~ ~~- During short-term COVID-19 modifications, these loans generally should not be reported as nonaccrual or as classified.~~

The Company began offering short-term loan modifications to assist borrowers during the COVID-19 pandemic. These modifications generally involve principal and/or interest payment deferrals for up to six months. These modifications generally meet the criteria of both Section 4013 of the CARES Act and the joint interagency statement, and therefore, the Company does not account for such loan modifications as TDRs. As the COVID-19 pandemic persists in negatively impacting the economy, the Company continues to offer additional loan modifications to borrowers struggling as a result of the pandemic. Similar to the initial modifications granted, the additional round of loan modifications are granted specifically under Section 4013 of the CARES Act and generally involve principal and/or interest payment deferrals for up to an additional six months for commercial and consumer loans, and principal-only deferrals for up to an additional 12 months for selected commercial loans. On August 3, 2020, the Federal Financial Institutions Examination Council on behalf of its members (collectively “the FFIEC members”) issued a joint statement on additional loan accommodations related to the COVID-19 pandemic. The joint statement clarifies that for loan modifications in which Section 4013 is being applied, subsequent modifications could also be eligible under Section 4013. To be eligible, each loan modification must be (1) related to the COVID-19 event; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. The December 31, 2020 deadline was subsequently extended to January 1, 2022, by the CAA. Substantially all of the Company’s additional round of loan modifications granted under Section 4013 of the CARES Act are in compliance with the aforementioned FFIEC requirements. Accordingly, the Company does not account for such loan modifications as TDRs.

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

(2) Loans and Allowance for Loan Losses

Loans

Major classifications within the Company’s held for investment loan portfolio at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 is as follows:


(in thousands)	March 31, 2022		December 31, 2021
Commercial, financial, and agricultural(a)	$	221,015	$	217,214
Real estate construction − residential	21,515		27,920
Real estate construction − commercial	103,478		91,369
Real estate mortgage − residential	287,879		279,346
Real estate mortgage − commercial	677,539		663,256
Installment and other consumer	22,497		23,028
Total loans held for investment	$	1,333,923	$	1,302,133

(a)

March 31,

December 31,
(in thousands)

2021

2020
Commercial, financial, and agricultural (a)

$
251,943

$
272,918
Real estate construction − residential

33,962

29,692
Real estate construction − commercial

78,576

78,144
Real estate mortgage − residential

258,259

262,339
Real estate mortgage − commercial

628,178

617,133
Installment and other consumer

25,267

26,741
Total loans held for investment

$
1,276,185

$
1,286,967

~~(a)~~

~~Includes $56.3 million and $63.3 million SBA PPP loans, net as of March 31, 2021 and December 31, 2020, respectively.~~

Includes $2.3 million and $8.4 million of Small Business Administration Paycheck Protection (SBA PPP) loans, net as of March 31, 2022 and December 31, 2021, respectively.

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the Missouri communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St. Louis, and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes in the economic environment in these communities. The

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of automotive vehicles. At March 31, ~~2021,~~2022, loans of ~~$552.5~~$567.4 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit.

Allowance for Loan Losses

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

Three Months Ended March 31, 2021

Commercial,

Real Estate

Real Estate

Real Estate

Real Estate

Installment

Financial, &

Construction -

Construction -

Mortgage -

Mortgage -

and Other

Un-

(in thousands)

Agricultural

Residential

Commercial

Residential

Commercial

Consumer

allocated

Total
Balance at beginning of period

$
5,121

$
213

$
475

$
2,679

$
9,354

$
264

$
7

$
18,113
Additions:
















Provision for loan losses

(567)

83

57

(253)

573

13

94

—
Deductions:
















Loans charged off

27

—

—

—

23

57

—

107
Less recoveries on loans

(149)

(13)

—

(168)

—

(25)

—

(355)
Net loan charge-offs (recoveries)

(122)

(13)

—

(168)

23

32

—

(248)
Balance at end of period

$
4,676

$
309

$
532

$
2,594

$
9,904

$
245

$
101

$
18,361


	Three Months Ended March 31, 2021
(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
Balance at beginning of period	$	5,121	$	213	$	475	$	2,679	$	9,354	$	264	$	7	$	18,113
Additions:
Provision for loan losses	(567)		83		57		(253)		573		13		94		—
Deductions:
Loans charged off	27		—		—		—		23		57		—		107
Less recoveries on loans	(149)		(13)		—		(168)		—		(25)		—		(355)
Net loan charge-offs (recoveries)	(122)		(13)		—		(168)		23		32		—		(248)
Balance at end of period	$	4,676	$	309	$	532	$	2,594	$	9,904	$	245	$	101	$	18,361

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

Three Months Ended March 31, 2020

Commercial,

Real Estate

Real Estate

Real Estate

Real Estate

Installment

Financial, &

Construction -

Construction -

Mortgage -

Mortgage -

and Other

Un-

(in thousands)

Agricultural

Residential

Commercial

Residential

Commercial

Consumer

allocated

Total
Balance at beginning of period

$
2,918

$
64

$
369

$
2,118

$
6,547

$
381

$
80

$
12,477
Additions:
















Provision for loan losses

721

53

253

255

2,087

8

(77)

3,300
Deductions:
















Loans charged off

41

—

—

19

22

52

—

134
Less recoveries on loans

(25)

—

—

(9)

(2)

(14)

—

(50)
Net loan charge-offs

16

—

—

10

20

38

—

84
Balance at end of period

$
3,623

$
117

$
622

$
2,363

$
8,614

$
351

$
3

$
15,693

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

These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The historical loan loss rates are multiplied by loss emergence periods (LEP) which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a loss. Management's look-back period began with loss history in the first quarter 2012 as the starting point through the current quarter and it will continue to include this starting point going forward. The look-back period will continue to be evaluated and will be adjusted once a sustained loss producing downturn is recognized and found to be representative of historical losses expected for the current portfolio.

The Company’s methodology includes qualitative risk factors that allow management to adjust its estimates of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. Such risk factors are generally reviewed and updated quarterly, as appropriate, and are adjusted to reflect changes in national and local economic conditions and developments, the nature, volume and terms of loans in the portfolio, including changes in volume and severity of past due loans, the volume of ~~nonaccrual~~non-accrual loans, and the volume and severity of adversely classified or graded loans, loan concentrations, assessment of trends in collateral values, assessment

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

of changes in the quality of the Company’s internal loan review department, and changes in lending policies and procedures, including underwriting standards and collections, charge-off and recovery practices.

When the COVID-19 pandemic surfaced in the first quarter of 2020, management reassessed the calculation of the allowance for loan loss by increasing the economic qualitative factor in order to capture the impact on the credit risk present in the loan portfolio given the economic environment that existed at that time. As of the fourth quarter of 2020, management reassessed the qualitative factor and economic indicators. Enough time had passed so that data after the outbreak would be available and a better interpretation of the impact of the virus on the economy. Management determined that the local market and economy had been able to transition to a functional level while adapting to the new requirements aimed at stopping the spread of the virus and returned to calculating the qualitative adjustment according to the Company's methodology detailed above.

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

~~Additionally, the~~The funding of $88.4 million and ~~$40.2~~$47.5 million in SBA PPP loans during 2020 and 2021, respectively, required management to assess the methodology that would be adopted in regard to the allowance for loan losses applicable to these loans. As the SBA PPP loans are expected to be mostly paid off ~~in the next~~ ~~six~~ ~~to twelve months~~within a year and carry a 100% credit guarantee from the SBA, management determined that 0 allowance for loan losses was deemed necessary for these loans. At March 31, ~~2021~~2022, the net balance of the PPP loans totaled ~~$56.3~~$2.3 million.

All SBA PPP loans have a 1% interest rate and the Company earns a fee that is based upon a tiered schedule corresponding with the amount of the loan to the borrower, which is deferred and recognized over the life of the loan. ~~Based upon~~The PPP loan may be forgiven by the SBA if the borrower ~~meeting~~meets certain criteria as defined by the ~~CARES Act, the loan may be forgiven by the SBA.~~Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Company reports these loans at their principal amount outstanding, net of unearned income, unamortized deferred loan fee income and loan origination costs. Interest is accrued as earned and loan origination fees and direct costs are deferred and accreted or amortized into interest income, as an adjustment to the yield, over the life of the loan using the level yield method. When a PPP loan is paid off or forgiven by the SBA, the remaining unaccreted or unamortized net origination fees or costs are immediately recognized into income.

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

Commercial,

Real Estate

Real Estate

Real Estate

Real Estate

Installment

Financial, and

Construction -

Construction -

Mortgage -

Mortgage -

and Other

Un-

(in thousands)

Agricultural

Residential

Commercial

Residential

Commercial

Consumer

allocated

Total
March 31, 2021
















Allowance for loan losses:
















Individually evaluated for impairment

$
2,134

$
26

$
28

$
256

$
2,691

$
9

$
0

$
5,144
Collectively evaluated for impairment

2,542

283

504

2,338

7,213

236

101

13,217
Total

$
4,676

$
309

$
532

$
2,594

$
9,904

$
245

$
101

$
18,361
Loans outstanding:
















Individually evaluated for impairment

$
7,408

$
189

$
198

$
3,134

$
25,647

$
71

$
0

$
36,647
Collectively evaluated for impairment

244,535

33,773

78,378

255,125

602,531

25,196

0

1,239,538
Total

$
251,943

$
33,962

$
78,576

$
258,259

$
628,178

$
25,267

$
0

$
1,276,185
















December 31, 2020
















Allowance for loan losses:
















Individually evaluated for impairment

$
2,187

$
27

$
28

$
263

$
2,594

$
14

$
0

$
5,113
Collectively evaluated for impairment

2,934

186

447

2,416

6,760

250

7

13,000
Total

$
5,121

$
213

$
475

$
2,679

$
9,354

$
264

$
7

$
18,113
Loans outstanding:
















Individually evaluated for impairment

$
7,552

$
192

$
200

$
3,626

$
25,657

$
108

$
0

$
37,335
Collectively evaluated for impairment

265,366

29,500

77,944

258,713

591,476

26,633

0

1,249,632
Total

$
272,918

$
29,692

$
78,144

$
262,339

$
617,133

$
26,741

$
0

$
1,286,967


(in thousands)	Commercial, Financial, and Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
March 31, 2022
Allowance for loan losses:
Individually evaluated for impairment	$	39	$	—	$	13	$	206	$	41	$	18	$	—	$	317
Collectively evaluated for impairment	2,791		60		651		2,372		7,651		255		182		13,962
Total	$	2,830	$	60	$	664	$	2,578	$	7,692	$	273	$	182	$	14,279
Loans outstanding:
Individually evaluated for impairment	$	319	$	—	$	100	$	2,428	$	15,800	$	140	$	—	$	18,787
Collectively evaluated for impairment	220,696		21,515		103,378		285,451		661,739		22,357		—		1,315,136
Total	$	221,015	$	21,515	$	103,478	$	287,879	$	677,539	$	22,497	$	—	$	1,333,923

December 31, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	42	$	—	$	13	$	166	$	2,815	$	8	$	—	$	3,044
Collectively evaluated for impairment	2,675		137		575		2,316		7,847		248		61		13,859
Total	$	2,717	$	137	$	588	$	2,482	$	10,662	$	256	$	61	$	16,903
Loans outstanding:
Individually evaluated for impairment	$	341	$	—	$	105	$	2,391	$	24,357	$	60	$	—	$	27,254
Collectively evaluated for impairment	216,873		27,920		91,264		276,955		638,899		22,968		—		1,274,879
Total	$	217,214	$	27,920	$	91,369	$	279,346	$	663,256	$	23,028	$	—	$	1,302,133

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

Loans evaluated under ~~ASC~~Accounting Standards Codification (ASC) 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans individually evaluated for impairment totaled ~~$36.6~~$18.8 million and ~~$37.3~~$27.3 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, and are comprised of loans on non-accrual status and loans which have been classified as troubled debt restructurings (TDRs).

The net carrying value of impaired loans is based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At March 31, ~~2021, $31.8~~2022, $15.4 million of impaired loans were evaluated based on the fair value less estimated selling costs of the loans' collateral compared to ~~$32.2~~$24.2 million at December 31, ~~2020.~~2021. Once the impairment amount is calculated, a specific reserve allocation is recorded. At March 31, ~~2021, $5.1~~2022, $0.3 million of the Company’s allowance for loan losses was allocated to impaired loans totaling ~~$36.6~~$18.8 million compared to ~~$5.1~~$3.0 million of the Company’s allowance for loan losses allocated to impaired loans totaling ~~approximately $37.3~~$27.3 million at December 31, ~~2020.~~2021. Management determined that ~~$12.6 million,~~$16.1, or ~~34%~~86%, of total impaired loans required no reserve allocation at March 31, ~~2021~~2022 compared to ~~$11.9~~$16.6 million, or ~~32%~~61%, at December 31, ~~2020,~~2021, primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 are as follows:

March 31,

December 31,
(in thousands)

2021

2020
Non-accrual loans

$
34,233

$
34,559
Performing TDRs

2,414

2,776
Total impaired loans

$
36,647

$
37,335

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

The following tables provide additional information about impaired loans at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

Unpaid


Recorded

Principal

Specific
(in thousands)

Investment

Balance

Reserves
March 31, 2021

With no related allowance recorded:






Commercial, financial and agricultural

$
1,837

$
1,882

$
—
Real estate mortgage − residential

1,275

1,377

—
Real estate mortgage − commercial

9,457

9,467

—
Total

$
12,569

$
12,726

$
—
With an allowance recorded:






Commercial, financial and agricultural

$
5,571

$
5,645

$
2,134
Real estate construction − residential

189

189

26
Real estate construction − commercial

198

251

28
Real estate mortgage − residential

1,859

2,304

256
Real estate mortgage − commercial

16,190

16,257

2,691
Installment and other consumer

71

75

9
Total

$
24,078

$
24,721

$
5,144
Total impaired loans

$
36,647

$
37,447

$
5,144

Unpaid


Recorded

Principal

Specific
(in thousands)

Investment

Balance

Reserves
December 31, 2020






With no related allowance recorded:






Commercial, financial and agricultural

$
1,703

$
1,731

$
—
Real estate mortgage − residential

1,300

1,395

—
Real estate mortgage − commercial

8,943

8,943

—
Total

$
11,946

$
12,069

$
—
With an allowance recorded:






Commercial, financial and agricultural

$
5,849

$
6,180

$
2,187
Real estate construction − residential

192

192

27
Real estate construction − commercial

200

251

28
Real estate mortgage − residential

2,326

2,786

263
Real estate mortgage − commercial

16,714

16,787

2,594
Installment and other consumer

108

112

14
Total

$
25,389

$
26,308

$
5,113
Total impaired loans

$
37,335

$
38,377

$
5,113


(in thousands)	Recorded Investment		Unpaid Principal Balance		Specific Reserves
March 31, 2022
With no related allowance recorded:

Real estate mortgage − residential	$	754	$	754	$	—
Real estate mortgage − commercial	15,364		16,045		—
Installment and other consumer	—		4		—
Total	$	16,118	$	16,803	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	319	$	357	$	39

Real estate construction − commercial	100		135		13
Real estate mortgage − residential	1,674		2,152		206
Real estate mortgage − commercial	436		516		41
Installment and other consumer	140		140		18
Total	$	2,669	$	3,300	$	317
Total impaired loans	$	18,787	$	20,103	$	317

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)


(in thousands)	Recorded Investment		Unpaid Principal Balance		Specific Reserves
December 31, 2021
With no related allowance recorded:

Real estate mortgage − residential	$	1,034	$	1,152	$	—
Real estate mortgage − commercial	15,593		16,057		—
Total	$	16,627	$	17,209	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	341	$	374	$	42

Real estate construction − commercial	105		138		13
Real estate mortgage − residential	1,357		1,730		166
Real estate mortgage − commercial	8,764		9,142		2,815
Installment and other consumer	60		61		8
Total	$	10,627	$	11,445	$	3,044
Total impaired loans	$	27,254	$	28,654	$	3,044

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans during the periods indicated.

Three Months Ended March 31,

2021

2020

Interest

Interest

Average

Recognized

Average

Recognized

Recorded
��
For the

Recorded

For the

(in thousands)

Investment

Period Ended

Investment

Period Ended

With no related allowance recorded:









Commercial, financial and agricultural

$
1,742

$
8

$
1,014

$
0

Real estate construction − commercial

0

0

227

0

Real estate mortgage − residential

1,424

9

1,581

0

Real estate mortgage − commercial

9,457

0

1,163

6

Installment and other consumer

0

0

12

0

Total

$
12,623

$
17

$
3,997

$
6

With an allowance recorded:









Commercial, financial and agricultural

$
5,696

$
7

$
1,195

$
8

Real estate construction − residential

190

0

0

0

Real estate construction − commercial

199

0

0

0

Real estate mortgage − residential

1,958

6

2,550

20

Real estate mortgage − commercial

16,195

7

370

2

Installment and other consumer

85

3

117

6

Total

$
24,323

$
23

$
4,232

$
36

Total impaired loans

$
36,946

$
40

$
8,229

$
42


	Three Months Ended March 31,
		2022	2021
(in thousands)			Average Recorded Investment		Interest Recognized For the Period Ended		Average Recorded Investment		Interest Recognized For the Period Ended
With no related allowance recorded:
Commercial, financial and agricultural			$	—	$	—	$	1,742	$	8

Real estate mortgage − residential			759		9		1,424		9
Real estate mortgage − commercial			21,256		—		9,457		—
Installment and other consumer			2		—		—		—
Total			$	22,017	$	9	$	12,623	$	17
With an allowance recorded:
Commercial, financial and agricultural			$	323	$	3	$	5,696	$	7
Real estate construction − residential			—		—		190		—
Real estate construction − commercial			101		—		199		—
Real estate mortgage − residential			1,659		7		1,958		6
Real estate mortgage − commercial			440		7		16,195		7
Installment and other consumer			96		—		85		3
Total			$	2,619	$	17	$	24,323	$	23
Total impaired loans			$	24,636	$	26	$	36,946	$	40

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to ~~troubled debt restructurings,~~TDRs, was $26,000 for the three months ended March 31, 2022 compared to $40,000 for the three months ended March 31, ~~2021 compared to $42,000 for the three months ended March 31, 2020.~~2021. The average recorded investment in impaired loans is calculated on a monthly basis during the periods reported.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

Delinquent and Non-Accrual Loans

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

~~HAWTHORN BANCSHARES,��INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

ability to pay under the terms of the note through a sustained period of repayment performance, which is generally six months.

The following table provides aging information for the Company’s past due and non-accrual loans at March 31, ~~2021~~2022 and December 31, ~~2020.~~

Current or



90 Days




Less Than

Past Due

30 Days

30 - 89 Days

And Still

(in thousands)

Past Due

Past Due

Accruing

Non-Accrual

Total
March 31, 2021










Commercial, Financial, and Agricultural

$
245,019

$
333

$
0

$
6,591

$
251,943
Real estate construction − residential

33,773

0

0

189

33,962
Real estate construction − commercial

78,378

0

0

198

78,576
Real estate mortgage − residential

255,172

1,170

0

1,917

258,259
Real estate mortgage − commercial

602,502

367

0

25,309

628,178
Installment and Other Consumer

25,181

57

0

29

25,267
Total

$
1,240,025

$
1,927

$
0

$
34,233

$
1,276,185
December 31, 2020










Commercial, Financial, and Agricultural

$
265,821

$
380

$
0

$
6,717

$
272,918
Real estate construction − residential

29,500

0

0

192

29,692
Real estate construction − commercial

77,944

0

0

200

78,144
Real estate mortgage − residential

259,688

546

0

2,105

262,339
Real estate mortgage − commercial

591,815

4

0

25,314

617,133
Installment and Other Consumer

26,576

117

17

31

26,741
Total

$
1,251,344

$
1,047

$
17

$
34,559

$
1,286,967

The Company's past due and non-accrual loans at March 31, 2021 and December 31, 2020 do not include $43.5 million and $57.1 million of loans accepting forbearance under the CARES Act, respectively. Their delinquency status will not change through the forbearance period as they are fulfilling the agreement they have made with the Company. Of the total remaining $72.8 million loan modifications under the CARES Act, $29.3 million, are on nonaccrual status at March 31, 2021.


(in thousands)	Current or Less Than 30 Days Past Due		30 - 89 Days Past Due		90 Days Past Due And Still Accruing		Non-Accrual		Total
March 31, 2022
Commercial, Financial, and Agricultural	$	220,703	$	176	$	—	$	136	$	221,015
Real estate construction − residential	21,513		2		—		—		21,515
Real estate construction − commercial	103,339		39		—		100		103,478
Real estate mortgage − residential	286,007		614		—		1,258		287,879
Real estate mortgage − commercial	662,062		—		—		15,477		677,539
Installment and Other Consumer	22,273		96		3		125		22,497
Total	$	1,315,897	$	927	$	3	$	17,096	$	1,333,923

December 31, 2021
Commercial, Financial, and Agricultural	$	217,058	$	3	$	—	$	153	$	217,214
Real estate construction − residential	27,920		—		—		—		27,920
Real estate construction − commercial	91,264		—		—		105		91,369
Real estate mortgage − residential	277,532		671		14		1,129		279,346
Real estate mortgage − commercial	638,982		245		—		24,029		663,256
Installment and Other Consumer	22,848		137		—		43		23,028
Total	$	1,275,604	$	1,056	$	14	$	25,459	$	1,302,133

Credit Quality

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

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

non-performing TDRs and are included with all other ~~nonaccrual~~non-accrual loans for presentation purposes. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

The following table presents the risk categories by class at March 31, ~~2021~~2022 and December 31, ~~2020.~~

Commercial,

Real Estate

Real Estate

Real Estate

Real Estate

Installment


Financial, &

Construction -

Construction -

Mortgage -

Mortgage -

and other

(in thousands)

Agricultural

Residential

Commercial

Residential

Commercial

Consumer

Total
At March 31, 2021














Watch

$
8,675

$
540

$
7,013

$
15,694

$
71,375

$
0

$
103,297
Substandard

581

0

2,670

954

1,645

0

5,850
Performing TDRs

817

0

0

1,217

338

42

2,414
Non-accrual loans

6,591

189

198

1,917

25,309

29

34,233
Total

$
16,664

$
729

$
9,881

$
19,782

$
98,667

$
71

$
145,794
At December 31, 2020














Watch

$
9,649

$
545

$
10,806

$
15,835

$
66,936

$
0

$
103,771
Substandard

598

0

0

1,002

1,662

0

3,262
Performing TDRs

835

0

0

1,521

343

77

2,776
Non-accrual loans

6,717

192

200

2,105

25,314

31

34,559
Total

$
17,799

$
737

$
11,006

$
20,463

$
94,255

$
108

$
144,368

2021.


(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and other Consumer		Total
At March 31, 2022
Watch	$	8,618	$	—	$	2,897	$	12,061	$	41,464	$	—	$	65,040
Substandard	6,143		—		2,673		537		10,893		—		20,246
Performing TDRs	183		—		—		1,170		323		15		1,691
Non-accrual loans	136		—		100		1,258		15,477		125		17,096
Total	$	15,080	$	—	$	5,670	$	15,026	$	68,157	$	140	$	104,073

At December 31, 2021
Watch	$	9,219	$	—	$	4,304	$	12,185	$	43,348	$	—	$	69,056
Substandard	6,284		—		2,673		750		2,305		—		12,012
Performing TDRs	188		—		—		1,262		328		17		1,795
Non-accrual loans	153		—		105		1,129		24,029		43		25,459
Total	$	15,844	$	—	$	7,082	$	15,326	$	70,010	$	60	$	108,322

Troubled Debt Restructurings

At March 31, ~~2021,~~2022, loans classified as TDRs totaled ~~$3.3~~$2.2 million, of which ~~$0.9~~$0.6 million were classified as non-performing TDRs and ~~$2.4~~$1.7 million were classified as performing TDRs. At December 31, ~~2020,~~2021, loans classified as TDRs totaled ~~$3.7~~$2.4 million, of which ~~$0.9~~$0.6 million were classified as non-performing TDRs and ~~$2.8~~$1.8 million were classified as performing TDRs. Both performing and ~~nonperforming~~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 ~~$172,000~~$179,000 and ~~$214,000~~$159,000 related to TDRs were allocated to the allowance for loan losses at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

As provided for by the CARES Act, the Company offered payment modifications to borrowers. At March 31, 2021, $72.8 million, or 5.7% of total loans, remained in some form of a modification. These loan modifications include $28.1 million, or 38.5%, on interest only, $39.6 million, or 54.5%, on full deferral and $5.1 million, or 7.0%, with extended amortization. (See table below titled – ~~Loan Modifications under the CARES Act by NAICS Code.)~~

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

Total Remaining Loan Modifications under the CARES Act by NAICS Code as of March 31, 2021

% of

% of

% of

Total Remaining
Full
Total Remaining

Total Remaining

Interest
Loan
Deferral
Loan
Extended
Loan

Industry Category

Only
Modifications
(1)
Modifications
Amortizations
Modifications
Totals
(in thousands)

Real Estate and Rental and Leasing

$
4,521

6.2
%
$
5,790

8.0
%
$
499

0.7
%
$
10,810

Accommodations and Food Services

10,590

14.5

29,007

39.8

4,592

6.3

44,189

Construction

144

0.2

—

—

—

—

144

Lands and lots

1,553

2.1

—

—

—

—

1,553

Cinemas

1,086

1.5

4,691

6.4

—

—

5,777

Arts, Entertainment, Recreation

10,164

14.0

—

—

—

—

10,164

Non-NAICS (Consumer)

—

0.0

161

0.3

—

—

161

Total modifications

$
28,058

38.5
%
$
39,649

54.5
%
$
5,091

7.0
%
$
72,798

~~Remaining loan modifications under the CARES Act as a percent of the total loan portfolio5.7%~~

~~(1)~~

~~Of the $39.6 million loan modifications on full deferral, $29.3 million, or 40.3% of the total remaining loan modifications, were determined to be on nonaccrual status as of March 31, 2021.~~

~~The following table summarizes loans that were modified as TDRs during the periods indicated.~~

Three Months Ended March 31,

2021

2020

Recorded Investment (1)

Recorded Investment (1)

Number of

Pre-

Post-

Number of

Pre-

Post-
(in thousands)

Contracts

Modification

Modification

Contracts

Modification

Modification
Troubled Debt Restructurings











Installment and other consumer

—

$
—
　
$
—

1

$
6
$

5
Total

—

$
—

$
—

1

$
6

$
5

~~(1)~~

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

The Company’s portfolio of loans classified as TDRs include concessions for the borrower given their financial condition such as applying interest rates below the current market rate, deferring principal payments, and extending maturity dates. There were 0no loans meeting the TDR criteria that were modified during the three months ended March 31, 2022, and 2021, ~~and 1 loan during the three months ended March 31, 2020.~~respectively. The Company considers a TDR to be in default when it is 90 days or more past due under the modified terms, a charge-off occurs, or it is in the process of foreclosure. There were 0no loans modified as a TDR that defaulted during ~~any of~~ the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively, and within twelve months of their modification date. See Lending and Credit Management section for further information.

Loans Held For Sale

The Company designates certain long-term fixed rate personal real estate loans as held for ~~sale, and~~sale. In the fourth quarter of 2021, the Company ~~carries them~~elected the fair value option for all newly originated long-term personal real estate loans held for sale. As of December 31, 2021, all loans held for sale were carried at ~~the lower of cost or~~ fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac, and various other ~~various~~ secondary market investors. At March 31, ~~2021,~~2022, the carrying amount of these loans was ~~$6.3~~$0.9 million compared to ~~$5.1 million and $4.3~~$2.2 million at December 31, ~~2020 and March 31, 2020, respectively.~~

2021.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

(3) Other Real Estate Acquired in Settlement of Loans

March 31,

December 31,
(in thousands)

2021

2020
Commercial

$
920

$
920
Real estate construction - residential

—

—
Real estate construction - commercial

10,987

10,986
Real estate mortgage - residential

137

201
Real estate mortgage - commercial

2,798

2,798
Total

$
14,842

$
14,905
Less valuation allowance for other real estate owned

(2,702)

(2,614)
Total other real estate owned

$
12,140

$
12,291


	March 31,		December 31,
(in thousands)	2022		2021
Commercial	$	—	$	643
Real estate construction - commercial	10,094		10,166
Real estate mortgage - residential	117		117
Real estate mortgage - commercial	2,458		2,510
Total	$	12,669	$	13,436
Less valuation allowance for other real estate owned	(2,911)		(2,911)
Total other real estate owned	$	9,758	$	10,525

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

Three Months Ended March 31,


2021

2020

Balance at beginning of period

$
14,905

$
15,737

Additions

30

—

Proceeds from sales

(108)

—

Charge-offs against the valuation allowance for other real estate owned, net

0

0

Net gain on sales

15

0

Total other real estate owned

$
14,842

$
15,737

Less valuation allowance for other real estate owned

(2,702)

(2,968)

Balance at end of period

$
12,140

$
12,769


	Three Months Ended March 31,
(in thousands)		2022		2021
Balance at beginning of period		$	13,436	$	14,905
Additions net of (charge-offs)		(52)		30
Proceeds from sales		(723)		(108)

Net gain on sales		8		15
Total other real estate owned		$	12,669	$	14,842
Less valuation allowance for other real estate owned		(2,911)		(2,702)
Balance at end of period		$	9,758	$	12,140

At March 31, ~~2021, $285,000~~2022, $0.2 million of consumer mortgage loans secured by residential real estate properties were in the process of foreclosure compared to ~~$287,000~~$0.2 million of consumer mortgage loans at December 31, ~~2020.~~

2021.

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

Three Months Ended March 31,
(in thousands)

2021

2020
Balance, beginning of period

$
2,614

$
2,956
Provision for other real estate owned

88

12
Charge-offs

0

0
Balance, end of period

$
2,702

$
2,968


	Three Months Ended March 31,
(in thousands)		2022		2021
Balance, beginning of period		$	2,911	$	2,614
Provision for other real estate owned		—		88

Balance, end of period		$	2,911	$	2,702

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

(4) Investment Securities

~~Available for sale securities~~

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:

Total

Amortized

Gross Unrealized

Fair
(in thousands)

Cost

Gains

Losses

Value
March 31, 2021








U.S. Treasury

$
3,018

$
23

$
0

$
3,041
U.S. government and federal agency obligations

20,161

76

(408)

19,829
U.S. government-sponsored enterprises

22,497

238

(184)

22,551
Obligations of states and political subdivisions

70,324

961

(467)

70,818
Mortgage-backed securities

108,106

1,586

(1,048)

108,644
Other debt securities (a)

11,825

209

(11)

12,023
Bank issued trust preferred securities (a)

1,486

0

(250)

1,236
Total available-for-sale securities

$
237,417

$
3,093

$
(2,368)

$
238,142

December 31, 2020








U.S. Treasury

$
2,772

$
26

$
0

$
2,798
U.S. government and federal agency obligations

11,732

197

0

11,929
U.S. government-sponsored enterprises

22,495

379

0

22,874
Obligations of states and political subdivisions

56,943

1,801

0

58,744
Mortgage-backed securities

88,357

1,809

(54)

90,112
Other debt securities (a)

10,000

358

(14)

10,344
Bank issued trust preferred securities (a)

1,486

0

(257)

1,229
Total available-for-sale securities

$
193,785

$
4,570

$
(325)

$
198,030


			Gross Unrealized
(in thousands)	Total Amortized Cost		Gains		Losses		Fair Value
March 31, 2022
U.S. Treasury	$	3,154	$	3	$	(12)	$	3,145
U.S. government and federal agency obligations	1,015		—		(40)		975
U.S. government-sponsored enterprises	26,498		—		(1,233)		25,265
Obligations of states and political subdivisions	134,882		10		(14,458)		120,434
Mortgage-backed securities	132,222		81		(8,455)		123,848
Other debt securities (a)	11,825		222		(226)		11,821
Bank issued trust preferred securities (a)	1,486		—		(220)		1,266
Total available-for-sale securities	$	311,082	$	316	$	(24,644)	$	286,754

December 31, 2021
U.S. Treasury	$	3,909	$	11	$	(3)	$	3,917
U.S. government and federal agency obligations	1,314		5		—		1,319
U.S. government-sponsored enterprises	26,498		70		(196)		26,372
Obligations of states and political subdivisions	128,093		1,605		(474)		129,224
Mortgage-backed securities	137,286		791		(1,611)		136,466
Other debt securities (a)	11,825		482		(23)		12,284
Bank issued trust preferred securities (a)	1,486		—		(198)		1,288
Total available-for-sale securities	$	310,411	$	2,964	$	(2,505)	$	310,870

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

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

Debt securities with carrying values aggregating approximately ~~$197.6~~$189.5 million and ~~$153.9~~$275.4 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

The amortized cost and fair value of debt securities classified as available-for-sale at March 31, ~~2021,~~2022, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.

Amortized

Fair
(in thousands)

Cost

Value
Due in one year or less

$
4,975

$
5,011
Due after one year through five years

18,245

18,456
Due after five years through ten years

35,184

35,589
Due after ten years

70,907

70,442
Total
��

129,311

129,498
Mortgage-backed securities

108,106

108,644
Total available-for-sale securities

$
237,417

$
238,142


(in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	5,521	$	5,517
Due after one year through five years	23,271		22,653
Due after five years through ten years	29,254		28,264
Due after ten years	120,814		106,472
Total	178,860		162,906
Mortgage-backed securities	132,222		123,848
Total available-for-sale securities	$	311,082	$	286,754

Other ~~securities~~

Investment Securities

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

March 31,

December 31,

(in thousands)

2021

2020

Other securities:





FHLB stock

$
5,992

$
6,170

MIB stock

151

151

Equity securities with readily determinable fair values

45

32

Total other investment securities

$
6,188

$
6,353


(in thousands)	March 31, 2022		December 31, 2021
Other securities:
FHLB stock	$	5,283	$	5,197
MIB stock	151		151
Equity securities with readily determinable fair values	56		60
Total other investment securities	$	5,490	$	5,408

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:

Less than 12 months

12 months or more

Total

Total


Fair

Unrealized

Fair

Unrealized

Fair

Unrealized
(in thousands)

Value

Losses

Value

Losses

Value

Losses
At March 31, 2021












U.S. Treasury

$
1,022

$
0

$
250

$
0

$
1,272

$
0
U.S. government and federal agency obligations

14,447

(408)

0

0

14,447

(408)
U.S. government-sponsored enterprises

5,816

(184)

0

0

5,816

(184)
Obligations of states and political subdivisions

22,580

(467)

0

0

22,580

(467)
Mortgage-backed securities

46,969

(1,048)

0

0

46,969

(1,048)
Other debt securities

2,989

(11)

0

0

2,989

(11)
Bank issued trust preferred securities

0

0

1,236

(250)

1,236

(250)
Total

$
93,823

$
(2,118)

$
1,486

$
(250)

$
95,309

$
(2,368)

(in thousands)












At December 31, 2020












U.S. Treasury

$
1,015

$
0

$
0

$
0

$
1,015

$
0
Mortgage-backed securities

7,494

(54)

0

0

7,494

(54)
Other debt securities

2,987

(14)

0

0

2,987

(14)
Bank issued trust preferred securities

0

0

1,229

(257)

1,229

(257)
Total

$
11,496

$
(68)

$
1,229

$
(257)

$
12,725

$
(325)


	Less than 12 months				12 months or more
(in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Total Fair Value		Total Unrealized Losses
At March 31, 2022
U.S. Treasury	$	2,145	$	(9)	$	248	$	(3)	$	2,393	$	(12)
U.S. government and federal agency obligations	975		(40)		—		—		975		(40)
U.S. government-sponsored enterprises	20,736		(763)		4,530		(470)		25,266		(1,233)
Obligations of states and political subdivisions	110,254		(13,072)		5,612		(1,386)		115,866		(14,458)
Mortgage-backed securities	87,136		(5,018)		30,475		(3,437)		117,611		(8,455)
Other debt securities	4,598		(226)		—		—		4,598		(226)
Bank issued trust preferred securities	—		—		1,266		(220)		1,266		(220)
Total	$	225,844	$	(19,128)	$	42,131	$	(5,516)	$	267,975	$	(24,644)

(in thousands)
At December 31, 2021
U.S. Treasury	$	1,758	$	(3)	$	—	$	—	$	1,758	$	(3)

U.S. government-sponsored enterprises	18,304		(196)		—		—		18,304		(196)
Obligations of states and political subdivisions	39,221		(474)		—		—		39,221		(474)
Mortgage-backed securities	89,520		(1,579)		1,864		(32)		91,384		(1,611)
Other debt securities	3,802		(23)		—		—		3,802		(23)
Bank issued trust preferred securities	—		—		1,288		(198)		1,288		(198)
Total	$	152,605	$	(2,275)	$	3,152	$	(230)	$	155,757	$	(2,505)

The total ~~available for sale~~available-for-sale portfolio consisted of approximately ~~342~~440 securities at March 31, ~~2021.~~2022. The portfolio included 87393 securities having an aggregate fair value of ~~$95.3~~$268.0 million that were in a loss position at March 31, 2022. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $42.1 million at fair value at March 31, 2022. The $24.6 million aggregate unrealized loss included in accumulated other comprehensive loss at March 31, 2022 was caused by interest rate fluctuations.

The total available-for-sale portfolio consisted of approximately 435 securities at December 31, 2021. The portfolio included 134 securities having an aggregate fair value of $155.8 million that were in a loss position at December 31, 2021. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled ~~$1.5 million at fair value at March 31, 2021. The $2.4 million aggregate unrealized loss included in accumulated other comprehensive loss at March 31, 2021 was caused by interest rate fluctuations.~~

The total available for sale portfolio consisted of approximately 308 securities at December 31, 2020. The portfolio included 10 securities having an aggregate fair value of $12.7 million that were in a loss position at December 31, 2020. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $1.2$3.2 million at fair value at December 31, ~~2020.~~2021. The ~~$325,000~~$2.5 million aggregate unrealized loss included in accumulated other comprehensive loss at December 31, ~~2020~~2021 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 March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, 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.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

The following table presents the gross realized gains and losses from sales and calls of available-for-sale securities, as well as gains and losses on equity securities from fair value adjustments which have been recognized in earnings:

Three Months Ended March 31,

(in thousands)

2021

2020

Investment securities gains (losses), net





Available for sale securities:





Gross realized gains

$
2

$
0

Gross realized losses

0

0

Other-than-temporary impairment recognized

0

0

Other investment securities:





Fair value adjustments, net

12

(1)

Investment securities gains (losses), net

$
14

$
(1)

Three Months Ended March 31,
(in thousands) 2022 2021
Investment securities (losses) gains, net
Available-for-sale securities:
Gross realized gains $ — $ 2
Gross realized losses — —
Other-than-temporary impairment recognized — —
Other investment securities:
Fair value adjustments, net (4) 12
Investment securities (losses) gains, net $ (4) $ 14

(5) Intangible Assets

Mortgage Servicing Rights

At March 31, ~~2021,~~2022, the Company was servicing approximately ~~$288.9~~$261.5 million of loans sold to the secondary market compared to ~~$292.7~~$270.0 million at December 31, ~~2020,~~2021, and ~~$270.6~~$288.9 million at March 31, ~~2020.~~2021. Mortgage loan servicing fees, reported in real estate servicing fees, net, earned on loans sold were ~~$193,000~~$0.3 million for the three months ended March 31, ~~2021,~~2022 compared to ~~$188,000~~$0.2 million for the three months ended March 31, ~~2020.~~

2021.

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

Three Months Ended March 31,

(in thousands)

2021

2020

Balance at beginning of period

$
2,445

$
2,482

Originated mortgage servicing rights

170

67

Changes in fair value:





Due to changes in model inputs and assumptions (1)

22

(198)

Other changes in fair value (2)

(143)

(77)

Total changes in fair value

(121)

(275)

Balance at end of period

$
2,494

$
2,274


	Three Months Ended March 31,
(in thousands)		2022		2021
Balance at beginning of period		$	2,659	$	2,445
Originated mortgage servicing rights		28		170
Changes in fair value:
Due to changes in model inputs and assumptions (1)		30		22
Other changes in fair value (2)		(78)		(143)
Total changes in fair value		(48)		(121)
Balance at end of period		$	2,639	$	2,494

(2)Other changes in fair value, reported in real estate servicing fees, net, reflect changes due to customer payments and passage of time.

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

The following key data and assumptions were used in estimating the fair value of the Company’s MSRs as of March 31, 2022 and 2021, respectively:


	Three Months Ended March 31,
	2022		2021
Weighted average constant prepayment rate	9.40	%	15.04	%
Weighted average note rate	3.36	%	3.47	%
Weighted average discount rate	8.00	%	7.75	%
Weighted average expected life (in years)	6.2		5.0

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(6) Deposits

The table below represents the aggregate amount of time deposits with balances that met or exceeded the Federal Deposit Insurance Corporation (FDIC) insurance limit of $250,000 and ~~2020, respectively:~~

brokered deposits for the periods indicated.


(aggregate amounts in thousands)	March 31, 2022		December 31, 2021
Time deposits with balances > $250,000	$	84,692	$	69,075
Brokered deposits	$	20,209	$	20,202

Three Months Ended March 31,

2021

2020

Weighted average constant prepayment rate

15.04
%
15.18
%
Weighted average note rate

3.47
%
3.91
%
Weighted average discount rate

7.75
%
8.25
%
Weighted average expected life (in years)

5.0

4.4

~~(6)~~

(7) Federal ~~funds purchased~~Funds Purchased and ~~securities sold~~Securities Sold under ~~agreements~~Agreements to ~~repurchase~~

Repurchase


(in thousands)	March 31, 2022		December 31, 2021
Federal funds purchased	$	—	$	—
Repurchase agreements	5,514		23,829
Total	$	5,514	$	23,829

March 31,

December 31,

(in thousands)

2021

2020

Federal funds purchased

$
0

$
0

Repurchase agreements

42,018

45,154

Total

$
42,018

$
45,154

The Company offers a sweep account program whereby amounts in excess of an established limit are “swept” from the customer’s demand deposit account on a daily basis into retail repurchase agreements pursuant to individual repurchase agreements between the Company and its customers. Repurchase agreements are agreements to sell securities subject to an obligation to repurchase the same or similar securities. They are accounted for as collateralized financing transactions, not as sales and purchases of the securities portfolio. The securities collateral pledged for the repurchase agreements with customers is maintained by a designated ~~third party~~third-party custodian. The collateral amounts pledged to repurchase agreements by remaining maturity in the table below are limited to the outstanding balances of the related asset or liability; thus amounts of excess collateral are not shown.

Repurchase Agreements

Remaining Contractual Maturity of the Agreements


Overnight

Less

Greater



and

than

than



(in thousands)

continuous

90 days

90 days

Total
At March 31, 2021








U.S. government-sponsored enterprises

$
8,757

$
0

$
0

$
8,757
Mortgage-backed securities

33,261

0

0

33,261
Total

$
42,018

$
0

$
0

$
42,018

At December 31, 2020








U.S. government and federal agency obligations

$
2,728

$
0

$
0

$
2,728
U.S. government-sponsored enterprises

15,533

0

0

15,533
Mortgage-backed securities

26,893

0

0

26,893
Total

$
45,154

$
0

$
0

$
45,154

~~(7)~~

Repurchase Agreements Remaining Contractual Maturity of the Agreements
(in thousands) Overnight and continuous Less than 90 days Greater than 90 days Total
At March 31, 2022
U.S. government-sponsored enterprises $ 5,514 $ — $ — $ 5,514
Total $ 5,514 $ — $ — $ 5,514
At December 31, 2021
U.S. government-sponsored enterprises $ 9,113 $ — $ — $ 9,113
Mortgage-backed securities 14,716 — — 14,716
Total $ 23,829 $ — $ — $ 23,829

(8) Leases

The Company's leases primarily consist of office space and bank branches with remaining lease terms of generally 1 to 10 years. As of March 31, ~~2021,~~2022, operating right of use (ROU) assets and liabilities were ~~$2.0~~$1.7 million and ~~$2.1~~$1.8 million,

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

respectively. As of March 31, ~~2021,~~2022, the weighted-average remaining lease term on these operating leases is approximately ~~7.3~~6.3 years and the weighted-average discount rate used to measure the lease liabilities is approximately ~~4.0%~~4%.

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

Operating lease ROU assets represent the Company's right to use an underlying asset during the lease term and operating lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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 $94,000 for the three months ended March 31, 2022 compared to $100,000 for the three months ended March 31, ~~2021 compared to $86,000 for the three months ended March 31, 2020.~~

2021.

At adoption of ~~ASU~~Accounting Standards Update (ASU) 2016-02 on January 1, 2019, lease and non-lease components of new lease agreements are accounted for separately. Lease components include fixed payments including rent, real estate taxes and insurance costs and non-lease components include common-area maintenance costs. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Operating lease expense for these leases was $24,000 for the three months ended March 31, 2022 compared to $13,000 for the three months ended March 31, ~~2021 compared to $35,000 for the three months ended March 31, 2020.~~

2021.

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

Operating
Lease payments due in:

Lease
(in thousands)

2021 (excluding 3 months ending March 31, 2021)

$
276
2022

367
2023

366
2024

258
2025

257
Thereafter

830
Total lease payments

2,354
Less imputed interest

(296)
Total lease liabilities, as reported

$
2,058

~~(8)~~

Lease payments due in: Operating Lease
(in thousands)
2022 (excluding 3 months ended March 31, 2022) $ 276
2023 367
2024 258
2025 257
2026 259
Thereafter 571
Total lease payments 1,988
Less imputed interest (225)
Total lease liabilities, as reported $ 1,763

(9) Income Taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 18.8% for the three months ended March 31, 2022 compared to 18.9% for the three months ended March 31, ~~2021 compared to 15.3% for the three months ended March 31, 2020, respectively.~~ 2021.

The ~~increase~~decrease in the effective tax rate for the three months ended March 31, ~~2021~~2022 compared to the three months ended March 31, ~~2020~~2021 was primarily attributable to the increase in ~~earnings.~~earnings and an increase in state taxes attributed to elevated earnings partially offset by the benefit recorded pertaining to the historical tax credit. The effective tax rate for each of the three

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

months ended March 31, ~~2021~~2022 and ~~2020,~~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 for the quarter ended March 31, 2022 is a $13,000 benefit associated with a historic tax credit investment. The investment is expected to generate a $321,000 tax benefit over the life of the project and is being recognized under the deferral method of accounting.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income of the appropriate character during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning initiatives in making this assessment. In management's opinion, the Company will more likely than not realize the benefits of its deferred tax assets and, therefore, has not established a valuation allowance against its deferred tax assets as of March 31, ~~2021.~~2022. Management arrived at this conclusion based upon the level of historical taxable income and projections for future taxable income of the appropriate character over the periods in which the deferred tax assets are deductible.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. For each of the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively, the Company did not have any uncertain tax provisions, and did not record any related tax liabilities.

~~(9)~~

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)

(10) Stockholders’ Equity

Accumulated Other Comprehensive Income (Loss)

The following details the change in the components of the Company’s accumulated other comprehensive income (loss) for the three months ended March 31, ~~2021~~2022 and ~~2020:~~

Three Months Ended March 31, 2021

Accumulated

Unrecognized Net

Other

Unrealized

Pension and

Comprehensive

Gains (Losses)

Postretirement

Income
(in thousands)

on Securities (1)

Costs (2)

(Loss)
Balance at beginning of period

$
3,353

$
(1,825)

$
1,528
Other comprehensive income, before reclassifications

(3,518)

45

(3,473)
Amounts reclassified from accumulated other comprehensive (loss) income

(2)

—

(2)
Current period other comprehensive income (loss), before tax

(3,520)

45

(3,475)
Income tax benefit (expense)

740

(10)

730
Current period other comprehensive income (loss), net of tax

(2,780)

35

(2,745)
Balance at end of period

$
573

$
(1,790)

$
(1,217)

2021:


	Three Months Ended March 31, 2022
(in thousands)	Unrealized Gains (Losses) on Securities (1)		Unrecognized Net Pension and Postretirement Costs (2)		Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	$	362	$	2,931	$	3,293
Other comprehensive loss, before reclassifications	(24,787)		—		(24,787)
Amounts reclassified from accumulated other comprehensive income (loss)	—		—		—
Current period other comprehensive loss, before tax	(24,787)		—		(24,787)
Income tax benefit	5,205		—		5,205
Current period other comprehensive loss, net of tax	(19,582)		—		(19,582)
Balance at end of period	$	(19,220)	$	2,931	$	(16,289)


	Three Months Ended March 31, 2021
(in thousands)	Unrealized Gains (Losses) on Securities (1)		Unrecognized Net Pension and Postretirement Costs (2)		Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period	$	3,353	$	(1,825)	$	1,528
Other comprehensive (loss) income, before reclassifications	(3,518)		45		(3,473)
Amounts reclassified from accumulated other comprehensive (loss) income	(2)		—		(2)
Current period other comprehensive (loss) income, before tax	(3,520)		45		(3,475)
Income tax benefit (expense)	740		(10)		730
Current period other comprehensive (loss) income, net of tax	(2,780)		35		(2,745)
Balance at end of period	$	573	$	(1,790)	$	(1,217)

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

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

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

Three Months Ended March 31, 2020

Accumulated

Unrecognized Net

Other

Unrealized

Pension and

Comprehensive

Gains (Losses)

Postretirement

Income
(in thousands)

on Securities (1)

Costs (2)

(Loss)
Balance at beginning of period

$
(23)

$
(3,732)

$
(3,755)
Other comprehensive income, before reclassifications

2,760

67

2,827
Amounts reclassified from accumulated other comprehensive income (loss)

0

0

0
Current period other comprehensive income, before tax

2,760

67

2,827
Income tax expense

(580)

(14)

(594)
Current period other comprehensive income, net of tax

2,180

53

2,233
Balance at end of period

$
2,157

$
(3,679)

$
(1,522)

~~(1)~~

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

~~(2)~~

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

~~(10)~~(11) Employee Benefit Plans

Employee Benefits

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

Three Months Ended March 31,
(in thousands)

2021

2020
Payroll taxes

$
435

$
389
Medical plans

450

427
401(k) match and profit sharing

499

306
Periodic pension cost

416

464
Other

4

23
Total employee benefits

$
1,804

$
1,609


	Three Months Ended March 31,
(in thousands)		2022		2021
Payroll taxes		$	441	$	435
Medical plans		475		450
401(k) match and profit sharing		369		499
Periodic pension cost		437		416
Other		8		4
Total employee benefits		$	1,730	$	1,804

The ~~Company’s~~Company's profit-sharing plan includes a matching 401(k) portion, in which the Company matches the first 3% of eligible employee contributions. The Company ~~makes~~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,

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown.

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

Other Plans

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

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes~~The accrued liability relating to the ~~Consolidated Financial Statements~~

~~(Unaudited)~~

AsSERP was $1.8 million as of March 31, ~~2021, the accrued liability was $1.1 million~~2022, and the expense for the three months ended March 31, ~~2021 and 2020~~2022 was $93,000 compared to $97,000 ~~and $80,000, respectively,~~for the three months ended March 31, 2021 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 made a pension contribution of $1.0 million on ~~March 22, 2021.~~

April 1, 2022.

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

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

(Loss)

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

Pension Benefits

(in thousands)

2021

2020

Service cost - benefits earned during the year

$
1,663

$
1,857

Interest costs on projected benefit obligations (a)

1,023

1,159

Expected return on plan assets (a)

(1,825)

(1,572)

Expected administrative expenses (a)

104

110

Amortization of prior service cost (a)

—

50

Amortization of unrecognized net loss (a)

181

218

Net periodic pension cost

$
1,146

$
1,822


	Three Months Ended March 31,
(in thousands)	2022		2021
Service cost - benefits earned during the year	$	1,630	$	1,663
Interest costs on projected benefit obligations (a)	1,183		1,023
Expected return on plan assets (a)	(2,231)		(1,825)
Expected administrative expenses	118		104
Amortization of prior service cost (a)	—		—
Amortization of unrecognized net loss (a)	—		181
Net periodic pension cost	$	700	$	1,146

~~(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

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

participants in the ~~Plans.~~pension plan. The prior service credit is amortized over the average remaining service period to full eligibility for participating employees expected to receive benefits.

~~(11)~~ Currently, there is no prior service cost or net transition (asset)/obligation to be amortized.

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)

(12) Earnings per Share

Stock Dividend

On July 1, ~~2020,~~2021, the Company paid a special stock dividend of 4% to common shareholders of record at the close of business on June 15, ~~2020.~~2021. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Basic earnings per share is computed by dividing income available to shareholders by the weighted average number of shares outstanding during the ~~year.~~period. Diluted earnings per share gives effect to all dilutive potential shares that were outstanding during the ~~year.~~

period.

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


	Three Months Ended March 31,
(dollars in thousands, except per share data)		2022		2021
Basic earnings per share:
Net income available to shareholders		$	6,609	$	5,839
Average shares outstanding		6,604,493		6,617,368
Basic earnings per share		$	1.00	$	0.88
Diluted earnings per share:
Net income available to shareholders		$	6,609	$	5,839
Average shares outstanding		6,604,493		6,617,368
Diluted earnings per share		$	1.00	$	0.88

Repurchase Program

Three Months Ended March 31,

(dollars in thousands, except per share data)

2021

2020

Basic earnings per share:

Net income available to shareholders

$
5,839

$
868

Average shares outstanding

6,362,869

6,510,189

Basic earnings per share

$
0.92

$
0.13

Diluted earnings per share:

Net income available to shareholders

$
5,839

$
868

Average shares outstanding

6,362,869

6,510,189

Effect of dilutive stock options

0

0

Average shares outstanding including dilutive stock options

6,362,869

6,510,189

Diluted earnings per share

$
0.92

0.13

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of any unamortized compensation expense, exceeds the option price

The Company's 2019 Repurchase Plan was amended during the ~~period, except when the Company has a loss from continuing operations available~~second quarter of 2021 to shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period. There were 0 shares for the three months ended March 31, 2021 that were omitted from the computation of diluted earnings per share as a result of being considered anti-dilutive.

~~Repurchase Program~~

~~In 2019, the Company's Board of Directors authorized~~authorize the purchase of up to an additional $5.0 million in market value of the Company's common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases.

During the ~~three months ended March 31, 2021~~first quarter 2022, the Company repurchased ~~117,632~~23,536 common shares at an average cost of ~~$18.26~~$25.75 per share totaling ~~$2.1~~$0.6 million. As of March 31, ~~2021, $1.9~~2022, $4.4 million remained available for ~~the repurchase of shares~~share repurchases pursuant to ~~the share repurchase~~that authorization.

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

~~(12)~~(13) Fair Value Measurements

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

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

The fair value hierarchy is as follows:

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

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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~~non-recurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred.

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

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

~~Available-for-Sale~~

Available-for-sale Securities

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

Other Investment Securities

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in Federal Home Loan Bank (FHLB) stock, and Midwest Independent Bank (MIB) bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations. Equity securities that are not actively traded are classified in level 2.

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

Loans Held for Sale

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

Derivative Assets and Liabilities

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes~~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 ~~Consolidated Financial Statements~~

~~(Unaudited)~~

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 mortgage servicing rights is based on the discounted value of estimated future cash flows utilizing contractual cash flows, servicing rate, constant prepayment rate, servicing cost, and discount rate factors. Accordingly, the fair value is estimated based on a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimates of prepayment speeds, market discount rates, cost to service, float earnings

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

rates, and other ancillary income, including late fees. The valuation models estimate the present value of estimated future net servicing income. The Company classifies its servicing rights as Level 3.

Fair Value Measurements

Quoted Prices

in Active

Markets for

Other

Significant

Identical

Observable

Unobservable

Assets

Inputs

Inputs
(in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)
March 31, 2021

Assets:

U.S. Treasury

$
3,041

$
3,041

0

$
0
U.S. government and federal agency obligations

19,829

0

19,829

0
U.S. government-sponsored enterprises

22,551

0

22,551

0
Obligations of states and political subdivisions

70,818

0

70,818

0
Mortgage-backed securities

108,644

0

108,644

0
Other debt securities

12,023

0

12,023

0
Bank-issued trust preferred securities

1,236

0

1,236

0
Equity securities

45

45

0

0
Mortgage servicing rights

2,494

0

0

2,494
Total

$
240,681

$
3,086

$
235,101

$
2,494

December 31, 2020

Assets:

U.S. Treasury

$
2,798

$
2,798

0

$
0
U.S. government and federal agency obligations

11,929

0

11,929

0
U.S. government-sponsored enterprises

22,874

0

22,874

0
Obligations of states and political subdivisions

58,744

0

58,744

0
Mortgage-backed securities

90,112

0

90,112

0
Other debt securities

10,344

0

10,344

0
Bank-issued trust preferred securities

1,229

0

1,229

0
Equity securities

32

32

0

0
Mortgage servicing rights

2,445

0

0

2,445
Total

$
200,507

$
2,830

$
195,232

$
2,445


			Fair Value Measurements
(in thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2022
Assets:
U.S. Treasury	$	3,145	$	3,145	$	—	$	—
U.S. government and federal agency obligations	975		—		975		—
U.S. government-sponsored enterprises	25,265		—		25,265		—
Obligations of states and political subdivisions	120,434		—		120,434		—
Mortgage-backed securities	123,848		—		123,848		—
Other debt securities	11,821		—		11,821		—
Bank-issued trust preferred securities	1,266		—		1,266		—
Equity securities	56		56		—		—
Interest rate lock commitments	64		—		—		64
Forward sale commitments	21		—		21		—
Loans held for sale	909		—		909		—
Mortgage servicing rights	2,639		—		—		2,639
Total	$	290,443	$	3,201	$	284,539	$	2,703
Liabilities:
Interest rate lock commitments	$	47	$	—	$	—	$	47
Total	$	47	$	—	$	—	$	47

December 31, 2021
Assets:
U.S. Treasury	$	3,917	$	3,917	$	—	$	—
U.S. government and federal agency obligations	1,319		—		1,319		—
U.S. government-sponsored enterprises	26,372		—		26,372		—
Obligations of states and political subdivisions	129,224		—		129,224		—
Mortgage-backed securities	136,466		—		136,466		—
Other debt securities	12,284		—		12,284		—
Bank-issued trust preferred securities	1,288		—		1,288		—
Equity securities	60		60		—		—
Interest rate lock commitments	312		—		—		312
Forward sale commitments	12		—		12		—
Loans held for sale	2,249		—		2,249		—
Mortgage servicing rights	2,659		—		—		2,659
Total	$	316,162	$	3,977	$	309,214	$	2,971
Liabilities:
Interest rate lock commitments	$	26	$	—	$	—	$	26
Total	$	26	$	—	$	—	$	26

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

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

Fair Value Measurements Using

(Level 3)

Mortgage Servicing Rights

Three Months Ended March 31,

(in thousands)

2021

2020

Balance at beginning of period

$
2,445

$
2,482

Total (losses) or gains (realized/unrealized):

Included in earnings

(121)

(275)

Included in other comprehensive income

0

0

Purchases

0

0

Sales

0

0

Issues

170

67

Settlements

0

0

Balance at end of period

$
2,494

$
2,274


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Mortgage Servicing Rights				Interest Rate Lock Commitments
	Three Months Ended March 31,
(in thousands)	2022		2021		2022		2021
Balance at beginning of period	$	2,659	$	2,445	$	286	$	—
Total gains or (losses) (realized/unrealized):
Included in earnings	(48)		(121)		(8)		—
Included in other comprehensive income	—		—		—		—
Purchases	—		—		—		—
Sales	—		—		(286)		—
Issues	28		170		25		—
Settlements	—		—		—		—
Balance at end of period	$	2,639	$	2,494	$	17	$	—

Valuation ~~methods~~Methods for Assets and Liabilities ~~measured~~Measured at ~~fair value~~Fair Value on a ~~nonrecurring basis~~

Non-recurring Basis

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

While the overall loan portfolio is not carried at fair value, the Company periodically records ~~nonrecurring~~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~~Non-recurring adjustments also include certain impairment amounts for collateral dependent loans when establishing the allowance for loan losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In determining the value of real estate collateral, the Company relies on external and internal appraisals of property values depending on the size and complexity of the real estate collateral. The Company maintains staff that is trained to perform in-house evaluations and also review ~~third party~~third-party appraisal reports for reasonableness. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgments based on the experience and expertise of internal specialists. Values of all loan collateral are regularly reviewed by a senior loan committee. Because many of these inputs are not observable, the measurements are classified as Level 3. As of March 31, 2022, the Company identified $15.4 million in collateral dependent impaired loans that required no specific allowance for loan losses. Related to these loans, there were $23,000 in charge-offs recorded during the three months ended March 31, 2022. As of March 31, 2021, the Company identified $31.8 million in collateral dependent impaired loans that had specific allowances for losses aggregating ~~$4.7~~$4.8 million. Related to these loans, there were $23,000 in charge-offs recorded during the three months ended March 31, 2021. As of March 31, 2020 the Company identified $5.8 million in collateral dependent impaired loans that had specific allowances for losses aggregating $0.2 million. Related to these loans, there were $55,000 in charge-offs recorded during the three months ended March 31, 2020.

Other real estate owned (OREO) and foreclosed assets consisted of loan collateral that has been repossessed through foreclosure. This collateral is comprised of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Subsequent to foreclosure, these assets initially are carried at fair value of the collateral less estimated selling costs. Fair value, when recorded, is generally based

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

upon appraisals by approved, independent ~~state certified~~state-certified appraisers. Like impaired loans, appraisals on OREO may be discounted based on the Company’s historical knowledge, changes in market conditions from the time of appraisal or other information available. During the holding period, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

Fair Value Measurements Using

Quoted Prices

in Active

Markets for

Other

Significant

Identical

Observable

Unobservable

Total

Assets

Inputs

Inputs

Total Gains
(in thousands)

Fair Value

(Level 1)

(Level 2)

(Level 3)

(Losses)*
March 31, 2021

Assets:

Collateral dependent impaired loans:

Commercial, financial, & agricultural

$
4,188

$
0

$
0

$
4,188

$
—
Real estate mortgage - residential

403

0

0

403

—
Real estate mortgage - commercial

22,484

0

0

22,484

(23)
Total

$
27,075

$
0

$
0

$
27,075

$
(23)
Other real estate and repossessed assets

$
12,140

$
0

$
0

$
12,140

$
(73)

March 31, 2020

Assets:

Collateral dependent impaired loans:

Commercial, financial, & agricultural

$
2,422

$
0

$
0

$
2,422

$
—
Real estate construction - commercial

408

0

0

408

0
Real estate mortgage - residential

1,921

0

0

1,921

(19)
Real estate mortgage - commercial

827

0

0

827

(22)
Installment and other consumer

12

0

0

12

(14)
Total

$
5,590

$
0

$
0

$
5,590

$
(55)
Other real estate and repossessed assets

$
12,769

$
0

$
0

$
12,769

$
(12)

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)


			Fair Value Measurements Using
(in thousands)	Total Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Three Months Ended March 31, Total Gains (Losses)*
March 31, 2022
Assets:
Collateral dependent impaired loans:



Real estate mortgage - commercial	$	15,365	$	—	$	—	$	15,365	$	(23)

Total	$	15,365	$	—	$	—	$	15,365	$	(23)
Other real estate and repossessed assets	$	9,758	$	—	$	—	$	9,758	$	(45)

March 31, 2021
Assets:
Collateral dependent impaired loans:
Commercial, financial, & agricultural	$	4,188	$	—	$	—	$	4,188	$	—

Real estate mortgage - residential	403		—		—		403		—
Real estate mortgage - commercial	22,484		—		—		22,484		(23)

Total	$	27,075	$	—	$	—	$	27,075	$	(23)
Other real estate and repossessed assets	$	12,140	$	—	$	—	$	12,140	$	(73)

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

~~(13)~~

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

(14) Fair Value of Financial Instruments

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

Loans

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

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

used are estimated using comparable market rates for similar types of loan products adjusted to be commensurate with the credit risk, overhead costs, and optionality of such instruments.

~~Loans Held for Sale~~

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

~~Investment Securities~~

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

~~Other investment securities~~

Other investment securities include equity securities with readily determinable fair values and other investment securities that do not have readily determinable fair values. Investments in Federal Home Loan Bank (FHLB) stock, and Midwest Independent Bank (MIB) bankers bank stock, that do not have readily determinable fair values, are required for membership in those organizations. Equity securities that are not actively traded are classified in level 2.

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

Federal Funds Sold, Cash, and Due from Banks

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

Certificates of Deposit in ~~other banks~~

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~~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.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

Accrued Interest Receivable and Payable

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

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

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

Subordinated Notes and Other Borrowings

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

~~Operating Lease Liabilities~~

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

(Unaudited)

A summary of the carrying amounts and fair values of the Company’s financial instruments at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 is as follows:

March 31, 2021

Fair Value Measurements

Quoted Prices

in Active

Net

Markets for

Other

Significant

March 31, 2021

Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs
(in thousands)

amount

value

(Level 1)

(Level 2)

(Level 3)
Assets:

Cash and due from banks

$
18,496

$
18,496

$
18,496

$
0

$
0
Federal funds sold and overnight interest-bearing deposits

128,207

128,207

128,207

0

0
Certificates of deposit in other banks

8,897

8,897

8,897

0

0
Available for sale securities

238,142

238,142

3,041

235,101

0
Other investment securities

6,188

6,188

45

6,143

0
Loans, net

1,257,824

1,283,560

0

0

1,283,560
Loans held for sale

6,308

6,308

0

0

6,308
Cash surrender value - life insurance

2,465

2,465

0

2,465

0
Accrued interest receivable

6,488

6,488

6,488

0

0
Total

$
1,673,015

$
1,698,751

$
165,174

$
243,709

$
1,289,868
Liabilities:

Deposits:

Non-interest bearing demand

$
431,035

$
431,035

$
431,035

$
0

$
0
Savings, interest checking and money market

708,615

708,615

708,615

0

0
Time deposits

254,332

256,047

0

0

256,047
Federal funds purchased and securities sold under agreements to repurchase

42,018

42,018

42,018

0

0
Federal Home Loan Bank advances and other borrowings

97,614

99,750

0

99,750

0
Subordinated notes

49,486

41,176

0

41,176

0
Operating lease liabilities

2,058

2,058

0

2,058

0
Accrued interest payable

439

439

439

0

0
Total

$
1,585,597

$
1,581,138

$
1,182,107

$
142,984

$
256,047


					March 31, 2022
					Fair Value Measurements
	March 31, 2022				Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Net Significant Unobservable Inputs
(in thousands)	Carrying amount		Fair value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	22,544	$	22,544	$	22,544	$	—	$	—
Federal funds sold and overnight interest-bearing deposits	27,971		27,971		27,971		—		—
Certificates of deposit in other banks	4,701		4,701		4,701		—		—
Available-for-sale securities	286,754		286,754		3,145		283,609		—
Other investment securities	5,490		5,490		56		5,434		—
Loans, net	1,319,644		1,326,968		—		—		1,326,968
Loans held for sale	909		909		—		909		—
Cash surrender value - life insurance	2,524		2,524		—		2,524		—
Interest rate lock commitments	64		64		—		—		64
Forward sale commitments	21		21		—		21		—
Accrued interest receivable	6,241		6,241		6,241		—		—
Total	$	1,676,863	$	1,684,187	$	64,658	$	292,497	$	1,327,032
Liabilities:
Deposits:
Non-interest bearing demand	$	450,225	$	450,225	$	450,225	$	—	$	—
Savings, interest checking and money market	752,164		752,164		752,164		—		—
Time deposits	253,754		252,878		—		—		252,878
Federal funds purchased and securities sold under agreements to repurchase	5,514		5,514		5,514		—		—
Federal Home Loan Bank advances and other borrowings	77,357		77,364		—		77,364		—
Subordinated notes	49,486		42,166		—		42,166		—
Interest rate lock commitments	47		47		—		—		47
Accrued interest payable	298		298		298		—		—
Total	$	1,588,845	$	1,580,656	$	1,208,201	$	119,530	$	252,925

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

~~(Unaudited)~~

December 31, 2020

Fair Value Measurements

Quoted Prices

in Active

Net

Markets for

Other

Significant

December 31, 2020

Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs
(in thousands)

amount

value

(Level 1)

(Level 2)

(Level 3)
Assets:

Cash and due from banks

$
19,235

$
19,235

$
19,235

$
0

$
0
Federal funds sold and overnight interest-bearing deposits

161,128

161,128

161,128

0

0
Certificates of deposit in other banks

9,376

9,376

9,376

0

0
Available-for-sale securities

198,030

198,030

2,798

195,232

0
Other investment securities

6,353

6,353

32

6,321

0
Loans, net

1,268,854

1,288,677

0

0

1,288,677
Loans held for sale

5,099

5,279

0

0

5,279
Cash surrender value - life insurance

2,451

2,451

0

2,451

0
Accrued interest receivable

6,640

6,640

6,640

0

0

$
1,677,166

$
1,697,169

$
199,209

$
204,004

$
1,293,956
Liabilities:

Deposits:

Non-interest bearing demand

$
382,492

$
382,492

$
382,492

$
0

$
0
Savings, interest checking and money market

723,808

723,808

723,808

0

0
Time deposits

277,306

279,569

0

0

279,569
Federal funds purchased and securities sold under agreements to repurchase

45,154

45,154

45,154

0

0
Federal Home Loan Bank advances and other borrowings

106,674

110,121

0

110,121

0
Subordinated notes

49,486

40,929

0

40,929

0
Operating lease liabilities

2,137

2,137

0

2,137

0
Accrued interest payable

837

837

837

0

0

$
1,587,894

$
1,585,047

$
1,152,291

$
153,187

$
279,569

(Unaudited)


					December 31, 2021
					Fair Value Measurements
	December 31, 2021				Quoted Prices in Active Markets for Identical Assets		Other Observable Inputs		Net Significant Unobservable Inputs
(in thousands)	Carrying amount		Fair value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	17,287	$	17,287	$	17,287	$	—	$	—
Federal funds sold and overnight interest-bearing deposits	142,622		142,622		142,622		—		—
Certificates of deposit in other banks	5,193		5,193		5,193		—		—
Available-for-sale securities	310,870		310,870		3,917		306,953		—
Other investment securities	5,408		5,408		60		5,348		—
Loans, net	1,285,230		1,308,539		—		—		1,308,539
Loans held for sale	2,249		2,249		—		2,249		—
Cash surrender value - life insurance	2,509		2,509		—		2,509		—
Interest rate lock commitments	312		312		—		—		312
Forward sale commitments	12		12		—		12		—
Accrued interest receivable	6,621		6,621		6,621		—		—
Total	$	1,778,313	$	1,801,622	$	175,700	$	317,071	$	1,308,851
Liabilities:
Deposits:
Non-interest bearing demand	$	453,066	$	453,066	$	453,066	$	—	$	—
Savings, interest checking and money market	818,358		818,358		818,358		—		—
Time deposits	245,396		246,025		—		—		246,025
Federal funds purchased and securities sold under agreements to repurchase	23,829		23,829		23,829		—		—
Federal Home Loan Bank advances and other borrowings	77,418		78,152		—		78,152		—
Subordinated notes	49,486		42,908		—		42,908		—
Interest rate lock commitments	26		26		—		—		26
Accrued interest payable	282		282		282		—		—
Total	$	1,667,861	$	1,662,646	$	1,295,535	$	121,060	$	246,051

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.

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

~~HAWTHORN BANCSHARES, INC.~~

~~AND SUBSIDIARIES~~

~~Notes to the Consolidated Financial Statements~~

~~(Unaudited)~~

involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.

~~(14)~~

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(Unaudited)

(15) Commitments and Contingencies

The Company issues financial instruments with off-balance-sheet risk in the normal course of business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The Company’s extent of involvement and maximum potential exposure to credit loss in the event of ~~nonperformance~~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 March 31, ~~2021,~~2022, no amounts have been accrued for any estimated losses for these financial instruments.

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

March 31,

December 31,
(in thousands)

2021

2020
Commitments to extend credit

$
350,465

$
264,528
Commitments to originate residential first and second mortgage loans

50,340

51,270
Standby letters of credit

20,810

125,800
Total

421,615

441,598


(in thousands)	March 31, 2022		December 31, 2021
Commitments to extend credit	$	398,543	$	396,958
Interest rate lock commitments	14,684		16,161
Forward sale commitments	909		2,199
Standby letters of credit	4,329		35,514
Total	$	418,465	$	450,832

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.~~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 March 31, ~~2021.~~

2022.

Pending Litigation

The Company and its subsidiaries are defendants in various legal actions incidental to the Company’s past and current business activities. Based on the Company’s analysis, and considering the inherent uncertainties associated with litigation, management does not believe that it is reasonably possible that these legal actions will materially adversely affect the Company’s consolidated financial condition or results of operations in the near term. The Company records a loss accrual for all legal matters for which it deems a loss is probable and can be reasonably estimated. Some legal matters, which are at early stages in the legal process, have not yet progressed to the point where a loss is deemed probable or an amount can be estimated.

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

Forward-Looking Statements

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

●

~~statements that are not historical in nature, and~~

●

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

•statements that are not historical in nature, and

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

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

●

•competitive pressures among financial services companies may increase significantly,

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

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

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

•changes may occur in the securities markets, and

•the COVID-19 pandemic, or other external events may adversely affect the Company.

~~competitive pressures among financial services companies may increase significantly,~~

●

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

●

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

●

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

●

~~costs or difficulties related to 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,~~

●

~~changes may occur in the securities markets and,~~

●

~~effects of the COVID-19 pandemic, or other adverse external events.~~

We have described under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, and in other reports filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.

Except as required by law, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in its business, results of operations or financial condition over time.

Overview

Crucial to the Company’s community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.7 billion in assets at March 31, ~~2021,~~2022, provides a broad range of commercial and personal banking services. The Bank’s specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration (SBA) loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. Other financial services that the Company provides include trust services that include estate planning, investment and asset management services and a comprehensive suite of cash management services. The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St. Louis, and the greater Kansas City metropolitan area.

The Company’s primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company’s business is commercial, commercial real estate development, and residential mortgage

lending. The Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity.

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

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

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

Significant Developments and Transactions

~~Each~~

The item listed below materially affects the comparability of our results of operations for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, and our financial condition as of March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, and may affect the comparability of financial information we report in future fiscal periods.

COVID-19 Pandemic

~~Impact of COVID-19~~. The ~~COVID-19~~Coronavirus Disease 2019 (COVID-19) pandemic (the pandemic) has impacted the Company and ~~related restrictive measures taken by governments, businesses and individuals caused unprecedented~~may continue to do so, as uncertainty ~~volatility and disruption in financial markets and in governmental, commercial and consumer activity in~~remains about the United States and globally, including the markets that we serve. As the restrictive measures have been eased during 2020 and into 2021, the U.S. economy has begun to recover and with the availability and distribution of a COVID-19 vaccine, we anticipate continued improvements in commercial and consumer activity and the U.S. economy. As of June 16, 2020, the governor of Missouri rescinded all COVID-19 related statewide public health orders. He announced it would be the responsibility of local officials to put further measures and regulations in place.

~~Effects on Our Market Areas.~~ Our commercial and consumer banking products and services are delivered primarily in Missouri, where individual and governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity While positive headwinds exist, we recognize that our business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue into the second quarter of 2021, especially if new COVID-19 variant infections increase and new economic restrictions are mandated. Commercial activity has improved, but has not returned to the levels existing prior to the outbreakduration of the pandemic ~~which may result in~~and the timing and strength of the global and national economic recovery. In conjunction with our ~~customers’ inability~~efforts to meet their loan obligations to us. In addition, the economic pressures and uncertainties related to the COVID-19 pandemic have resulted in changes in consumer spending behaviors, which may negatively impact the demand for loans and other services we offer. Our borrowing base includes customers in industries hotel/lodging, restaurants, entertainment, retail and commercial real estate, all of which have been significantly impactedsupport clients affected by the ~~COVID-19 pandemic. We recognize that these industries may take longer~~pandemic, the Company has cumulatively originated $136.0 million in loans under the Paycheck Protection Program (PPP) with amounts outstanding of $2.3 million and $8.4 million at March 31, 2022 and December 31, 2021, respectively. For more information on PPP loans, see Note 2 – Loans and Allowance for Loan Losses in the Notes to ~~recover as consumers may be hesitant to return to full social interaction or may change their spending habits on a more permanent basis as a result~~Consolidated Financial Statements (unaudited). The future direct and indirect impact of the ~~pandemic. We continue to monitor these customers closely.~~

~~Effects on Our Business.~~ ~~The COVID-19~~ pandemic ~~and the specific developments referred to above will continue to have a significant impact~~ on our ~~business. In particular, we anticipate that a significant portion~~businesses, results of operations and financial condition remains uncertain. Should current economic conditions deteriorate or if the ~~Bank’s borrowers in~~pandemic worsens due to various factors, including through the ~~hotel, restaurant, gaming, long-term healthcare~~spread of more easily communicable variants of COVID-19, such conditions could have an adverse effect on our businesses and ~~retail industries will continue to endure significant economic distress, which has caused,~~results of operations and ~~will continue to cause, them to draw on their existing lines of credit and~~could adversely affect ~~their ability to repay existing indebtedness. These developments, together with economic conditions generally, are also expected to impact~~ our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, our consumer loan business and loan portfolio, and the value of certain collateral securing our loans.

The Company continues to lend to qualified consumer and commercial customers. We continue to participate in the SBA’s Small Business Paycheck Protection Program. As of March 31, 2021 the net balance of the PPP loans totaled $56.3 million.

financial condition.

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses

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

~~SELECTED CONSOLIDATED FINANCIAL DATA~~

The following table presents selected consolidated financial information for the Company as of and for each of the three months ended March 31, 2021 and 2020, respectively. The selected consolidated financial data should be read in conjunction with the unaudited consolidated financial statements of the Company, including the related notes, presented elsewhere herein.

Selected Financial Data

Three Months Ended

March 31,

(In thousands, except per share data)

2021

2020

Per Share Data

Basic earnings per share

$
0.92

$
0.13

Diluted earnings per share

0.92

0.13

Cash dividends paid on common stock

842

753

Book value per share

20.54

17.92

Market price per share

21.29

17.64

Selected Ratios

(Based on average balance sheets)

Return on total assets

1.38
%

0.23
%
Return on stockholders' equity

18.03
%

2.97
%
Stockholders' equity to total assets

7.64
%

7.80
%
Efficiency ratio (1)

61.86
%

70.80
%
Net interest spread

3.44
%

3.28
%
Net interest margin

3.62
%

3.55
%

(Based on end-of-period data)

Stockholders' equity to assets

7.55
%

7.64
%
Total risk-based capital ratio

14.80
%

14.80
%
Tier 1 risk-based capital ratio

13.21
%

12.81
%
Common equity Tier 1 capital

9.93
%

9.64
%
Tier 1 leverage ratio (2)

10.22
%

10.43
%
Executive Summary

~~(1)~~

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

~~(2)~~

~~Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets.~~

~~RESULTS OF OPERATIONS ANALYSIS~~

The Company has prepared all of the consolidated financial information in this report in accordance with ~~accounting principles generally accepted in the United States of America (U.S. GAAP).~~U.S. GAAP. In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the 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.

Three Months Ended March 31,
(In thousands)

2021

2020

$ Change

% Change

Net interest income

$
14,390

$
12,526

$
1,864

14.9
%
Provision for loan losses

—

3,300

(3,300)

(100.0)

Non-interest income

4,443

2,291

2,152

93.9

Investment securities gains (losses), net

14

(1)

15

100.0

Non-interest expense

11,651

10,491

1,160

11.1

Income before income taxes

7,196

1,025

6,171

602.0

Income tax expense

1,357

157

1,200

764.3

Net income

$
5,839

$
868

$
4,971

572.7
%

~~NM = not meaningful~~


	As of and for the three months ended
(Dollars in thousands, except per share data)		March 31, 2022		December 31, 2021		March 31, 2021
Net interest income		$	14,145	$	15,103	$	14,390
(Release of) provision for loan losses		(2,500)		(2,400)		—
Non-interest income		3,726		3,675		4,572
Investment securities (losses) gains, net		(4)		9		14
Non-interest expense		12,227		13,474		11,780
Income before income taxes		8,140		7,713		7,196
Income tax expense		1,531		1,723		1,357
Net income		$	6,609	$	5,990	$	5,839
Basic earnings per share		$	1.00	$	0.90	$	0.88
Diluted earnings per share		$	1.00	$	0.90	$	0.88

Cash dividends paid on common stock		$	993	$	992	$	842
Book value per share		$	20.35	$	22.51	$	19.75
Market price per share		$	25.28	$	25.94	$	20.47








Return on average total assets		1.51%		1.35%		1.38%
Return on average stockholders' equity		18.41%		16.70%		18.03%
Average stockholders' equity to total assets		8.22%		8.10%		7.64%
Efficiency ratio (1)		68.42%		71.75%		62.12%
Net interest spread		3.36%		3.52%		3.44%
Net interest margin		3.50%		3.67%		3.61%

Stockholders' equity to assets		7.74%		8.13%		7.55%
Total risk-based capital ratio		14.66%		14.79%		14.80%
Tier 1 risk-based capital ratio		13.44%		13.59%		13.21%
Common equity Tier 1 capital		10.36%		10.22%		9.93%
Tier 1 leverage ratio (2)		10.99%		11.01%		10.22%

Asset Quality

Net-charge-offs (recoveries)		$	124	$	(375)	$	(248)
Non-performing loans		$	17,099	$	25,473	$	34,233
Classified assets		$	104,073	$	108,322	$	145,794
Non-performing loans to total loans		1.28%		1.96%		2.68%
Non-performing assets to total assets		1.55%		1.97%		2.68%
Allowance for loan losses to total loans		1.07%		1.30%		1.44%

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

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

Results of Operations Highlights:

Consolidated net income of ~~$5.8~~$6.6 million ~~or $0.92~~for the first quarter 2022, an increase of $0.6 million compared to the fourth quarter 2021 ("linked quarter") and an increase of $0.8 million from the first quarter 2021 (the "prior year quarter"). Earnings per diluted share (“EPS”) was $1.00 for the ~~three months ended March 31, 2021 increased $5.0 million~~first quarter 2022 compared to ~~$.9 million, or $0.13 per diluted share,~~$0.90 and $0.88 for the ~~three months ended March 31, 2020.~~linked quarter and prior year quarter, respectively. For the ~~three months ended March 31, 2021,~~first quarter 2022, the return on average assets was ~~1.38%~~1.51%, the return on average stockholders’ equity was ~~18.03%~~18.41%, and the efficiency ratio was ~~61.9%~~68.4%.

Net interest income ~~was $14.4~~ of $14.1 million for the ~~three months ended March 31, 2021 compared to $12.5~~first quarter 2022, decreased $1.0 million ~~for~~from the ~~three months ended March 31, 2020. The net~~linked quarter, and decreased $0.2 million from the prior year quarter. Net interest margin, ~~(expressed~~ on a fully taxable equivalent ~~basis) increased to 3.62%~~basis ("FTE") basis, was 3.50% for the ~~three months ended March 31, 2021 compared to 3.55%~~first quarter, a decrease from 3.67% for the ~~three months ended March 31, 2020.~~linked quarter, and a decrease from 3.61% for the prior year quarter. These changes are discussed in greater detail under the Average Balance ~~Sheets~~Sheet Data and Rate and Volume Analysis section below.

~~provision~~Non-interest income for ~~loan losses~~ ~~was required for the three months ended March 31, 2021 compared to a $3.3 million provision for the three months ended March 31, 2020. The decreased provision in~~ the first quarter 2022 was $3.7 million, an increase of ~~2021~~$0.1 million, or 1.4%, from the linked quarter, and a decrease of $0.8 million, or 18.5%, from the prior year quarter. The change in the current quarter compared to the ~~first~~prior year quarter of 2020 resulted primarily from the impact of net recoveries and improvement in the economic outlook as the economy begins to recover from the impacts of the COVID-19 pandemic. The provision in the first quarter of 2020 wasis primarily due to ~~current economic conditions resulting from~~ the ~~COVID-19 pandemic.~~

~~The Company’s net loan recoveries were $248,000 for~~decrease in the ~~three months ended March 31, 2021 compared to net loan charge-offs~~gain on sale of ~~$84,000 for the three months ended March 31, 2020.~~

~~Non-performing loans totaled $34.2~~real estate mortgages of $1.6 million, or ~~2.68% of total loans, at March 31, 2021 compared to $34.6 million, or 2.69% of total loans, at December 31, 2020, and $8.1 million, or 0.68% of total loans, at March 31, 2020.~~64.0%. These changes are discussed in greater detail under the ~~Lending~~Non-interest Income and ~~Credit Management~~Expense section below.

Non-interest ~~income~~expense ~~increased $2.2~~ for the first quarter 2022 was $12.2 million, a decrease of $1.2 million, or ~~93.9%~~9.3%, ~~for~~from the ~~three months ended March 31, 2021~~linked quarter, and an increase of $0.4 million, or 3.8%, from the prior year quarter. The change in the current quarter compared to the ~~three months ended March 31, 2020.~~linked quarter is primarily due to the decrease in legal fees expenses resulting from the recognition of final settlement of a legal matter in the fourth quarter of 2021. These changes are discussed in greater detail under the Non-interest Income and Expense section below.

Balance Sheet Highlights:

~~Investment securities gains, net~~Loans ~~The Company recognized net securities gains, which include the unrealized net gains related~~ – Loans held for investment increased by $31.8 million, or 2.4%, equal to ~~equity securities,~~$1.3 billion as of ~~$14,000 for the three months~~ March 31, ~~2021 compared to net securities losses of $1,000 for the three months ended March 31, 2020. These changes are discussed in greater detail under~~ ~~Investment securities gains, net~~ ~~section below.~~

~~Non-interest expense~~ ~~increased $1.2 million, or 11.1%, for the three months ended March 31, 2021~~2022 as compared to the ~~three months ended~~end of the linked quarter. Year-over-year, loans held for investment grew $57.7 million, or 4.5%, from $1.3 billion as of March 31, ~~2020.~~2021.

Asset quality – Non-performing loans totaled $17.1 million at March 31, 2022, a decrease of $8.4 million from $25.5 million at the end of the linked quarter, and a decrease of $17.1 million from $34.2 million at the end of the prior year quarter. The reduction in non-performing loans in the current quarter, as compared to the linked quarter and prior year quarter is primarily due to several large non-accrual loans returning to accrual status described in more detail below. The allowance for loan losses to total loans was 1.07% at March 31, 2022, compared to 1.30% at December 31, 2021 and 1.44% at March 31, 2021. These changes are discussed in greater detail under the ~~Non-interest Income~~Lending and ~~Expense~~Credit Management section below.

Deposits – Total deposits decreased by $60.7 million, or 4.0%, equal to $1.5 billion as of March 31, 2022 as compared to the end of the linked quarter. Year-over-year deposits grew $62.2 million, or 4.5%, from $1.4 billion as of March 31, 2021.

Capital – Total shareholder’s equity was $134.4 million and the common equity to assets ratio was 7.74% at March 31, 2022 as compared to 8.13% and 7.55% at the end of the linked quarter and the prior year quarter, respectively. Regulatory capital ratios remain “well-capitalized”, with tier 1 leverage ratio of 10.99% and a total risk-based capital ratio of 14.66% at March 31, 2022.

Average Balance ~~Sheets~~

Sheet Data

Net interest income is the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and ~~interest bearing~~interest-bearing liabilities. The following table presents average balance ~~sheets,~~sheet data, net interest income, average yields of earning assets, average costs of ~~interest bearing~~interest-bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the three month periods ended March 31, 2022 and 2021, respectively. The average balances used in this table and ~~2020,~~other statistical data were calculated using average daily balances.


	Three Months Ended March 31,
	2022					2021
(Dollars in thousands)	Average Balance		Interest Income/ Expense (1)		Rate Earned/ Paid (1)	Average Balance		Interest Income/ Expense (1)		Rate Earned/ Paid (1)
ASSETS
Loans: (2) (3)
Commercial	$	220,888	$	2,832	5.20%	$	257,623	$	4,159	6.55%
Real estate construction - residential	23,455		256		4.43	33,492		394		4.77
Real estate construction - commercial	95,935		996		4.21	78,578		878		4.53
Real estate mortgage - residential	281,824		2,832		4.08	260,040		2,841		4.43
Real estate mortgage - commercial	670,713		6,938		4.20	621,877		6,600		4.30
Installment and other consumer	22,342		206		3.74	25,992		265		4.13
Total loans	$	1,315,157	$	14,060	4.34%	$	1,277,602	$	15,137	4.81%
Loans held for sale	2,288		20		3.55	5,500		25		1.84
Investment securities:
U.S. Treasury	4,010		5		0.51	3,006		8		1.08
U.S. government and federal agency obligations	27,371		89		1.32	38,605		146		1.53
Obligations of states and political subdivisions	126,577		1,020		3.27	61,456		452		2.98
Mortgage-backed securities	132,922		510		1.56	101,101		338		1.36
Other debt securities	13,456		156		4.70	11,539		143		5.03
Total investment securities	304,336		1,780		2.37	215,707		1,087		2.04
Other investment securities	5,412		75		5.62	5,982		83		5.63
Federal funds sold	6,232		1		0.07	20,276		4		0.08
Interest bearing deposits in other financial institutions	70,824		60		0.34	129,048		98		0.31
Total interest earning assets	$	1,704,249	$	15,996	3.81%	$	1,654,115	$	16,434	4.03%
All other assets	83,294					84,407
Allowance for loan losses	(16,926)					(18,466)
Total assets	$	1,770,617				$	1,720,056
LIABILITIES AND STOCKHOLDERS' EQUITY
NOW accounts	$	176,648	$	15	0.03%	$	142,735	$	12	0.03%
Savings	265,542		187		0.29	231,311		138		0.24
Interest checking	29,398		28		0.39	61,522		76		0.50
Money market	289,140		86		0.12	279,234		83		0.12
Time deposits	260,628		389		0.61	267,047		671		1.02
Total interest bearing deposits	$	1,021,356	$	705	0.28%	$	981,849	$	980	0.40%
Federal funds purchased and securities sold under agreements to repurchase	13,792		10		0.29	41,507		26		0.25
Federal Home Loan Bank advances and other borrowings	77,397		252		1.32	98,152		396		1.64
Subordinated notes	49,486		324		2.66	49,486		310		2.54
Total borrowings	140,675		586		1.69	189,145		732		1.57
Total interest bearing liabilities	$	1,162,031	$	1,291	0.45%	$	1,170,994	$	1,712	0.59%
Demand deposits	449,175					399,429
Other liabilities	13,849					18,275
Total liabilities	$	1,625,055				$	1,588,698
Stockholders' equity	145,562					131,358
Total liabilities and stockholders' equity	$	1,770,617				$	1,720,056
Net interest income (FTE)			$	14,705				$	14,722
Net interest spread					3.36%					3.44%
Net interest margin					3.50%					3.61%

(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 three months ended March 31, 2022 and 2021. Such adjustments totaled $0.6 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively.

Three Months Ended March 31,

2021

2020

Interest

Rate

Interest

Rate

Average

Income/

Earned/

Average

Income/

Earned/

(In thousands)

Balance

Expense(1)

Paid(1)

Balance

Expense(1)

Paid(1)

ASSETS

Loans: (2) (3)













Commercial

$
257,623

$
4,159

6.55
%
$
199,082

$
2,570

5.19
%

Real estate construction - residential

33,492

394

4.77

23,467

323

5.54

Real estate construction - commercial

78,578

878

4.53

85,573

1,108

5.21

Real estate mortgage - residential

260,040

2,841

4.43

250,757

3,132

5.02

Real estate mortgage - commercial

621,877

6,600

4.30

573,133

7,005

4.92

Installment and other consumer

25,992

265

4.13

31,441

357

4.57

Total loans

$
1,277,602

$
15,137

4.81
%
$
1,163,453

$
14,495

5.01
%

Loans held for sale

$
5,500

$
25

1.84
%
$
1,892

$
5

1.06
%

Investment securities:













U.S. Treasury

$
3,006

$
8

1.08
%
$
758

$
4

2.12
%

U.S. government and federal agency obligations

38,605

146

1.53

37,167

195

2.11

Obligations of states and political subdivisions

61,456

452

2.98

36,785

270

2.95

Mortgage-backed securities

101,101

338

1.36

104,029

525

2.03

Other debt securities

11,539

143

5.03

4,402

60

5.48

Total investment securities

$
215,707

$
1,087

2.04
%
$
183,141

$
1,054

2.31
%

Other investment securities

5,982

83

5.63

6,253

100

6.43

Federal funds sold and interest bearing deposits in other financial institutions

149,325

102

0.28

82,215

325

1.59

Total interest earning assets

$
1,654,116

$
16,434

4.03
%
$
1,436,954

$
15,979

4.47
%

All other assets

84,733

83,136





Allowance for loan losses

(18,466)

(12,584)





Total assets

$
1,720,383

$
1,507,506





LIABILITIES AND STOCKHOLDERS' EQUITY













NOW accounts

$
231,312

$
138

0.24
%
$
185,642

$
290

0.63
%

Savings

142,735

12

0.03

100,862

22

0.09

Interest checking

61,521

76

0.50

47,295

173

1.47

Money market

279,234

83

0.12

270,520

462

0.69

Time deposits

267,047

671

1.02

323,103

1,165

1.45

Total interest bearing deposits

$
981,849

$
980

0.40
%
$
927,422

$
2,112

0.92
%

Federal funds purchased and securities sold under agreements to repurchase

41,507

26

0.25

26,290

37

0.57

Federal Home Loan Bank advances and other borrowings

98,152

396

1.64

108,031

632

2.35

Subordinated notes

49,486

310

2.54

49,486

501

4.07

Total borrowings

$
189,145

$
732

1.57
%
$
183,807

$
1,170

2.56
%

Total interest bearing liabilities

$
1,170,994

$
1,712

0.59
%
$
1,111,229

$
3,282

1.19
%

Demand deposits

399,429

261,244





Other liabilities

18,601

17,433





Total liabilities

1,589,024

1,389,906





Stockholders' equity

131,359

117,600





Total liabilities and stockholders' equity

$
1,720,383

$
1,507,506





Net interest income (FTE)

$
14,722

$
12,697



Net interest spread

3.44
%



3.28
%

Net interest margin

3.62
%



3.55
%

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

(3)Fees and costs on loans are included in interest income ($0.3 million and $1.5 million of PPP fees were included in commercial loan income for the three months ended March 31, 2022 and 2021, respectively).

~~(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 three months ended March 31, 2021 and 2020. Such adjustments totaled $332,000 and $171,000 for the three months ended March 31, 2021 and 2020, respectively.

~~(2)~~

~~Non-accruing loans are included in the average amounts outstanding.~~

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~~interest-bearing liabilities, identifying changes related to volumes and rates for the three months ended March 31, ~~2021~~2022 compared to the three months ended March 31, ~~2020.~~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.

Three Months Ended March 31,

2021 vs. 2020


Change due to

Total

Average

Average

(In thousands)

Change

Volume

Rate

Interest income on a fully taxable equivalent basis: (1)







Loans: (2) (3)







Commercial

$
1,589

$
858

$
731

Real estate construction - residential

71

123

(52)

Real estate construction - commercial

(230)

(86)

(144)

Real estate mortgage - residential

(291)

113

(404)

Real estate mortgage - commercial

(405)

565

(970)

Installment and other consumer

(92)

(58)

(34)

Loans held for sale

20

15

5

Investment securities:

U.S. Treasury

4

7

(3)

U.S. government and federal agency obligations

(49)

8

(57)

Obligations of states and political subdivisions

182

181

1

Mortgage-backed securities

(187)

(15)

(172)

Other debt securities

83

89

(6)

Other investment securities

(17)

(4)

(13)

Federal funds sold and interest bearing deposits in other financial institutions

(223)

156

(379)

Total interest income

455

1,952

(1,497)

Interest expense:







NOW accounts

(152)

58

(210)

Savings

(10)

7

(17)

Interest checking

(97)

41

(138)

Money market

(379)

15

(394)

Time deposits

(494)

(180)

(314)

Federal funds purchased and securities sold under agreements to repurchase

(11)

15

(26)

Federal Home Loan Bank advances and other borrowings

(236)

(54)

(182)

Subordinated notes

(191)

—

(191)

Total interest expense

(1,570)

(98)

(1,472)

Net interest income on a fully taxable equivalent basis

$
2,025

$
2,050

$
(25)


	Three Months Ended March 31,
	2022 vs. 2021
		Change due to
(In thousands)		Total Change		Average Volume		Average Rate
Interest income on a fully taxable equivalent basis: (1)
Loans: (2) (3)
Commercial		$	(1,327)	$	(543)	$	(784)
Real estate construction - residential		(138)		(111)		(27)
Real estate construction - commercial		118		183		(65)
Real estate mortgage - residential		(9)		228		(237)
Real estate mortgage - commercial		338		509		(171)
Installment and other consumer		(59)		(35)		(24)
Loans held for sale		(5)		(20)		15
Investment securities:
U.S. Treasury		(3)		2		(5)
U.S. government and federal agency obligations		(57)		(38)		(19)
Obligations of states and political subdivisions		568		521		47
Mortgage-backed securities		172		117		55
Other debt securities		13		23		(10)
Other investment securities		(8)		(8)		—
Federal funds sold		(3)		(2)		(1)
Interest bearing deposits in other financial institutions		(38)		(48)		10
Total interest income		$	(438)	$	778	$	(1,216)
Interest expense:
Savings		3		3		—
NOW accounts		49		22		27
Interest checking		(48)		(33)		(15)
Money market		3		3		—
Time deposits		(282)		(16)		(266)
Federal funds purchased and securities sold under agreements to repurchase		(16)		(19)		3
Federal Home Loan Bank advances and other borrowings		(144)		(75)		(69)
Subordinated notes		14		—		14
Total interest expense		$	(421)	$	(115)	$	(306)
Net interest income on a fully taxable equivalent basis		$	(17)	$	893	$	(910)

Financial results for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 reflected ~~an increase~~a decrease in net interest income, on a tax equivalent basis, of ~~$2.0 million,~~$17,000, or ~~15.6%~~0.1%. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) ~~increased~~decreased to ~~3.62%~~3.50% for the quarter ended March 31, 2022 compared to 3.61% for the quarter ended March 31, 2021. Net interest income and net interest margin decreased primarily due to a decrease in PPP fees and interest income in the three month comparative periods. The Company earned $0.3 million in PPP income for the three months ended March 31, ~~2021~~2022 compared to ~~3.55%~~$1.5 million for the three months ended March 31, ~~2020. Net interest income and~~

2021.

~~net interest margin increased primarily due to an increase in average earning assets and a decrease in rates paid on average interest bearing liabilities in the three month comparative periods.~~

Average interest-earning assets increased ~~$217.2~~$50.1 million, or ~~15.1%~~3.0%, to $1.70 billion for the quarter ended March 31, 2022 compared to $1.65 billion for the quarter ended March 31, 2021, and average interest-bearing liabilities decreased $9.0 million, or 0.8%, to $1.16 billion for the quarter ended March 31, 2022 compared to $1.17 billion for the quarter ended March 31, 2021.

Total interest income (expressed on a fully taxable equivalent basis) was $16.0 million for the three months ended March 31, ~~2021~~2022 compared to ~~$1.44 billion for the three months ended March 31, 2020.~~

~~Total interest income~~ ~~(expressed on a fully taxable equivalent basis) was~~ $16.4 million for the three months ended March 31, ~~2021 compared to $16.0 million for the three months ended March 31, 2020.~~2021. The Company’s rates earned on interest earning assets were 3.81% for the three months ended March 31, 2022 compared to 4.03% for the three months ended March 31, ~~2021 compared to 4.47% for the three March 31, 2020.~~

2021.

Interest income on loans held for investment was $14.1 million for the three months ended March 31, 2022 compared to $15.1 million for the three months ended March 31, ~~2021 compared to $14.5 million for the three months ended March 31, 2020.~~

2021.

Average loans outstanding increased ~~$114.1~~$37.6 million, or ~~9.8%~~2.9%, to ~~$1.27~~$1.32 billion for the ~~three months~~quarter ended March 31, ~~2021~~2022 compared to ~~$1.16~~$1.28 billion for the ~~three months~~quarter ended March 31, ~~2020.~~2021. The average yield on loans decreased to 4.34% for the quarter ended March 31, 2022 compared to 4.81% for the ~~three months~~quarter ended March 31, ~~2021 compared to 5.01% for the three months ended March 31, 2020.~~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 was ~~$1.1~~$1.8 million for the three months ended March 31, ~~2021~~2022 compared to $1.1 million for the three months ended March 31, ~~2020.~~

2021.

Average securities increased ~~$32.6~~$88.6 million, or ~~17.8%~~41.1%, to $304.3 million for the quarter ended March 31, 2022 compared to $215.7 million for the quarter ended March 31, 2021. The average yield on securities increased to 2.37% for the quarter ended March 31, 2022 compared to 2.04% for the quarter ended March 31, 2021. See the Liquidity Management section for further discussion.

Total interest expense decreased to $1.3 million for the three months ended March 31, ~~2021~~2022 compared to $183.1 million for the three months ended March 31, 2020. The average yield on securities decreased to 2.04% for the three months ended March 31, 2021 compared to 2.31% for the three months ended March 31, 2020. Management plans to grow the investment portfolio to $300.0 million by the end of 2021. See the ~~Liquidity Management~~ ~~section for further discussion.~~

~~Total interest expense~~ ~~decreased~~ to $1.7 million for the three months ended March 31, ~~2021 compared to $3.3 million for the three months ended March 31, 2020.~~2021. The Company’s rates paid on interest bearing liabilities were 0.45% for the three months ended March 31, 2022 compared to 0.59% for the three months ended March 31, ~~2021 compared~~2021. See the Liquidity Management section for further discussion.

Interest expense on deposits decreased to ~~1.19%~~$0.7 million for the three months ended March 31, ~~2020. See the~~ ~~Liquidity Management~~ ~~section for further discussion.~~

~~Interest expense on deposits~~ ~~decreased~~2022 compared to $1.0 million for the three months ended March 31, ~~2021~~2021.

Average interest-bearing deposits increased $39.5 million, or 4.0%, to $1.02 billion for the quarter ended March 31, 2022 compared to ~~$2.1~~$0.98 billion for the quarter ended March 31, 2021. The average cost of deposits decreased to 0.28% for the quarter ended March 31, 2022 compared to 0.40% for the quarter ended March 31, 2021.

Interest expense on borrowings decreased to $0.6 million for the three months ended March 31, ~~2020.~~

~~Average interest bearing deposits increased $54.4 million, or 5.9%, to $981.8 million for the three months ended March 31, 2021~~2022 compared to $927.4 million for the three months ended March 31, 2020. The average cost of deposits decreased to 0.40% for the three months ended March 31, 2021 compared to 0.92% for the three months ended March 31, 2020. Although offering rates remain low in response to lower market interest rates, growth in deposits was positively impacted in part by customers who deposited both economic stimulus payments and PPP loan proceeds.

~~Interest expense on borrowings~~ ~~was~~ $0.7 million for the three months ended March 31, ~~2021 compared~~2021.

Average borrowings decreased to ~~$1.2~~$140.7 million for the ~~three months~~quarter ended March 31, ~~2020.~~

~~Average borrowings increased~~2022 compared to $189.1 million for the ~~three months~~quarter ended March 31, ~~2021 compared to $183.8 million for the three months ended March 31, 2020.~~2021. The average cost of borrowings ~~decreased~~increased to 1.69% for the quarter ended March 31, 2022 compared to 1.57% for the ~~three months~~quarter ended March 31, ~~2021 compared to 2.56% for the three months ended March 31, 2020.~~2021. The ~~decrease~~increase in cost of funds primarily resulted from ~~lower~~higher market interest rates.

The increase in average borrowings during 2020 was primarily due to an increase in FHLB advances to fund liquidity needs as refinancing activity increased when rates dropped during the first quarter of 2020. This in turn was offset beginning in April of 2020 when the Company had an increase in liquidity due to participation in the CARES Act economic stimulus programs. The Company experienced significant deposit growth primarily due to stimulus checks, proceeds from

~~PPP loan funding, deferral of income tax payments,~~Non-interest Income and ~~customers holding on to savings due to uncertain times and has been repaying these advances as they come due since May of 2020. See the~~ ~~Liquidity Management~~ ~~section for further discussion.~~

~~Non-interest income and expense~~

Expense

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

Three Months Ended March 31,

(In thousands)

2021

2020

$ Change

% Change

Non-interest income









Service charges and other fees

$
739

$
799

$
(60)

(7.5)
%
Bank card income and fees

860

693

167

24.1

Trust department income

294

379

(85)

(22.4)

Real estate servicing fees, net

73

(87)

160

(183.9)

Gain on sales of mortgage loans, net

2,469

419

2,050

489.3

Other

8

88

(80)

(90.9)

Total non-interest income

$
4,443

$
2,291

$
2,152

93.9
%
Non-interest income as a % of total revenue *

23.6
%

15.5
%


	Three Months Ended March 31,
(Dollars in thousands)		2022			2021			$ Change		% Change
Non-interest income
Service charges and other fees		$	793		$	739		$	54	7.3	%
Bank card income and fees		961			860			101		11.7	%
Trust department income		340			294			46		15.6	%
Real estate servicing fees, net		231			73			158		216.4	%
Gain on sales of mortgage loans, net		888			2,469			(1,581)		(64.0)	%
Other		513			137			376		274.5	%
Total non-interest income		$	3,726		$	4,572		$	(846)	(18.5)	%
Non-interest income as a % of total revenue *		20.8		%	24.1		%

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

Total non-interest income ~~increased $2.2~~ decreased $0.8 million, or ~~93.9%~~18.5%, to ~~$4.4~~$3.7 million for the ~~three months~~quarter ended March 31, ~~2021~~2022 compared to ~~$2.3~~$4.6 million for the ~~three months~~quarter ended March 31, ~~2020.~~

~~Service charges and fees~~ ~~decreased $60,000, or 7.5%, to $739,000 for the three months ended March 31, 2021 compared to $799,000 for the three months ended March 31, 2020.~~2021. The decrease ~~in fees~~ was primarily due to ~~a refund~~the decrease in gain on sale of ~~service fees issued during the first quarter~~real estate mortgages due to lower volumes of ~~2021.~~

real estate mortgage loans sold as further discussed below.

Real estate servicing fees, net of the change in valuation of mortgage servicing rights (MSRs) increased ~~$160,000~~$0.2 million to ~~$73,000~~$0.2 million for the ~~three months~~quarter ended March 31, ~~2021~~2022 compared to ~~$(87,000)~~$0.1 million for the ~~three months~~quarter ended March 31, ~~2020.~~

2021.

Mortgage loan servicing fees earned on loans sold were $193,000 for the three months ended March 31, 2021 compared to $188,000 for the three months ended March 31, 2020. The current quarter's MSR valuation increased $22,000 from the prior linked quarter primarily due to decreased prepayment assumptions. The dramatic drop in market interest rates created an economic incentive for borrowers to refinance their existing home mortgage loans during 2020 that has slowed down in 2021.

~~The Company was servicing $288.9 million of mortgage loans at March 31, 2021 compared to $292.7 million and $270.6 million at December 31, 2020 and March 31, 2020, respectively.~~

~~Gain on sales of mortgage loans~~ ~~increased $2.1 million to $2.5~~$0.3 million for the three months ended March 31, ~~2021~~2022 compared to ~~$0.4~~$0.2 million for the three months ended March 31, ~~2020. During~~2021. The current quarter's MSR valuation increased $31,000 from the ~~fourth~~linked quarter primarily due to an increase in market rates. The Company was servicing $261.5 million of ~~2019,~~mortgage loans at March 31, 2022 compared to $270.0 million and $288.9 million at December 31, 2021 and March 31, 2021, respectively.

Gain on sales of mortgage loans decreased $1.6 million to $0.9 million for the ~~Company focused on creation and development of a new mortgage loan department and began offering new mortgage loan products in addition~~quarter ended March 31, 2022 compared to ~~Freddie and Fannie loans that are sold to~~$2.5 million for the ~~secondary market.~~quarter ended March 31, 2021. The Company sold ~~$66.3~~$29.1 million of loans for the three months ended March 31, ~~2021~~2022 compared to ~~$13.2~~$66.3 million for the three months ended March 31, ~~2020.~~

2021. Loans sold to the secondary market slowed after strong sales during the first six months of 2021.

Other Income ~~decreased $80,000, or 90.9%,~~ increased $0.4 million to ~~$8,000~~$0.5 million for the ~~three months~~quarter ended March 31, ~~2021~~2022 compared to ~~$88,000~~$0.1 million for the ~~three months~~quarter ended March 31, ~~2020.~~2021. The ~~decrease~~increase primarily resulted from ~~an increase in~~mortgage banking derivative income, interest component of net ~~losses on sales~~pension cost, and income received from the Missouri Department of ~~other real estate owned~~Transportation related to a land easement. During the fourth quarter of 2021 the Company elected to record the fair value of derivatives related to interest rate lock commitments and ~~net losses on disposal of fixed assets,~~mandatory commitments and ~~a reduction in rent received on foreclosed properties. These decreases were partially offset by an increase in brokerage income.~~

the related changes due to volume and rates through non-interest income and non-interest expense.

Three Months Ended March 31,

(in thousands)

2021

2020

Investment securities gains (losses), net





Available for sale securities:





Gross realized gains

$
2

$
—

Gross realized losses

—

—

Other-than-temporary impairment recognized

—

—

Other investment securities:





Fair value adjustments, net

12

(1)

Investment securities gains (losses), net

$
14

$
(1)


	Three Months Ended March 31,
(in thousands)		2022		2021
Investment securities (losses) gains, net
Available-for-sale securities:
Gross realized gains		$	—	$	2
Gross realized losses		—		—
Other-than-temporary impairment recognized		—		—
Other investment securities:
Fair value adjustments, net		(4)		12
Investment securities (losses) gains, net		$	(4)	$	14

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

Three Months Ended March 31,

(In thousands)

2021

2020

$ Change

% Change

Non-interest expense







Salaries

$
5,342

$
4,512

$
830

18.4
%
Employee benefits

1,804

1,609

195

12.1

Occupancy expense, net

771

766

5

0.7

Furniture and equipment expense

744

750

(6)

(0.8)

Processing, network and bank card expense

1,007

976

31

3.2

Legal, examination, and professional fees

404

367

37

10.1

Advertising and promotion

243

249

(6)

(2.4)

Postage, printing, and supplies

204

241

(37)

(15.4)

Loan expense

174

123

51

41.5

Other

958

898

60

6.7

Total non-interest expense

$
11,651

$
10,491

$
1,160

11.1
%
Efficiency ratio*

61.9
%

70.8
%

Number of full-time equivalent employees

304

303


	Three Months Ended March 31,
(Dollars in thousands)		2022			2021			$ Change		% Change
Non-interest expense
Salaries		$	5,156		$	5,342		$	(187)	(3.5)	%
Employee benefits		1,730			1,804			(73)		(4.1)
Occupancy expense, net		786			771			15		1.9
Furniture and equipment expense		755			744			11		1.5
Processing, network and bank card expense		1,142			1,007			135		13.4
Legal, examination, and professional fees		440			404			36		8.9
Advertising and promotion		293			243			50		20.6
Postage, printing, and supplies		190			204			(14)		(6.9)
Loan expense		145			174			(29)		(16.7)
Other		1,590			1,087			503		46.3
Total non-interest expense		$	12,227		$	11,780		$	447	3.8	%
Efficiency ratio*		68.4		%	62.1		%
Number of full-time equivalent employees		306			304

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

Total non-interest expense increased ~~$1.2~~$0.4 million ~~or 11.1%,~~ to ~~$11.7~~$12.2 million for the ~~three months~~quarter ended March 31, ~~2021~~2022 compared to ~~$10.5~~$11.8 million for the ~~three months~~quarter ended March 31, ~~2020.~~

2021.

Salaries ~~increased $0.8~~ decreased $0.2 million, or ~~18.4%~~3.5%, to $5.2 million for the quarter ended March 31, 2022 compared to $5.3 million for the ~~three months~~quarter ended March 31, 2021 ~~compared~~primarily due to ~~$4.5~~reduced commissions based on loan volume. See Gains on sales of mortgage loans discussion above.

Employee benefits decreased $0.1 million, or 4.1%, to $1.7 million for the ~~three months~~quarter ended March 31, 2020. The increases were primarily due to adding additional personnel to the new mortgage loan department. In addition, annual merit increases average approximately 4.0% each year and are awarded in the first quarter of each year.

~~Employee benefits~~ ~~increased $0.2 million, or 12.1%,~~2022 compared to $1.8 million for the ~~three months~~quarter ended March 31, ~~2021 compared to $1.6 million for the three months ended March 31, 2020.~~2021. The ~~increases~~decreases were primarily due to ~~an increase~~a decrease in 401(k) plan contributions ~~and payroll taxes,~~ partially offset by ~~a decrease~~an increase in medical premiums and pension cost due to ~~higher~~lower annual discount rate assumptions compared to the prior year's annual assumptions.

~~Legal, examination,~~Processing, network, and ~~professional fees~~bank card expense increased ~~$37,000,~~$0.1 million, or ~~10.1%~~13.4%, to ~~$404,000~~$1.1 million for the ~~three months~~quarter ended March 31, ~~2021~~2022 compared to ~~$367,000~~$1.0 million for the ~~three months~~quarter ended March 31, ~~2020.~~2021. These ~~increases are primarily related to an increase in audit expenses related to subsidiaries and professional fees related to a new investment adviser, partially offset by a decrease in legal fees.~~

~~Postage, printing, and supplies~~ decreased $37,000, or 15.4%, to $204,000 for the three months ended March 31, 2021 compared to $241,000 for the three months ended March 31, 2020. These decreases are primarily related to savings in stationary and supplies purchases and check printing expenses related to switching vendors.

~~Loan expense~~ ~~increased $51,000, or 41.5%, to $174,000 for the three months ended March 31, 2021 compared to $123,000 for the three months ended March 31, 2020. The~~ increases were primarily related to increases in ~~real estate loan~~debit card processing and ATM interchange expenses, ~~due to the growth~~partially offset by decreases in ~~loan volume sold to the secondary market.~~

network and processing expenses.

Other non-interest expense increased ~~$60,000,~~$0.5 million, or ~~6.7%~~46.3%, to ~~$958,000~~$1.6 million for the ~~three months~~quarter ended March 31, ~~2021~~2022 compared to ~~$898,000~~$1.1 million for the ~~three months~~quarter ended March 31, ~~2020.~~2021. The increases were primarily related to ~~an increase in the FDIC assessment~~mortgage banking derivative expense, telephone, travel, donations and software expense, ~~due to new mortgage loan software,~~ partially offset by a decrease in FDIC insurance assessments. During the ~~pension net~~fourth quarter of 2021 the Company elected to record the fair value of derivatives related to interest ~~cost. The increase in~~rate lock commitments and mandatory commitments and the ~~FDIC assessment was~~related changes due to ~~the Company had received the remaining FDIC assessment credit during the first quarter of 2020 that reduced the overall assessment due.~~

volume and rates through non-interest income and non-interest expense.

Income taxes

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented ~~72.6%~~76.0% of total assets as of March 31, ~~2021~~2022 compared to ~~73.2%~~70.2% as of December 31, ~~2020.~~

2021.

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

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

March 31, 2021

December 31, 2020

(In thousands)

Amount

% of Loans


2020
% of Loans


Commercial, financial, and agricultural (a)

$
251,943

19.7
%

$
272,918
21.2
%

Real estate construction − residential

33,962

2.7

29,692
2.3

Real estate construction − commercial

78,576

6.2

78,144
6.1

Real estate mortgage − residential

258,259

20.2

262,339
20.4

Real estate mortgage − commercial

628,178

49.2

617,133
48.0

Installment and other consumer

25,267

2.0

26,741
2.1

Total loans held for investment

$
1,276,185

100.0
%

$
1,286,967
100.0
%

~~(a)~~

~~Includes $56.3 million and $63.3 million SBA PPP loans, net as of March 31, 2021 and December 31, 2020, respectively.~~


	March 31, 2022				December 31, 2021
(Dollars in thousands)	Amount		% of Loans		Amount		% of Loans
Commercial, financial, and agricultural (a)	$	221,015	16.6	%	$	217,214	16.7	%
Real estate construction − residential	21,515		1.6		27,920		2.1
Real estate construction − commercial	103,478		7.8		91,369		7.0
Real estate mortgage − residential	287,879		21.6		279,346		21.5
Real estate mortgage − commercial	677,539		50.8		663,256		50.9
Installment and other consumer	22,497		1.7		23,028		1.8
Total loans held for investment	$	1,333,923	100.0	%	$	1,302,133	100.0	%

(a)Includes $2.3 million and $8.4 million of SBA PPP loans, net as of March 31, 2022 and December 31, 2021, respectively.

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

The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. During the three months ended March 31, ~~2021,~~2022, the Company sold approximately ~~$66.3~~$29.1 million of loans to investors compared to ~~$13.2~~$66.3 million for the three months ended March 31, ~~2020.~~2021. At March 31, ~~2021,~~2022, the Company was servicing approximately ~~$288.9~~$261.5 million of loans sold to the secondary market compared to ~~$292.7~~$270.0 million at December 31, ~~2020,~~2021, and ~~$270.6~~$288.9 million at March 31, ~~2020.~~

2021.

Risk Elements of the Loan Portfolio

Management, the senior loan committee, and internal loan review, formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Loans in excess of $2.0 million in aggregate and all adversely classified credits identified by management are reviewed by the senior loan committee. In addition, all other loans are reviewed on a risk weighted selection process. The senior loan committee reviews and reports to the ~~board~~Board of ~~directors, on a monthly basis:~~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 also determines which loans should be considered impaired. Management follows the guidance provided in the ~~FASB's~~Financial Accounting Standards Board's (FASB) ASC Topic 310-10-35 in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type,

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

Non-performing Assets

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

March 31,

December 31,

March 31,

(In thousands)

2021

2020

2020

Nonaccrual loans:







Commercial, financial, and agricultural

$
6,591

$
6,717

$
3,111

Real estate construction − residential

189

192

—

Real estate construction − commercial

198

200

408

Real estate mortgage − residential

1,917

2,105

3,211

Real estate mortgage − commercial

25,309

25,314

1,068

Installment and other consumer

29

31

46

Total

$
34,233

$
34,559

$
7,844

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







Real estate mortgage - residential

$
—

$
—

$
190

Installment and other consumer

—

17

27

Total

$
—

$
17

$
217

Total non-performing loans (a)

34,233

34,576

8,061

Other real estate owned and repossessed assets

12,140

12,291

12,769

Total non-performing assets

$
46,373

$
46,867

$
20,830

Loans held for investment

$
1,276,185

$
1,286,967

$
1,180,522

Allowance for loan losses to loans

1.44
%

1.41
%

1.33
%
Non-performing loans to loans (a)

2.68
%

2.69
%

0.68
%
Non-performing assets to loans (b)

3.63
%

3.64
%

1.76
%
Non-performing assets to assets (b)

2.68
%

2.70
%

1.36
%
Allowance for loan losses to non-performing loans

53.64
%

52.39
%

194.68
%


	March 31,			December 31,
(Dollars in thousands)	2022			2021

Non-accrual loans:
Commercial, financial, and agricultural	$	136		$	153

Real estate construction − commercial	100			105
Real estate mortgage − residential	1,258			1,129
Real estate mortgage − commercial	15,477			24,029
Installment and other consumer	125			43
Total	$	17,096		$	25,459
Loans contractually past - due 90 days or more and still accruing:



Real estate mortgage − residential	$	—		$	14

Installment and other consumer	3			—
Total	$	3		$	14
Total non-performing loans (a)	17,099			25,473
Other real estate owned and repossessed assets	9,758			10,525
Total non-performing assets	$	26,857		$	35,998

Loans held for investment	$	1,333,923		$	1,302,133
Allowance for loan losses to loans	1.07		%	1.30		%
Non-accrual loans to total loans	1.28		%	1.96		%
Non-performing loans to loans (a)	1.28		%	1.96		%
Non-performing assets to loans (b)	2.01		%	2.76		%
Non-performing assets to assets (b)	1.55		%	1.97		%
Allowance for loan losses to non-accrual loans	83.52		%	66.39		%
Allowance for loan losses to non-performing loans	83.51		%	66.36		%

~~(a)~~

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

~~(b)~~

~~Non-performing assets include non-performing loans and other real estate owned and repossessed assets.~~

(a)

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

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

Total non-performing assets were ~~$46.4~~$26.9 million, or ~~3.63%~~2.01% of total loans, at March 31, ~~2021~~2022 compared to ~~$46.9~~$36.0 million, or ~~3.64%~~2.76% of total loans, at December 31, ~~2020, and $20.8 million, or 1.76% of total loans, at March 31, 2020, respectively.~~

2021.

Total non-accrual loans at March 31, ~~2021~~2022 decreased ~~$326,000~~$8.4 million, or ~~0.9%~~32.8%, to ~~$34.2~~$17.1 million compared to ~~$34.6~~$25.5 million at December 31, ~~2020.~~2021. There were no$3,000 in loans past due 90 days and still accruing interest at March 31, ~~2021~~2022 compared to ~~$17,000~~$14,000 at December 31, ~~2020.~~2021. Other real estate and repossessed assets were ~~$12.1~~$9.8 million and ~~$12.3~~$10.5 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. During the three months ended March 31, ~~2021,~~2022 there were no additions to other real estate owned compared to $30,000 of non-accrual loans, net of charge-offs taken, ~~moved to other real estate owned and repossessed assets compared to no loans~~ during the three months ended March 31, ~~2020.~~

2021. During the first quarter ended March 31, 2022, an additional $52,000 charge-off was recorded related to a property that moved into other real estate owned at the end of the fourth quarter of 2021.

As of March 31, ~~2021,~~2022, approximately ~~$8.3~~$21.9 million ~~compared to $6.0 million and $5.8 million at December 31, 2020 and March 31, 2020, respectively,~~ of loans classified as substandard, which include performing TDRs, and ~~are~~ not included in the non-performing asset table, were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment ~~terms.~~terms, compared to $13.8

million at December 31, 2021. Management believes the allowance for loan losses was sufficient to cover the risks and probable losses related to such loans at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

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

March 31, 2021

December 31, 2020


Number of

Recorded

Specific

Number of

Recorded

Specific
(In thousands)

contracts

Investment

Reserves

contracts

Investment

Reserves
Performing TDRs












Commercial, financial and agricultural

7

$
817

$
37

7

$
835

$
90
Real estate mortgage − residential

5

1,217

46

5

1,521

28
Real estate mortgage − commercial

2

338

7

2

343

7
Installment and other consumer

4

42

5

5

77

10
Total performing TDRs

18

$
2,414

$
95

19

$
2,776

$
135
Non-performing TDRs












Commercial, financial and agricultural

1

$
3

$
—

1

$
4

$
1
Real estate mortgage − residential

8

876

77

8

895

78
Total non-performing TDRs

9

$
879

$
77

9

$
899

$
79
Total TDRs

27

$
3,293

$
172

28

$
3,675

$
214


	March 31, 2022					December 31, 2021
(Dollars in thousands)	Number of contracts	Recorded Investment		Specific Reserves		Number of contracts	Recorded Investment		Specific Reserves
Performing TDRs
Commercial, financial and agricultural	2	$	183	$	23	2	$	188	$	24
Real estate mortgage − residential	5	1,170		46		6	1,262		56
Real estate mortgage − commercial	2	323		38		2	328		38
Installment and other consumer	2	15		2		2	17		2
Total performing TDRs	11	$	1,691	$	109	12	$	1,795	$	120
Non-performing TDRs

Real estate mortgage − residential	5	$	551	$	70	5	$	561	$	39


Total non-performing TDRs	5	$	551	$	70	5	$	561	$	39
Total TDRs	16	$	2,242	$	179	17	$	2,356	$	159

At March 31, ~~2021,~~2022, loans classified as TDRs totaled ~~$3.3~~$2.2 million, with ~~$172,000~~$0.2 million of specific reserves, compared to ~~$3.7~~$2.4 million of loans classified as TDRs, with ~~$214,000~~$0.2 million of specific reserves at December 31, ~~2020.~~2021. Non-performing loans, included ~~$0.9~~$0.6 million of loans classified as TDRs at March 31, ~~2021~~2022 compared to ~~$0.9~~$0.6 million at December 31, ~~2020.~~2021. Both performing and ~~nonperforming~~non-performing TDRs are considered impaired loans. When an individual loan is determined to be a TDR, the amount of impairment is based upon the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the underlying collateral less applicable selling costs if the loan is collateral dependent. The net decrease in total TDRs from December 31, ~~2020~~2021 to March 31, ~~2021~~2022 was primarily due to ~~$382,000~~$115,000 of payments received on TDRs.

Allowance for Loan Losses and Provision

Allowance for Loan Losses

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

March 31,

December 31,

(In thousands)

2021

2020

Allocation of allowance for loan losses at end of period:





Commercial, financial, and agricultural

$
4,676

$
5,121

Real estate construction − residential

309

213

Real estate construction − commercial

532

475

Real estate mortgage − residential

2,594

2,679

Real estate mortgage − commercial

9,904

9,354

Installment and other consumer

245

264

Unallocated

101

7

Total

$
18,361

$
18,113


	March 31, 2022				December 31, 2021
(In thousands)	Amount		% of loans in each category to total loans		Amount		% of loans in each category to total loans
Allocation of allowance for loan losses at end of period:
Commercial, financial, and agricultural	$	2,830	16.6	%	$	2,717	16.7	%
Real estate construction − residential	60		1.6		137		2.1
Real estate construction − commercial	664		7.8		588		7.0
Real estate mortgage − residential	2,578		21.6		2,482		21.5
Real estate mortgage − commercial	7,692		50.8		10,662		50.9
Installment and other consumer	273		1.7		256		1.8
Unallocated	182		—		61		—
Total	$	14,279	100.0	%	$	16,903	100.0	%

The allowance for loan losses ~~(ALL)~~ was ~~$18.4~~$14.3 million, or ~~1.44%~~1.07%, of loans outstanding at March 31, ~~2021~~2022 compared to ~~$18.1~~$16.9 million, or ~~1.41%~~1.30%, of loans outstanding at December 31, ~~2020, and $15.7 million, or 1.33% at March 31, 2020.~~2021. The ratio of the allowance for loan losses to ~~nonperforming~~non-performing loans was ~~53.64%~~83.51% at March 31, ~~2021,~~2022, compared to ~~52.39%~~66.36% at December 31, ~~2020, and 194.68% at March 31, 2020.~~

2021.

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

March 31,

December 31,

(In thousands)

2021

2020

Allocation of allowance for loan losses:





Individually evaluated for impairment − specific reserves

$
5,144

$
5,113

Collectively evaluated for impairment − general reserves

13,217

13,000

Total

$
18,361

$
18,113


(In thousands)	March 31, 2022		December 31, 2021
Allocation of allowance for loan losses:
Individually evaluated for impairment − specific reserves	$	317	$	3,044
Collectively evaluated for impairment − general reserves	13,962		13,859
Total	$	14,279	$	16,903

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At March 31, ~~2021, $5.1~~2022, $0.3 million of the Company’s ALL was allocated to impaired loans totaling approximately ~~$36.6~~$18.8 million compared to ~~$5.1~~$3.0 million of the Company’s ALL allocated to impaired loans totaling approximately ~~$37.3~~$27.3 million at December 31, ~~2020.~~2021. Management determined that ~~$12.6~~$16.1 million, or ~~34%~~86%, of total impaired loans required no reserve allocation at March 31, ~~2021~~2022 compared to ~~$11.9~~$16.6 million, or ~~32%~~61%, at December 31, ~~2020,~~2021, primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by asset type. Loans not individually evaluated are aggregated by risk characteristics and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type. The look-back period begins with loss history in the first quarter 2012 as the starting point through the current quarter and it will continue to include this starting point going forward. Management determined that the look-back period should be expanded until a loss producing downturn is recognized. This would be accomplished by allowing the look-back period to shift forward by eliminating the earliest loss period and replenishing it with losses from the most recent period. The look-back period is consistently evaluated for relevance given the current facts and circumstances.

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

The changes in the allowance for loan losses ~~changes~~ from December 31, ~~2020~~2021 to March 31, ~~2021~~2022 primarily resulted from ~~net recovery activity,~~transitioning loans impacted by COVID-19 from non-accrual status back to performing status. This transition was made according to the Company’s established internal loan policies regarding loan performance as ~~there was no provision recorded during~~well as consultation with industry experts. This transition back to performing status also reduced specific reserves based on the ~~quarter given~~attributes of the individual loan ~~portfolio remained stable from December 31, 2020.~~collateral, to the general allocations method described above. The Company continues to monitor the risks associated with its ~~nonperforming loans and the remaining loans modified under the CARES Act.~~

non-performing loans.

Provision

The Company recognized a negative provision expense for loan losses ~~was required~~of $2.5 million for the three months ended March 31, ~~2021~~2022 compared to ~~a $3.3 million~~no provision expense for the three months ended March 31, ~~2020.~~2021. The ~~decreased~~negative provision expense primarily resulted from the release of specific reserves totaling $2.8 million in the first quarter of ~~2021 compared~~2022 due to returning significant loan balances to accrual from non-accrual status or other collateral valuation adjustments. No provision was required during the first

quarter of ~~2020 resulted~~2021 primarily ~~from~~due to the impact of net recoveries and improvement in

the economic outlook as the economy ~~begins~~began to recover from the impacts of the COVID-19 ~~pandemic. Criticized loan levels remain elevated when compared to pre-pandemic levels due to the downgrade of loans to borrowers that have been impacted by the COVID-19 pandemic.~~

pandemic experienced throughout 2020.

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

Three Months Ended

March 31,

(In thousands)

2021

2020

Analysis of allowance for loan losses:





Balance beginning of period

$
18,113

$
12,477

Charge-offs:

Commercial, financial, and agricultural

27

41

Real estate construction − residential

—

—

Real estate construction − commercial

—

—

Real estate mortgage − residential

—

19

Real estate mortgage − commercial

23

22

Installment and other consumer

57

52

Total charge-offs

$
107

$
134

Recoveries:





Commercial, financial, and agricultural

$
149

$
25

Real estate construction − residential

13

—

Real estate construction − commercial

—

—

Real estate mortgage − residential

168

9

Real estate mortgage − commercial

—

2

Installment and other consumer

25

14

Total recoveries

$
355

$
50

Net charge-offs (recoveries)

(248)

84

Provision for loan losses

—

3,300

Balance end of period

$
18,361

$
15,693


	Three Months Ended March 31,
	2022						2021
(Dollars in thousands)	Net Charge-offs (Recoveries)		Average Loans		Net (Recoveries) Charge-offs / Average Loans		Net Charge-offs (Recoveries)		Average Loans		Net (Recoveries) Charge-offs / Average Loans
Commercial, financial, and agricultural	$	15	$	220,888	0.01	%	$	(122)	$	257,623	(0.05)	%
Real estate construction − residential	—		23,455		—		(13)		33,492		(0.04)
Real estate construction − commercial	—		95,935		—		—		78,578		—
Real estate mortgage − residential	(3)		281,824		—		(168)		260,040		(0.06)
Real estate mortgage − commercial	73		670,713		0.01		23		621,877		—
Installment and other consumer	39		22,342		0.17		32		25,992		0.12
Total	$	124	$	1,315,157	0.01	%	$	(248)	$	1,277,602	(0.02)	%

Net Loan Charge-offs (recoveries)

The Company’s net ~~recoveries~~charge-offs were ~~$248,000~~$0.1 million, or 0.01%, of average loans for the three months ended March 31, ~~2021~~2022 compared to net ~~charge-offs~~recoveries of ~~$84,000~~$0.2 million, (0.02)%, for the three months ended March 31, ~~2020. During the first quarter of 2021 the Company received commercial and a real estate mortgage recoveries primarily related two loan relationships.~~

2021.

Loans Held For Sale

The Company designates certain long-term fixed rate personal real estate loans as held for ~~sale, and~~sale. In the fourth quarter of 2021, the Company ~~carries them~~elected the fair value option for all newly originated long-term personal real estate loans held for sale. As of December 31, 2021, all loans held for sale were carried at ~~the lower of cost or~~ fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, and PennyMac and other various secondary market investors. At March 31, ~~2021,~~2022, the carrying amount of these loans was ~~$6.3~~$0.9 million compared to ~~$5.1~~$2.2 million at December 31, ~~2020.~~

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

2021.

Liquidity and Capital Resources

Liquidity Management

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet ~~the~~these 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 as the primary sources of funding.

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

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

March 31,

December 31,

(In thousands)

2021

2020

Federal funds sold and other interest-bearing deposits

$
128,207

$
161,128

Certificates of deposit in other banks

8,897

9,376

Available-for-sale investment securities

238,142

198,030

Total

$
375,246

$
368,534


(In thousands)	March 31, 2022		December 31, 2021
Federal funds sold	$	419	$	7,122
Other interest-bearing deposits	27,552		135,500
Certificates of deposit in other banks	4,701		5,193
Available-for-sale investment securities	286,754		310,870
Total	$	319,426	$	458,685

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 ~~$238.1~~$286.8 million at March 31, ~~2021~~2022 and included an unrealized net ~~gain~~loss of ~~$0.7~~$24.3 million. The portfolio includes projected maturities and ~~mortgage backed~~mortgage-backed securities pay-downs of approximately ~~$5.0~~$5.5 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s ~~deposit base.~~

borrowings.

The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes as required or permitted by law. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company’s unpledged securities in the ~~available for sale~~available-for-sale portfolio totaled approximately ~~$40.6~~$97.3 million and ~~$44.1~~$35.5 million, respectively.

Total investment securities pledged for these purposes were as follows:

March 31,

December 31,

(In thousands)

2021

2020

Investment securities pledged for the purpose of securing:





Federal Reserve Bank borrowings

$
10,824

$
9,115

Federal funds purchased and securities sold under agreements to repurchase

51,625

59,695

Other deposits

135,122

85,130

Total pledged, at fair value

$
197,571

$
153,940


(In thousands)	March 31, 2022		December 31, 2021
Investment securities pledged for the purpose of securing:
Federal Reserve Bank borrowings	$	9,448	$	10,778
Federal funds purchased and securities sold under agreements to repurchase	6,448		28,769
Other deposits	173,592		235,829
Total pledged, at fair value	$	189,488	$	275,376

Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and time deposits less than $250,000, less all brokered deposits under $250,000. At March 31, ~~2021,~~2022, such deposits totaled ~~$1.3~~$1.4 billion and represented ~~92.4%~~92.8% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships.

Core deposits at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:

March 31,

December 31,

(In thousands)

2021

2020

Core deposit base:

Non-interest bearing demand

$
431,035

$
382,492

Interest checking

264,210

292,375

Savings and money market

414,215

391,248

Other time deposits

177,943

183,072

Total

$
1,287,403

$
1,249,187

~~Time~~


(In thousands)	March 31, 2022		December 31, 2021
Core deposit base:
Non-interest bearing demand	$	450,225	$	453,066
Interest checking	277,988		357,825
Savings and money market	453,967		440,331
Other time deposits	168,568		175,827
Total	$	1,350,748	$	1,427,049

Estimated uninsured deposits ~~and~~totaled $430.4 million, including $84.7 million of certificates of deposit, ~~of $250,000 and greater~~ at March 31, ~~2021 and~~2022, compared to $513.5 million, including $69.1 million of certificates of deposit, at December 31, ~~2020 were $74.4 million and $91.3 million, respectively.~~2021. The Company had brokered deposits totaling ~~$30.2~~$20.2 million and ~~$40.2~~$20.2 million at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

Other components of liquidity are the level of borrowings from ~~third party~~third-party sources and the availability of future credit. The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As of March 31, ~~2021,~~2022, under agreements

with these unaffiliated banks, the Bank may borrow up to $60.0 million in federal funds on an unsecured basis and ~~$10.4~~$8.9 million on a secured basis. There were no federal funds purchased outstanding at March 31, ~~2021.~~2022. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the Company’s investment portfolio. At March 31, ~~2021~~2022, there were ~~$42.0~~$5.5 million in repurchase agreements. The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window, although no such borrowings were outstanding at March 31, ~~2021.~~

2022.

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has access to credit products of the FHLB. As of March 31, ~~2021,~~2022, the Bank had ~~$97.6~~$77.4 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

Borrowings outstanding at March 31, ~~2021~~2022 and December 31, ~~2020~~2021 were as follows:

March 31,

December 31,

(In thousands)

2021

2020

Borrowings:

Federal funds purchased and securities sold under agreements to repurchase

$
42,018

$
45,154

Federal Home Loan Bank advances

97,600

106,660

Subordinated notes

49,486

49,486

Other borrowings

14

14

Total

$
189,118

$
201,314


(In thousands)	March 31, 2022		December 31, 2021
Borrowings:
Federal funds purchased and securities sold under agreements to repurchase	$	5,514	$	23,829
Federal Home Loan Bank advances	77,357		77,418
Subordinated notes	49,486		49,486

Total	$	132,357	$	150,733

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 FHLB establishes a collateral value from which the Company may draw advances against this collateral. This collateral is also used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings

from the discount window.

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

March 31,

December 31,

2021

2020






Federal







Federal


Funds

Funds

Federal

Purchased

Federal

Purchased

(In thousands)

FHLB

Reserve Bank

Lines

Total

FHLB

Reserve Bank

Lines

Total
Advance equivalent

$
281,044

$
10,388

$
60,000

$
351,432

$
300,633

$
8,898

$
56,835

$
366,366
Letters of credit

(18,000)

—

—

(18,000)

(123,000)

—

—

(123,000)
Advances outstanding

(97,599)

—

—

(97,599)

(106,660)

—

—

(106,660)
Total available

$
165,445

$
10,388

$
60,000

$
235,833

$
70,973

$
8,898

$
56,835

$
136,706


	March 31, 2022								December 31, 2021
(In thousands)	FHLB		Federal Reserve Bank		Federal Funds Purchased Lines		Total		FHLB		Federal Reserve Bank		Federal Funds Purchased Lines		Total
Advance equivalent	$	278,761	$	8,947	$	60,000	$	347,708	$	273,479	$	10,384	$	60,000	$	343,863
Letters of credit	—		—		—		—		(31,000)		—		—		(31,000)
Advances outstanding	(77,357)		—		—		(77,357)		(77,418)		—		—		(77,418)
Total available	$	201,404	$	8,947	$	60,000	$	270,351	$	165,061	$	10,384	$	60,000	$	235,445

At March 31, ~~2021,~~2022, loans of ~~$552.5~~$567.4 million were pledged atto the Federal Home Loan Bank as collateral for borrowings and letters of credit. At March 31, ~~2021,~~2022, investments ~~totaling $10.8~~with a market value of $9.4 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Based upon the above, management believes the Company has more than adequate liquidity, both on balance sheet and through the additional funding capacity with the FHLB, the Federal Reserve Bank and Federal funds purchased lines to meet future anticipated ~~needs; this includes~~needs in both the impact of the COVID-19 pandemic that is difficult to currently measure. Management believes the most significant impact to the Company’s liquidity position in the short-term may be related to the PPP as loans are expected to be forgivenshort and ~~depositors may choose to redirect their funds. The longer-term impact on the Company's liquidity from the pandemic will be closely monitored and addressed as needs arise.~~

~~The Company also has available additional liquidity having pledged the PPP loans to the FHLB as collateral for available advances.~~

long-term.

Sources and Uses of Funds

Cash and cash equivalents were ~~$146.7~~$50.5 million at March 31, ~~2021~~2022 compared to ~~$180.4~~$159.9 million at December 31, ~~2020.~~2021. The ~~$33.6~~$109.4 million decrease resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the three months ended March 31, ~~2021.~~2022. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of ~~$3.6~~$4.4 million for the three months ended March 31, ~~2021.~~

2022.

Investing activities consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio used total cash of ~~$32.4 million.~~$33.1 million during the three months ended March 31, 2022. The cash outflow primarily consisted of ~~$62.3~~a net increase in loans held for investment of $31.8 million ~~purchase~~and $14.6 million in purchases of investment securities partially offset by ~~an $11.0 million decrease in loans and $18.2~~$13.5 million from maturities and calls and sales of investment securities. ~~Management hopes to grow the investment portfolio to $300.0 million by the end of 2021.~~

Financing activities used total cash of ~~$4.8~~$80.7 million during the three months ended March 31, 2022, resulting primarily from a ~~$38.2~~$66.2 million decrease in interest-bearing transaction accounts and ~~time~~a $18.3 million decrease in securities sold under agreements to repurchase. The decrease in interest-bearing accounts was due primarily to reductions in deposits ~~and a $9.1 million repayment~~for public funds customers, resulting from the distribution of FHLB advances, partially offset by a $48.5 million increase in demand deposits. The growth in demand deposits was positively impacted by customers who deposited both economic stimulus payments and PPP loan proceeds into demand accounts. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2021.

prior year tax collections.

In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company had ~~$421.6~~$418.5 million in unused loan commitments and standby letters of credit

as of March 31, ~~2021.~~2022. Although the Company’s current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low.

The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing liquidity needs primarily include funding its operating expenses, ~~and~~ paying cash dividends to its ~~shareholders.~~shareholders and, to a lesser extent, repurchasing its shares of common stock. The Company paid cash dividends to its shareholders totaling approximately ~~$842,000~~$1.0 million and ~~$753,000~~$0.8 million for the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $3.5 million and $4.5 million ~~and no~~in dividends to the Company during the three months ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. At March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had cash and cash equivalents totaling ~~$3.0~~$4.1 million and ~~$2.0~~$1.8 million, respectively.

Subject to declaration by the Company's Board of Directors, the Company expects to continue paying quarterly cash dividends as a part of its current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of the Company's Board of Directors and compliance with applicable regulatory capital requirements.

The Company's 2019 Repurchase Plan was amended during the second quarter 2021 to authorize the purchase of up to an additional $5.0 million in market value of the Company's common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases. During the first quarter 2022, the Company repurchased 23,536 common shares at an average cost of $25.75 per share totaling $0.6 million.

The repurchases under these authorizations may be effectuated in the open market, by block purchase, in privately negotiated transactions, or through other transactions managed by broker-dealers, or any combination thereof. No time limit was set for the completion of these authorized share repurchases. As of March 31, 2022, $4.4 million remained available for the repurchase of shares pursuant to the share repurchase authorizations. The Company may continue to repurchase shares under its share repurchase authorizations, but the amount and timing of such repurchases will be dependent on a number of factors, including the price of its common stock and other cash flow needs. There is no assurance that the Company will repurchase up to the full amount remaining under its share repurchase authorizations.

Capital Management

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

The Basel III regulatory capital framework (the "Basel III Capital Rules") adopted by U.S. federal regulatory authorities, among other things, (i) establishes the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consist of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) requires that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) defines the scope of the deductions/adjustments to the capital measures.

Additionally, the Basel III Capital Rules require that the Company maintain a 2.5% 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 March 31, ~~2021,~~2022, 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 March 31, ~~2021~~2022 and December 31, ~~2020.~~2021. Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be ~~well capitalized.~~well-capitalized. The regulatory authorities can apply changes in 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 ~~our~~the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue to classify ~~our~~its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.

Under the Basel III requirements, at March 31, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as of periods indicated:

Minimum Capital

Required to be

Required - Basel III

Considered Well-

Actual

Fully Phased-In

Capitalized

(in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

March 31, 2021

Total Capital (to risk-weighted assets):

Company

$
196,553

14.80
%
$
139,475

10.50
%
$
—

N.A
%
Bank

193,745

14.62

139,119

10.50

132,495

10.00

Tier 1 Capital (to risk-weighted assets):

Company

$
172,591

13.21
%
$
112,909

8.50
%
$
—

N.A
%
Bank

177,159

13.37

112,620

8.50

105,996

8.00

Common Equity Tier 1 Capital (to risk-weighted assets):

Company

$
131,925

9.93
%
$
92,984

7.00
%
$
—

N.A
%
Bank

177,159

13.37

92,746

7.00

86,121

6.50

Tier 1 leverage ratio (to adjusted average assets):

Company

$
175,494

10.22
%
$
68,654

4.00
%
$
—

N.A
%
Bank

177,159

10.37

68,315

4.00

85,394

5.00

December 31, 2020

Total Capital (to risk-weighted assets):

Company

$
193,220

14.97
%
$
135,518

10.50
%
$
—

N.A
%
Bank

191,504

14.87

135,186

10.50

128,748

10.00

Tier 1 Capital (to risk-weighted assets):

Company

$
172,591

13.37
%
$
109,705

8.50
%
$
—

N.A
%
Bank

175,384

13.62

109,436

8.50

102,999

8.00

Common Equity Tier 1 Capital (to risk-weighted assets)

Company

$
129,061

10.00
%
$
90,345

7.00
%
$
—

N.A
%
Bank

175,384

13.62

90,124

7.00

83,686

6.50

Tier 1 leverage ratio:

Company

$
172,591

10.19
%
$
67,724

4.00
%
$
—

N.A
%
Bank

175,384

10.41

67,394

4.00

84,243

5.00


	Actual				Minimum Capital Required - Basel III Fully Phased-In				Required to be Considered Well- Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2022
Total Capital (to risk-weighted assets):
Company	$	213,114	14.66	%	$	152,691	10.50	%	$	—	N.A%
Bank	211,027		14.52	%	152,575		10.50	%	145,309		10.00	%
Tier 1 Capital (to risk-weighted assets):
Company	$	195,471	13.44	%	$	123,607	8.50	%	$	—	N.A%
Bank	196,588		13.53	%	123,513		8.50	%	116,248		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets):
Company	$	150,675	10.36	%	$	101,794	7.00	%	$	—	N.A%
Bank	196,588		13.53	%	101,717		7.00	%	94,451		6.50	%
Tier 1 leverage ratio (to adjusted average assets):
Company	$	195,471	10.99	%	$	71,122	4.00	%	$	—	N.A%
Bank	196,588		11.12	%	70,747		4.00	%	88,434		5.00	%

December 31, 2021
Total Capital (to risk-weighted assets):
Company	$	210,726	14.79	%	$	149,640	10.50	%	$	—	N.A%
Bank	210,148		14.78	%	149,339		10.50	%	142,228		10.00	%
Tier 1 Capital (to risk-weighted assets):
Company	$	193,663	13.59	%	$	121,137	8.50	%	$	—	N.A%
Bank	193,085		13.58	%	120,894		8.50	%	113,782		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets):
Company	$	145,663	10.22	%	$	99,760	7.00	%	$	—	N.A%
Bank	193,085		13.58	%	99,559		7.00	%	92,448		6.50	%
Tier 1 leverage ratio:
Company	$	193,663	11.01	%	$	70,342	4.00%		$	—	N.A%
Bank	193,085		11.04	%	69,959		4.00	%	87,449		5.00	%

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Asset/Liability and Interest Rate Risk

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

The principal objective of the Company’s asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing earnings and preserving adequate levels of liquidity and capital. The asset and liability management function is under the guidance of the ~~Asset Liability Committee~~ALCO with direction from ~~direction of~~ the Board of Directors. The ~~Asset Liability Committee~~ALCO meets monthly to review, among other things, the sensitivity of the Company’s assets and liabilities to interest rate changes, local and national market

conditions and rates. The ~~Asset Liability Committee~~ALCO also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.

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

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

The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 200 and 100 basis point decrease in interest rates on net interest income based on the interest rate risk model at March 31, ~~2021~~2022 and December 31, ~~2020.~~

% Change in projected net interest income
Hypothetical shift in interest rates

March 31,

December 31,

(bps)

2021

2020

200

(1.06)
%

0.73
%
100

(1.50)
%

0.10
%
(100)

(2.73)
%

(1.28)
%
(200)

(3.34)
%

(1.81)
%

2021.


	% Change in projected net interest income
Hypothetical shift in interest rates	March 31,		December 31,
(bps)	2022		2021
200	1.84%		4.47%
100	0.96%		1.80%
(100)	(2.16)	%	(3.12)	%
(200)	(3.28)	%	(4.02)	%

The change in ~~our~~the Company’s interest rate risk exposure from December 31, ~~2020~~2021 to March 31, ~~2021~~2022 was primarily due to ~~the~~a decrease in market rates over this period that has caused the yields for both interest-bearing liabilities and earning assets to be lower. While the percent change of net interest income is lower than the current position, the increase in fedFederal funds sold and ~~PPP loan program have caused an overall shortening of the balance sheet, where assets would be repricing faster than liabilities. These factors have caused~~interest bearing deposits in other financial institutions. This will cause the Company’s balance sheet to become ~~more~~less asset ~~sensitive in the next 12 months, where interest rate increases translate into higher net interest income.~~sensitive. Management believes the change in projected net interest income from interest rate shifts of up 200 bps and down 200 bps is an acceptable level of interest rate risk.

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

Effects of Inflation

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

Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on the Company’s operations for the three months ended March 31, ~~2021.~~

2022.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Company’s management has evaluated, with the participation of our principal executive and principal financial officers, the effectiveness of our disclosure controls and procedures as defined in Rules 13a – 15(e) or 15d – 15(e) of the Securities Exchange Act of 1934 as of March 31, ~~2021.~~2022. Based upon and as of the date of that evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were designed, and were effective, to ~~ensure~~provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported as and when required. It should be noted that any system of disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any system of disclosure controls and procedures is based in part upon assumptions about the likelihood of future events. Because of these and other inherent limitations of any such system, there can be no assurance that any design will always succeed in achieving its stated goals under all circumstances.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Securities Exchange ~~Act)~~Act of 1934) that occurred during the three months ended March 31, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Impact of New Accounting Standards

Financial Instruments:

In March 2022 the FASB issued ASU 2022-02 Financial Instruments–Credit Losses (Topic 326); Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance on troubled debt restructurings for creditors in ASC 310-40 and amends the guidance on “vintage disclosures” to require disclosure of current-period gross write-offs by year of origination. The ASU also updates the requirements related to accounting for credit losses under ASC 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The amendments in this update will be effective for fiscal years beginning after December 15, 2022 for entities that have adopted the amendments in ASU 2016-13, Financial Instruments–Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments. The Company is evaluating the additional disclosure requirements and does not expect them to have a material effect on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses(Topic 326):Measurement of Credit Losses on Financial Instruments (CECL). The revised accounting guidance will remove all recognition thresholds and will require a company to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. It also amends the credit loss measurement guidance for available-for-sale debt securities and beneficial interests in securitized financial assets. This new accounting guidance will be effective for interim and annual reporting periods beginning after December 15, 2022. While the Company generally expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, the Company has not determined the magnitude of any such one-time adjustment or the overall impact of the new guidance on the Company's consolidated financial statements. The Company has formed a committee and is continuing to evaluate the impact of the ASU's adoption on the Company's consolidated financial statements by assessing different credit risk models. In 2019, 2020 and ~~2020,~~2021, the Company modeled the various methods prescribed in the ASU against the

identified loan segments. The Company will continue to run parallel computations as it continues to evaluate the impact of adoption of this ASU on January 1, 2023.

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

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There has been no material change in risk factors previously disclosed under Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~

2021.

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

The Company's Purchases of Equity Securities

The following table summarizes the purchases made by or on behalf of the Company or certain affiliated purchasers of shares of the Company's common stock during the ~~three months~~quarter ended March 31, ~~2021:~~

2022:


Period	(a) Total Number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs *
January 1-31, 2022	—		$	—	—	$	5,000,000
February 1-28, 2022	14,062		$	25.56	14,062	$	4,640,575
March 1-31, 2022	9,474		$	26.04	9,474	$	4,393,903
Total	23,536	23,536	$	25.75	23,536	$	4,393,903

(d) Maximum Number (or

(c) Total Number of

Approximate Dollar

Shares (or Units)

Value) of Shares (or

(a) Total Number of

(b) Average Price

Purchased as Part of

Units) that May Yet Be

Shares (or Units)

Paid per Share (or

Publicly Announced Plans

Purchased Under the
Period

Purchased

Unit)

or Programs

Plans or Programs *

January 1-31, 2021

116,490

$
18.25

116,490

$
1,966,362
February 1-28, 2021

1,142

$
18.76

1,142

$
1,944,942
March 1-31, 2021

—

$
—

—

$
1,944,942
Total

117,632

$
18.26

117,632

$
1,944,942

* InThe Company's 2019 Repurchase Plan was amended during the ~~Company's Board of Directors authorized~~second quarter 2021 to authorize the purchase of up to an additional $5.0 million in market value of the Company's common stock. Management was given discretion to determine the number and pricing of the shares to be purchased, as well as the timing of any such purchases. As of March 31, ~~2021, $1.9~~2022, $4.4 million remained available for ~~the repurchase of shares~~share repurchases pursuant to ~~the share repurchase~~that authorization.


~~Item 3.~~	~~Defaults Upon Senior Securities~~	~~None~~

~~Item 4.~~	~~Mine Safety Disclosures~~	~~None~~

~~Item 5.~~	~~Other Information~~	~~None~~

~~Item 6.~~	~~Exhibits~~

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits


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

SIGNATURES

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


			HAWTHORN BANCSHARES, INC.

Date

			/s/ David T. Turner

May 10, ~~2021~~ 2022			David T. Turner, Chairman of the Board, President and
			Chief Executive Officer (Principal Executive Officer)

			/s/ Stephen E. Guthrie

May 10, ~~2021~~ 2022			Stephen E. Guthrie, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)


	March 31,		December 31,
(In thousands, except per share data)	2021		2020
	(Unaudited)
ASSETS
Cash and due from banks	$	18,496	$	19,235
Federal funds sold and other interest-bearing deposits		128,207		161,128
Cash and cash equivalents		146,703		180,363
Certificates of deposit in other banks		8,897		9,376
Available-for-sale debt securities, at fair value		238,142		198,030
Other investments		6,188		6,353
Total investment securities		244,330		204,383
Loans held for investment		1,276,185		1,286,967
Allowance for loan losses		(18,361)		(18,113)
Net loans		1,257,824		1,268,854
Loans held for sale, at lower of cost or fair value		6,308		5,099
Premises and equipment - net		34,027		34,561
Mortgage servicing rights, at fair value		2,494		2,445
Other real estate owned - net		12,140		12,291
Accrued interest receivable		6,488		6,640
Cash surrender value - life insurance		2,465		2,451
Other assets		10,248		7,268
Total assets	$	1,731,924	$	1,733,731
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand	$	431,035	$	382,492
Savings, interest checking and money market		708,615		723,808
Time deposits $250,000 and over		74,406		91,263
Other time deposits		179,926		186,043
Total deposits		1,393,982		1,383,606
Federal funds purchased and securities sold under agreements to repurchase		42,018		45,154
Federal Home Loan Bank advances and other borrowings		97,614		106,674
Subordinated notes		49,486		49,486
Operating lease liabilities		2,058		2,137
Accrued interest payable		439		837
Other liabilities		15,619		15,248
Total liabilities		1,601,216		1,603,142
Stockholders’ equity:
Common stock, $1 par value, authorized 15,000,000 shares; issued 6,769,322		6,769		6,769
Surplus		59,307		59,307
Retained earnings		73,947		68,935
Accumulated other comprehensive income (loss), net of tax		(1,217)		1,528
Treasury stock; 406,846, and 289,214 shares, at cost, respectively		(8,098)		(5,950)
Total stockholders’ equity		130,708		130,589
Total liabilities and stockholders’ equity	$	1,731,924	$	1,733,731


	Three Months Ended
	March 31,
(In thousands, except per share amounts)	2021		2020
INTEREST INCOME
Interest and fees on loans	$	14,979	$	14,422
Interest and fees on loans held for sale		25		5
Interest on investment securities:
Taxable		667		813
Nontaxable		246		142
Federal funds sold, other interest-bearing deposits, and certificates of deposit in other banks		102		326
Dividends on other investments		83		100
Total interest income		16,102		15,808
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		309		947
Time deposit accounts $250,000 and over		210		413
Time deposits		461		752
Total interest expense on deposits		980		2,112
Interest on federal funds purchased and securities sold under agreements to repurchase		26		37
Interest on Federal Home Loan Bank advances		396		632
Interest on subordinated notes		310		501
Total interest expense on borrowings		732		1,170
Total interest expense		1,712		3,282
Net interest income		14,390		12,526
Provision for loan losses		—		3,300
Net interest income after provision for loan losses		14,390		9,226
NON-INTEREST INCOME
Service charges and other fees		739		799
Bank card income and fees		860		693
Trust department income		294		379
Real estate servicing fees, net		73		(87)
Gain on sale of mortgage loans, net		2,469		419
Other		8		88
Total non-interest income		4,443		2,291
Investment securities gains (losses), net		14		(1)
NON-INTEREST EXPENSE
Salaries and employee benefits		7,146		6,121
Occupancy expense, net		771		766
Furniture and equipment expense		744		750
Processing, network, and bank card expense		1,007		976
Legal, examination, and professional fees		404		367
Advertising and promotion		243		249
Postage, printing, and supplies		204		241
Loan expense		174		123
Other		958		898
Total non-interest expense		11,651		10,491
Income before income taxes		7,196		1,025
Income tax expense		1,357		157
Net income	$	5,839	$	868
Basic earnings per share	$	0.92	$	0.13
Diluted earnings per share	$	0.92	$	0.13



	For the Three Months Ended March 31, 2021 and 2020
							Accumulated				Total
							Other				Stock -
	Common				Retained		Comprehensive		Treasury		holders'
(In thousands)	Stock		Surplus		Earnings		Income (Loss)		Stock		Equity
Balance, December 31, 2020	$	6,769	$	59,307	$	68,935	$	1,528	$	(5,950)	$	130,589
Net income		0		0		5,839		0		0		5,839
Other comprehensive loss		0		0		0		(2,745)		0		(2,745)
Purchase of treasury stock		0		0		0		0		(2,148)		(2,148)
Cash dividends declared, common stock ($0.13 per share)		0		0		(827)		0		0		(827)
Balance, March 31, 2021	$	6,769	$	59,307	$	73,947	$	(1,217)	$	(8,098)	$	130,708

Balance, December 31, 2019	$	6,520	$	55,727	$	61,590	$	(3,755)	$	(5,044)	$	115,038
Net income		0		0		868		0		0		868
Other comprehensive income		0		0		0		2,233		0		2,233
Purchase of treasury stock		0		0		0		0		(719)		(719)
Cash dividends declared, common stock ($0.12 per share)		0		0		(750)		0		0		(750)
Balance, March 31, 2020	$	6,520	$	55,727	$	61,708	$	(1,522)	$	(5,763)	$	116,670


	Three Months Ended March 31,
(In thousands)	2021		2020
Cash flows from operating activities:
Net income	$	5,839	$	868
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		0		3,300
Depreciation expense		578		562
Net amortization of investment securities, premiums, and discounts		418		312
Change in fair value of mortgage servicing rights		121		275
Investment securities (gains) losses, net		(14)		1
Losses (gains) on sales and dispositions of premises and equipment		4		(55)
Gain on sales and dispositions of other real estate		(15)		0
Provision for other real estate owned		88		12
Decrease in accrued interest receivable		152		218
Increase in cash surrender value - life insurance		(14)		(13)
Increase in other assets		(1,756)		(312)
Operating lease liabilities		(79)		(62)
Decrease in accrued interest payable		(398)		(356)
Increase (decrease) in other liabilities		12		(1,367)
Origination of mortgage loans held for sale		(65,012)		(16,609)
Proceeds from the sale of mortgage loans held for sale		66,272		13,170
Gain on sale of mortgage loans, net		(2,469)		(419)
Other, net		(170)		(67)
Net cash provided by (used in) operating activities		3,557		(542)
Cash flows from investing activities:
Purchase of certificates of deposit in other banks		(245)		(735)
Proceeds from maturities of certificates of deposit in other banks		736		491
Net decrease (increase) in loans		11,000		(11,809)
Purchase of available-for-sale debt securities		(62,297)		(43,984)
Proceeds from maturities of available-for-sale debt securities		10,491		13,860
Proceeds from calls of available-for-sale debt securities		7,745		8,935
Proceeds from sales of available-for-sale debt securities		0		681
Purchases of FHLB stock		(327)		(1,491)
Proceeds from sales of FHLB stock		505		2
Purchases of premises and equipment		(135)		(369)
Proceeds from sales of premises and equipment		12		123
Proceeds from sales of other real estate and repossessed assets		108		0
Net cash used in investing activities		(32,407)		(34,296)
Cash flows from financing activities:
Net increase in demand deposits		48,543		11,412
Net decrease in interest-bearing transaction accounts		(15,193)		(18,037)
Net decrease in time deposits		(22,974)		(325)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase		(3,136)		3,492
Repayment of FHLB advances and other borrowings		(9,060)		(58)
FHLB advances		0		37,000
Purchase of treasury stock		(2,148)		(719)
Cash dividends paid - common stock		(842)		(753)
Net cash (used in) provided by financing activities		(4,810)		32,012
Net decrease in cash and cash equivalents		(33,660)		(2,826)
Cash and cash equivalents, beginning of period		180,363		78,121
Cash and cash equivalents, end of period	$	146,703	$	75,295
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	2,109	$	3,639
Income taxes	$	0	$	0
Noncash investing and financing activities:
Other real estate and repossessed assets acquired in settlement of loans	$	30	$	0


	March 31,		December 31,
(in thousands)	2021		2020
Commercial, financial, and agricultural (a)	$	251,943	$	272,918
Real estate construction − residential		33,962		29,692
Real estate construction − commercial		78,576		78,144
Real estate mortgage − residential		258,259		262,339
Real estate mortgage − commercial		628,178		617,133
Installment and other consumer		25,267		26,741
Total loans held for investment	$	1,276,185	$	1,286,967


	Three Months Ended March 31, 2021
	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, &		Construction -		Construction -		Mortgage -		Mortgage -		and Other		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Consumer		allocated		Total
Balance at beginning of period	$	5,121	$	213	$	475	$	2,679	$	9,354	$	264	$	7	$	18,113
Additions:
Provision for loan losses		(567)		83		57		(253)		573		13		94		—
Deductions:
Loans charged off		27		—		—		—		23		57		—		107
Less recoveries on loans		(149)		(13)		—		(168)		—		(25)		—		(355)
Net loan charge-offs (recoveries)		(122)		(13)		—		(168)		23		32		—		(248)
Balance at end of period	$	4,676	$	309	$	532	$	2,594	$	9,904	$	245	$	101	$	18,361


	Three Months Ended March 31, 2020
	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, &		Construction -		Construction -		Mortgage -		Mortgage -		and Other		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Consumer		allocated		Total
Balance at beginning of period	$	2,918	$	64	$	369	$	2,118	$	6,547	$	381	$	80	$	12,477
Additions:
Provision for loan losses		721		53		253		255		2,087		8		(77)		3,300
Deductions:
Loans charged off		41		—		—		19		22		52		—		134
Less recoveries on loans		(25)		—		—		(9)		(2)		(14)		—		(50)
Net loan charge-offs		16		—		—		10		20		38		—		84
Balance at end of period	$	3,623	$	117	$	622	$	2,363	$	8,614	$	351	$	3	$	15,693


			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
March 31, 2021
With no related allowance recorded:
Commercial, financial and agricultural	$	1,837	$	1,882	$	—
Real estate mortgage − residential		1,275		1,377		—
Real estate mortgage − commercial		9,457		9,467		—
Total	$	12,569	$	12,726	$	—
With an allowance recorded:
Commercial, financial and agricultural	$	5,571	$	5,645	$	2,134
Real estate construction − residential		189		189		26
Real estate construction − commercial		198		251		28
Real estate mortgage − residential		1,859		2,304		256
Real estate mortgage − commercial		16,190		16,257		2,691
Installment and other consumer		71		75		9
Total	$	24,078	$	24,721	$	5,144
Total impaired loans	$	36,647	$	37,447	$	5,144


	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
March 31, 2021
Commercial, Financial, and Agricultural	$	245,019	$	333	$	0	$	6,591	$	251,943
Real estate construction − residential		33,773		0		0		189		33,962
Real estate construction − commercial		78,378		0		0		198		78,576
Real estate mortgage − residential		255,172		1,170		0		1,917		258,259
Real estate mortgage − commercial		602,502		367		0		25,309		628,178
Installment and Other Consumer		25,181		57		0		29		25,267
Total	$	1,240,025	$	1,927	$	0	$	34,233	$	1,276,185
December 31, 2020
Commercial, Financial, and Agricultural	$	265,821	$	380	$	0	$	6,717	$	272,918
Real estate construction − residential		29,500		0		0		192		29,692
Real estate construction − commercial		77,944		0		0		200		78,144
Real estate mortgage − residential		259,688		546		0		2,105		262,339
Real estate mortgage − commercial		591,815		4		0		25,314		617,133
Installment and Other Consumer		26,576		117		17		31		26,741
Total	$	1,251,344	$	1,047	$	17	$	34,559	$	1,286,967

	Total Remaining Loan Modifications under the CARES Act by NAICS Code as of March 31, 2021
			% of					% of					% of
			Total Remaining			Full		Total Remaining					Total Remaining
	Interest		Loan			Deferral		Loan			Extended		Loan
Industry Category	Only		Modifications			(1)		Modifications			Amortizations		Modifications			Totals
(in thousands)
Real Estate and Rental and Leasing	$	4,521		6.2	%	$	5,790		8.0	%	$	499		0.7	%	$	10,810
Accommodations and Food Services		10,590		14.5			29,007		39.8			4,592		6.3			44,189
Construction		144		0.2			—		—			—		—			144
Lands and lots		1,553		2.1			—		—			—		—			1,553
Cinemas		1,086		1.5			4,691		6.4			—		—			5,777
Arts, Entertainment, Recreation		10,164		14.0			—		—			—		—			10,164
Non-NAICS (Consumer)		—		0.0			161		0.3			—		—			161
Total modifications	$	28,058		38.5	%	$	39,649		54.5	%	$	5,091		7.0	%	$	72,798


	Total
	Amortized		Gross Unrealized				Fair
(in thousands)	Cost		Gains		Losses		Value
March 31, 2021
U.S. Treasury	$	3,018	$	23	$	0	$	3,041
U.S. government and federal agency obligations		20,161		76		(408)		19,829
U.S. government-sponsored enterprises		22,497		238		(184)		22,551
Obligations of states and political subdivisions		70,324		961		(467)		70,818
Mortgage-backed securities		108,106		1,586		(1,048)		108,644
Other debt securities (a)		11,825		209		(11)		12,023
Bank issued trust preferred securities (a)		1,486		0		(250)		1,236
Total available-for-sale securities	$	237,417	$	3,093	$	(2,368)	$	238,142

December 31, 2020
U.S. Treasury	$	2,772	$	26	$	0	$	2,798
U.S. government and federal agency obligations		11,732		197		0		11,929
U.S. government-sponsored enterprises		22,495		379		0		22,874
Obligations of states and political subdivisions		56,943		1,801		0		58,744
Mortgage-backed securities		88,357		1,809		(54)		90,112
Other debt securities (a)		10,000		358		(14)		10,344
Bank issued trust preferred securities (a)		1,486		0		(257)		1,229
Total available-for-sale securities	$	193,785	$	4,570	$	(325)	$	198,030


	Less than 12 months				12 months or more				Total		Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(in thousands)	Value		Losses		Value		Losses		Value		Losses
At March 31, 2021
U.S. Treasury	$	1,022	$	0	$	250	$	0	$	1,272	$	0
U.S. government and federal agency obligations		14,447		(408)		0		0		14,447		(408)
U.S. government-sponsored enterprises		5,816		(184)		0		0		5,816		(184)
Obligations of states and political subdivisions		22,580		(467)		0		0		22,580		(467)
Mortgage-backed securities		46,969		(1,048)		0		0		46,969		(1,048)
Other debt securities		2,989		(11)		0		0		2,989		(11)
Bank issued trust preferred securities		0		0		1,236		(250)		1,236		(250)
Total	$	93,823	$	(2,118)	$	1,486	$	(250)	$	95,309	$	(2,368)

(in thousands)
At December 31, 2020
U.S. Treasury	$	1,015	$	0	$	0	$	0	$	1,015	$	0
Mortgage-backed securities		7,494		(54)		0		0		7,494		(54)
Other debt securities		2,987		(14)		0		0		2,987		(14)
Bank issued trust preferred securities		0		0		1,229		(257)		1,229		(257)
Total	$	11,496	$	(68)	$	1,229	$	(257)	$	12,725	$	(325)


Repurchase Agreements	Remaining Contractual Maturity of the Agreements
	Overnight		Less		Greater
	and		than		than
(in thousands)	continuous		90 days		90 days		Total
At March 31, 2021
U.S. government-sponsored enterprises	$	8,757	$	0	$	0	$	8,757
Mortgage-backed securities		33,261		0		0		33,261
Total	$	42,018	$	0	$	0	$	42,018

At December 31, 2020
U.S. government and federal agency obligations	$	2,728	$	0	$	0	$	2,728
U.S. government-sponsored enterprises		15,533		0		0		15,533
Mortgage-backed securities		26,893		0		0		26,893
Total	$	45,154	$	0	$	0	$	45,154


Repurchase Agreements	Remaining Contractual Maturity of the Agreements
(in thousands)	Overnight and continuous		Less than 90 days		Greater than 90 days		Total
At March 31, 2022
U.S. government-sponsored enterprises	$	5,514	$	—	$	—	$	5,514

Total	$	5,514	$	—	$	—	$	5,514

At December 31, 2021

U.S. government-sponsored enterprises	$	9,113	$	—	$	—	$	9,113
Mortgage-backed securities	14,716		—		—		14,716
Total	$	23,829	$	—	$	—	$	23,829


	Operating
Lease payments due in:	Lease
(in thousands)
2021 (excluding 3 months ending March 31, 2021)	$	276
2022		367
2023		366
2024		258
2025		257
Thereafter		830
Total lease payments		2,354
Less imputed interest		(296)
Total lease liabilities, as reported	$	2,058


Lease payments due in:	Operating Lease
(in thousands)
2022 (excluding 3 months ended March 31, 2022)	$	276
2023	367
2024	258
2025	257
2026	259


Thereafter	571
Total lease payments	1,988
Less imputed interest	(225)
Total lease liabilities, as reported	$	1,763


	Three Months Ended March 31, 2021
					Accumulated
			Unrecognized Net		Other
	Unrealized		Pension and		Comprehensive
	Gains (Losses)		Postretirement		Income
(in thousands)	on Securities (1)		Costs (2)		(Loss)
Balance at beginning of period	$	3,353	$	(1,825)	$	1,528
Other comprehensive income, before reclassifications		(3,518)		45		(3,473)
Amounts reclassified from accumulated other comprehensive (loss) income		(2)		—		(2)
Current period other comprehensive income (loss), before tax		(3,520)		45		(3,475)
Income tax benefit (expense)		740		(10)		730
Current period other comprehensive income (loss), net of tax		(2,780)		35		(2,745)
Balance at end of period	$	573	$	(1,790)	$	(1,217)


	Pension Benefits
(in thousands)	2021		2020
Service cost - benefits earned during the year	$	1,663	$	1,857
Interest costs on projected benefit obligations (a)		1,023		1,159
Expected return on plan assets (a)		(1,825)		(1,572)
Expected administrative expenses (a)		104		110
Amortization of prior service cost (a)		—		50
Amortization of unrecognized net loss (a)		181		218
Net periodic pension cost	$	1,146	$	1,822


	Three Months Ended March 31,
(dollars in thousands, except per share data)	2021		2020
Basic earnings per share:
Net income available to shareholders	$	5,839	$	868
Average shares outstanding		6,362,869		6,510,189
Basic earnings per share	$	0.92	$	0.13
Diluted earnings per share:
Net income available to shareholders	$	5,839	$	868
Average shares outstanding		6,362,869		6,510,189
Effect of dilutive stock options		0		0
Average shares outstanding including dilutive stock options		6,362,869		6,510,189
Diluted earnings per share	$	0.92		0.13


			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2021
Assets:
U.S. Treasury	$	3,041	$	3,041		0	$	0
U.S. government and federal agency obligations		19,829		0		19,829		0
U.S. government-sponsored enterprises		22,551		0		22,551		0
Obligations of states and political subdivisions		70,818		0		70,818		0
Mortgage-backed securities		108,644		0		108,644		0
Other debt securities		12,023		0		12,023		0
Bank-issued trust preferred securities		1,236		0		1,236		0
Equity securities		45		45		0		0
Mortgage servicing rights		2,494		0		0		2,494
Total	$	240,681	$	3,086	$	235,101	$	2,494

December 31, 2020
Assets:
U.S. Treasury	$	2,798	$	2,798		0	$	0
U.S. government and federal agency obligations		11,929		0		11,929		0
U.S. government-sponsored enterprises		22,874		0		22,874		0
Obligations of states and political subdivisions		58,744		0		58,744		0
Mortgage-backed securities		90,112		0		90,112		0
Other debt securities		10,344		0		10,344		0
Bank-issued trust preferred securities		1,229		0		1,229		0
Equity securities		32		32		0		0
Mortgage servicing rights		2,445		0		0		2,445
Total	$	200,507	$	2,830	$	195,232	$	2,445


	Fair Value Measurements Using
	(Level 3)
	Mortgage Servicing Rights
	Three Months Ended March 31,
(in thousands)	2021		2020
Balance at beginning of period	$	2,445	$	2,482
Total (losses) or gains (realized/unrealized):
Included in earnings		(121)		(275)
Included in other comprehensive income		0		0
Purchases		0		0
Sales		0		0
Issues		170		67
Settlements		0		0
Balance at end of period	$	2,494	$	2,274


Selected Financial Data
	Three Months Ended
	March 31,
(In thousands, except per share data)		2021			2020
Per Share Data
Basic earnings per share	$	0.92		$	0.13
Diluted earnings per share		0.92			0.13
Cash dividends paid on common stock		842			753
Book value per share		20.54			17.92
Market price per share		21.29			17.64
Selected Ratios
(Based on average balance sheets)
Return on total assets		1.38	%		0.23	%
Return on stockholders' equity		18.03	%		2.97	%
Stockholders' equity to total assets		7.64	%		7.80	%
Efficiency ratio (1)		61.86	%		70.80	%
Net interest spread		3.44	%		3.28	%
Net interest margin		3.62	%		3.55	%

(Based on end-of-period data)
Stockholders' equity to assets		7.55	%		7.64	%
Total risk-based capital ratio		14.80	%		14.80	%
Tier 1 risk-based capital ratio		13.21	%		12.81	%
Common equity Tier 1 capital		9.93	%		9.64	%
Tier 1 leverage ratio (2)		10.22	%		10.43	%


	Three Months Ended March 31,
	2021 vs. 2020
			Change due to
	Total		Average		Average
(In thousands)	Change		Volume		Rate
Interest income on a fully taxable equivalent basis: (1)
Loans: (2) (3)
Commercial	$	1,589	$	858	$	731
Real estate construction - residential		71		123		(52)
Real estate construction - commercial		(230)		(86)		(144)
Real estate mortgage - residential		(291)		113		(404)
Real estate mortgage - commercial		(405)		565		(970)
Installment and other consumer		(92)		(58)		(34)
Loans held for sale		20		15		5
Investment securities:
U.S. Treasury		4		7		(3)
U.S. government and federal agency obligations		(49)		8		(57)
Obligations of states and political subdivisions		182		181		1
Mortgage-backed securities		(187)		(15)		(172)
Other debt securities		83		89		(6)
Other investment securities		(17)		(4)		(13)
Federal funds sold and interest bearing deposits in other financial institutions		(223)		156		(379)
Total interest income		455		1,952		(1,497)
Interest expense:
NOW accounts		(152)		58		(210)
Savings		(10)		7		(17)
Interest checking		(97)		41		(138)
Money market		(379)		15		(394)
Time deposits		(494)		(180)		(314)
Federal funds purchased and securities sold under agreements to repurchase		(11)		15		(26)
Federal Home Loan Bank advances and other borrowings		(236)		(54)		(182)
Subordinated notes		(191)		—		(191)
Total interest expense		(1,570)		(98)		(1,472)
Net interest income on a fully taxable equivalent basis	$	2,025	$	2,050	$	(25)


	March 31, 2021					December 31, 2020
	Number of	Recorded		Specific		Number of	Recorded		Specific
(In thousands)	contracts	Investment		Reserves		contracts	Investment		Reserves
Performing TDRs
Commercial, financial and agricultural	7	$	817	$	37	7	$	835	$	90
Real estate mortgage − residential	5		1,217		46	5		1,521		28
Real estate mortgage − commercial	2		338		7	2		343		7
Installment and other consumer	4		42		5	5		77		10
Total performing TDRs	18	$	2,414	$	95	19	$	2,776	$	135
Non-performing TDRs
Commercial, financial and agricultural	1	$	3	$	—	1	$	4	$	1
Real estate mortgage − residential	8		876		77	8		895		78
Total non-performing TDRs	9	$	879	$	77	9	$	899	$	79
Total TDRs	27	$	3,293	$	172	28	$	3,675	$	214


					Minimum Capital				Required to be
					Required - Basel III				Considered Well-
	Actual				Fully Phased-In				Capitalized
(in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2021
Total Capital (to risk-weighted assets):
Company	$	196,553	14.80	%	$	139,475	10.50	%	$	—	N.A	%
Bank		193,745	14.62			139,119	10.50			132,495	10.00
Tier 1 Capital (to risk-weighted assets):
Company	$	172,591	13.21	%	$	112,909	8.50	%	$	—	N.A	%
Bank		177,159	13.37			112,620	8.50			105,996	8.00
Common Equity Tier 1 Capital (to risk-weighted assets):
Company	$	131,925	9.93	%	$	92,984	7.00	%	$	—	N.A	%
Bank		177,159	13.37			92,746	7.00			86,121	6.50
Tier 1 leverage ratio (to adjusted average assets):
Company	$	175,494	10.22	%	$	68,654	4.00	%	$	—	N.A	%
Bank		177,159	10.37			68,315	4.00			85,394	5.00

December 31, 2020
Total Capital (to risk-weighted assets):
Company	$	193,220	14.97	%	$	135,518	10.50	%	$	—	N.A	%
Bank		191,504	14.87			135,186	10.50			128,748	10.00
Tier 1 Capital (to risk-weighted assets):
Company	$	172,591	13.37	%	$	109,705	8.50	%	$	—	N.A	%
Bank		175,384	13.62			109,436	8.50			102,999	8.00
Common Equity Tier 1 Capital (to risk-weighted assets)
Company	$	129,061	10.00	%	$	90,345	7.00	%	$	—	N.A	%
Bank		175,384	13.62			90,124	7.00			83,686	6.50
Tier 1 leverage ratio:
Company	$	172,591	10.19	%	$	67,724	4.00	%	$	—	N.A	%
Bank		175,384	10.41			67,394	4.00			84,243	5.00


	% Change in projected net interest income
Hypothetical shift in interest rates	March 31,			December 31,
(bps)	2021			2020
200		(1.06)	%		0.73	%
100		(1.50)	%		0.10	%
(100)		(2.73)	%		(1.28)	%
(200)		(3.34)	%		(1.81)	%


					(d) Maximum Number (or
				(c) Total Number of	Approximate Dollar
				Shares (or Units)	Value) of Shares (or
	(a) Total Number of	(b) Average Price		Purchased as Part of	Units) that May Yet Be
	Shares (or Units)	Paid per Share (or		Publicly Announced Plans	Purchased Under the
Period	Purchased	Unit)		or Programs	Plans or Programs *

January 1-31, 2021	116,490	$	18.25	116,490	$	1,966,362
February 1-28, 2021	1,142	$	18.76	1,142	$	1,944,942
March 1-31, 2021	—	$	—	—	$	1,944,942
Total	117,632	$	18.26	117,632	$	1,944,942