HAWTHORN BANCSHARES, INC. [HWBK] Filings

10-Q 1 hwbk-20230331.htm 10-Q hwbk-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

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

For the transition period from ______________ to ______________

Commission file number: 0-23636

HAWTHORN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)


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

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

(Address of principal executive offices) (Zip Code)

(573) 761-6100

(Registrant’s telephone number, including area code)

N/A

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

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


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

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

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

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

Large accelerated filer ☐

Accelerated filer

☐

Non-accelerated filer

☒

Smaller reporting company

☒

Emerging growth company

☐

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

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

As of May 15, 2023, the registrant had 6,768,581 shares of common stock, par value $1.00 per share, outstanding.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets


(In thousands, except per share data)	March 31, 2023		December 31, 2022
	(Unaudited)
ASSETS
Cash and due from banks	$	18,301	$	18,661
Federal funds sold	47		46
Other interest-bearing deposits	15,425		65,013
Cash and cash equivalents	33,773		83,720
Certificates of deposit in other banks	2,215		2,955
Available-for-sale debt securities, at fair value	259,653		250,747
Other investments	6,240		6,353
Total investment securities	265,893		257,100
Loans held for investment	1,542,074		1,521,252
Allowance for credit losses (1)	(21,979)		(15,588)
Net loans	1,520,095		1,505,664
Loans held for sale, at lower of cost or fair value	1,753		591
Premises and equipment - net	32,454		32,856
Mortgage servicing rights, at fair value	2,934		2,899
Other real estate owned - net	8,247		8,795
Accrued interest receivable	7,288		7,953
Cash surrender value - life insurance	2,582		2,567
Other assets (1)	18,587		18,440
Total assets	$	1,895,821	$	1,923,540
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing demand	$	444,437	$	453,443
Savings, interest checking and money market	817,183		923,602
Time deposits $250,000 and over	175,251		94,859
Other time deposits	171,141		160,175
Total deposits	1,608,012		1,632,079
Federal funds purchased and securities sold under agreements to repurchase	5,115		5,187
Federal Home Loan Bank advances and other borrowings	93,000		98,000
Subordinated notes	49,486		49,486
Operating lease liabilities	1,454		1,533
Accrued interest payable	1,602		902
Liability for unfunded commitments (1)	1,302		—
Other liabilities	7,498		8,942
Total liabilities	1,767,469		1,796,129
Stockholders’ equity:
Common stock, $1.00 par value, authorized 15,000,000 shares; issued 7,284,151 shares, respectively	7,284		7,284
Surplus	71,042		71,042
Retained earnings	88,329		91,789
Accumulated other comprehensive loss, net of tax	(27,313)		(31,714)
Treasury stock; 515,570 shares, at cost, respectively	(10,990)		(10,990)
Total stockholders’ equity	128,352		127,411
Total liabilities and stockholders’ equity	$	1,895,821	$	1,923,540

(1) March 31, 2023 amounts include the impacts of the January 1, 2023 adoption of ASU 2013-13. See Note 2 for details.

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

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)


	Three Months Ended March 31,
(In thousands, except per share data)		2023		2022
INTEREST INCOME
Interest and fees on loans		$	18,803	$	13,915
Interest and fees on loans held for sale		27		20
Interest on investment securities:
Taxable		847		788
Nontaxable		626		577
Federal funds sold		—		1
Other interest-bearing deposits and certificates of deposit in other banks		537		60
Dividends on other investments		93		75
Total interest income		20,933		15,436
INTEREST EXPENSE
Interest on deposits:
Savings, interest checking and money market		3,854		316
Time deposit accounts $250,000 and over		1,150		113
Time deposits		548		276
Total interest expense on deposits		5,552		705
Interest on federal funds purchased and securities sold under agreements to repurchase		21		10
Interest on Federal Home Loan Bank advances		540		252
Interest on subordinated notes		872		324
Total interest expense on borrowings		1,433		586
Total interest expense		6,985		1,291
Net interest income		13,948		14,145
Provision for (release of) credit losses on loans and unfunded commitments (1)		680		(2,500)
Net interest income after provision for (release of) credit losses on loans and unfunded commitments		13,268		16,645
NON-INTEREST INCOME
Service charges and other fees		684		793
Bank card income and fees		960		961
Trust department income		271		340
Real estate servicing fees, net		193		231
Gain on sale of mortgage loans, net		496		888
Other		578		513
Total non-interest income		3,182		3,726
Investment securities gains (losses), net		8		(4)
NON-INTEREST EXPENSE
Salaries and employee benefits		7,003		6,886
Occupancy expense, net		795		786
Furniture and equipment expense		752		755
Processing, network, and bank card expense		1,157		1,142
Legal, examination, and professional fees		505		440
Advertising and promotion		357		293
Postage, printing, and supplies		193		190
Loan expense		385		145
Other		1,331		1,590
Total non-interest expense		12,478		12,227
Income before income taxes		3,980		8,140
Income tax expense		709		1,531
Net income		$	3,271	$	6,609
Basic earnings per share		$	0.48	$	0.97
Diluted earnings per share		$	0.48	$	0.97

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

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

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (unaudited)


	Three Months Ended March 31,
(In thousands)		2023		2022
Net income		$	3,271	$	6,609
Other comprehensive income (loss), net of tax
Investment securities available-for-sale:
Change in unrealized gains (losses) on investment securities available-for-sale, net of tax		4,513		(19,582)

Defined benefit pension plans:

Amortization of net gains included in net periodic pension cost, net of tax		(112)		—
Total other comprehensive income (loss)		4,401		(19,582)
Total comprehensive income (loss)		$	7,672	$	(12,973)

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

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity (unaudited)


	Three Months Ended March 31, 2023 and 2022
(In thousands, except per share data)	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Stockholders' Equity
Balance, December 31, 2022	$	7,284	$	71,042	$	91,789	$	(31,714)	$	(10,990)	$	127,411
Adoption of ASU 2016-13	—		—		(5,581)		—		—		(5,581)
Balance, January 01, 2023	7,284		71,042		86,208		(31,714)		(10,990)		121,830
Net income	—		—		3,271		—		—		3,271
Other comprehensive income	—		—		—		4,401		—		4,401


Cash dividends declared, common stock ($0.17 per share)	—		—		(1,150)		—		—		(1,150)
Balance, March 31, 2023	$	7,284	$	71,042	$	88,329	$	(27,313)	$	(10,990)	$	128,352

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

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)	2023		2022
Cash flows from operating activities:
Net income	$	3,271	$	6,609
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (release of) credit losses on loans and unfunded commitments	680		(2,500)
Depreciation expense	540		545
Net amortization of investment securities, premiums, and discounts	276		378
Change in fair value of mortgage servicing rights	(29)		48
Investment securities (gains) losses, net	(8)		4
Gain on sales and dispositions of premises and equipment	(132)		—
Gain on sales and dispositions of other real estate	(9)		(8)


Decrease in accrued interest receivable	665		380
Increase in cash surrender value - life insurance	(15)		(15)
Decrease in other assets	102		329
Decrease in operating lease liabilities	(79)		(74)
Increase in accrued interest payable	700		16
Decrease in other liabilities	(1,398)		(2,567)
Origination of mortgage loans held for sale	(20,910)		(26,935)
Proceeds from the sale of mortgage loans held for sale	20,238		29,085
Gain on sale of mortgage loans, net	(496)		(888)

Net cash provided by operating activities	3,396		4,407
Cash flows from investing activities:

Proceeds from maturities of certificates of deposit in other banks	739		490
Net increase in loans	(20,903)		(31,812)
Purchase of available-for-sale debt securities	(8,505)		(14,581)
Proceeds from maturities of available-for-sale debt securities	4,427		11,284
Proceeds from calls of available-for-sale debt securities	610		2,250

Purchases of FHLB stock	(137)		(178)
Proceeds from sales of FHLB stock	258		92
Purchases of premises and equipment	(226)		(1,417)
Proceeds from sales of premises and equipment	126		—


Proceeds from sales of other real estate and repossessed assets	557		723
Net cash used in investing activities	(23,054)		(33,149)
Cash flows from financing activities:
Net decrease in demand deposits	(9,006)		(2,841)
Net decrease in interest-bearing transaction accounts	(106,419)		(66,194)
Net increase in time deposits	91,358		8,358
Net decrease in federal funds purchased and securities sold under agreements to repurchase	(72)		(18,315)
Repayment of FHLB advances and other borrowings	(5,500)		(61)
FHLB advances	500		—
Purchase of treasury stock	—		(606)
Cash dividends paid - common stock	(1,150)		(993)
Net cash used in financing activities	(30,289)		(80,652)
Net decrease in cash and cash equivalents	(49,947)		(109,394)
Cash and cash equivalents, beginning of period	83,720		159,909
Cash and cash equivalents, end of period	$	33,773	$	50,515

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

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited) continued


	Three Months Ended March 31,
(In thousands)	2023		2022

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	6,285	$	1,275
Income taxes	$	—	$	—
Noncash investing and financing activities:
Other real estate and repossessed assets acquired in settlement of loans net of (charge-offs)	$	—	$	(52)

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

(1) Summary of Significant Accounting Policies

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

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

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

Stock Dividend. On July 1, 2022, the Company paid a special stock dividend of four percent (4%) to shareholders of record at the close of business on June 15, 2022. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Recently Adopted Accounting Pronouncements

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

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

The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost, and off-balance-sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under the new standard while prior period amounts continue to be reported in accordance with previously applicable U.S.

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

GAAP. The Company recorded an after-tax decrease to retained earnings of $5.6 million as of January 1, 2023 for the cumulative effect of adopting this standard.

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


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

(2) Loans and Allowance for Credit Losses

Loans

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


(in thousands)	March 31, 2023		December 31, 2022
Commercial, financial, and agricultural	$	227,992	$	244,549
Real estate construction − residential	44,467		32,095
Real estate construction − commercial	157,860		137,235
Real estate mortgage − residential	363,634		361,025
Real estate mortgage − commercial	725,573		722,729
Installment and other consumer	22,548		23,619
Total loans held for investment	$	1,542,074	$	1,521,252

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the Missouri communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, St. Louis, and the greater Kansas City metropolitan area. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of automotive vehicles. Accrued interest on loans totaled $5.9 million and $6.4 million at March 31, 2023 and December 31, 2022, respectively, and is included in the accrued interest receivable on the Company's Consolidated Balance Sheets. The total amount of accrued interest is excluded from the amortized cost basis of loans presented above. Further, the Company has elected not to measure an allowance for credit losses for accrued interest receivable. At March 31, 2023, loans of $598.1 million were pledged to the Federal Home Loan Bank (FHLB) as collateral for borrowings and letters of credit.

Allowance for Credit Losses

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

aggregate of amounts previously charged-off and expected to be charged-off. Loans are charged off against the allowance for credit losses when management believes the balance has become uncollectible.

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

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

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

Sensitivity in the Allowance for Credit Loss Model

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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


	Three Months Ended March 31, 2023
(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
Balance at beginning of period	$	2,735	$	157	$	875	$	3,329	$	8,000	$	326	$	166	$	15,588
Adoption of ASU 2016-13	(649)		291		2,894		1,890		1,613		(80)		(166)		5,793
Balance at January 1, 2023	2,086		448		3,769		5,219		9,613		246		—		21,381
Provision for (release of ) credit losses (1)	(144)		183		695		41		(123)		6		(8)		650
Loans charged off	30		—		—		—		5		58		—		93
Less recoveries on loans	(9)		—		—		(2)		(2)		(28)		—		(41)
Net loan charge-offs (recoveries)	21		—		—		(2)		3		30		—		52
Balance at end of period	$	1,921	$	631	$	4,464	$	5,262	$	9,487	$	222	$	(8)	$	21,979
Liability for Unfunded Commitments
Balance at beginning of period	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Adoption of ASU 2016-13	104		341		569		107		150		1		—		1,272
Balance at January 1, 2023	104		341		569		107		150		1		—		1,272
Provision for credit losses on unfunded commitments	20		48		(7)		3		(8)		—		(26)		30
Balance at end of period	$	124	$	389	$	562	$	110	$	142	$	1	$	(26)	$	1,302
Allowance for credit losses on loans and liability for unfunded commitments	$	2,045	$	1,020	$	5,026	$	5,372	$	9,629	$	223	$	(34)	$	23,281


	Three Months Ended March 31, 2022
(in thousands)	Commercial, Financial, & Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
Balance at beginning of period	$	2,717	$	137	$	588	$	2,482	$	10,662	$	256	$	61	$	16,903
Provision for (release of ) loan losses (1)	128		(77)		76		93		(2,897)		56		121		(2,500)
Loans charged off	35		—		—		—		75		56		—		166
Less recoveries on loans	(20)		—		—		(3)		(2)		(17)		—		(42)
Net loan charge-offs (recoveries)	15		—		—		(3)		73		39		—		124
Balance at end of period	$	2,830	$	60	$	664	$	2,578	$	7,692	$	273	$	182	$	14,279

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

On January 1, 2023, the Company's adoption of the CECL methodology resulted in an increase to the allowance for credit losses of $5.8 million and a liability for unfunded commitments totaling $1.3 million. Under the CECL methodology, the Company recorded a $0.7 million provision for credit losses in the first quarter of 2023 compared to a $2.5 million release of provision for loan losses in the first quarter of 2022 under the incurred-loss method.

Collateral-Dependent loans

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

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

HAWTHORN BANCSHARES, INC.

AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

(Unaudited)

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

The amortized cost of collateral-dependent loans by class as of March 31, 2023 was as follows:


	Collateral Type
(in thousands)	Real Estate		Other		Allowance Allocated
March 31, 2023
Commercial, financial, and agricultural	$	—	$	50	$	—


Real estate mortgage − residential	149		—		63
Real estate mortgage − commercial	18,228		—		—

Total	$	18,377	$	50	$	63

Impaired Loans

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

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


(in thousands)	Commercial, Financial, and Agricultural		Real Estate Construction - Residential		Real Estate Construction - Commercial		Real Estate Mortgage - Residential		Real Estate Mortgage - Commercial		Installment and Other Consumer		Un- allocated		Total
December 31, 2022
Allowance for loan losses:
Individually evaluated for impairment	$	36	$	—	$	11	$	148	$	62	$	1	$	—	$	258
Collectively evaluated for impairment