10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2014

OR

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

For the transition period from __________________ to _________________.

Commission file number: 0-23636

HAWTHORN BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices) (Zip Code)

(573) 761-6100

(Registrant's telephone number, including area code)

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

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

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

Common Stock, par value $1.00 per share

(Title of Class)

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

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

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "larger accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b 2 of the Exchange Act. (Check one):

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  x  (Do not check if a smaller reporting company)	Smaller reporting company  ¨

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

The aggregate market value of the 4,009,528 shares of voting and non-voting common equity of the registrant held by non-affiliates computed by reference to the $12.52 closing price of such common equity on June 30, 2014, the last business day of the registrant's most recently completed second fiscal quarter, was $50,199,289. Aggregate market value excludes an aggregate of 1,224,458 shares of common stock held by officers and directors and by each person known by the registrant to own 5% or more of the outstanding common stock on such date. Exclusion of shares held by any of these persons should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant. As of March 31, 2015, the registrant had 5,395,844 shares of common stock, par value $1.00 per share, issued and 5,233,986 shares outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents are incorporated by reference into the indicated parts of this report: (1) 2014 Annual Report to Shareholders - Part II and (2) definitive Proxy Statement for the 2015 Annual Meeting of Shareholders to be filed with the Commission pursuant to Regulation 14A - Part III.

PART I

Item 1. Business.

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

General

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

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

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

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

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

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

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

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

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

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

Description of Business

Company. The Company is a bank holding company registered under the Bank Holding Company Act that has elected to become a financial holding company. The Company's activities currently are limited to ownership, indirectly through its subsidiary (Union State Bancshares, Inc.), of the outstanding capital stock of Hawthorn Bank. In addition to ownership of its subsidiaries, the Company may seek expansion through acquisition and may engage in those activities (such as investments in banks or operations that are financial in nature) in which it is permitted to engage under applicable law. It is not currently anticipated that the Company will engage in any business other than that directly related to its ownership of its banking subsidiary or other financial institutions.

2

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

Hawthorn Bank. Hawthorn Bank was founded in 1932 as a Missouri bank and converted to a Missouri trust company on August 16, 1989. However, its predecessors trace their lineage back to the founding of Exchange National Bank in 1865. Hawthorn Bank has 24 banking offices, including its principal office at 132 East High Street in Jefferson City's central business district. See "Item 2. Properties".

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

Hawthorn Bank's deposit accounts are insured by the Federal Deposit Insurance Corporation (the "FDIC") to the extent provided by law. Hawthorn Bank's operations are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of Hawthorn Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of the holders of Hawthorn Bank's common stock. See "Regulation Applicable to Bank Holding Companies" and "Regulation Applicable to the Bank".

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

Real Estate Holdings of Missouri, LLC. Real Estate Holdings of Missouri, LLC, a non-bank subsidiary of the Company, was formed in March 2010 in order to purchase from Hawthorn Bank and hold parcels of foreclosed real property located in and around Kansas City, Missouri. The purpose for acquiring this foreclosed real estate in Real Estate Holdings of Missouri, LLC is to allow for the orderly, and potentially more expeditious, disposition of these assets and strengthen Hawthorn Bank's financial position.

Employees

As of December 31, 2014, Hawthorn and its subsidiaries had approximately 308 full-time and 50 part-time employees. None of its employees is presently represented by any union or collective bargaining group, and the Company considers its employee relations to be satisfactory.

Competition

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

The Bank experiences substantial competition for deposits and loans within both its primary service areas of Jefferson City, Columbia, Clinton, Lee's Summit, Warsaw, Springfield, and Branson, Missouri and its secondary service area of the nearby communities in Cole, Boone, Henry, Cass, Benton, and Greene counties of Missouri. Hawthorn Bank's principal competition for deposits and loans comes from other banks within its primary service areas and, to an increasing extent, other banks in nearby communities. Based on publicly available information, management believes that Hawthorn Bank is the third largest (in terms of deposits) of the thirteen banks within Cole county, the twelfth largest

3

(in terms of deposits) of thirty banks within Boone county, the largest (in terms of deposits) of the eight banks within Henry county, the fourth largest (in terms of deposits) of the seventeen banks within Cass county, and the second largest (in terms of deposits) of the five banks within Benton county. The main competition for Hawthorn Bank's trust services is from other commercial banks, including those of the Kansas City metropolitan area.

Regulation Applicable to Bank Holding Companies

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

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

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

· securities underwriting, dealing and market making;

· sponsoring mutual funds and investment companies;

· insurance underwriting and insurance agency activities;

· merchant banking; and

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

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

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

4

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

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

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

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

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

· merging or consolidating with another bank holding company.

Regulatory Capital Requirements. The FRB has issued risk-based and leverage capital guidelines applicable to United States banking organizations. If a bank holding company's capital falls below minimum required levels, then the bank holding company must implement a plan to increase its capital, and its ability to pay dividends and make acquisitions of new bank subsidiaries may be restricted or prohibited. As discussed below under "Changes in Laws and Monetary Policies - Recent Amendments to Regulatory Capital Requirements," new risk-based and leverage capital guidelines went into effect on January 1, 2015. As of December 31, 2014, the FRB's risk-based guidelines defined a two-tier capital framework. Tier 1 capital generally included common shareholders' equity, a limited amount of trust preferred securities, minority interests and qualifying preferred stock, less goodwill and other adjustments. Tier 2 capital generally consisted of preferred stock not qualifying as Tier 1 capital, mandatory convertible debt, limited amounts of subordinated debt, other qualifying term debt and the allowance for credit losses up to 1.25% of risk-weighted assets and other adjustments. The sum of Tier 1 and Tier 2 capital less investments in unconsolidated subsidiaries represented the total capital.

Prior to January 1, 2015, the risk-based capital ratios were calculated by dividing Tier 1 and total capital by risk-weighted assets (including certain off-balance sheet activities). The FRB's capital adequacy guidelines required that bank holding companies maintain a Tier 1 risk-based capital ratio equal to at least 4% of its risk-weighted assets and a total risk-based capital ratio equal to at least 8% of its risk-weighted assets. In addition, the FRB established a minimum leverage ratio for bank holding companies. Prior to January 1, 2015, the FRB's capital adequacy guidelines required that bank holding companies meeting specified criteria (including having the highest regulatory rating) maintain a Tier 1 leverage ratio equal to at least 3% of its average total consolidated assets. All other bank holding companies generally were required to maintain a Tier 1 leverage ratio of at least 4%.

On December 31, 2014, Hawthorn was in compliance with the FRB's capital adequacy guidelines. Hawthorn's capital ratios on December 31, 2014 and the minimum requirements as of that date are shown below:

Leverage Ratio	Tier 1 Risk-Based Capital Ratio	Total Risk-Based Capital Ratio
(3% minimum requirement)	(4% minimum requirement)	(8% minimum requirement)
9.42%	12.38%	15.78%

See "Changes in Laws and Monetary Policies - Recent Amendments to Regulatory Capital Requirements" below for a discussion of the new risk-based and leverage capital guidelines that went into effect on January 1, 2015.

5

Basel I, Basel II and Basel III Accords. The risk-based capital guidelines that applied to us and our subsidiary bank as of December 31, 2014 were based on the 1988 capital accord, referred to as Basel I, of the International Basel Committee on Banking Supervision (which we refer to as the "Basel Committee"), a committee of central banks and bank supervisors, as implemented by federal bank regulators. In 2008, the bank regulatory agencies began to phase-in capital standards based on a second capital accord issued by the Basel Committee, referred to as Basel II, for large or "core" international banks (generally defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of $10 billion or more). Because we do not anticipate controlling any large or "core" international bank in the foreseeable future, Basel II does not apply to us. On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, announced agreement on the calibration and phase-in arrangements for a strengthened set of capital requirements, known as Basel III. In July 2013, the federal banking agencies announced new risk-based capital and leverage ratios to conform to the Basel III framework and address provisions of the Dodd-Frank Act. With respect to the Company and the Bank, these requirements become effective on January 1, 2015. See "Changes in Laws and Monetary Policies - Recent Amendments to Regulatory Capital Requirements" below for a discussion of these new Basel III requirements.

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

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

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

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

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

6

and expanding the extra-territorial jurisdiction of the United States. The regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent, and report money laundering and terrorist financing. The regulations include significant penalties for non-compliance.

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

Regulation Applicable to the Bank

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

Bank Regulatory Capital Requirements. The FDIC has adopted minimum capital requirements applicable to state non-member banks, which are similar to the capital adequacy guidelines established by the FRB for bank holding companies. As of December 31, 2014, Federal banking laws classified an insured financial institution in one of the following five categories, depending upon the amount of its regulatory capital:

· "well-capitalized" if it has a total Tier 1 leverage ratio of 5% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a total risk-based capital ratio of 10% or greater (and is not subject to any order or written directive requiring the bank to adhere to a higher capital ratio);

· "adequately capitalized" if it has a total Tier 1 leverage ratio of 4% or greater (or a Tier 1 leverage ratio of 3% or greater, if the bank has a Capital adequacy, Asset quality, Management, Liquidity, and Sensitivity to market risk (CAMELS) rating of 1), a Tier 1 risk-based capital ratio of 4% or greater, and a total risk-based capital ratio of 8% or greater;

· "undercapitalized" if it has a total Tier 1 leverage ratio that is less than 4% (or a Tier 1 leverage ratio that is less than 3%, if the bank has a CAMELS rating of 1), a Tier 1 risk-based capital ratio that is less than 4% or a total risk-based capital ratio that is less than 8%;

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

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

Federal regulatory agencies are required to take prompt corrective action against undercapitalized financial institutions. On December 31, 2014, the Bank was classified as "well-capitalized," which is required for Hawthorn to remain a financial holding company. The capital ratios and classifications of the Bank as of December 31, 2014 and the minimum requirements as of such date are shown on the following chart.

Leverage Ratio	Tier 1 Risk-Based Capital Ratio	Total Risk-Based Capital Ratio
(5% minimum requirement)	(6% minimum requirement)	(10% minimum requirement)
10.42%	13.74%	14.78%

In July 2013, the federal banking agencies announced new risk-based capital and leverage ratios to conform to the Basel III framework and address provisions of the Dodd-Frank Act. With respect to the Company and the Bank, these requirements became effective on January 1, 2015. See "Changes in Laws and Monetary Policies - Recent Amendments to Regulatory Capital Requirements" below for a discussion of these new Basel III requirements.

7

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

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

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

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

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

Changes in Laws and Monetary Policies

Recent Amendments to Regulatory Capital Requirements. In July 2013, the federal banking agencies approved amendments to their regulatory capital rules to conform them to the international regulatory standards agreed to by the Basel Committee on Banking Supervision in the accord often referred to as "Basel III".  The revisions establish new higher capital ratio requirements, tighten the definitions of capital, impose new operating restrictions on banking organizations with insufficient capital buffers and increase the risk weighting of certain assets. The new capital requirements apply to all banks and savings associations, bank holding companies with more than $500 million in assets and all savings and loan holding companies (other than certain savings and loan holding companies engaged in insurance underwriting and grandfathered diversified holding companies) regardless of asset size.  The rules became effective for institutions with assets over $250 billion and internationally active institutions starting in January 2014 and became effective for all other institutions beginning in January 2015.  The following discussion summarizes the changes which are believed most likely to affect the Company and the Bank.

New and Higher Capital Requirements.  The regulations establish a new capital measure called "Common Equity Tier 1 Capital" which consists of common stock instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income and, subject to certain adjustments, minority common equity interests in subsidiaries.  Unlike the rules in effect immediately prior to January 1,

8

2015, which excluded unrealized gains and losses on available-for-sale debt securities from regulatory capital, the amended rules require accumulated other comprehensive income to flow through to regulatory capital unless a one-time, irrevocable opt-out election is made in the first regulatory reporting period under the new rule.  Effective January 1, 2015, depository institutions and their holding companies are required to maintain Common Equity Tier 1 Capital equal to at least 4.5% of risk-weighted assets.

The amended regulations increased the required ratio of Tier 1 Capital to risk-weighted assets from 4% to 6%. Tier 1 Capital now consists of Common Equity Tier 1 Capital plus Additional Tier 1 Capital elements which includes non-cumulative perpetual preferred stock.  Cumulative preferred stock (other than cumulative preferred stock issued to the U.S. Treasury under the Capital Purchase Program or the Small Business Lending Fund) no longer qualifies as Additional Tier 1 Capital.  Trust preferred securities and other non-qualifying capital instruments issued prior to May 19, 2010 by bank and savings and loan holding companies with less than $15 billion in assets as of December 31, 2009 or by mutual holding companies may continue to be included in Tier 1 Capital but will be phased out over 10 years beginning in 2016 for all other banking organizations.  These non-qualifying capital instruments, however, may be included in Tier 2 Capital which may also include qualifying subordinated debt.  The amended regulations also require a minimum Tier 1 leverage ratio of 4% for all institutions, eliminating the 3% option for institutions with the highest supervisory ratings.  The minimum required ratio of total capital to risk-weighted assets remains at 8%.

Capital Conservation Buffer Requirement. In addition to higher capital requirements, depository institutions and their holding companies will be required to maintain a common equity Tier 1 capital conservation buffer of at least 2.5% of risk-weighted assets over and above the minimum risk-based capital requirements.  Institutions that do not maintain the required capital buffer will become subject to progressively more stringent limitations on the percentage of earnings that can be paid out in dividends or used for stock repurchases and on the payment of discretionary bonuses to senior executive management.  The capital conservation buffer requirement will be phased in over four years beginning in 2016.  The capital conservation buffer requirement effectively raises the minimum required risk-based capital ratios to 7% Common Equity Tier 1 Capital, 8.5% Tier 1 Capital and 10.5% Total Capital on a fully phased-in basis.

Changes to Prompt Corrective Action Capital Categories.  The Prompt Corrective Action rules were amended effective January 1, 2015 to incorporate a Common Equity Tier 1 Capital requirement and to raise the capital requirements for certain capital categories.  In order to be adequately capitalized for purposes of the prompt corrective action rules, a banking organization is required to have at least an 8% Total Risk-Based Capital Ratio, a 6% Tier 1 Risk-Based Capital Ratio, a 4.5% Common Equity Tier 1 Risk Based Capital Ratio and a 4% Tier 1 Leverage Ratio.  To be well capitalized, a banking organization is required to have at least a 10% Total Risk-Based Capital Ratio, an 8% Tier 1 Risk-Based Capital Ratio, a 6.5% Common Equity Tier 1 Risk Based Capital Ratio and a 5% Tier 1 Leverage Ratio.

Additional Deductions from Capital. Banking organizations are required to deduct goodwill and other intangible assets (other than certain mortgage servicing assets), net of associated deferred tax liabilities, from Common Equity Tier 1 Capital.  Deferred tax assets arising from temporary timing differences that cannot be realized through net operating loss (NOL) carrybacks continue to be deducted.  Deferred tax assets that can be realized through NOL carrybacks are not be deducted but will be subject to 100% risk weighting.  Defined benefit pension fund assets, net of any associated deferred tax liability, are deducted from Common Equity Tier 1 Capital unless the banking organization has unrestricted and unfettered access to such assets.  Reciprocal cross-holdings of capital instruments in any other financial institutions are deducted from capital, not just holdings in other depository institutions.  For this purpose, financial institutions are broadly defined to include securities and commodities firms, hedge and private equity funds and non-depository lenders.  Banking organizations are required to deduct non-significant investments (less than 10% of outstanding stock) in the capital of other financial institutions (including investments in trust preferred securities) to the extent these exceed 10% of Common Equity Tier 1 Capital subject to a 15% of Common Equity Tier 1 Capital cap.  Greater than 10% investments must be deducted if they exceed 10% of Common Equity Tier 1 Capital.  If the aggregate amount of certain items excluded from capital deduction due to a 10% threshold exceeds 17.65% of Common Equity Tier 1 Capital, the excess must be deducted.

9

Changes in Risk-Weightings.  The federal banking agencies did not adopt a proposed rule that would have significantly changed the risk-weighting for residential mortgages.  Instead, the amended regulations continue to follow the capital rules in effect as of December 31, 2014, which assign a 50% risk-weighting to "qualifying mortgage loans" which generally consist of residential first mortgages with an 80% loan-to-value ratio (or which carry mortgage insurance that reduces the bank's exposure to 80%) that are not more than 90 days past due.  All other mortgage loans have a 100% risk weight.  The revised regulations apply a 250% risk-weighting to mortgage servicing rights, deferred tax assets that cannot be realized through NOL carrybacks and investments in the capital instruments of other financial institutions that are not deducted from capital.  The revised regulations also create a new 150% risk-weighting category for "high volatility commercial real estate loans" which are credit facilities for the acquisition, construction or development of real property other than for certain community development projects, agricultural land and one- to four-family residential properties or commercial real projects where: (i) the loan-to-value ratio is not in excess of interagency real estate lending standards; and (ii) the borrower has contributed capital equal to not less than 15% of the real estate's "as completed" value before the loan is made.

Although the Company continues to assess the impact of the new rules, management believes that, as of January 1, 2015, the Company's and the Bank's capital levels would remain "well-capitalized" under the new rules.

Recent Legislation. Various pieces of legislation, including proposals to change substantially the financial institution regulatory system, are from time to time introduced and considered by the Missouri state legislature and the United States Congress. In July 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which enacted substantial changes to the legal framework of the entire financial services industry. The Dodd-Frank Act mandates the passage of numerous rules and regulations by various regulatory agencies over the next few years. It also creates the Consumer Financial Protection Bureau, which will overtake supervision of most providers of consumer financial products and services, and will be empowered to declare acts or practices related to the delivery of a consumer financial product or service to be "unfair, deceptive or abusive." This law will continue to change banking regulation and the operating environment of Hawthorn in substantial and unpredictable ways. These changes could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. Hawthorn cannot predict the impact that the Dodd-Frank Act, and the various regulations issued thereunder will have on its business.

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

· conducting open market operations in United States government securities;

· changing the discount rates of borrowings of depository institutions;

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

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

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

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

10

Available Information

The address of the Company's principal executive offices is 132 East High Street, Jefferson City, Missouri 65102 and the telephone number at this location is (573)761-6100. The Company's common stock trades on the Nasdaq Global Select Market under the symbol "HWBK".

We electronically file certain documents with the Securities and Exchange Commission (SEC). We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K (as appropriate), along with any related amendments and supplements. From time-to-time, we also may file registration and related statements pertaining to equity or debt offerings. You may read and download the Company's SEC filings over the internet from several commercial document retrieval services as well as at the SEC's internet website (www.sec.gov). You may also read and copy the Company's SEC filings at the SEC's public reference room located at 100 F Street, NE., Washington, DC 20549. Please call the SEC 1-800-SEC-0330 for further information concerning the public reference room and any applicable copy charges.

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

Item 1A. Risk Factors.

Risk Factors

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

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

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

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

• borrowers may be unable to repay their loans,

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

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

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

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

11

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

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

• the Bank's ability to originate loans,

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

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

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

• the Bank's ability to obtain deposits.

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

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

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

12

The Provision For Probable Loan Losses May Need To Be Increased. Hawthorn's banking subsidiary makes a provision for loan losses based upon management's estimate of probable losses in the loan portfolio and its consideration of prevailing economic and environmental conditions. The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond the Company's control, and these losses may exceed current estimates. We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future. The Bank may need to increase the provision for loan losses through additional provisions in the future if, among other things, the financial condition of any of its borrowers deteriorates, if its borrower fails to perform its obligations to it, or if real estate values decline. Furthermore, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's loan portfolio, provision for loan losses, and real estate acquired by foreclosure. Such agencies may require the Bank to recognize additions to the provision for loan losses based on their judgments of information available to them at the time of the examination. Any additional provision for probable loan losses, whether required as a result of regulatory review or initiated by Hawthorn itself, may materially alter the financial outlook of Hawthorn and its banking subsidiary and may have a material adverse effect on the Company's financial condition and results of operations.

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

Although there has been a modest recovery in the domestic economy, the recovery is weak and there can be no assurance that the economy will not enter into another recession, whether in the near or long term future. Furthermore, real estate values and the demand for commercial real estate loans have not fully recovered, and reduced availability of commercial credit and continuing unemployment have negatively impacted the credit performance of commercial and consumer credit. Additional market developments such as a relapse or worsening of economic conditions in other parts of the world would likely exacerbate the lingering effects of the difficult market conditions experienced by us and others in the financial services industry and could further slow, stall or reverse the slow recovery in the U.S. A further deterioration of overall market conditions, a continuation of the economic downturn or prolonged economic stagnation in the Company's markets may have a negative impact on its business, financial condition, results of operations and the trading price of its common stock. If the strength of the U.S. economy in general and the strength of the economy in areas where we lend were to stagnate or decline, this could result in, among other things, a deterioration in credit quality or a reduced demand for credit, including a resultant adverse effect on the Company's loan portfolio and provision for losses on loans. This may exacerbate the Company's exposure to credit risk, impair the Company's ability to assess the creditworthiness of its customers or to estimate the values of its assets and adversely affect the ability of borrowers to perform under the terms of their lending arrangements with us. Negative conditions in the real estate markets where we operate could adversely affect borrowers' ability to repay their loans and the value of the underlying collateral. Real estate values are affected by various factors, including general economic conditions, governmental rules or policies and natural disasters. These factors may adversely impact borrowers' ability to make required payments, which in turn, may negatively impact the Company's financial results. As a result of the difficult market and economic conditions referred to above, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and for bank regulatory agencies to be very aggressive in responding to concerns and trends identified in examinations. This increased government action may increase costs and limit the Company's ability to pursue certain business opportunities.

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

13

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

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

• borrowers may not be able to repay their loans;

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

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

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

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

The FDIC's Changes in the Calculation of Deposit Insurance Premiums and Ability to Levy Special Assessments Could Increase The Company's Non-Interest Expense And May Reduce Its Profitability. The range of base assessment rates currently varies from 12 to 45 basis points depending on an institution's risk category, with newly added financial measures resulting in increased assessment rates for institutions heavily relying on brokered deposits to support rapid asset growth. However, the Dodd-Frank Act requires the FDIC to amend its regulations to redefine the assessment base used for calculating deposit insurance assessments. On February 9, 2011, the FDIC adopted a final rule that defines the assessment base as the average consolidated total assets during the assessment period minus the average tangible equity of the insured depository institution during the assessment period. The FDIC also imposed a new assessment rate scale. Under the new system, banks will pay assessments at a rate between 5 and 35 basis points per assets minus tangible equity, depending upon an institution's risk category (the final rule also includes progressively lower assessment rate schedules when the FDIC's reserve ratio reaches certain levels). The rulemaking changes the current assessment rate schedule so the schedule will result in the collection of assessment revenue that is approximately the same as generated under the current rate schedule and current assessment base. Nearly all banks with assets less than $10 billion will pay smaller deposit insurance assessments as a result of the new rule. The majority of the changes in the FDIC's final rule became effective on April 1, 2011. The FDIC has the statutory authority to impose special assessments on insured depository institutions in an amount, and for such purposes, as the FDIC may deem necessary. The change in the calculation methodology for deposit insurance premiums and the possible emergency special assessments could increase non-interest expense and may adversely affect the Company's profitability.

We May Elect Or Be Compelled To Seek Additional Capital In The Future, But That Capital May Not Be Available When It Is Needed. We are required by regulatory authorities to maintain adequate levels of capital to support operations. In addition, we may elect to raise additional capital to support the growth of the Company's business or to finance acquisitions, if any, or we may elect to raise additional capital for other reasons. In that regard, a number of financial institutions have recently raised considerable amounts of capital as a result of a deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values and other factors. Should we elect or be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, common stock or securities

14

convertible into common stock, which could dilute your ownership interest in the Company. Although we remain "well-capitalized" and have not had a deterioration in liquidity, the future cost and availability of capital may be adversely affected by illiquid credit markets, economic conditions and a number of other factors, many of which are outside of the Company's control. Accordingly, we cannot assure you of the ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed or on terms acceptable to us, it may have a material adverse effect on the Company's financial condition and results of operations.

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

Such competition for loans comes principally from:

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

Competition for deposits comes principally from:

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

Many of these competitors have greater financial resources and name recognition, more locations, more advanced technology and more financial products to offer than the Bank. Competition from larger institutions may increase due to an acceleration of bank mergers and consolidations in Missouri and the rest of the nation. In addition, the Gramm-Leach-Bliley Act removes many of the remaining restrictions in federal banking law against cross-ownership between banks and other financial institutions, such as insurance companies and securities firms. The law will likely increase the number and financial strength of companies that compete directly with the Bank. The profitability of the Bank depends of its continued ability to attract new customers and compete in Missouri. New competitors, as well as the expanding operations of existing competitors, have had, and are expected to continue to have, an adverse impact on the Bank's market share of deposits and loans in the Bank's service areas. If the Bank is unable to successfully compete, its financial condition and results of operations will be adversely affected.

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

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

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

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

• potential disruption to existing business and operations;

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

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

The success of the Company's internal growth strategy will depend primarily on the ability of the Bank to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in

15

non-interest expenses relative to revenues generated. There is no assurance that we will be successful in implementing the Company's internal growth strategy.

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

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

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

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

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

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

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

If We Fail To Maintain An Effective System Of Internal Control Over Financial Reporting, We May Not Be Able To Accurately Report Our Financial Results Or Prevent Fraud, And, As A Result, Investors And Depositors Could Lose Confidence In Our Financial Reporting, Which Could Adversely Affect Our Business, The Trading Price Of Our Stock, And Our Ability To Attract Additional Deposits. We are required to include in our

16

annual reports filed with the SEC a report from our management regarding internal control over financial reporting. As a result, we documented and evaluated our internal control over financial reporting in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act and SEC rules and regulations, which require an annual management report on our internal control over financial reporting, including, among other matters, management's assessment of the effectiveness of internal control over financial reporting. Failure or circumvention of our system of internal control could have an adverse effect on our business, profitability, and financial condition, and could result in regulatory actions and loss of investor confidence. Additionally, if we fail to identify and correct any significant deficiencies or material weaknesses in the design or operating effectiveness of our internal control over financial reporting or fail to prevent fraud, current and potential stockholders and depositors could lose confidence in our financial reporting, which could adversely affect our business, financial condition and results of operations, the trading price of our stock and our ability to attract additional deposits.

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

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

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

The Operation Of Our Business, Including Our Interaction With Customers, Are Increasingly Done Via Electronic Means, And This Has Increased Our Risks Related To Cybersecurity. We are exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks or unintentional events. We have observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as by causing denial-of-service attacks on websites. Cyber-attacks may be carried out by third parties or insiders using techniques that range from highly sophisticated efforts to electronically circumvent network security or overwhelm websites to more traditional intelligence gathering and social engineering aimed at obtaining information necessary to gain access. The objectives of cyber-attacks vary widely and can include theft of financial assets, intellectual property, or other sensitive information, including the information belonging to our banking customers. Cyber-attacks may also be directed at disrupting our operations.

17

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

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

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

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

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

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

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

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

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

· failure to meet analysts' revenue or earnings estimates;

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

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

18

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

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

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

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

· proposed or adopted regulatory changes or developments;

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

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

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

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

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

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

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

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

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Neither the Company nor Union State Bancshares owns or leases any property. The Company's principal offices are located at 132 East High Street, Jefferson City, Missouri 65102. The table below provides a list of the Bank's facilities.

19

						Net Book
						Value at
	Approximate			Owned or		12/31/2014
Location	Square Footage			Leased		(in thousands)
8127 East 171st Street, Belton, MO		13,000		Owned		$	1,879
4675 Gretna Road, Branson, MO		11,000	(1)	Owned		$	1,411
1000 West Buchanan Street, California, MO		2,270		Owned		$	380
102 North Second Street, Clinton, MO		11,524		Owned		$	1,478
1400 East Ohio Street, Clinton, MO		13,551		Owned		$	3,023
1712 East Ohio Street, Clinton, MO
(inside a Wal-Mart store)		600		Leased	(2)		N/A
1101 North Highway 13,Collins, MO		1,500		Owned		$	20
1110 Club Village Drive, Columbia, MO		5,000		Owned		$	1,527
18 S. Ninth St., Suites 208-209, Columbia, MO		1,500		Leased	(3)		N/A
115 South 2nd Street, Drexel, MO		4,000		Owned		$	191
100 Plaza Drive, Harrisonville, MO		4,000		Owned		$	512
17430 East 39th Street, Independence, MO		4,070		Owned		$	655
220 West White Oak, Independence, MO		1,800		Owned		$	70
132 East High Street, Jefferson City, MO		34,800		Owned		$	3,175
3701 West Truman Blvd, Jefferson City, MO		21,000		Owned		$	355
211 West Dunklin Street, Jefferson City, MO		2,500		Owned		$	1,623
800 Eastland Drive, Jefferson City, MO		4,100		Owned		$	668
3600 Amazonas Drive, Jefferson City, MO		26,000		Owned		$	2,588
300 S.W. Longview Blvd, Lee's Summit, MO		11,700		Owned		$	2,062
5 Victory lane, Suite 203, Liberty, MO		1075		Leased	(4)		N/A
335 Chestnut, Osceola, MO		1,580		Owned		$	52
500 North Mott Drive, # 103C, Raymore, MO
(in the Foxwood Springs Seniors Center)		462		Leased	(5)		N/A
595 VFW Memorial Drive, St. Robert, MO		2,236		Owned		$	67
321 West Battlefield, Springfield, MO		12,500	(6)	Owned		$	591
200 West Main Street, Warsaw, MO		8,900		Owned		$	140
1891 Commercial Drive, Warsaw, MO		11,000		Owned		$	1,639
125 South Main, Windsor, MO		3,600		Owned		$	241

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

(2) The term of this lease began in January 1999 and ends in January 2019.

(3) The term of this lease began on October 2014 and ends in September 2015.

(4) The term of this lease began in May 2014 and ends in April 2016.

(5) The term of this lease can be terminated at any time upon thirty days' notice.

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

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

Item 3. Legal Proceedings.

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

20

Item 4. Mine Safety Disclosures.

Not applicable

EXECUTIVE OFFICERS OF THE REGISTRANT

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

Name	Age	Position
David T. Turner	58	Chairman, Chief Executive Officer, President and Director
W. Bruce Phelps	64	Senior Vice President and Chief Financial Officer
Kathleen L. Bruegenhemke	49	Senior Vice President and Secretary

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

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

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

Kathleen L. Bruegenhemke has served as Senior Vice President and Secretary of the Company since November 1997. Since October 2014, she also has served as Columbia Market President. From January 1992 until November 1997, she served as Internal Auditor of Hawthorn Bank (or of one of its constituent predecessors). Prior to joining the Bank, Ms. Bruegenhemke served as a Commissioned Bank Examiner for the Federal Deposit Insurance Corporation.

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

PART II

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

Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item, other than that referred to below, is incorporated herein by reference to the information under the caption "Market Price of and Dividends on Equity Securities and Related Matters" in the Company's 2014 Annual Report to Shareholders.

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

21

The Company's Purchases of Equity Securities

The following table summarizes the purchases made by or on behalf of the Company or certain affiliated purchasers of shares of the Company's common stock during the fourth quarter of the year ended December 31, 2014:

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 *
October 1-31, 2014		—		—		—	$	333,038
November 1-30, 2014		—		—		—	$	333,038
December 1-31, 2014		—		—		—	$	333,038
Total		—		—		—	$	333,038

* On August 22, 2001, the Company announced that its Board of Directors authorized the purchase, through open market transactions, of up to $2,000,000 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. On November 26, 2002, the Company announced that its Board of Directors authorized an additional $2,000,000 for the purchase of the Company's stock through open market transactions.

Recent Issuance of Securities

None.

Item 6. Selected Financial Data.

Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption "Selected Consolidated Financial Data" in the Company's 2014 Annual Report to Shareholders.

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

Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2014 Annual Report to Shareholders.

Forward-Looking Statements

This report, including information included or incorporated by reference in this report, contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, strategy, future performance and business of the Company and its subsidiaries, including, without limitation:

· statements that are not historical in nature, and

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

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

· competitive pressures among financial services companies may increase significantly,

22

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

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

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

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

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

· changes may occur in the securities markets.

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

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

The Company's exposure to market risk is reviewed on a regular basis by our Bank's asset/liability committee and board of directors. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize those risks. Tools used by the Bank's management include the standard GAP report subject to different rate shock scenarios. At December 31, 2014, the rate shock scenario models indicated that annual net interest income could change by as much as -18.3% to +25.5% should interest rates rise or fall within 400 basis points from their current level over a one year period. However there are no assurances that the change will not be more or less than this estimate.

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

(i) the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations — Interest Sensitivity and Liquidity" in the Company's 2014 Annual Report to Shareholders; and

(ii) the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations — Quantitative and Qualitative Disclosures About Market Risk" in the Company's 2014 Annual Report to Shareholders.

Item 8. Financial Statements and Supplementary Data.

Pursuant to General Instruction G(2) to Form 10-K, the information required by this Item is incorporated herein by reference to the report of the independent auditors and the information under the caption "Consolidated Financial Statements" in the Company's 2014 Annual Report to Shareholders.

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

None.

23

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2014. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that, as of December 31, 2014, the Company’s disclosure controls and procedures were effective.

Internal Controls Over Financial Reporting.

Management's Report on Internal Control Over Financial Reporting.

The Company's management is responsible for establishing and maintaining effective internal control over financial reporting, as such term is defined in Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company's management, including the Company's principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting, as of December 31, 2014, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992). Based upon its assessment, management has concluded that, as of December 31, 2014, the Company's internal control over financial reporting, is effective based on the criteria established in Internal Control-Integrated Framework (1992).

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As discussed in the Company’s September 30, 2014 Quarterly Report on Form 10-Q filed with the SEC on November 14, 2014, during the quarter, the Company’s management discovered an instance of employee fraud resulting in the loss of an aggregate $421,000 of cash over an extended period of time. As a result of the discovery, the Company recorded a $136,000 loss in its consolidated financial statements as of December 31, 2014, representing the $421,000 gross loss, net of expected insurance proceeds of $285,000. The Company determined that any adjustments relating to prior-period financial statements were immaterial.

Although this employee fraud was ultimately discovered as a result of high-level controls in place at the Company, management determined that the operation of the Company’s controls related to cash reconcilement and accounting were not effective at that time to ensure consistent application of established policies and procedures, including those designed to detect or prevent certain unauthorized, fraudulent transactions, and that such deficiency constituted a material weakness in the Company’s internal control over financial reporting. Accordingly, the Company promptly took steps to enhance its cash controls and procedures to remediate such material weakness, including, among other things, the adoption of clarifying revisions to existing policies to aid in their effective implementation, adjustments to the level of precision at which the controls operate, enhancements to the segregation of certain duties, and additional communication from senior management regarding effective application of existing controls and procedures. In addition to these remedial measures, the Company performed a cash count at all of its branches utilizing the enhanced controls and procedures to ensure that cash totals reconciled to its financial statements.

Management has made a comprehensive review, evaluation, and assessment of the Company’s internal control over financial reporting as of December 31, 2014. In making its assessment of the effectiveness of the Company’s internal control over financial reporting, management used the framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (1992). Based on that assessment, management concluded that, as of December 31, 2014, the remedial measures discussed above have strengthened the Company’s internal control over financial reporting to the extent necessary to remedy the material weakness relating to the detection and prevention of certain unauthorized, fraudulent transactions and that the Company’s internal control over financial reporting was effective.

24

Management's assessment of the effectiveness of internal control over financial reporting, as of December 31, 2014, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.

Changes in Internal Controls.

Other than the remediation of the cash controls and procedures noted above, there has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Report of Independent Registered Public Accounting Firm.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Hawthorn Bancshares, Inc.:

We have audited Hawthorn Bancshares, Inc.'s (the Company) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on the audit.

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

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

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

In our opinion, Hawthorn Bancshares, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Hawthorn Bancshares, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income,

25

stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and the report dated March 31, 2015 expressed an unqualified opinion on those consolidated financial statements.

/s / KPMG LLP

St. Louis, Missouri

March 31, 2015

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

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

(i) the information under the caption "Item 1: Election of Directors—What is the structure of our board and how often are directors elected?" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii) the information under the caption "Item 1: Election of Directors—Who are this year's nominees?" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(iii) the information under the caption "Item 1: Election of Directors—What is the business experience of the nominees and of our continuing board members?" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

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

(v) the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(vi) the information under the caption "Corporate Governance and Board Matters—Consideration of Director Nominees" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and

(vii) the information under the caption "Corporate Governance and Board Matters—Committees of the Board—Audit Committee" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Code of Ethics

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

26

officer, principal accounting officer, controller, or persons performing similar functions will be disclosed in a report on Form 8-K.

Item 11. Executive Compensation.

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

(i) the information under the caption "Executive Compensation and Related Matters" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii) the information under the caption "Corporate Governance and Board Matters—Director Compensation" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and

(iii) the information under the caption "Corporate Governance and Board Matters—Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

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

Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item, other than that presented below, is incorporated herein by reference to the information under the caption "Ownership of Common Stock" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Securities Authorized For Issuance Under Equity Compensation Plans

The Company has two equity compensation plans for its employees pursuant to which options, rights or warrants may be granted. The following is a summary of the shares reserved for issuance pursuant to outstanding options, rights or warrants granted under equity compensation plans as of December 31, 2014:

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)			(b)		(c)
Equity compensation plans approved by security holders		96,481	*	$	22.42		962,366	**
Equity compensation plans not approved by security holders		-0-			-0-		-0-
Total		96,481	*	$	22.42		962,366	**

* Consists of shares reserved for issuance pursuant to outstanding stock option grants under the Company's incentive stock option plan.

** Consists of 456,238 shares available for future issuance under the Company's incentive stock option plan and 506,128 shares available for future issuance under the Company's 2007 omnibus incentive plan.

27

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

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

(i) the information under the caption "Related Party Transactions" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A;

(ii) the information under the caption "Item 1: Election of Directors—What is the structure of our board and how often are directors elected?" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A; and

(iii) the information under the caption "Corporate Governance and Board Matters—Committees of the Board" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

Item 14. Principal Accounting Fees and Services.

Pursuant to General Instruction G(3) to Form 10-K, the information required by this Item is incorporated herein by reference to the information under the caption "Independent Auditor Fees and Services" in the Company's definitive Proxy Statement for its 2015 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.

PART IV

Item 15. Exhibits, Financial Statement Schedules.

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

1. Financial Statements:

The following consolidated financial statements of the Company and reports of the Company's independent auditors, included in the Company's Annual Report to Shareholders for the year ended December 31, 2014 under the caption "Consolidated Financial Statements", are incorporated herein by reference:

Report of Independent Registered Public Accounting Firm.

Consolidated Balance Sheets as of December 31, 2014 and 2013.

Consolidated Statements of Income for the years ended December 31, 2014, 2013, and 2012.

Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013, and 2012.

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2014, 2013, and 2012.

Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013, and 2012.

Notes to the Consolidated Financial Statements.

2. Financial Statement Schedules:

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

28

3. Exhibits:

Exhibit No.	Description
3.1	Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company's current report on Form 8-K on August 9, 2007 and incorporated herein by reference).
3.2	Amended and Restated Bylaws of the Company (filed as Exhibit 3.2 to the Company's current report on Form 8-K on November 1, 2007 and incorporated herein by reference).
4.1	Specimen certificate representing shares of the Company's $1.00 par value Common Stock (filed as Exhibit 4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).
10.1	Exchange National Bancshares, Inc. Incentive Stock Option Plan (filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).*
10.2	Form of Change of Control Agreement and schedule of parties thereto (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarterly period March 31, 2005 and incorporated herein by reference).*
13	The Company's 2014 Annual Report to Shareholders (only those portions of this Annual Report to Shareholders which are specifically incorporated by reference into this Annual Report on Form 10-K shall be deemed to be filed with the Commission).
14	Code of Business Conduct and Ethics of the Company (filed as Exhibit 14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
21	List of Subsidiaries (filed as Exhibit 21 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 and incorporated herein by reference).
23	Consent of Independent Registered Public Accounting Firm.
24	Power of Attorney (included on the signature page to this Annual Report on Form 10-K).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL)

______________________

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

(b) Exhibits.

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

(c) Financial Statement Schedules.

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

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	HAWTHORN BANCSHARES, INC.
Dated:  March 31, 2015	By	/s/	David T. Turner
			David T. Turner, Chairman of the Board,
			President and Chief Executive Officer

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

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

Date	Signature and Title
March 31, 2015	/s/ David T. Turner
	David T. Turner, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
March 31, 2015	/s/ W. Bruce Phelps
	W. Bruce Phelps, Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)
March 31, 2015	/s/ Frank E. Burkhead
	Frank E. Burkhead, Director
March 31, 2015	/s/ Philip D. Freeman
	Philip D. Freeman, Director
March 31, 2015	/s/ Kevin L. Riley
	Kevin L. Riley, Director
March 31, 2015	/s/ James E. Smith
	James E. Smith, Director
March 31, 2015	/s/ Gus S. Wetzel, II
	Gus S. Wetzel, II, Director

30

EXHIBIT INDEX

Exhibit No.	Description	Page No.
13	The Company's 2014 Annual Report to Shareholders (only those portions of this Annual Report to Shareholders which are specifically incorporated by reference into this Annual Report on Form 10-K shall be deemed to be filed with the Commission).
23	Consent of Independent Registered Public Accounting Firm
24	Power of Attorney (included on the signature page to this Annual Report on Form 10-K).
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail (XBRL).*

_______________________

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

31

EX-13

Exhibit 13​

2014

ANNUAL REPORT

TO

SHAREHOLDERS

HAWTHORN BANCSHARES, INC.

Jefferson City, Missouri

 

March 31, 2015

Dear Shareholders:

I am pleased to report that net income for 2014 increased 76% over 2013 and reached its highest level since 2007. For 2014, Hawthorn reported a net profit of  $7.7 million compared to $4.4 million for 2013. As a result of our 2013 U.S. Treasury debt repayment, all of the Company’s 2014 net income was available to common shareholders, and we are pleased to report 2014 diluted earnings per share of  $1.46 compared to $0.83 for 2013.

Our earnings improvement for 2014 was primarily due to a $4.1 million reduction in foreclosed property expenses and a $2.0 million decrease in the provision for loan losses. Foreclosed property expenses fell largely because we sold a significant portion of foreclosed properties in 2013. Continuation of those sales in 2014 led to our lowest year-end ORE balance since 2009. The decrease in the provision for loan losses resulted from the determination, following continuing, extensive evaluation of loan portfolio risk, that no provision was required for 2014.

Net interest income for 2014 was $39.5 million compared to $39.3 million for 2013. On a tax equivalent basis, Hawthorn’s net interest margin was 3.72% for both 2014 and 2013. Although our net interest margin remained flat due to the historically low rate environment and continued competition for quality loans, it continues to be healthy and exceeds peer averages.

Non-interest income for 2014 was $8.7 million compared to $10.9 million for 2013. The decrease is primarily the result of lower real estate service fees and mortgage sales income and $0.8 million of gains realized in 2013 on the sale of investment securities. Non-interest expense for 2014 was $36.5 million compared to $40.8 million for 2013. The largest contributor to the decrease resulted from lower expenses related to foreclosed properties.

Our Capital levels at December 31, 2014 continue to exceed regulatory well capitalized thresholds with 9.42% of leverage capital and 15.78% of total risk-based capital.

While 2014 was certainly better than 2013, I am still not satisfied with our performance. We must continue to improve upon our 0.66% return on average assets and 9.69% return on average common equity for 2014. As an investor, director and executive officer, I am committed to maintaining strong asset quality, improving earnings performance, sustaining sound and proper capital levels and paying regular dividends.

Our focus remains the same - to prudently and safely grow the company. We have built a structure to deliver quality service to customers. We have developed a team of experienced first class lenders who are bringing in loan opportunities, but also meeting the customer’s treasury management needs. We want, and strive for, the entire customer relationship. While good opportunities to grow exist within our current markets, we are in an excellent position to take advantage of acquisition opportunities that may arise as the banking industry consolidates.

Finally, I would like to reflect on the passing of Director Harold Butzer in 2014. Harold was a strong advisor to our Company for more than 49 years. His contributions to the board and committees will be missed. Also, I would like to welcome Frank Burkhead to our board of directors. Frank was added to our management team in 2014 as Director Charles Dudenhoeffer, Jr. transitioned to advisory director status. Frank is a certified public accountant with much experience in wealth management.

Hawthorn Bancshares’ future is bright and you should feel confident about your investment. Your bankers are highly professional and I respect their talents immensely. On behalf of your board and management team, thank you for your continued trust and confidence.

Sincerely,

 

David T. Turner,
Chairman & Chief Executive Officer

A WORD CONCERNING FORWARD-LOOKING STATEMENTS

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

•

statements that are not historical in nature, and

•

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

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

•

competitive pressures among financial services companies may increase significantly,

•

changes in the interest rate environment may reduce interest margins,

•

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

•

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

•

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

•

legislative or regulatory changes may adversely affect the business in which the Company and its subsidiaries are engaged, and

•

changes may occur in the securities markets.

We have described under the caption Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and in other reports filed with the SEC from time to time, additional factors that could cause actual results to be materially different from those described in the forward-looking statements. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made.

2

HAWTHORN BANCSHARES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Crucial to the Company’s community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through the branch network of its subsidiary bank, Hawthorn Bank (the Bank), the Company, with $1.2 billion in assets at December 31, 2014, 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 (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 communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson, and Lee’s Summit, Missouri.

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 mortgage lending. The Company has experienced soft loan demand in the communities within which we operate during the current economic slowdown. The Company’s income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancings.

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

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

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

3

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial information for the Company as of and for each of the years in the five-years ended December 31, 2014. The selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements of the Company, including the related notes, presented elsewhere herein.

Income Statement Data

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

(In thousands, except per share data)

2014

2013

2012

2011

2010

Interest income

​

$

44,498

​

$

45,665

​

$

49,114

​

$

53,469

​

$

58,739

Interest expense

​

​

5,044

​

​

6,342

​

​

7,905

​

​

10,853

​

​

15,753

Net interest income

​

​

39,454

​

​

39,323

​

​

41,209

​

​

42,616

​

​

42,986

Provision for loan losses

​

​

0

​

​

2,030

​

​

8,900

​

​

11,523

​

​

15,255

Net interest income after provision for loan losses

​

​

39,454

​

​

37,293

​

​

32,309

​

​

31,093

​

​

27,731

Non-interest income

​

​

8,749

​

​

10,866

​

​

9,726

​

​

9,200

​

​

10,481

Non-interest expense

​

​

36,507

​

​

40,763

​

​

38,667

​

​

36,845

​

​

44,851

Income (loss) before income taxes

​

​

11,696

​

​

7,396

​

​

3,368

​

​

3,448

​

​

(6,639)

Income tax expense (benefit)

​

​

4,042

​

​

2,422

​

​

546

​

​

591

​

​

(3,087)

Net income (loss)

​

​

7,654

​

​

4,974

​

​

2,822

​

​

2,857

​

​

(3,552)

Preferred stock dividends and accretion of discount

​

​

0

​

​

615

​

​

1,784

​

​

1,989

​

​

1,989

Net income (loss) available to common shareholders

​

$

7,654

​

$

4,359

​

$

1,038

​

$

868

​

$

(5,541)

Dividends on Common Stock

Declared

​

$

1,027

​

$

988

​

$

949

​

$

913

​

$

1,136

Paid

​

​

1,017

​

​

978

​

​

940

​

​

904

​

​

1,385

Per Share Data

Basic earnings (loss) per common share

​

$

1.46

​

$

0.83

​

$

0.20

​

$

0.17

​

$

(1.06)

Diluted earnings (loss) per common share

​

​

1.46

​

​

0.83

​

​

0.20

​

​

0.17

​

​

(1.06)

Basic weighted average shares of common stock outstanding

​

​

5,233,986

​

​

5,233,986

​

​

5,233,986

​

​

5,233,986

​

​

5,233,986

Diluted weighted average shares of common stock outstanding

​

​

5,233,986

​

​

5,233,986

​

​

5,233,986

​

​

5,233,986

​

​

5,233,986

4

(In thousands)

2014

2013

2012

2011

2010

Balance Sheet Data (at year end)

Total assets

​

$

1,169,731

​

$

1,140,122

​

$

1,181,606

​

$

1,171,161

​

$

1,200,172

Net loans

​

​

852,114

​

​

825,828

​

​

832,142

​

​

829,121

​

​

883,908

Investment securities

​

​

203,720

​

​

209,986

​

​

204,171

​

​

218,191

​

​

185,120

Total deposits

​

​

969,514

​

​

956,471

​

​

991,275

​

​

958,224

​

​

946,663

Subordinated notes

​

​

49,486

​

​

49,486

​

​

49,486

​

​

49,486

​

​

49,486

Federal Home Loan Bank advances

​

​

43,000

​

​

24,000

​

​

20,126

​

​

28,410

​

​

66,986

Stockholders’ equity

​

​

80,568

​

​

74,380

​

​

74,243

​

​

73,258

​

​

72,647

Total stockholders’ equity

​

​

80,568

​

​

74,380

​

​

92,220

​

​

102,576

​

​

101,488

Balance Sheet Data (average balances)

Total assets

​

$

1,156,911

​

$

1,159,127

​

$

1,176,384

​

$

1,187,410

​

$

1,236,841

Net loans

​

​

839,957

​

​

818,525

​

​

827,881

​

​

851,664

​

​

935,603

Investment securities

​

​

212,697

​

​

224,551

​

​

225,119

​

​

214,168

​

​

171,569

Total deposits

​

​

971,777

​

​

978,063

​

​

971,767

​

​

957,965

​

​

967,970

Subordinated notes

​

​

49,486

​

​

49,486

​

​

49,486

​

​

49,486

​

​

49,486

Federal Home Loan Bank advances

​

​

29,964

​

​

23,256

​

​

27,961

​

​

42,230

​

​

70,456

Stockholders’ equity

​

​

78,953

​

​

73,259

​

​

74,245

​

​

75,390

​

​

80,735

Total stockholders’ equity

​

​

78,953

​

​

79,875

​

​

96,176

​

​

104,455

​

​

109,323

Key Ratios

Earnings Ratios

Return (loss) on average total assets

​

​

0.66%

​

​

0.43%

​

​

0.24%

​

​

0.24%

​

​

(0.29)%

Return (loss) on average common stockholders’ equity

​

​

9.69

​

​

5.95

​

​

1.40

​

​

1.15

​

​

(6.86)

Efficiency ratio (3)

​

​

75.74

​

​

81.22

​

​

75.91

​

​

71.11

​

​

83.89

Asset Quality Ratios

Allowance for loan losses to loans

​

​

1.06%

​

​

1.63%

​

​

1.75%

​

​

1.64%

​

​

1.62%

Nonperforming loans to loans (1)

​

​

4.18

​

​

4.21

​

​

4.65

​

​

6.37

​

​

6.27

Allowance for loan losses to nonperforming loans (1)

​

​

25.26

​

​

38.84

​

​

37.70

​

​

25.73

​

​

25.87

Nonperforming assets to loans and foreclosed assets (2)

​

​

5.49

​

​

5.87

​

​

7.23

​

​

8.11

​

​

7.71

Net loan charge-offs to average loans

​

​

0.54

​

​

0.38

​

​

0.93

​

​

1.42

​

​

1.63

Capital Ratios

Average stockholders’ equity to average total assets

​

​

6.82%

​

​

6.89%

​

​

8.18%

​

​

8.80%

​

​

8.84%

Period-end common stockholders’ equity to period-end assets

​

​

6.89

​

​

6.52

​

​

6.28

​

​

6.26

​

​

6.05

Period-end stockholders’ equity to period-end assets

​

​

6.89

​

​

6.52

​

​

7.80

​

​

8.76

​

​

8.46

Total risk-based capital ratio

​

​

15.78

​

​

15.33

​

​

16.83

​

​

18.03

​

​

17.05

Tier 1 risk-based capital ratio

​

​

12.38

​

​

11.40

​

​

13.58

​

​

15.16

​

​

14.25

Leverage ratio

​

​

9.42

​

​

8.80

​

​

10.37

​

​

11.52

​

​

11.00

(1)

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

(2)

Nonperforming assets consist of nonperforming loans and foreclosed assets.

(3)

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

5

CRITICAL ACCOUNTING POLICIES

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

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. Further discussion of the methodology used in establishing the allowance and the impact of any associated risks related to these policies on the Company’s business operations is provided in Note 1 to the Company’s consolidated financial statements and is also discussed in the Lending and Credit Management section below. 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.

Other Real Estate Owned and Repossessed Assets

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

6

RESULTS OF OPERATIONS ANALYSIS

The Company has prepared all of the consolidated financial information in this report in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.

​	​	​	​	​	​	​	​	​	​	$ Change						% Change
(In thousands)	2014			2013			2012			’14-’13			’13-’12			’14-’13		’13-’12
Net interest income	​	$	39,454	​	$	39,323	​	$	41,209	​	$	131	​	$	(1,886)	​	0.3%	​	(4.6)%
Provision for loan losses	​	​	-	​	​	2,030	​	​	8,900	​	​	(2,030)	​	​	(6,870)	​	(100.0)	​	(77.2)
Noninterest income	​	​	8,749	​	​	10,866	​	​	9,726	​	​	(2,117)	​	​	1,140	​	(19.5)	​	11.7
Noninterest expense	​	​	36,507	​	​	40,763	​	​	38,667	​	​	(4,256)	​	​	2,096	​	(10.4)	​	5.4
Income (loss) before income taxes	​	​	11,696	​	​	7,396	​	​	3,368	​	​	4,300	​	​	4,028	​	(58.1)	​	119.6
Income tax expense	​	​	4,042	​	​	2,422	​	​	546	​	​	1,620	​	​	1,876	​	(66.9)	​	343.6
Net income	​	$	7,654	​	$	4,974	​	$	2,822	​	$	2,680	​	$	2,152	​	53.9%	​	76.3%
Preferred stock dividends and accretion of discount	​	​	-	​	​	615	​	​	1,784	​	​	(615)	​	​	(1,169)	​	(100.0)	​	(65.5)
Net income available to common shareholders	​	$	7,654	​	$	4,359	​	$	1,038	​	$	3,295	​	$	3,321	​	75.6%	​	(319.9)%

Preferred Stock On December 19, 2008, the Company announced its participation in the U.S. Treasury Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. Participation in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of  $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock. On May 9, 2012, the Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program for a total purchase price of  $12.1 million, and on May 15, 2013, the remaining 18,255 shares were redeemed for a total purchase price of  $18.5 million.

On June 11, 2013 the common stock warrant issued under the U.S. Treasury Department’s CPP program was repurchased by the Company for a total purchase price of  $540,000, or $1.88 per warrant share. The purchase price was based on the fair value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ended the Company’s participation in the U.S Treasury Department’s CPP.

Stock Dividend For the sixth consecutive year, on July 1, 2014, the Company distributed a four percent stock dividend to common shareholders of record at the close of business on June 15, 2014. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect the stock dividend.

Consolidated net income of  $7.7 million for the year ended December 31, 2014 increased $2.7 million compared to consolidated net income of  $5.0 million for the year ended December 31, 2013. Net income available to common shareholders for the year ended December 31, 2014 was $7.7 million, or $1.46 per diluted common share, compared to net income available to common shareholders of  $4.4 million, or $0.83 per diluted common share for the year ended December 31, 2013. For the year ended December 31, 2014, the return on average assets was 0.66%, the return on average common stockholders’ equity was 9.69%, and the efficiency ratio was 75.74%.

For the year ended December 31, 2013, consolidated net income of  $5.0 million increased $2.2 million compared to a consolidated net income of  $2.8 million for the year ended December 31, 2012. Net income available to common shareholders for the year ended December 31, 2013 was $4.4 million, or $0.83 per diluted common share, compared to net income available to common shareholders of  $1.0 million, or $0.20 per diluted common share for the year ended December 31, 2012. For the year ended December 31, 2013,

7

the return on average assets was 0.43%, the return on average common stockholders’ equity was 5.95%, and the efficiency ratio was 81.22%. The lower level of dividends and accretion on preferred stock for the year ended December 31, 2013 resulted from the Company’s redemption of the remaining 18,255 shares of preferred stock issued under the U.S. Treasury’s CPP program on May 15, 2013.

Net interest income was $39.5 million for the year ended December 31, 2014 compared to $39.3 million and $41.2 million for the years ended December 31, 2013 and 2012, respectively. The increase from 2013 was primarily due to an increase in average loan volume, while the decrease from 2012 was primarily due to lower average earning asset levels and continued contraction of the net interest margin resulting from the prolonged low interest rate environment. The net interest margin was 3.72% for both the years ended December 31, 2014 and 2013, compared to 3.84% for the year ended December 31, 2012.

No provision for loan losses was required for the year ended December 31, 2014 compared to $2.0 million and $8.9 million for the years ended December 31, 2013 and 2012, respectively. This was primarily due to decreases in the Company’s historical loss rates based on the Company’s last thirty-six months of charge-off experience. Net charge-offs for the year ended December 31, 2014, were $4.7 million, or 0.54% of average loans compared to $3.2 million, or 0.38% of average loans for the year ended December 31, 2013, and $7.9 million, or 0.93% of average loans for the year ended December 31, 2012. Non-performing assets were 4.09% of total assets at December 31, 2014 compared to 4.40% at December 31, 2013, and 5.33% at December 31, 2012.

Non-interest income decreased $2.1 million, or 19.5%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, and increased $1.1 million, or 11.7%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. These changes are discussed in greater detail below under Non-interest Income.

Non-interest expense decreased $4.3 million, or 10.4%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, and increased $2.1 million, or 5.4%, for the year ended December 31, 2013, compared to the year ended December 31, 2012. These increases are discussed in greater detail below under Non-interest Expense.

Average Balance Sheets

Net interest income is the largest source of revenue resulting from the Company’s lending, investing, borrowing, and deposit gathering activities. It is affected by both changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. The following table presents average balance sheets, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on a fully taxable equivalent basis for each of the years in the three year periods ended December 31, 2014, 2013, and 2012, respectively.

8

(In thousands)

2014

2013

2012

​

Average Balance

Interest Income/​ Expense (1)

Rate Earned/​ Paid (1)

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

​

$

144,847

​

$

6,862

​

4.74%

​

$

136,588

​

$

6,676

​

4.89%

​

$

132,132

​

$

6,836

​

5.17%

Real estate construction - residential

​

​

22,047

​

​

956

​

4.34

​

​

23,856

​

​

1,062

​

4.45

​

​

21,471

​

​

1,196

​

5.57

Real estate construction - commercial

​

​

58,785

​

​

2,539

​

4.32

​

​

47,490

​

​

2,217

​

4.67

​

​

43,224

​

​

1,872

​

4.33

Real estate mortgage - residential

​

​

232,785

​

​

11,124

​

4.78

​

​

219,402

​

​

11,037

​

5.03

​

​

219,133

​

​

11,718

​

5.35

Real estate mortgage - commercial

​

​

375,177

​

​

17,894

​

4.77

​

​

383,942

​

​

18,912

​

4.93

​

​

400,210

​

​

20,760

​

5.19

Consumer

​

​

18,938

​

​

1,054

​

5.57

​

​

22,244

​

​

1,303

​

5.86

​

​

26,852

​

​

1,680

​

6.26

Total loans

​

$

852,579

​

$

40,429

​

4.74%

​

$

833,522

​

$

41,207

​

4.94%

​

$

843,022

​

$

44,062

​

5.23%

Investment securities:

U.S. Treasury

​

$

286

​

$

4

​

1.40%

​

$

1,378

​

$

20

​

1.45%

​

$

2,048

​

$

33

​

1.61%

Government sponsored enterprises

​

​

64,997

​

​

918

​

1.41

​

​

66,771

​

​

814

​

1.22

​

​

70,787

​

​

998

​

1.41

Asset backed securities

​

​

109,550

​

​

2,415

​

2.20

​

​

117,496

​

​

2,714

​

2.31

​

​

113,749

​

​

3,025

​

2.66

State and municipal

​

​

33,655

​

​

1,138

​

3.38

​

​

34,879

​

​

1,303

​

3.74

​

​

34,248

​

​

1,398

​

4.08

Total investment in Available-for-sale securities

​

$

208,488

​

$

4,475

​

2.15%

​

$

220,524

​

$

4,851

​

2.20%

​

$

220,832

​

$

5,454

​

2.47%

Other investments & securities

​

​

4,209

​

​

80

​

1.90

​

​

4,027

​

​

82

​

2.04

​

​

4,287

​

​

102

​

2.38

Federal funds sold and interest bearing deposits in other financial institutions

​

​

10,350

​

​

28

​

0.27

​

​

13,975

​

​

37

​

0.26

​

​

18,255

​

​

46

​

0.25

Total interest earning assets

​

$

1,075,626

​

$

45,012

​

4.18%

​

$

1,072,048

​

$

46,177

​

4.31%

​

$

1,086,396

​

$

49,664

​

4.57%

All other assets

​

​

93,906

​

​

​

​

​

​

​

102,076

​

​

​

​

​

​

​

105,129

​

​

​

​

​

Allowance for loan losses

​

​

(12,621)

​

​

​

​

​

​

​

(14,997)

​

​

​

​

​

​

​

(15,141)

​

​

​

​

​

Total assets

​

$

1,156,911

​

​

​

​

​

​

$

1,159,127

​

​

​

​

​

​

$

1,176,384

​

​

​

​

​

LIABILITIES AND STOCKHOLDERS’ EQUITY

NOW accounts

​

$

197,785

​

$

507

​

0.26%

​

$

189,610

​

$

504

​

0.27%

​

$

181,422

​

$

636

​

0.35%

Savings

​

​

82,676

​

​

57

​

0.07

​

​

75,374

​

​

80

​

0.11

​

​

66,569

​

​

74

​

0.11

Money market

​

​

163,844

​

​

404

​

0.25

​

​

159,834

​

​

390

​

0.24

​

​

153,388

​

​

436

​

0.28

Time deposits of  $100,000 and over

​

​

141,868

​

​

940

​

0.66

​

​

152,376

​

​

906

​

0.75

​

​

161,067

​

​

1,345

​

0.86

Other time deposits

​

​

196,153

​

​

1,384

​

0.71

​

​

220,956

​

​

2,734

​

1.13

​

​

245,435

​

​

3,481

​

1.34

Total time deposits

​

$

782,326

​

$

3,292

​

0.42%

​

$

798,150

​

$

4,614

​

0.58%

​

$

807,881

​

$

5,972

​

0.74%

Federal funds purchased and securities sold under agreements to repurchase

​

​

20,223

​

​

21

​

0.10

​

​

20,548

​

​

24

​

0.12

​

​

23,280

​

​

21

​

0.09

Subordinated notes

​

​

49,486

​

​

1,264

​

2.55

​

​

49,486

​

​

1,284

​

2.59

​

​

49,486

​

​

1,381

​

2.78

Federal Home Loan Bank Advances

​

​

29,964

​

​

467

​

1.56

​

​

23,256

​

​

420

​

1.81

​

​

27,961

​

​

531

​

1.89

Total borrowings

​

$

99,673

​

$

1,752

​

1.76%

​

$

93,290

​

$

1,728

​

1.85%

​

$

100,727

​

$

1,933

​

1.91%

Total interest bearing liabilities

​

$

881,999

​

$

5,044

​

0.57%

​

$

891,440

​

$

6,342

​

0.71%

​

$

908,608

​

$

7,905

​

0.87%

Demand deposits

​

​

189,451

​

​

​

​

​

​

​

179,913

​

​

​

​

​

​

​

163,886

​

​

​

​

​

Other liabilities

​

​

6,508

​

​

​

​

​

​

​

7,899

​

​

​

​

​

​

​

7,714

​

​

​

​

​

Total liabilities

​

​

1,077,958

​

​

​

​

​

​

​

1,079,252

​

​

​

​

​

​

​

1,080,208

​

​

​

​

​

Stockholders’ equity

​

​

78,953

​

​

​

​

​

​

​

79,875

​

​

​

​

​

​

​

96,176

​

​

​

​

​

Total liabilities and stockholders’ equity

​

$

1,156,911

​

​

​

​

​

​

$

1,159,127

​

​

​

​

​

​

$

1,176,384

​

​

​

​

​

Net interest income (FTE)

​

​

​

​

​

39,968

​

​

​

​

​

​

​

39,835

​

​

​

​

​

​

​

41,759

​

​

Net interest spread

​

​

​

​

​

​

​

3.61%

​

​

​

​

​

​

​

3.60%

​

​

​

​

​

​

​

3.70%

Net interest margin

​

​

​

​

​

​

​

3.72%

​

​

​

​

​

​

​

3.72%

​

​

​

​

​

​

​

3.84%

(1)

Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $514,000, $512,000 and $550,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

(2)

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

(3)

Fees and costs on loans are included in interest income.

9

Rate and volume analysis

The following table summarizes the changes in net interest income on a fully taxable equivalent basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates for the years ended December 31, 2014, compared to December 31, 2013, and for the years ended December 31, 2013 compared to December 31, 2012. 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.

​

2014

2013

​

​

​

​

Change due to

​

​

​

Change due to

(In thousands)

Total Change

Average Volume

Average Rate

Total Change

Average Volume

Average Rate

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

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans: (2) (3)

​

​

​

​

​

​

Commercial

​

$

186

​

$

396

​

$

(210)

​

$

(160)

​

$

226

​

$

(386)

Real estate construction - residential

​

​

(106)

​

​

(79)

​

​

(27)

​

​

(134)

​

​

123

​

​

(257)

Real estate construction - commercial

​

​

322

​

​

497

​

​

(175)

​

​

345

​

​

193

​

​

152

Real estate mortgage - residential

​

​

87

​

​

654

​

​

(567)

​

​

(681)

​

​

14

​

​

(695)

Real estate mortgage - commercial

​

​

(1,018)

​

​

(426)

​

​

(592)

​

​

(1,848)

​

​

(824)

​

​

(1,024)

Consumer

​

​

(249)

​

​

(187)

​

​

(62)

​

​

(377)

​

​

(274)

​

​

(103)

Investment securities:

​

​

​

​

​

​

U.S. Treasury

​

​

(16)

​

​

(15)

​

​

(1)

​

​

(13)

​

​

(10)

​

​

(3)

Government sponsored entities

​

​

104

​

​

(22)

​

​

126

​

​

(184)

​

​

(55)

​

​

(129)

Asset backed securities

​

​

(299)

​

​

(179)

​

​

(120)

​

​

(311)

​

​

97

​

​

(408)

State and municipal

​

​

(165)

​

​

(45)

​

​

(120)

​

​

(95)

​

​

26

​

​

(121)

Other investments & securities, at cost

​

​

(2)

​

​

4

​

​

(6)

​

​

(20)

​

​

(6)

​

​

(14)

Federal funds sold and interest bearing deposits in other financial institutions

​

​

(9)

​

​

(10)

​

​

1

​

​

(9)

​

​

(11)

​

​

2

Total interest income

​

​

(1,165)

​

​

588

​

​

(1,753)

​

​

(3,487)

​

​

(501)

​

​

(2,986)

Interest expense:

NOW accounts

​

​

3

​

​

22

​

​

(19)

​

​

(132)

​

​

28

​

​

(160)

Savings

​

​

(23)

​

​

7

​

​

(30)

​

​

6

​

​

10

​

​

(4)

Money market

​

​

14

​

​

10

​

​

4

​

​

(46)

​

​

17

​

​

(63)

Time deposits of  $100,000 and over

​

​

(202)

​

​

(76)

​

​

(126)

​

​

(203)

​

​

(70)

​

​

(133)

Other time deposits

​

​

(1,114)

​

​

(256)

​

​

(858)

​

​

(983)

​

​

(323)

​

​

(660)

Federal funds purchased and securities sold under agreements to repurchase

​

​

(3)

​

​

-

​

​

(3)

​

​

3

​

​

(2)

​

​

5

Subordinated notes

​

​

(20)

​

​

-

​

​

(20)

​

​

(97)

​

​

-

​

​

(97)

Federal Home Loan Bank advances

​

​

47

​

​

110

​

​

(63)

​

​

(111)

​

​

(85)

​

​

(26)

Total interest expense

​

​

(1,298)

​

​

(183)

​

​

(1,115)

​

​

(1,563)

​

​

(425)

​

​

(1,138)

Net interest income on a fully taxable equivalent basis

​

$

133

​

$

771

​

$

(638)

​

$

(1,924)

​

$

(76)

​

$

(1,848)

(1)

Interest income and yields are presented on a fully taxable equivalent basis using the federal statutory income tax rate of 34%, net of nondeductible interest expense. Such adjustments totaled $514,000, $512,000 and $550,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

(2)

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

(3)

Fees and costs on loans are included in interest income.

Financial results for the year ended December 31, 2014 compared to the year ended December 31, 2013 reflected an increase in net interest income, on a tax equivalent basis, of  $133,000, or 0.33%, and a decrease of  $1.9 million, or 4.6% for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase in net interest income in 2014 over 2013 was primarily due to an increase in average loan volume partially offset by a decrease in rates earned. The decrease in net interest income in 2013 over 2012 was primarily due to lower average earning asset levels and contraction of the net interest

10

margin resulting from the prolonged low interest rate environment. Measured as a percentage of average earning assets, the net interest margin (expressed on a fully taxable equivalent basis) was 3.72% for both the years ended December 31, 2014 and 2013, compared to 3.84% for the year ended December 31, 2012.

Average interest-earning assets increased $3.6 million, or 0.33%, to $1.1 billion for the year ended December 31, 2014 compared to the year ended December 31, 2013 and average interest bearing liabilities decreased $9.4 million, or 1.1%, to $882.0 million for the year ended December 31, 2014 compared to $891.4 million for the year ended December 31, 2013.

Average interest-earning assets decreased $14.3 million, or 1.3%, to $1.1 billion for the year ended December 31, 2013 compared to the year ended December 31, 2012 and average interest bearing liabilities decreased $17.2 million, or 1.9%, to $891.4 million for the year ended December 31, 2013 compared to $908.6 million for the year ended December 31, 2012.

Total interest income (expressed on a fully taxable equivalent basis) decreased to $45.0 million for the year ended December 31, 2014 compared to $46.2 million and $49.7 million for the years ended December 31, 2013 and 2012, respectively. The Company’s rates earned on interest earning assets were 4.18% for the year ended December 31, 2014 compared to 4.31% and 4.57% for the years ended December 31, 2013 and 2012, respectively.

Interest income on loans decreased to $40.4 million for the year ended December 31, 2014 compared to $41.2 million and $44.1 million for the years ended December 31, 2013 and 2012, respectively.

Average loans outstanding increased $19.1 million, or 2.3%, to $852.6 million for the year ended December 31, 2014 compared to $833.5 million for the year ended December 31, 2013. The average yield on loans receivable decreased to 4.74% during the year ended December 31, 2014 compared to 4.94% for the year ended December 31, 2013 primarily as a result of decreasing market interest rates.

Average loans outstanding decreased $9.5 million, or 1.1%, to $833.5 million for the year ended December 31, 2013 compared to $843.0 million for the year ended December 31, 2012. The average yield on loans receivable decreased to 4.94% during the year ended December 31, 2013 compared to 5.23% for the year ended December 31, 2012 primarily as a result of decreasing market interest rates. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio.

Total interest expense decreased to $5.0 million for the year ended December 31, 2014 compared to $6.3 million and $7.9 million for the years ended December 31, 2013 and 2012, respectively. The Company’s rates paid on interest bearing liabilities was 0.57% for the year ended December 31, 2014 compared to 0.71% and 0.87% for the years ended December 31, 2013 and 2012, respectively. See the Liquidity Management section for further discussion.

Interest expense on deposits decreased to $3.3 million for the year ended December 31, 2013 compared to $4.6 million and $6.0 million for the years ended December 31, 2013 and 2012, respectively.

Average time deposits decreased $15.8 million, or 2.0%, to $782.3 million for the year ended December 31, 2014 compared to $798.2 million for the year ended December 31, 2013. The average cost of deposits decreased to 0.42% during the year ended December 31, 2014 compared to 0.58% for the year ended December 31, 2013.

Average time deposits decreased $9.7 million, or 1.2%, to $798.2 million for the year ended December 31, 2013 compared to $807.9 million for the year ended December 31, 2012. The average cost of deposits decreased to 0.58% for the year ended December 31, 2013 compared to 0.74% for the year ended December 31, 2012, primarily as a result of lower market interest rates, and approximately $23.0 million from a 58 month 6.05% certificate of deposit special that matured during the third quarter of 2013.

Interest expense on borrowings was $1.8 million for year ended December 31, 2014 compared to $1.7 million and $1.9 million for the years ended December 31, 2013 and 2012, respectively. Average borrowings were $99.7 million for the year ended December 31, 2014 compared to $93.3 million and $100.7 million for the years ended December 31, 2013 and 2012, respectively. See the Liquidity Management section for further discussion.

11

Non-interest Income and Expense

Non-interest income for the years ended December 31, 2014, 2013, and 2012 was as follows:

​

​

​

​

​

​

​

​

​

​

$ Change

% Change

(In thousands)

2014

2013

2012

’14-’13

’13-’12

’14-’13

’13-’12

Non-interest Income

​

​

​

​

​

​

​

Service charges on deposit accounts

​

$

5,265

​

$

5,556

​

$

5,439

​

$

(291)

​

$

117

​

(5.2)%

​

2.2%

Trust department income

​

​

844

​

​

796

​

​

893

​

​

48

​

​

(97)

​

6.0

​

(10.9)

Real estate servicing fees, net

​

​

319

​

​

876

​

​

(453)

​

​

(557)

​

​

1,329

​

(63.6)

​

(293.4)

Gain on sales of mortgage loans, net

​

​

1,093

​

​

1,665

​

​

2,669

​

​

(572)

​

​

(1,004)

​

(34.4)

​

(37.6)

Gain on sale of investment securities

​

​

20

​

​

778

​

​

26

​

​

(758)

​

​

752

​

NM

​

NM

Other

​

​

1,208

​

​

1,195

​

​

1,152

​

​

13

​

​

43

​

1.1

​

3.7

Total non-interest income

​

$

8,749

​

$

10,866

​

$

9,726

​

$

(2,117)

​

$

1,140

​

(19.5)%

​

11.7%

Non-interest income as a % of total revenue *

​

​

18.2%

​

​

21.7%

​

​

19.1%

​

​

​

​

​

​

​

​

​

​

Total revenue per full time equivalent employee

​

$

144.8

​

$

145.1

​

$

147.6

​

​

​

​

​

​

​

​

​

​

*

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

NM - not meaningful

Total non-interest income decreased $2.1 million, or 19.5%, to $8.7 million for the year ended December 31, 2014 compared to $10.8 million for the year ended December 31, 2013, and increased $1.1 million, or 11.7%, to $10.8 million for the year ended December 31, 2013 compared to $9.7 million for the year ended December 31, 2012. On January 1, 2012, the Company opted to measure mortgage servicing rights (MSRs) at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of  $459,890, which was recorded as an increase to beginning retained earnings, as further described in Note 6 to the consolidated financial statements. As such, effective January 1, 2012, the change in the fair value of mortgage servicing rights is recognized in real estate servicing fees, net in non-interest income for the period in which the change occurs.

Real estate servicing fees, net decreased $557,000 to $319,000 for the year ended December 31, 2014 compared to the year ended December 31, 2013, and increased $1.3 million to $876,000 for the year ended December 31, 2013 compared to the year ended December 31, 2012. Net real estate servicing fees include mortgage loan servicing fees and the gains or losses due to the change in fair value of MSRs arising from inputs and assumptions as well as paydowns and payoffs. Mortgage loan servicing fees earned on loans sold were $896,000 for the year ended December 31, 2014 compared to $901,000 and $878,000 for the years ended 2013 and 2012, respectively. Total net losses recognized related to MSRs due to the change in fair value were $576,000, for the year ended December 31, 2014 compared to net losses of  $25,000 and $1.3 million for the years December 31, 2013 and 2012, respectively. The net losses recognized related to MSRs in 2012 included a one time adjustment of  $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years. The Company was servicing $313.9 million of mortgage loans at December 31, 2014 compared to $322.5 million and $310.6 million at December 31, 2013 and 2012, respectively.

Gain on sales of mortgage loans decreased $572,000 to $1.1 million for the year ended December 31, 2014 compared to the year ended December 31, 2013, and decreased $1.0 million to $1.7 million for the year ended December 31, 2013 compared to the year ended December 31, 2012. The Company sold loans of $36.6 million for the year ended December 31, 2014 compared to $76.0 million and $99.8 million for the years ended 2013 and 2012, respectively. Refinancing activity impacting both the volume of loans sold and gains recognized began to slow down during 2013 due to rising interest rates that carried into 2014. During

12

2013, the Company increased its repurchase reserve liability by $160,000 for estimated losses incurred on sold loans that is included in total gain on sales of mortgage loans.

Gain on sale of investment securities During the year ended December 31, 2014, the Company received $5.3 million from proceeds on sales of available-for-sale debt securities and recognized net gains of  $20,000 compared to during the year ended December 31, 2013, the Company received $32.6 million from proceeds on sales of available-for-sale debt securities and recognized gains of  $778,000. These transactions were the result of bond sales and purchases to replace several smaller holdings with fewer, larger investments without materially changing the duration or yield of the investment portfolio.

Non-interest expense for the years ended December 31, 2014, 2013, and 2012 was as follows:

​

​

​

​

​

​

​

​

​

​

$ Change

% Change

(In thousands)

2014

2013

2012

’14-’13

’13-’12

’14-’13

’13-’12

Non-interest Expense

​

​

​

​

​

​

​

Salaries

​

$

15,729

​

$

14,702

​

$

14,369

​

$

1,027

​

$

333

​

7.0%

​

2.3%

Employee benefits

​

​

4,648

​

​

4,840

​

​

4,796

​

​

(192)

​

​

44

​

(4.0)

​

0.9

Occupancy expense, net

​

​

2,660

​

​

2,630

​

​

2,598

​

​

30

​

​

32

​

1.1

​

1.2

Furniture and equipment expense

​

​

1,823

​

​

2,007

​

​

1,840

​

​

(184)

​

​

167

​

(9.2)

​

9.1

FDIC insurance assessment

​

​

933

​

​

992

​

​

993

​

​

(59)

​

​

(1)

​

(5.9)

​

(0.1)

Legal, examination, and professional fees

​

​

1,159

​

​

982

​

​

1,189

​

​

177

​

​

(207)

​

18.0

​

(17.4)

Advertising and promotion

​

​

1,274

​

​

1,301

​

​

1,083

​

​

(27)

​

​

218

​

(2.1)

​

20.1

Postage, printing, and supplies

​

​

1,117

​

​

1,210

​

​

1,144

​

​

(93)

​

​

66

​

(7.7)

​

5.8

Processing expense

​

​

3,101

​

​

3,543

​

​

3,593

​

​

(442)

​

​

(50)

​

(12.5)

​

(1.4)

Other real estate expense

​

​

845

​

​

4,924

​

​

2,659

​

​

(4,079)

​

​

2,265

​

(82.8)

​

85.2

Other

​

​

3,218

​

​

3,632

​

​

4,403

​

​

(414)

​

​

(771)

​

(11.4)

​

(17.5)

Total non-interest expense

​

$

36,507

​

$

40,763

​

$

38,667

​

$

(4,256)

​

$

2,096

​

(10.4)%

​

5.4%

Efficiency ratio*

​

​

75.7%

​

​

81.2%

​

​

75.9%

​

​

​

​

​

​

​

​

​

​

Efficiency ratio**

​

​

74.0%

​

​

71.7%

​

​

70.7%

​

​

​

​

​

​

​

​

​

​

Salaries and benefits as a % of total non-interest expense

​

​

55.8%

​

​

47.9%

​

​

49.6%

​

​

​

​

​

​

​

​

​

​

Number of full-time equivalent employees

​

​

333

​

​

346

​

​

345

​

​

​

​

​

​

​

​

​

​

*

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

**

Does not include other real estate expense, gain on sale of investments, or a one time consulting fee

Total non-interest expense decreased $4.3 million, or 10.4%, to $36.5 million for the year ended December 31, 2014 compared to the year ended December 31, 2013 and increased $2.1 million, or 5.4%, to $40.8 million for the year ended December 31, 2013 compared to the year ended December 31, 2012.

Salaries increased $1.0 million, or 7.0%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, and increased $333,000, or 2.3%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase for the year ended 2014 over 2013 was primarily due to the accrual for a 2014 incentive program approved by the Board of Directors, while the increase in 2013 over 2012 was primarily due to annual salary increases.

Legal, examination, and professional fees increased $177,000, or 18.0%, for the year ended December 31, 2014 compared to December 31, 2013, and decreased $207,000, or 17.4%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase in 2014 over 2013 primarily consisted of an increase in legal fees related to impaired loans, an increase in audit fees primarily related to additional services required, an increase in additional tax consultation services, and an increase in consulting fees related to strategic planning. The decrease in 2013 over 2012 was primarily a result of a decrease in litigation fees related to two legal suits incurred during 2012, and a decrease in auditing fees primarily due to nonrecurring fees incurred in 2012 for tax and fair value analysis.

13

Advertising and promotion decreased $27,000, or 2.1%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, and increased $218,000, or 20.1%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The increase in 2013 over the year ended December 31, 2012 was primarily due to additional advertising projects and payment for several sponsorships and promotional items that were not incurred during 2012.

Processing expense decreased $442,000, or 12.5%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, and decreased $50,000, or 1.4% for the year ended December 31, 2013 compared to the year ended December 31, 2012. The decrease in 2014 compared to 2013 and 2012 was primarily due to contract savings resulting in lower core processing expenses. In 2013 a one time consulting fee was incurred to negotiate reduced future core processing expenses. A portion of this fee is being amortized over the new contract period with the Company’s core processing vendor.

Other real estate (ORE) expense decreased $4.1 million, or 82.8%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, and increased $2.3 million, or 85.2%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. Net losses recognized on other real estate owned were $371,000 for the year ended December 31, 2014, compared to $3.5 million and $407,000 for the years ended December 31, 2013 and 2012, respectively. Expenses to maintain these foreclosed properties were $474,000 for the year ended December 31, 2014, compared to $1.5 million and $2.3 million for the years ended December 31, 2013 and 2012, respectively. The significant decrease in net losses and expenses during 2014 compared to 2013 and 2012, primarily related to two hotels located in the Branson area that were sold at auction during the second quarter of 2013. The Company began to see a decrease in overall operating costs for foreclosed properties during the third quarter of 2013 due to the sale of the hotels.

Other non-interest expense decreased $414,000, or 11.4%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, and decreased $771,000, or 17.5%, for the year ended December 31, 2013 compared to the year ended December 31, 2012. The decrease for the year ended December 31, 2014 primarily related to a decrease in core deposit intangible (CDI) asset amortization which became fully amortized in the second quarter of 2013, reduced levels of credit card dispute charge-offs, and a decrease in consumer loan expense primarily related to a $189,000 write-down on repossessed mining equipment during the second quarter of 2013. This decrease was partially offset by a $136,000 loss recorded due to employee fraud that management discovered during the third quarter of 2014 (see Item 9A. Controls and Procedures for further discussion). The decrease for the year ended December 31, 2013 was primarily due to a decrease in CDI amortization, a decrease in consumer loan expense primarily related to impairment write-downs, and a decrease in donations resulting from property that was donated during 2012. Impairment write-downs taken on mining equipment and classic cars, included in consumer repossessed asset and loan expenses, were $189,000 in 2013 compared to $330,000 in 2012.

Comparing fourth quarter 2014 to third quarter 2014

Consolidated net income available to common shareholders’ increased to $2.0 million for the fourth quarter 2014 compared to $1.6 million for the third quarter 2014. Net interest income remained consistent at $10.0 million for both the fourth and third quarters of 2014 with $1.1 billion in average interest earning assets.

No provision for loan losses was required for both the fourth and third quarter of 2014 primarily due to decreases in the Company’s historical loss rates. Net charge-offs for the fourth quarter 2014 were $2.9 million, or 0.34% of average loans, compared to $117,000, or 0.01% of average loans for the third quarter 2014.

Non-interest income decreased to $2.2 million for the fourth quarter 2014 compared to $2.3 million for the third quarter of 2014. This decrease primarily resulted from a $69,000 decrease in service charges, a $52,000 decrease in net real estate servicing income, and a $15,000 decrease in gains on sale of mortgage loans. The Company’s loans sold were consistent at $11.0 million for both the fourth and third quarter of 2014. Net real estate servicing fees include mortgage loan servicing fees and the gains or losses due to the change in fair value of MSRs arising from inputs and assumptions. Mortgage loan servicing fees earned on

14

loans sold were $224,000 for the fourth quarter 2014 compared to $226,000 for the third quarter 2014. Total net losses recognized due to the change in fair value of MSRs arising from inputs and assumptions were $190,000 for the fourth quarter 2014 compared to $140,000 for the third quarter 2014.

Non-interest expense decreased to $9.1 million for the fourth quarter 2014 compared to $9.9 million for the third quarter 2014. This decrease primarily resulted from a $578,000 decrease in salaries, a $200,000 decrease in employee benefits, and a $173,000 decrease in other real estate expenses, partially offset by an $117,000 increase in advertising and promotion expense. Net losses recognized on other real estate owned were $76,000 for the fourth quarter 2014, compared to $274,000 for the third quarter 2014, and expenses to maintain these foreclosed properties were $112,000 for the fourth quarter 2014 compared to $87,000 for the third quarter 2014. The decrease in salary expense for the fourth quarter of 2014 over the third quarter of 2014 primarily related to an accrual for an incentive program approved by the Board of Directors in the third quarter of 2014, and the decrease in employee benefits for the fourth quarter of 2014 over the third quarter of 2014 primarily related to a decrease in the annual accrual for profit-sharing. The increases in advertising and promotion expenses were primarily due to additional marketing and promotional events that typically occur each year in December.

Comparing fourth quarter 2014 to fourth quarter 2013

Consolidated net income available to common shareholders’ increased to $2.0 million for the fourth quarter 2014 compared to $1.7 million for the fourth 2013. Net interest income remained unchanged at $10.0 million over the same period with $1.1 billion in average interest earning assets.

No provision for loan losses was required for the fourth quarter 2014 compared to $30,000 for the fourth quarter 2013, and was primarily due to decreases in the Company’s historical loss rates. Net charge-offs for the fourth quarter 2014 were $2.9 million, or 0.34% of average loans, compared to $564,000, or 0.07% of average loans for the fourth quarter 2013.

Non-interest income decreased to $2.2 million for fourth quarter 2014 compared to $2.3 million for fourth quarter of 2013. This decrease primarily resulted from a $204,000 decrease in gains on sale of investment securities, and a $82,000 decrease in net real estate servicing income, partially offset by a $165,000 increase in gain on sale of mortgage loans. Without a $129,000 increase to the Company’s servicing repurchase liability, included in total gain on sale of mortgage loans, for the fourth quarter of 2013, gain on sale of mortgage loans would have been $279,000 compared to $315,000 for the fourth quarter 2014. The Company’s loans sold were unchanged at $11.0 million for both fourth quarters 2014 and 2013. Net real estate servicing fees include mortgage loan servicing fees and the gains or losses due to the change in fair value of MSRs arising from inputs and assumptions. Mortgage loan servicing fees earned on loans sold were $224,000 for the fourth quarter 2014 compared to $227,000 for the fourth quarter 2013. Total net losses recognized due to the change in fair value of MSRs arising from inputs and assumptions were $190,000 for the fourth quarter 2014 compared to $111,000 for the fourth quarter 2013.

Non-interest expense decreased to $9.1 million for the fourth quarter 2014 compared to $9.6 million for the fourth quarter 2013. This decrease primarily resulted from a $299,000 decrease in other real estate expenses, and a $248,000 decrease in employee benefits. Net losses realized on other real estate owned were $76,000 for the fourth quarter 2014, compared to $327,000 for the fourth quarter 2013, and expenses to maintain these foreclosed properties were $112,000 for the fourth quarter 2014 compared to $160,000 for the fourth quarter 2013. These decreases in net losses and expenses primarily related to two hotels located in the Branson area that were sold at auction during the second quarter of 2013. The decrease in employee benefits for the fourth quarter of 2014 over the fourth quarter of 2013 primarily related to a decrease in the annual accrual for profit-sharing and pension expenses.

Income taxes

Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 34.6% for the year ended December 31, 2014 compared to 32.8% and 16.2% for the years ended December 31, 2013 and 2012, respectively. Excluding an immaterial correction of a prior period error

15

of  $371,000, income taxes as a percentage of earnings before income taxes would have been 26.3% for the year ended December 31, 2012. The increase in the effective tax rate in 2014 is primarily due to an increase in earnings before income taxes, while tax-exempt investment income remained consistent with that for 2013 and 2012.

Lending and Credit Management

Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 72.9% of total assets as of December 31, 2014 compared to 72.4% as of December 31, 2013.

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

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

(In thousands)

2014

2013

2012

2011

2010

Commercial, financial, and agricultural

​

$

154,834

​

$

141,845

​

$

134,275

​

$

133,345

​

$

136,666

Real estate construction - residential

​

​

18,103

​

​

21,008

​

​

22,177

​

​

30,201

​

​

31,834

Real estate construction - commercial

​

​

48,822

​

​

55,076

​

​

43,486

​

​

47,697

​

​

56,053

Real estate mortgage - residential

​

​

247,117

​

​

225,630

​

​

221,310

​

​

203,536

​

​

207,908

Real estate mortgage - commercial

​

​

372,321

​

​

375,686

​

​

400,536

​

​

398,915

​

​

434,594

Installment loans to individuals

​

​

20,016

​

​

20,302

​

​

25,200

​

​

29,236

​

​

31,417

Total loans

​

$

861,213

​

$

839,547

​

$

846,984

​

$

842,930

​

$

898,472

Percent of categories to total loans:

​

​

​

​

​

Commercial, financial, and agricultural

​

​

18.0%

​

​

16.9%

​

​

15.9%

​

​

15.8%

​

​

15.2%

Real estate construction - residential

​

​

2.1

​

​

2.5

​

​

2.6

​

​

3.6

​

​

3.5

Real estate construction - commercial

​

​

5.7

​

​

6.6

​

​

5.1

​

​

5.7

​

​

6.2

Real estate mortgage - residential

​

​

28.7

​

​

26.9

​

​

26.1

​

​

24.1

​

​

23.2

Real estate mortgage - commercial

​

​

43.2

​

​

44.7

​

​

47.3

​

​

47.3

​

​

48.4

Installment loans to individuals

​

​

2.3

​

​

2.4

​

​

3.0

​

​

3.5

​

​

3.5

Total

​

​

100.0%

​

​

100.0%

​

​

100.0%

​

​

100.0%

​

​

100.0%

During 2014, the Company has experienced positive trends over 2013 as seen in the $13.0 million increase in Commercial, financial, and agricultural loans and the $18.1 million increase in Real estate mortgage loans. The Company benefited from Commercial borrowers more willing to expand operations, and new calling programs resulted in new customers and expanded loan relationships with existing customers. The Company extends credit to its local community market through traditional real estate mortgage products. The Company does not participate in extending credit to sub-prime residential real estate markets. The Company does not lend funds for the type of transactions defined as “highly leveraged” by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table. The Company does not have any interest-earning assets that would have been included in nonaccrual, past due, or restructured loans if such assets were loans.

16

The contractual maturities of loan categories at December 31, 2014, and the composition of those loans between fixed rate and floating rate loans are as follows:

​

Principal Payments Due

​

(In thousands)

One Year Or Less

Over One Year Through Five Years

Over Five Years

Total

Commercial, financial, and agricultural

​

$

83,464

​

$

58,815

​

$

12,555

​

$

154,834

Real estate construction - residential

​

​

17,516

​

​

587

​

​

-

​

​

18,103

Real estate construction - commercial

​

​

26,229

​

​

20,520

​

​

2,073

​

​

48,822

Real estate mortgage - residential

​

​

38,968

​

​

99,403

​

​

108,746

​

​

247,117

Real estate mortgage - commercial

​

​

84,697

​

​

253,607

​

​

34,017

​

​

372,321

Installment loans to individuals

​

​

7,898

​

​

10,997

​

​

1,121

​

​

20,016

Total loans net of unearned income

​

$

258,772

​

$

443,929

​

$

158,512

​

$

861,213

Loans with fixed rates

​

​

202,760

​

​

391,754

​

​

38,550

​

​

633,064

Loans with floating rates

​

​

56,012

​

​

52,175

​

​

119,962

​

​

228,149

Total loans net of unearned income

​

$

258,772

​

$

443,929

​

$

158,512

​

$

861,213

The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers, but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. For the year ended December 31, 2014, the Company sold approximately $36.6 million of loans to investors compared to $76.0 million and $99.8 million for the years December 31, 2013 and 2012, respectively. At December 31, 2014, the Company was servicing approximately $313.9 million of loans sold to the secondary market compared to $322.5 million at December 31, 2013, and $310.6 million at December 31, 2012.

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. Currently, loans in excess of  $2.0 million in aggregate and all adversely classified credits identified by management are reviewed. In addition, all other loans are reviewed on a sample basis. The senior loan committee reviews and reports to the board of directors, on a monthly basis, past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, substandard, doubtful, or loss. During this review, management also determines which loans should be considered impaired. Management follows the guidance provided in the FASB’s ASC Topic 310, Accounting by Creditors for Impairment of a Loan, in identifying and measuring loan impairment. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated as further discussed below. Loans not individually evaluated are aggregated and reserves are recorded using a consistent methodology that considers historical loan loss experience by loan type, delinquencies, current economic conditions, loan risk ratings and industry concentration. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. Based upon these procedures, both the allowance and provision for loan losses are adjusted to maintain the allowance at a level considered necessary by management to provide for probable losses inherent in the loan portfolio.

17

Nonperforming Assets

The following table summarizes nonperforming assets at the dates indicated:

(In thousands)

2014

2013

2012

2011

2010

Nonaccrual loans:

​

​

​

​

​

Commercial, financial, and agricultural

​

$

5,279

​

$

1,684

​

$

1,335

​

$

268

​

$

3,532

Real estate construction - residential

​

​

1,751

​

​

2,204

​

​

2,497

​

​

1,147

​

​

3,586

Real estate construction - commercial

​

​

2,096

​

​

6,251

​

​

7,762

​

​

7,867

​

​

10,067

Real estate mortgage - residential

​

​

4,419

​

​

4,165

​

​

5,330

​

​

4,153

​

​

5,672

Real estate mortgage - commercial

​

​

4,465

​

​

9,074

​

​

13,938

​

​

31,000

​

​

27,604

Installment loans to individuals

​

​

233

​

​

302

​

​

219

​

​

168

​

​

126

Total

​

$

18,243

​

$

23,680

​

$

31,081

​

$

44,603

​

$

50,587

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

​

​

​

​

​

Commercial, financial, and agricultural

​

$

0

​

$

0

​

$

0

​

$

0

​

$

0

Real estate construction - residential

​

​

0

​

​

0

​

​

0

​

​

0

​

​

0

Real estate construction - commercial

​

​

56

​

​

0

​

​

0

​

​

8

​

​

0

Real estate mortgage - residential

​

​

0

​

​

129

​

​

0

​

​

9

​

​

0

Real estate mortgage - commercial

​

​

0

​

​

100

​

​

0

​

​

36

​

​

0

Installment loans to individuals

​

​

2

​

​

14

​

​

6

​

​

1

​

​

33

Total

​

$

58

​

$

243

​

$

6

​

$

54

​

$

33

Troubled debt restructurings - accruing

​

​

17,720

​

​

11,395

​

​

8,282

​

​

7,217

​

​

5,683

Total nonperforming loans

​

​

36,021

​

​

35,318

​

​

39,369

​

​

53,674

​

​

56,303

Other real estate owned and repossessed assets - net

​

​

11,885

​

​

14,867

​

​

23,592

​

​

16,020

​

​

14,009

Total nonperforming assets

​

$

47,906

​

$

50,185

​

$

62,961

​

$

69,694

​

$

70,312

Loans

​

$

861,213

​

$

839,547

​

$

846,984

​

$

842,930

​

$

898,472

Allowance for loan losses to loans

​

​

1.06%

​

​

1.63%

​

​

1.75%

​

​

1.64%

​

​

1.62%

Nonperforming loans to loans

​

​

4.18%

​

​

4.21%

​

​

4.65%

​

​

6.37%

​

​

6.27%

Allowance for loan losses to nonperforming loans

​

​

25.26%

​

​

38.84%

​

​

37.70%

​

​

25.73%

​

​

25.87%

Allowance for loan losses to nonperforming loans, excluding TDR’s - accruing

​

​

49.72%

​

​

57.35%

​

​

47.74%

​

​

29.72%

​

​

28.77%

Nonperforming assets to loans, other real estate owned and foreclosed assets

​

​

5.49%

​

​

5.87%

​

​

7.23%

​

​

8.11%

​

​

7.71%

Total nonperforming assets totaled $47.9 million at December 31, 2014 compared to $50.2 million at December 31, 2013. 2014. Nonperforming loans, defined as loans on non-accrual status, loans 90 days or more past due and still accruing, and TDRs totaled $36.0 million, or 4.18%, of total loans at December 31, 2014 compared to $35.3 million, or 4.21%, of total loans at December 31, 2013. Non-accrual loans included $1.6 million and $10.1 million of loans classified as TDRs at December 31, 2014 and 2013, respectively.

It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the borrower’s financial condition, after consideration of business conditions and collection efforts, is such that the collection of interest is doubtful, or upon which principal or interest due has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis. Contractual interest lost on loans in non-accrual status, was approximately $1.1 million for the year ended December 31, 2014 compared to $1.2 million for both the years ended December 31, 2013 and 2012.

As of December 31, 2014, approximately $9.6 million compared to $21.0 million at December 31, 2013, of loans classified as substandard, not included in the nonperforming asset table, were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower

18

to comply with present loan repayment terms. Even though borrowers are experiencing moderate cash flow problems as well as some deterioration in collateral value, management believes the general allowance was sufficient to cover the risks and probable losses related to such loans at December 31, 2014 and December 31, 2013, respectively.

Total non-accrual loans at December 31, 2014 decreased $5.4 million to $18.2 million compared to $23.7 million at December 31, 2013. This decrease primarily consisted of a $4.3 million decrease in real estate mortgage non-accrual loans and a $4.6 million decrease in real estate construction loans. The decrease in non-accrual loans primarily resulted from $2.0 million transferred to other real estate owned and reposed assets, and $3.3 million of charge-offs taken related to non-accrual loans with specific reserves. This decrease was partially offset by a $3.6 million increase in commercial, financial, and agricultural non-accrual loans. At December 31, 2014, commercial, financial, and agricultural non-accrual loans made up 29% of total non-accrual loans compared to 7% at December 31, 2013.

Loans past due 90 days and still accruing interest at December 31, 2014, were $58,000 compared to $243,000 at December 31, 2013. Other real estate owned and repossessed assets at December 31, 2014 of $11.9 million compared to $14.9 million at December 31, 2013. During the year ended December 31, 2014, $2.0 million of nonaccrual loans, net of charge-offs taken, were transferred to other real estate owned and repossessed assets, and a net $585,000 additional provision to the valuation allowance was recorded to reflect current fair values. This compared to $4.6 million of nonaccrual loans, net of charge-offs taken, transferred to other real estate owned and repossessed assets, and a net $3.4 million additional provision during the year ended December 31, 2013. The provision during 2013 primarily related to two hotels located in the Branson area that were sold during the second quarter.

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

​	December 31, 2014								December 31, 2013
(In thousands)	Number of contracts		Recorded Investment			Specific Reserves			Number of contracts		Recorded Investment			Specific Reserves
TDRs - Accrual	​		​			​			​		​			​
Commercial, financial and agricultural	​	10	​	$	2,262	​	$	6	​	9	​	$	2,331	​	$	101
Real estate construction - commercial	​	-	​	​	-	​	​	-	​	1	​	​	364	​	​	-
Real estate mortgage - residential	​	6	​	​	3,459	​	​	752	​	6	​	​	2,352	​	​	529
Real estate mortgage - commercial	​	8	​	​	11,999	​	​	-	​	6	​	​	6,348	​	​	885
Total TDRs - Accrual	​	24	​	$	17,720	​	$	758	​	22	​	$	11,395	​	$	1,515
TDRs - Non-accrual	​		​			​			​		​			​
Commercial, financial and agricultural	​	2	​	$	71	​	$	-	​	2	​	$	88	​	$	8
Real estate construction - commercial	​	-	​	​	-	​	​	-	​	1	​	​	3,742	​	​	-
Real estate mortgage - residential	​	2	​	​	347	​	​	140	​	5	​	​	639	​	​	229
Real estate mortgage - commercial	​	3	​	​	1,167	​	​	10	​	7	​	​	5,572	​	​	424
Consumer	​	-	​	​	-	​	​	-	​	2	​	​	43	​	​	15
Total TDRs - Non-accrual	​	7	​	$	1,585	​	$	150	​	17	​	$	10,084	​	$	676
Total TDRs	​	31	​	$	19,305	​	$	908	​	39	​	$	21,479	​	$	2,191

At December 31, 2014, loans classified as TDRs totaled $19.3 million, of which $1.6 million were on non-accrual status and $17.7 million were on accrual status, compared to $21.5 million of loans classified as TDRs, of which $10.1 million were on non-accrual status and $11.4 million were on accrual status at December 31, 2013. The net decrease in total TDRs from December 31, 2013 was primarily due to $9.8 million of additions to TDRs that were offset by $1.5 million charged off and approximately $10.4 million of payments received during 2014. Approximately $7.0 million of the decrease in TDRs on non-accrual status from December 31, 2013 was due to loans that transferred to accruing TDR status during the year ended December 31, 2014.

19

Provision and Allowance for Loan Losses

The Company is continuing to recover from the deterioration of collateral values during the recent periods of unfavorable economic conditions. The allowance for loan losses was $9.1 million, or 1.06%, of loans outstanding at December 31, 2014, compared to $13.7 million, or 1.63%, of loans outstanding at December 31, 2013, and $14.8 million, or 1.75%, of loans outstanding at December 31, 2012. The decrease in the allowance for loan losses coverage ratio from December 31, 2013 to December 31, 2014 is primarily due to charging off the specific reserves on certain impaired loans leading to the decline in specific reserves at December 31, 2014 compared to the prior year ends. See further discussion below.

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

(In thousands)

2014

2013

2012

2011

2010

Analysis of allowance for loan losses:

​

​

​

​

​

Balance beginning of year

​

$

13,719

​

$

14,842

​

$

13,809

​

$

14,565

​

$

14,797

Charge-offs:

​

​

​

​

​

Commercial, financial, and agricultural

​

​

1,285

​

​

895

​

​

1,760

​

​

2,157

​

​

1,903

Real estate construction - residential

​

​

349

​

​

119

​

​

-

​

​

1,858

​

​

933

Real estate construction - commercial

​

​

491

​

​

633

​

​

-

​

​

512

​

​

4,556

Real estate mortgage - residential

​

​

408

​

​

812

​

​

977

​

​

1,883

​

​

4,534

Real estate mortgage - commercial

​

​

2,890

​

​

1,301

​

​

5,466

​

​

6,420

​

​

3,841

Installment loans to individuals

​

​

405

​

​

420

​

​

586

​

​

376

​

​

422

Total charge-offs

​

​

5,828

​

​

4,180

​

​

8,789

​

​

13,206

​

​

16,189

Recoveries:

​

​

​

​

​

Commercial, financial, and agricultural

​

​

319

​

​

340

​

​

161

​

​

193

​

​

153

Real estate construction - residential

​

​

181

​

​

-

​

​

67

​

​

65

​

​

30

Real estate construction - commercial

​

​

-

​

​

5

​

​

23

​

​

250

​

​

22

Real estate mortgage - residential

​

​

202

​

​

111

​

​

158

​

​

108

​

​

228

Real estate mortgage - commercial

​

​

320

​

​

368

​

​

248

​

​

103

​

​

29

Installment loans to individuals

​

​

186

​

​

203

​

​

265

​

​

208

​

​

241

Total recoveries

​

​

1,208

​

​

1,027

​

​

922

​

​

927

​

​

703

Net charge-offs

​

​

4,620

​

​

3,153

​

​

7,867

​

​

12,279

​

​

15,486

Provision for loan losses

​

​

-

​

​

2,030

​

​

8,900

​

​

11,523

​

​

15,254

Balance end of year

​

$

9,099

​

$

13,719

​

$

14,842

​

$

13,809

​

$

14,565

Net Loan Charge-offs

The Company’s net loan charge-offs were $4.6 million, or 0.54% of average loans, for the year ended December 31, 2014 compared to net loan charge-offs of  $3.2 million, or 0.38% of average loans, for the year ended December 31, 2013, and $7.9 million, or 0.93% of average loans for the year ended December 31, 2012. As detailed above, net charge offs for 2014 increased by $1.5 million over 2014 primarily due to $2.7 million of charge offs related to six impaired loan relationships with specific reserves that management determined to be uncollectable. The deterioration of credit quality impacted by economic conditions in previous years that led to heighted net charge offs recognized peaked in 2010 and has decreased significantly in the following years.

Provision

No provision was required for the year ended December 31, 2014 due to decreases in historical loss rates based on the Company’s last thirty-six months of charge-off experience. This is compared to $2.0 million for the year ended December 31, 2013 and $8.9 million for the year ended December 31, 2012.

20

Allowance for loan losses

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

(In thousands)

2014

2013

2012

2011

2010

Allocation of allowance for loan losses at end of year:

​

​

​

​

​

Commercial, financial, and agricultural

​

$

1,779

​

$

2,374

​

$

1,937

​

$

1,804

​

$

2,931

Real estate construction - residential

​

​

171

​

​

931

​

​

732

​

​

1,188

​

​

2,067

Real estate construction - commercial

​

​

466

​

​

631

​

​

1,711

​

​

1,562

​

​

1,339

Real estate mortgage - residential

​

​

2,527

​

​

2,959

​

​

3,387

​

​

3,251

​

​

3,922

Real estate mortgage - commercial

​

​

3,846

​

​

6,523

​

​

6,834

​

​

5,734

​

​

3,458

Installment loans to individuals

​

​

270

​

​

294

​

​

239

​

​

267

​

​

231

Unallocated

​

​

40

​

​

7

​

​

2

​

​

3

​

​

617

Total

​

$

9,099

​

$

13,719

​

$

14,842

​

$

13,809

​

$

14,565

The Company’s allowance for loan losses decreased to $9.1 million at December 31, 2014 compared to $13.7 million at December 31, 2013. The decrease from December 31, 2013 primarily consisted of a $3.1 million decrease in the allocation for real estate mortgage loans due to charging off  $3.3 million of specific reserves, which $2.7 million related to six loan relationships that management deemed uncollectable. The ratio of the allowance for loan losses to nonperforming loans, excluding TDR’s – accruing, was 49.72% at December 31, 2014, compared to 57.4% at December 31, 2013.

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

(In thousands)	2014			2013			2012			2011			2010
Allocation of allowance for loan losses:	​			​			​			​			​
Individually evaluated for impairment - specific reserves	​	$	1,749	​	$	4,796	​	$	4,020	​	$	3,748	​	$	6,376
Collectively evaluated for impairment - general reserves	​	​	7,350	​	​	8,923	​	​	10,822	​	​	10,061	​	​	8,189
Total	​	$	9,099	​	$	13,719	​	$	14,842	​	$	13,809	​	$	14,565

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2014, $1.7 million of the Company’s allowance for loan losses was allocated to impaired loans totaling approximately $36.0 million compared to $4.8 million of the Company’s allowance for loan losses (ALL) allocated to impaired loans totaling approximately $35.1 million at December 31, 2013. Management determined that $28.5 million, or 79%, of total impaired loans required no reserve allocation at December 31, 2014 compared to $18.8 million, or 54%, at December 31, 2013 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 percentages 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, delinquencies, current economic conditions, loan risk ratings, and industry concentration adjusted for certain qualitative factors to reflect current risk characteristics of the portfolio. In addition, the combined historical loan loss rates and qualitative factors 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 determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as the starting point to determine allowance provisions. The Company’s methodology includes qualitative factors that allow management to adjust its estimates of losses based on the most recent information available. These factors

21

reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

Loss Emergence Periods While the historical loss rates and qualitative factors (discussed above) provide a good foundation as to the incurred losses in the current portfolio, the portfolio is comprised of very unique loan categories that inherently may need more time to produce a loss than other loan categories (given these unique segments and workout periods). As such, a review of the Company’s LEP is necessary to ensure the ALL estimate is appropriately stated as of the balance sheet date, rather than relying on a singular annualized loss rate based upon the historical charge-off activity. Determination of the LEP allows for loans with effective useful lives longer than twelve months, often loans with extended workout periods, to be incorporated into the reserve estimate, given the incurred loss event had occurred prior to the balance sheet date. This approach is consistent with the Interagency ALL Guidance noted above.

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

Investment Portfolio

The Company classifies its debt and equity securities into one of the following two categories:

Held-to-Maturity includes investments in debt securities that the Company has the positive intent and ability to hold until maturity. Available-for-Sale - includes investments in debt and equity securities not classified as held to maturity or trading (i.e., investments that the Company has no present plans to sell in the near-term but may be sold in the future under different circumstances). The Company’s investment portfolio consists of available-for-sale securities.

Debt securities classified as held-to-maturity are carried at amortized cost, while debt and equity securities classified as available-for-sale are carried at estimated market value. Unrealized holding gains and losses from available-for-sale securities are excluded from earnings and reported, net of applicable taxes, as a separate component of stockholders’ equity until realized.

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

At December 31, 2014, the investment portfolio classified as available-for-sale represented 17.0% of total consolidated assets. Future levels of held-to-maturity and available-for-sale investment securities can be expected to vary depending upon liquidity and interest sensitivity needs as well as other factors.

The following table presents the composition of the investment portfolio by major category:

(In thousands)	2014			2013
U.S. Treasury	​	$	-	​	$	1,003
Government sponsored enterprises	​	​	57,099	​	​	60,616
Asset-backed securities	​	​	106,462	​	​	110,373
Obligations of states and political subdivisions	​	​	35,437	​	​	33,993
Total available for sale debt securities	​	$	198,998	​	$	205,985

22

As of December 31, 2014, the maturity of debt securities in the investment portfolio was as follows:

(In thousands)	One Year Or Less			Over One Through Five Years			Over Five Through Ten Years			Over Ten Years			Total			Weighted Average Yield
Government sponsored enterprises	​	$	11,131	​	$	39,197	​	$	6,771	​	$	-	​	$	57,099	​	1.50%
Asset-backed securities (1)	​	​	292	​	​	63,749	​	​	42,421	​	​	-	​	​	106,462	​	2.20
States and political subdivisions (2)	​	​	1,289	​	​	17,131	​	​	14,996	​	​	2,021	​	​	35,437	​	3.52
Total available-for-sale debt securities	​	$	12,712	​	$	120,077	​	$	64,188	​	$	2,021	​	$	198,998	​	2.23%
Weighted average yield	​	​	2.16%	​	​	2.06%	​	​	2.54%	​	​	3.01%	​	​	2.23%	​	​

1)

Asset-backed securities have been included using historic repayment speeds. Repayment speeds were determined from actual portfolio experience during the twelve months ended December 31, 2014 calculated separately for each mortgage-backed security. These repayment speeds are not necessarily indicative of future repayment speeds and are subject to change based on changing mortgage interest rates.

2)

Rates on obligations of states and political subdivisions have been adjusted to fully taxable equivalent rates using the statutory federal income tax rate of 34%.

At December 31, 2014 $10,500 of debt securities classified as available-for-sale in the table above had variable rate provisions with adjustment periods ranging from one week to twelve months.

The following non-marketable securities are restricted securities which, lacking a market, are carried at cost. These securities are reported in other assets. At December 31, 2014, $3.1 million of the total included Federal Home Loan Bank (Des Moines) stock held by the Bank in accordance with debt and regulatory requirements. Other non-marketable securities include a $1.5 million equity investment in the Company’s unconsolidated Exchange Statutory Trusts. See Note 8 to the Company’s consolidated financials for further explanation of the Exchange Statutory Trusts.

(In thousands)	2014			2013
Federal Home Loan Bank of Des Moines stock	​	$	3,075	​	$	2,354
Midwest Independent Bank stock	​	​	151	​	​	151
Federal Agricultural Mortgage Corporation stock	​	​	10	​	​	10
Investment in unconsolidated trusts	​	​	1,486	​	​	1,486
Total non-marketable investment securities	​	$	4,722	​	$	4,001

Liquidity and Capital Resources

Liquidity Management

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet the demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full service relationships with customers. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than the market rate.

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.

23

The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company’s most liquid assets are comprised of available for sale investment securities, federal funds sold, and excess reserves held at the Federal Reserve Bank.

(In thousands)	2014			2013
Federal funds sold and other overnight interest-bearing deposits	​	$	20,445	​	$	1,360
Available for sale investment securities	​	​	198,998	​	​	205,985
Total	​	$	219,443	​	$	207,345

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 $206.0 million at December 31, 2014 and included an unrealized net loss of  $2.4 million. The portfolio includes projected maturities and mortgage backed securities pay-downs of approximately $7.5 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company’s deposit base.

The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes required by law. The Company’s unpledged securities in the available for sale portfolio totaled approximately $53.4 million and $60.2 million at December 31, 2014 and 2013, respectively.

Total investment securities pledged for these purposes were as follows:

(In thousands)	2014			2013
Investment securities pledged for the purpose of securing:	​			​
Federal Reserve Bank borrowings	​	$	3,504	​	$	3,360
Federal funds purchased and securities sold under agreements to repurchase	​	​	26,770	​	​	25,149
Other deposits	​	​	115,272	​	​	117,283
Total pledged, at fair value	​	$	145,546	​	$	145,792

Liquidity is available from the Company’s base of core customer deposits, defined as demand, interest checking, savings, and money market deposit accounts. At December 31, 2014, such deposits totaled $649.7 million and represented 67.0% of the Company’s total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships. Time deposits and certificates of deposit of  $100,000 and over totaled $319.7 million at December 31, 2014. These accounts are normally considered more volatile and higher costing representing 33.0% of total deposits at December 31, 2014.

Core deposits at December 31, 2014 and 2013 were as follows:

(In thousands)	2014			2013
Core deposit base:	​			​
Non-interest bearing demand	​	$	207,700	​	$	187,382
Interest checking	​	​	191,902	​	​	182,103
Savings and money market	​	​	250,157	​	​	236,982
Total	​	$	649,759	​	$	606,467

Other components of liquidity are the level of borrowings from third party sources and the availability of future credit. The Company’s outside borrowings are comprised of securities sold under agreements to repurchase, Federal Home Loan Bank advances, and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As of December 31, 2014, under agreements with these unaffiliated banks, the Bank may borrow up to $40.0 million in federal funds on an unsecured basis and $7.8 million on a secured basis. There were no federal funds purchased outstanding at December 31, 2014. Securities sold under agreements to repurchase are generally borrowed overnight and are secured by a portion of the

24

Company’s investment portfolio. At December 31, 2014, there was $17.9 million in repurchase agreements. The Company may periodically borrow additional short-term funds from the Federal Reserve Bank through the discount window; although no such borrowings were outstanding at December 31, 2014.

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB). As a member of the FHLB, the Bank has access to credit products of the FHLB. As of December 31, 2014, the Bank had $43.0 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million at December 31, 2014 in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.

Borrowings outstanding at December 31, 2014 and 2013 were as follows:

(In thousands)	2014			2013
Borrowings:	​			​
Securities sold under agreements to repurchase	​	$	17,970	​	$	31,084
Federal Home Loan Bank advances	​	​	43,000	​	​	24,000
Subordinated notes	​	​	49,486	​	​	49,486
Total	​	$	110,456	​	$	104,570

The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and borrow from these entities. Based on the type and value of collateral pledged, the Company may draw advances against this collateral.

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

​	2014												2013
(In thousands)	FHLB			Federal Reserve Bank			Federal Funds Purchased Lines			Total			FHLB			Federal Reserve Bank			Federal Funds Purchased Lines			Total
Advance equivalent	​	$	273,613	​	$	3,433	​	$	44,340	​	$	321,386	​	$	259,221	​	$	3,286	​	$	41,430	​	$	303,937
Advances outstanding	​	​	(43,000)	​	​	0	​	​	0	​	​	(43,000)	​	​	(24,000)	​	​	0	​	​	(13,504)	​	​	(37,504)
Total available	​	$	230,613	​	$	3,433	​	$	44,340	​	$	278,386	​	$	235,221	​	$	3,286	​	$	27,926	​	$	266,433

At December 31, 2014, loans with a market value of  $405.5 million were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit. At December 31, 2014, investments with a market value of  $8.6 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.

Sources and Uses of Funds

Cash and cash equivalents were $42.8 million at December 31, 2014 compared to $28.4 million at December 31, 2013. The $17.9 million increase resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statement of cash flows for the year ended December 31, 2014. Cash flow provided from operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided cash flow of  $13.6 million for the year ended December 31, 2014.

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  $17.1 million. The cash outflow primarily consisted of  $48.9 million purchases of investment securities and a $28.4 million increase in the loan portfolio, partially offset by $52.3 million in proceeds from investment maturities, calls, and pay-downs, $5.3 million in proceeds from sales of investment securities, and $4.6 million in proceeds received from sales of other real estate owned and repossessed assets.

25

Financing activities provided cash of  $17.9 million, resulting primarily from a $20.3 million increase in demand deposits, $23.0 million increase in interest-bearing transaction accounts, and a $19.0 million net advance from Federal Home Loan Bank. These increases were partially offset by a $30.2 million decrease in time deposits, and a $13.1 million decrease in federal funds purchased and securities sold under agreements to repurchase. Future short-term liquidity needs arising from daily operations are not expected to vary significantly during 2015.

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 $138.4 million in unused loan commitments and standby letters of credit as of December 31, 2014. Although the Company’s current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low.

The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company’s ongoing liquidity needs primarily include funding its operating expenses and paying cash dividends to its shareholders. The Company paid cash dividends to its common and preferred shareholders totaling approximately $1.0 and $1.4 million for the years ended December 31, 2014 and 2013, respectively. A large portion of the Company’s liquidity is obtained from the Bank in the form of dividends. The Bank declared and paid $2.5 million and $15.0 million in dividends to the Company during the years ended December 31, 2014 and 2013, respectively. At December 31, 2014 and 2013, the Company had cash and cash equivalents totaling $1.0 million and $450,000, respectively.

Capital Management

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

Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of December 31, 2014 and 2013, the Company and the Bank each met all capital adequacy requirements.

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began on January 1, 2015, while larger institutions (generally those with assets of  $250 billion or more) were required to begin compliance on January 1, 2014. The final rules call for the following capital requirements:

•

A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%.

•

A minimum ratio of tier 1 capital to risk-weighted assets of 6%.

•

A minimum leverage ratio of 4%.

In addition, the final rules establish a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations will begin on January 1, 2016.

Under the proposed rules previously issued by the federal banking agencies, accumulated other comprehensive income (AOCI) would have been included in a banking organization’s common equity tier 1 capital. The final rules allow community banks to make a one-time election not to include these new AOCI

26

components in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule.

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations began with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.

The Company has assessed the impact of these changes and it does not expect there to be a material impact on the regulatory ratios of the Company and the Bank and on the capital, operations and earnings of the Company and the Bank.

The Company exceeded all capital adequacy requirements as of December 31, for the years indicated:

​	2014		2013		2012		2011		2010		Well- Capitalized Regulatory Guidelines
Risk-based capital ratios:	​		​		​		​		​		​
Total capital	​	15.78%	​	15.33%	​	16.83%	​	18.03%	​	17.05%	​	10.00%
Tier I capital	​	12.38	​	11.40	​	13.58	​	15.16	​	14.25	​	6.00
Leverage ratio	​	9.42	​	8.79	​	10.37	​	11.52	​	11.00	​	5.00

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

The required payments of time deposits and other borrowed money, not including interest, at December 31, 2014 are as follows:

​

Payments due by Period

(In thousands)

Total

Less than 1 Year

1-3 Years

3-5 Years

Over 5 Years

Time deposits

​

$

319,755

​

$

204,638

​

$

91,728

​

$

22,042

​

$

1,347

Other borrowed money

​

​

43,000

​

​

8,000

​

​

13,000

​

​

20,000

​

​

2,000

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

The Company provides customers with off-balance-sheet credit support through loan commitments and standby letters of credit. Summarized credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2014 are as follows:

​

Amount of Commitment Expiration per Period

(In thousands)

Total

Less than 1 Year

1-3 Years

3-5 Years

Over 5 Years

Unused loan commitments

​

$

135,137

​

$

99,262

​

$

14,481

​

$

5,257

​

$

16,137

Commitments to originate residential first and second mortgage loans

​

​

1,640

​

​

1,640

​

​

-

​

​

-

​

​

-

Standby letters of credit

​

​

1,621

​

​

1,285

​

​

336

​

​

-

​

​

-

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

27

Quantitative and Qualitative Disclosures about Market Risk

Interest Sensitivity

Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through transactions other than trading activities. The Company uses financial modeling techniques to measure interest rate risk. These techniques measure the sensitivity of future earnings due to changing interest rate environments. Guidelines established by the Company’s Asset/Liability Committee and approved by the board of directors are used to monitor exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to specific points on the yield curve. At December 31, 2014, the rate shock scenario models indicated that annual net interest income could change by as much as -18.3% to +25.5% should interest rates rise or fall, respectively, 400 basis points from their current level over a one year period. However, there are no assurances that the change will not be more or less than this estimate. Management believes this is an acceptable level of risk.

The following table represents estimated interest rate sensitivity and periodic and cumulative gap positions calculated as of December 31, 2014. Significant assumptions used for this table included: loans will repay at historic repayment rates; certain interest-bearing demand accounts are interest sensitive due to immediate repricing, and fixed maturity deposits will not be withdrawn prior to maturity. A significant variance in actual results from one or more of these assumptions could materially affect the results reflected in the table.

(In thousands)

Year 1

Year 2

Year 3

Year 4

Year 5

Over 5 Years or No stated Maturity

Total

ASSETS

​

​

​

​

​

​

​

Investment securities

​

$

19,708

​

$

20,588

​

$

16,594

​

$

22,116

​

$

28,349

​

$

91,643

​

$

198,998

Federal funds sold and other over-night interest-bearing deposits

​

​

20,445

​

​

-

​

​

-

​

​

-

​

​

-

​

​

-

​

​

20,445

Other investments and securities, at cost

​

​

4,722

​

​

-

​

​

-

​

​

-

​

​

-

​

​

-

​

​

4,722

Loans

​

​

325,495

​

​

141,367

​

​

137,161

​

​

97,198

​

​

112,986

​

​

47,006

​

​

861,213

Total

​

$

370,370

​

$

161,955

​

$

153,755

​

$

119,314

​

$

141,335

​

$

138,649

​

$

1,085,378

LIABILITIES

​

​

​

​

​

​

​

Savings, interest checking, and money market deposits

​

$

254,991

​

$

-

​

$

187,068

​

$

-

​

$

-

​

$

-

​

$

442,059

Time deposits

​

​

205,986

​

​

58,177

​

​

33,551

​

​

16,760

​

​

5,281

​

​

-

​

​

319,755

Federal funds purchased and securities sold under agreements to repurchase

​

​

17,970

​

​

-

​

​

-

​

​

-

​

​

-

​

​

-

​

​

17,970

Subordinated notes

​

​

49,486

​

​

-

​

​

-

​

​

-

​

​

-

​

​

-

​

​

49,486

Federal Home Loan Bank advances

​

​

18,000

​

​

8,000

​

​

5,000

​

​

10,000

​

​

2,000

​

​

-

​

​

43,000

Total

​

$

546,433

​

$

66,177

​

$

225,619

​

$

26,760

​

$

7,281

​

$

-

​

$

872,270

Interest-sensitivity GAP

​

​

​

​

​

​

​

Periodic GAP

​

$

(176,063)

​

$

95,778

​

$

(71,864)

​

$

92,554

​

$

134,054

​

$

138,649

​

$

213,108

Cumulative GAP

​

$

(176,063)

​

$

(80,285)

​

$

(152,149)

​

$

(59,595)

​

$

74,459

​

$

213,108

​

$

213,108

Ratio of interest-earning assets to interest-bearing liabilities

​

​

​

​

​

​

​

Periodic GAP

​

​

0.68

​

​

2.45

​

​

0.68

​

​

4.46

​

​

19.41

​

​

NM

​

​

1.24

Cumulative GAP

​

​

0.68

​

​

0.87

​

​

0.82

​

​

0.93

​

​

1.09

​

​

1.24

​

​

1.24

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

28

inflation does underlie the general level of most interest rates, but interest rates do not increase at the rate of inflation as do prices of goods and services. Rather, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy.

Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase capital at higher than normal rates to maintain an appropriate capital to asset ratio. In the opinion of management, inflation did not have a significant effect on the Company’s operations for the year ended December 31, 2014.

Impact of New Accounting Standards

Investments - Equity Method and Joint Ventures The FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, in January 2014. These amendments allow investors in low income housing tax credit entities to account for the investments using a proportional amortization method, provided that certain conditions are met, and recognize amortization of the investment as a component of income tax expense. In addition, disclosures are required that will enable users to understand the nature of the investments, and the effect of the measurement of the investments and the related tax credits on the investor’s financial statements. This ASU is effective for interim and annual periods beginning January 1, 2015 and should be applied retrospectively to all periods presented. The adoption will not have a significant effect on the Company’s consolidated financial statements.

Troubled Debt Restructurings by Creditors

The FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, in January 2014. These amendments require companies to disclose the amount of foreclosed residential real estate property held and the recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction. The ASU also defines when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan. The amendments are effective for interim and annual periods beginning January 1, 2015. The adoption will not have a significant effect on the Company’s consolidated financial statements.

The FASB has issued ASU No. 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure in August 2014. The objective of this update is to reduce diversity in practice by addressing the classification of foreclosed mortgage loans that are fully or partially guaranteed under government programs, including those guaranteed by the FHA and the VA. Some creditors reclassify those loans to real estate consistent with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) The loan has a government guarantee that is not separable from the loan before foreclosure; (2) At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and (3) At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments are effective for interim and annual periods beginning after December 15, 2014. The adoption will not have a significant effect on the Company’s consolidated financial statements.

Revenue from Contracts with Customers The FASB issued ASU 2014-09, Revenue from Contracts with Customers, in May 2014. The ASU supersedes revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance in the FASB Accounting Standards Codification. The core principle of the new guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance identifies specific steps that entities should apply in order to achieve this principle. The amendments are effective for interim and annual periods beginning January 1, 2017 and must be applied retrospectively. The Company is in the process of evaluating the impact of the ASU’s adoption on the Company’s consolidated financial statements.

29

Transfers and Servicing The FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, in June 2014. The amendments require that repurchase-to-maturity transactions and repurchase agreements that are part of financing arrangements be accounted for as secured borrowings. The amendments also require additional disclosures for certain transfers accounted for as sales. The accounting changes and the disclosures on sales are required to be presented in interim and annual periods beginning January 1, 2015. The ASU also requires disclosures about types of collateral, contractual tenor and potential risks for transactions accounted for as secured borrowings. These disclosures are required in interim and annual periods beginning April 1, 2015. The adoption is not expected to have a significant effect on the Company’s consolidated financial statements.

Presentation of Financial Statements - Going Concern Uncertainties. The FASB has issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern in August 2014. ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. Financial reporting under this presumption is commonly referred to as the going concern basis of accounting. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for interim and annual periods ending after December 15, 2016. The adoption is not expected to have a significant effect on the Company’s consolidated financial statements.

30

CONSOLIDATED FINANCIAL STATEMENTS

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

​	Page
Report of Independent Registered Public Accounting Firm	​	32
Consolidated Balance Sheets as of December 31, 2014 and 2013	​	33
Consolidated Statements of Income for each of the years ended December 31, 2014, 2013, and 2012	​	34
Consolidated Statements of Comprehensive Income for each of the years ended December 31, 2014, 2013, and 2012	​	35
Consolidated Statements of Stockholders’ Equity for each of the years ended December 31, 2014, 2013, and 2012	​	36
Consolidated Statements of Cash Flows for each of the years ended December 31, 2014, 2013, and 2012	​	37
Notes to the Consolidated Financial Statements	​	38

31

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
Hawthorn Bancshares, Inc.:

We have audited the accompanying consolidated balance sheets of Hawthorn Bancshares, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hawthorn Bancshares, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Hawthorn Bancshares, Inc.’s internal control over financial reporting as of December 31, 2014, based oncriteria established in Internal Control – Integrated Framework (1992),issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report datedMarch 31, 2015 expressed an unqualified opinion on the effectiveness of Hawthorn Bancshares, Inc.’s internal control over financial reporting.

/s/ KPMG LLP
St. Louis, Missouri
March 31, 2015

32

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

​	December 31,
(In thousands, except per share data)	2014			2013
ASSETS	​			​
Cash and due from banks	​	$	22,364	​	$	27,079
Federal funds sold and other overnight interest-bearing deposits	​	​	20,445	​	​	1,360
Cash and cash equivalents	​	​	42,809	​	​	28,439
Investment in available-for-sale securities, at fair value	​	​	198,998	​	​	205,985
Other investments and securities, at cost	​	​	4,722	​	​	4,001
Total investment securities	​	​	203,720	​	​	209,986
Loans	​	​	861,213	​	​	839,547
Allowances for loan losses	​	​	(9,099)	​	​	(13,719)
Net loans	​	​	852,114	​	​	825,828
Premises and equipment - net	​	​	37,498	​	​	38,079
Mortgage servicing rights	​	​	2,762	​	​	3,036
Other real estate owned and repossessed assets - net	​	​	11,885	​	​	14,867
Accrued interest receivable	​	​	4,816	​	​	4,999
Cash surrender value - life insurance	​	​	2,284	​	​	2,213
Other assets	​	​	11,843	​	​	12,675
Total assets	​	$	1,169,731	​	$	1,140,122
LIABILITIES AND STOCKHOLDERS’ EQUITY	​			​
Deposits	​			​
Non-interest bearing demand	​	$	207,700	​	$	187,382
Savings, interest checking and money market	​	​	442,059	​	​	419,085
Time deposits $100,000 and over	​	​	134,945	​	​	145,957
Other time deposits	​	​	184,810	​	​	204,047
Total deposits	​	​	969,514	​	​	956,471
Federal funds purchased and securities sold under agreements to repurchase	​	​	17,970	​	​	31,084
Subordinated notes	​	​	49,486	​	​	49,486
Federal Home Loan Bank advances	​	​	43,000	​	​	24,000
Accrued interest payable	​	​	373	​	​	426
Other liabilities	​	​	8,820	​	​	4,275
Total liabilities	​	​	1,089,163	​	​	1,065,742
Stockholders’ equity:	​			​
Common stock, $1 par value, authorized 15,000,000 shares; Issued 5,395,844 and 5,194,537 shares, respectively	​	​	5,396	​	​	5,195
Surplus	​	​	35,901	​	​	33,385
Retained earnings	​	​	44,016	​	​	40,086
Accumulated other comprehensive loss, net of tax	​	​	(1,228)	​	​	(769)
Treasury stock; 161,858 shares, at cost	​	​	(3,517)	​	​	(3,517)
Total stockholders’ equity	​	​	80,568	​	​	74,380
Total liabilities and stockholders’ equity	​	$	1,169,731	​	$	1,140,122

See accompanying notes to the consolidated financial statements.

33

HAWTHORN BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income

​	Years Ended December 31,
(In thousands, except per share amounts)	2014			2013			2012
INTEREST INCOME	​			​			​
Interest and fees on loans	​	$	40,274	​	$	41,110	​	$	43,957
Interest on investment securities:	​			​			​
Taxable	​	​	3,394	​	​	3,592	​	​	4,100
Nontaxable	​	​	722	​	​	844	​	​	909
Federal funds sold and other overnight interest-bearing deposits	​	​	28	​	​	37	​	​	46
Dividends on other securities	​	​	80	​	​	82	​	​	102
Total interest income	​	​	44,498	​	​	45,665	​	​	49,114
INTEREST EXPENSE	​			​			​
Interest on deposits:	​			​			​
Savings, interest checking and money market	​	​	968	​	​	974	​	​	1,146
Time deposit accounts $100,000 and over	​	​	940	​	​	1,142	​	​	1,345
Other time deposits	​	​	1,384	​	​	2,498	​	​	3,481
Interest on federal funds purchased and securities sold under agreements to repurchase	​	​	21	​	​	24	​	​	21
Interest on subordinated notes	​	​	1,264	​	​	1,284	​	​	1,381
Interest on Federal Home Loan Bank advances	​	​	467	​	​	420	​	​	531
Total interest expense	​	​	5,044	​	​	6,342	​	​	7,905
Net interest income	​	​	39,454	​	​	39,323	​	​	41,209
Provision for loan losses	​	​	0	​	​	2,030	​	​	8,900
Net interest income after provision for loan losses	​	​	39,454	​	​	37,293	​	​	32,309
NON-INTEREST INCOME	​			​			​
Service charges on deposit accounts	​	​	5,265	​	​	5,556	​	​	5,439
Trust department income	​	​	844	​	​	796	​	​	893
Real estate servicing fees, net	​	​	319	​	​	876	​	​	(453)
Gain on sale of mortgage loans, net	​	​	1,093	​	​	1,665	​	​	2,669
Gain on sale of investment securities	​	​	20	​	​	778	​	​	26
Other	​	​	1,208	​	​	1,195	​	​	1,152
Total non-interest income	​	​	8,749	​	​	10,866	​	​	9,726
NON-INTEREST EXPENSE	​			​			​
Salaries and employee benefits	​	​	20,377	​	​	19,542	​	​	19,165
Occupancy expense, net	​	​	2,660	​	​	2,630	​	​	2,598
Furniture and equipment expense	​	​	1,823	​	​	2,007	​	​	1,840
FDIC insurance assessment	​	​	933	​	​	992	​	​	993
Legal, examination, and professional fees	​	​	1,159	​	​	982	​	​	1,189
Advertising and promotion	​	​	1,274	​	​	1,301	​	​	1,083
Postage, printing, and supplies	​	​	1,117	​	​	1,210	​	​	1,144
Processing expense	​	​	3,101	​	​	3,543	​	​	3,593
Other real estate expense, net	​	​	845	​	​	4,924	​	​	2,659
Other	​	​	3,218	​	​	3,632	​	​	4,403
Total non-interest expense	​	​	36,507	​	​	40,763	​	​	38,667
Income before income taxes	​	​	11,696	​	​	7,396	​	​	3,368
Income tax expense	​	​	4,042	​	​	2,422	​	​	546
Net income	​	​	7,654	​	​	4,974	​	​	2,822
Preferred stock dividends and accretion of discount	​	​	0	​	​	615	​	​	1,784
Net income available to common shareholders	​	$	7,654	​	$	4,359	​	$	1,038
Basic earnings per share	​	$	1.46	​	$	0.83	​	$	0.20
Diluted earnings per share	​	$	1.46	​	$	0.83	​	$	0.20

See accompanying notes to the consolidated financial statements.

34

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

​	Years Ended December 31,
(In thousands)	2014			2013			2012
Net income	​	$	7,654	​	$	4,974	​	$	2,822
Other comprehensive (loss) income, net of tax	​			​			​
Securities available for sale:	​			​			​
Unrealized gain (loss) on investment securities available-for-sale, net of tax	​	​	1,717	​	​	(4,275)	​	​	(123)
Adjustment for gain on sales of investment securities, net of tax	​	​	(12)	​	​	(482)	​	​	(16)
Defined benefit pension plans:	​			​			​
Net (loss) gain arising during the year, net of tax	​	​	(2,212)	​	​	2,095	​	​	547
Amortization of prior service cost included in net periodic pension cost, net of tax	​	​	48	​	​	68	​	​	77
Total other comprehensive (loss) income	​	​	(459)	​	​	(2,594)	​	​	485
Total comprehensive income	​	$	7,195	​	$	2,380	​	$	3,307

See accompanying notes to the consolidated financial statements.

35

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

(In thousands)

Preferred Stock

Common Stock

Surplus

Retained Earnings

Accumulated Other Comprehensive (Loss) Income

Treasury Stock

Total Stockholders’ Equity

Balance, December 31, 2011

​

$

29,318

​

$

4,815

​

$

30,266

​

$

40,354

​

$

1,340

​

$

(3,517)

​

$

102,576

Cumulative effect of change in accounting principle

​

​

0

​

​

0

​

​

0

​

​

460

​

​

0

​

​

0

​

​

460

Balance, January 1, 2012

​

$

29,318

​

$

4,815

​

$

30,266

​

$

40,814

​

$

1,340

​

$

(3,517)

​

$

103,036

Net income

​

​

0

​

​

0

​

​

0

​

​

2,822

​

​

0

​

​

0

​

​

2,822

Other comprehensive income

​

​

0

​

​

0

​

​

0

​

​

0

​

​

485

​

​

0

​

​

485

Stock based compensation expense

​

​

0

​

​

0

​

​

29

​

​

0

​

​

0

​

​

0

​

​

29

Accretion of preferred stock discount

​

​

659

​

​

0

​

​

0

​

​

(659)

​

​

0

​

​

0

​

​

0

Redemption of 12,000 shares of preferred stock

​

​

(12,000)

​

​

0

​

​

0

​

​

0

​

​

0

​

​

0

​

​

(12,000)

Stock dividend

​

​

0

​

​

186

​

​

1,521

​

​

(1,707)

​

​

0

​

​

0

​

​

0

Cash dividends declared, preferred stock

​

​

0

​

​

0

​

​

0

​

​

(1,203)

​

​

0

​

​

0

​

​

(1,203)

Cash dividends declared, common stock

​

​

0

​

​

0

​

​

0

​

​

(949)

​

​

0

​

​

0

​

​

(949)

Balance, December 31, 2012

​

$

17,977

​

$

5,001

​

$

31,816

​

$

39,118

​

$

1,825

​

$

(3,517)

​

$

92,220

Net income

​

​

0

​

​

0

​

​

0

​

​

4,974

​

​

0

​

​

0

​

​

4,974

Other comprehensive loss

​

​

0

​

​

0

​

​

0

​

​

0

​

​

(2,594)

​

​

0

​

​

(2,594)

Stock based compensation expense

​

​

0

​

​

0

​

​

19

​

​

0

​

​

0

​

​

0

​

​

19

Accretion of preferred stock discount

​

​

278

​

​

0

​

​

0

​

​

(278)

​

​

0

​

​

0

​

​

0

Redemption of 18,255 shares of preferred stock

​

​

(18,255)

​

​

0

​

​

0

​

​

0

​

​

0

​

​

0

​

​

(18,255)

Redemption of common stock warrant

​

​

0

​

​

0

​

​

(540)

​

​

0

​

​

0

​

​

0

​

​

(540)

Stock dividend

​

​

0

​

​

194

​

​

2,090

​

​

(2,284)

​

​

0

​

​

0

​

​

0

Cash dividends declared, preferred stock

​

​

0

​

​

0

​

​

0

​

​

(456)

​

​

0

​

​

0

​

​

(456)

Cash dividends declared, common stock

​

​

0

​

​

0

​

​

0

​

​

(988)

​

​

0

​

​

0

​

​

(988)

Balance, December 31, 2013

​

$

0

​

$

5,195

​

$

33,385

​

$

40,086

​

$

(769)

​

$

(3,517)

​

$

74,380

Net income

​

​

0

​

​

0

​

​

0

​

​

7,654

​

​

0

​

​

0

​

​

7,654

Other comprehensive loss

​

​

0

​

​

0

​

​

0

​

​

0

​

​

(459)

​

​

0

​

​

(459)

Stock based compensation expense

​

​

0

​

​

0

​

​

20

​

​

0

​

​

0

​

​

0

​

​

20

Stock dividend

​

​

0

​

​

201

​

​

2,496

​

​

(2,697)

​

​

0

​

​

0

​

​

0

Cash dividends declared, common stock

​

​

0

​

​

0

​

​

0

​

​

(1,027)

​

​

0

​

​

0

​

​

(1,027)

Balance, December 31, 2014

​

$

0

​

$

5,396

​

$

35,901

​

$

44,016

​

$

(1,228)

​

$

(3,517)

​

$

80,568

See accompanying notes to the consolidated financial statements.

36

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

​	Years Ended December 31,
(In thousands)	2014			2013			2012
Cash flows from operating activities:	​			​			​
Net income	​	$	7,654	​	$	4,974	​	$	2,822
Adjustments to reconcile net income to net cash provided by operating activities:	​			​			​
Provision for loan losses	​	​	0	​	​	2,030	​	​	8,900
Depreciation expense	​	​	1,758	​	​	1,605	​	​	1,858
Net amortization of investment securities, premiums, and discounts	​	​	1,058	​	​	1,211	​	​	1,161
Amortization of intangible assets	​	​	0	​	​	135	​	​	408
Stock based compensation expense	​	​	20	​	​	19	​	​	29
Change in fair value of mortgage servicing rights	​	​	576	​	​	25	​	​	1,331
Gain on sale of investment securities	​	​	(20)	​	​	(778)	​	​	(26)
Gain on sales and dispositions of premises and equipment	​	​	(60)	​	​	(6)	​	​	(79)
Gain (loss) on sales and dispositions of other real estate owned and repossessed assets	​	​	(188)	​	​	330	​	​	(317)
Provision for other real estate owned	​	​	585	​	​	3,367	​	​	713
Decrease in accrued interest receivable	​	​	183	​	​	191	​	​	151
Increase in cash surrender value - life insurance	​	​	(71)	​	​	(77)	​	​	(72)
(Increase) decrease in other assets	​	​	(479)	​	​	4,311	​	​	949
Decrease (increase) in income tax receivable	​	​	(826)	​	​	524	​	​	(644)
Decrease in accrued interest payable	​	​	(53)	​	​	(483)	​	​	(145)
Increase in other liabilities	​	​	966	​	​	1,113	​	​	253
Origination of mortgage loans for sale	​	​	(35,434)	​	​	(72,100)	​	​	(99,420)
Proceeds from the sale of mortgage loans	​	​	36,623	​	​	75,961	​	​	99,797
Gain on sale of mortgage loans, net	​	​	(1,093)	​	​	(1,665)	​	​	(2,669)
Other, net	​	​	2,355	​	​	(444)	​	​	(125)
Net cash provided by operating activities	​	​	13,554	​	​	20,243	​	​	14,875
Cash flows from investing activities:	​			​			​
Net increase in loans	​	​	(28,357)	​	​	(2,525)	​	​	(26,499)
Purchase of available-for-sale debt securities	​	​	(48,942)	​	​	(88,137)	​	​	(76,498)
Proceeds from maturities of available-for-sale debt securities	​	​	23,702	​	​	33,341	​	​	42,735
Proceeds from calls of available-for-sale debt securities	​	​	28,605	​	​	8,275	​	​	45,170
Proceeds from sales of available-for-sale debt securities	​	​	5,334	​	​	32,590	​	​	790
Proceeds from sales of FHLB stock	​	​	439	​	​	536	​	​	460
Purchases of FHLB stock	​	​	(1,160)	​	​	(612)	​	​	0
Purchases of premises and equipment	​	​	(1,342)	​	​	(2,680)	​	​	(1,375)
Proceeds from sales of premises and equipment	​	​	65	​	​	23	​	​	272
Proceeds from sales of other real estate owned and repossessed assets	​	​	4,560	​	​	9,641	​	​	8,571
Net cash used by investing activities	​	​	(17,096)	​	​	(9,548)	​	​	(6,374)
Cash flows from financing activities:	​			​			​
Net increase (decrease) in demand deposits	​	​	20,318	​	​	(4,889)	​	​	33,084
Net increase in interest-bearing transaction accounts	​	​	22,974	​	​	13,383	​	​	21,103
Net decrease in time deposits	​	​	(30,249)	​	​	(43,298)	​	​	(21,136)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase	​	​	(13,114)	​	​	10,026	​	​	(3,458)
Repayment of FHLB advances	​	​	(10,000)	​	​	(15,126)	​	​	(8,284)
FHLB advances	​	​	29,000	​	​	19,000	​	​	0
Redemption of 18,255 and 12,000 shares, respectively, of preferred stock	​	​	0	​	​	(18,255)	​	​	(12,000)
Warrant redemption	​	​	0	​	​	(540)	​	​	0
Cash dividends paid - preferred stock	​	​	0	​	​	(456)	​	​	(1,203)
Cash dividends paid - common stock	​	​	(1,017)	​	​	(978)	​	​	(940)
Net cash provided (used) by financing activities	​	​	17,912	​	​	(41,133)	​	​	7,166
Net increase (decrease) in cash and cash equivalents	​	​	14,370	​	​	(30,438)	​	​	15,667
Cash and cash equivalents, beginning of year	​	​	28,439	​	​	58,877	​	​	43,210
Cash and cash equivalents, end of year	​	$	42,809	​	$	28,439	​	$	58,877
Supplemental disclosures of cash flow information:	​			​			​
Cash paid during the year for:	​			​			​
Interest	​	$	5,097	​	$	6,825	​	$	8,420
Income taxes	​	$	2,265	​	$	131	​	$	1,591
Supplemental schedule of noncash investing and financing activities:	​			​			​
Other real estate and repossessions acquired in settlement of loans	​	$	1,975	​	$	4,613	​	$	16,869

See accompanying notes to the consolidated financial statements.

37

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012

(1)   Summary of Significant Accounting Policies

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

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

During the third quarter of, 2014, the Company’s management discovered employee fraud resulting in the loss of an aggregate $421,000 of cash over an extended period of time. As a result of the discovery, the Company recorded a $136,000 loss in its consolidated financial statements as of December 31, 2014, representing the $421,000 gross loss, net of expected insurance proceeds of  $285,000. The Company determined that any adjustments relating to prior-period financial statements were immaterial

Stock Dividend On July 1, 2014, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2014. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Preferred Stock On December 19, 2008, the Company announced its participation in the U.S. Treasury Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. Participation in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of  $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock. On May 9, 2012, the Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program for a total purchase price of  $12.1 million, and on May 15, 2013, the remaining 18,255 shares were redeemed for a total purchase price of  $18.5 million.

On June 11, 2013, the common stock warrant issued under the U.S. Treasury Department’s CPP program was repurchased by the Company for a total purchase price of  $540,000, or $1.88 per warrant share. The purchase price was based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ended the Company’s participation in the U.S. Treasury Department’s CPP.

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

Principles of Consolidation

In December of 2008 and March of 2010, the Company formed Hawthorn Real Estate, LLC, and Real Estate Holdings of Missouri, LLC, respectively (the Real Estate Companies); both are wholly owned subsidiaries of the Company. The consolidated financial statements include the accounts of the Company,

38

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Hawthorn Bank (the Bank), and the Real Estate Companies. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans

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

Loans Held for Sale

The Bank originates certain loans, which are sold in the secondary market. These long-term, fixed rate loans are typically classified as held for sale upon origination based on management’s intent to sell and are accounted for at the lower of adjusted cost or fair value. Adjusted cost reflects the funded loan amount and any loan origination costs and fees. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. At December 31, 2014, there were no mortgage loans that were held for sale in comparison to $95,882 loans held for sale at December 31, 2013.

Impaired Loans

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

Non-Accrual Loans

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

Restructured Loans

A modified or restructured loan is accounted for as a troubled debt restructuring (TDR) for any loans in which concessions are made to the borrower for economic or legal reasons that the Company would not otherwise consider and the borrower is experiencing financial difficulty. A loan classified as a TDR will generally retain such classification until the loan is paid in full. Non-accrual TDRs are returned to accruing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months. The Company includes all accruing and non-accruing TDRs in the impaired and non-performing asset totals. TDRs are measured for impairment loss by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows.

39

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

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. 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.

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. When loans become 90 days past due, they are generally placed on nonaccrual status or charged off unless extenuating circumstances justify leaving the loan on accrual basis. When loans reach 120 days past due and there is little likelihood of repayment, they are charged off. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated. 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 adjusted for certain qualitative factors to reflect current risk characteristics of the portfolio. In addition, the combined historical loan loss rates and qualitative factors are multiplied by loss emergence periods which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a potential loss. Although the allowance for loan losses are comprised of specific and general allocations, the entire allowance is available to absorb credit losses.

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by 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, delinquencies, current economic conditions, loan risk ratings, and industry concentration adjusted for certain qualitative factors to reflect current risk characteristics of the portfolio. In addition, the combined historical loan loss rates and qualitative factors 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 determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The Company’s methodology includes qualitative factors that allow management to adjust its estimates of losses based on the most recent information available. These factors reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

40

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Investment in Debt and Equity Securities

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

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

Capital Stock of the Federal Home Loan Bank

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

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improve-ments and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such lives are estimated to be 5 to 40 years for buildings and improvements and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.

Core Deposit Intangibles

Intangible assets that have finite useful lives, such as core deposit intangibles, are amortized over their estimated useful lives. Core deposit intangibles are amortized over periods of 7 to 8 years representing their estimated lives using straight line and accelerated methods.

When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the carrying value based upon future cash flows expected to result from the use of the underlying asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the underlying asset, the Company recognizes an impairment loss. The impairment loss recognized represents the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset.

41

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Mortgage Servicing Rights

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

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

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of  $459,890, which was recorded as an increase to beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights have been recognized in real estate servicing fees, net in non-interest income in the Company’s Consolidated Statements of Income in the period in which the change occurred.

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

Other Real Estate Owned and Repossessed Assets

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

Pension Plan

The Company provides a noncontributory defined benefit pension plan for all full-time employees. The benefits are based on age, years of service and the level of compensation during the employees highest ten years of compensation before retirement. Net periodic costs are recognized as employees render the services necessary to earn the retirement benefits. The Company records annual amounts relating to its pension plan based on calculations that incorporate various actuarial and other assumptions including discount rates, mortality, assumed rates of return, compensation increases, and turnover rates. The Company reviews its

42

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

assumptions on an annual basis and may make modifications to the assumptions based on current rates and trends when it is appropriate to do so. The Company believes that the assumptions utilized in recording its obligations under its plan are reasonable based on its experience and market conditions.

The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation – Retirement Plans under the subtopic Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the funded status of a plan as of the date of its fiscal year-end, with limited exceptions. Additional disclosures are required to provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures.

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Judgment is required in addressing the Company’s future tax consequences of events that have been recognized in the consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forwards and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, the Company would adjust the recorded value of our deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Likewise, the Company would reverse the valuation allowance when it is expected to realize the deferred tax asset. The Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions as of December 31, 2014, 2013, and 2012.

Trust Department

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

Consolidated Statements of Cash Flows

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

Stock-Based Compensation

The Company’s stock-based employee compensation plan is described in Note 12, Stock Compensation. In accordance with FASB ASC Topic 718, Compensation – Stock Compensation, the Company measures the cost of the stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The expense recognized is based on an estimation of the number of awards for which the requisite service is expected to be rendered, and is included in salaries and employee benefits in the accompanying Consolidated Statements of Income. The standard also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.

43

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Treasury Stock

The purchase of the Company’s common stock is recorded at cost. Purchases of the stock are made both in the open market and through negotiated private purchases based on market prices. At the date of subsequent reissue, the treasury stock account is reduced by the cost associated with such stock on a first-in-first-out basis.

Reclassifications

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

(2)   Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at December 31, 2014 and 2013 is as follows:

(in thousands)	2014			2013
Commercial, financial, and agricultural	​	$	154,834	​	$	141,845
Real estate construction - residential	​	​	18,103	​	​	21,008
Real estate construction - commercial	​	​	48,822	​	​	55,076
Real estate mortgage - residential	​	​	247,117	​	​	225,630
Real estate mortgage - commercial	​	​	372,321	​	​	375,686
Installment and other consumer	​	​	20,016	​	​	20,302
Total loans	​	$	861,213	​	$	839,547

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles. At December 31, 2014, loans with a carrying value of  $411.8 million, or $405.5 million fair value, were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

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

(in thousands)	​	​
Balance at December 31, 2013	$	4,837
New loans	​	478
Amounts collected	​	(375)
Balance at December 31, 2014	$	4,940

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

44

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Allowance for loan losses

The following is a summary of the allowance for loan losses for the years ended December 31, 2014, 2013, and 2012:

(in thousands)

Commercial, Financial, & Agricultural

Real Estate Construction - Residential

Real Estate Construction - Commercial

Real Estate Mortgage - Residential

Real Estate Mortgage - Commercial

Installment Loans to Individuals

Un- allocated

Total

Balance at December 31, 2011

​

$

1,804

​

$

1,188

​

$

1,562

​

$

3,251

​

$

5,734

​

$

267

​

$

3

​

$

13,809

Additions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Provision for loan losses

​

​

1,732

​

​

(523)

​

​

126

​

​

955

​

​

6,318

​

​

293

​

​

(1)

​

​

8,900

Deductions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans charged off

​

​

1,760

​

​

0

​

​

0

​

​

977

​

​

5,466

​

​

586

​

​

0

​

​

8,789

Less recoveries on loans

​

​

(161)

​

​

(67)

​

​

(23)

​

​

(158)

​

​

(248)

​

​

(265)

​

​

0

​

​

(922)

Net loans charged off

​

​

1,599

​

​

(67)

​

​

(23)

​

​

819

​

​

5,218

​

​

321

​

​

0

​

​

7,867

Balance at December 31, 2012

​

$

1,937

​

$

732

​

$

1,711

​

$

3,387

​

$

6,834

​

$

239

​

$

2

​

$

14,842

Additions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Provision for loan losses

​

​

992

​

​

318

​

​

(452)

​

​

273

​

​

622

​

​

272

​

​

5

​

​

2,030

Deductions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans charged off

​

​

895

​

​

119

​

​

633

​

​

812

​

​

1,301

​

​

420

​

​

0

​

​

4,180

Less recoveries on loans

​

​

(340)

​

​

0

​

​

(5)

​

​

(111)

​

​

(368)

​

​

(203)

​

​

0

​

​

(1,027)

Net loans charged off

​

​

555

​

​

119

​

​

628

​

​

701

​

​

933

​

​

217

​

​

0

​

​

3,153

Balance at December 31, 2013

​

$

2,374

​

$

931

​

$

631

​

$

2,959

​

$

6,523

​

$

294

​

$

7

​

$

13,719

Additions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Provision for loan losses

​

​

371

​

​

(592)

​

​

326

​

​

(226)

​

​

(107)

​

​

195

​

​

33

​

​

0

Deductions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans charged off

​

​

1,285

​

​

349

​

​

491

​

​

408

​

​

2,890

​

​

405

​

​

0

​

​

5,828

Less recoveries on loans

​

​

(319)

​

​

(181)

​

​

0

​

​

(202)

​

​

(320)

​

​

(186)

​

​

0

​

​

(1,208)

Net loans charged off

​

​

966

​

​

168

​

​

491

​

​

206

​

​

2,570

​

​

219

​

​

0

​

​

4,620

Balance at December 31, 2014

​

$

1,779

​

$

171

​

$

466

​

$

2,527

​

$

3,846

​

$

270

​

$

40

​

$

9,099

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.

45

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

The following table provides the balance in the allowance for loan losses at December 31, 2014 and 2013, and the related loan balance by impairment methodology.

(in thousands)

Commercial, Financial, and Agricultural

Real Estate Construction - Residential

Real Estate Construction - Commercial

Real Estate Mortgage - Residential

Real Estate Mortgage - Commercial

Installment Loans to Individuals

Un- allocated

Total

December 31, 2014

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Allowance for loan losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually evaluated for impairment

​

$

134

​

$

0

​

$

0

​

$

1,343

​

$

246

​

$

26

​

$

0

​

$

1,749

Collectively evaluated for impairment

​

​

1,645

​

​

171

​

​

466

​

​

1,184

​

​

3,600

​

​

244

​

​

40

​

​

7,350

Total

​

$

1,779

​

$

171

​

$

466

​

$

2,527

​

$

3,846

​

$

270

​

$

40

​

$

9,099

Loans outstanding:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually evaluated for impairment

​

$

7,541

​

$

1,750

​

$

2,096

​

$

7,878

​

$

16,464

​

$

234

​

$

0

​

$

35,963

Collectively evaluated for impairment

​

​

147,293

​

​

16,353

​

​

46,726

​

​

239,239

​

​

355,857

​

​

19,782

​

​

0

​

​

825,250

Total

​

$

154,834

​

$

18,103

​

$

48,822

​

$

247,117

​

$

372,321

​

$

20,016

​

$

0

​

$

861,213

December 31, 2013

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Allowance for loan losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually evaluated for impairment

​

$

721

​

$

392

​

$

304

​

$

1,374

​

$

1,989

​

$

16

​

$

0

​

$

4,796

Collectively evaluated for impairment

​

​

1,653

​

​

539

​

​

327

​

​

1,585

​

​

4,534

​

​

278

​

​

7

​

​

8,923

Total

​

$

2,374

​

$

931

​

$

631

​

$

2,959

​

$

6,523

​

$

294

​

$

7

​

$

13,719

Loans outstanding:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually evaluated for impairment

​

$

4,015

​

$

2,204

​

$

6,615

​

$

6,517

​

$

15,422

​

$

43

​

$

0

​

$

34,816

Collectively evaluated for impairment

​

​

137,830

​

​

18,804

​

​

48,461

​

​

219,113

​

​

360,264

​

​

20,259

​

​

0

​

​

804,731

Total

​

$

141,845

​

$

21,008

​

$

55,076

​

$

225,630

​

$

375,686

​

$

20,302

​

$

0

​

$

839,547

Impaired loans

Loans evaluated under ASC 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans totaled $36.0 million and $35.1 million at December 31, 2014 and 2013, respectively, and are comprised of loans on non-accrual status and loans, which have been classified as troubled debt restructurings. Total impaired loans of  $36.0 million at December 31, 2014 were individually evaluated for impairment compared to $35.1 million at December 31, 2013. The $35.1 million of total impaired loans individually evaluated for impairment as December 31, 2013, includes $34.8 million of impaired loans individually evaluated for impairment and $259,000 of non-accrual consumer loans that were collectively evaluated for impairment. Beginning in 2014, consumer non-accrual loans were included in the individually evaluated impairment calculations.

The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At December 31, 2014 and 2013, $15.6 million and $21.8 million, respectively, of impaired loans were evaluated based on the fair value less estimated selling costs of the loan’s collateral. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2014, $1.7 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $36.0 million compared to $4.8 million of the Company’s allowance for loan losses allocated to impaired loans totaling approximately

46

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

$35.1 million at December 31, 2013. Management determined that $28.5 million, or 79%, of total impaired loans required no reserve allocation at December 31, 2014 compared to $18.8 million, or 54%, at December 31, 2013 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at December 31, 2014 and 2013 are as follows:

(in thousands)	2014			2013
Non-accrual loans	​	$	18,243	​	$	23,680
Troubled debt restructurings continuing to accrue interest	​	​	17,720	​	​	11,395
Total impaired loans	​	$	35,963	​	$	35,075

The following tables provide additional information about impaired loans at December 31, 2014 and 2013, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

(in thousands)	Recorded Investment			Unpaid Principal Balance			Specific Reserves
December 31, 2014	​	​	​	​	​	​	​	​	​
With no related allowance recorded:	​	​	​	​	​	​	​	​	​
Commercial, financial and agricultural	​	$	6,021	​	$	6,232	​	$	0
Real estate - construction residential	​	​	1,750	​	​	2,259	​	​	0
Real estate - construction commercial	​	​	2,096	​	​	2,319	​	​	0
Real estate - residential	​	​	3,213	​	​	3,270	​	​	0
Real estate - commercial	​	​	15,409	​	​	18,950	​	​	0
Consumer	​	​	36	​	​	36	​	​	0
Total	​	$	28,525	​	$	33,066	​	$	0
With an allowance recorded:	​	​	​	​	​	​	​	​	​
Commercial, financial and agricultural	​	$	1,520	​	$	1,528	​	$	134
Real estate - construction residential	​	​	0	​	​	0	​	​	0
Real estate - construction commercial	​	​	0	​	​	0	​	​	0
Real estate - residential	​	​	4,665	​	​	3,546	​	​	1,343
Real estate - commercial	​	​	1,055	​	​	1,171	​	​	246
Consumer	​	​	198	​	​	237	​	​	26
Total	​	$	7,438	​	$	6,482	​	$	1,749
Total impaired loans	​	$	35,963	​	$	39,548	​	$	1,749

47

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(in thousands)	Recorded Investment			Unpaid Principal Balance			Specific Reserves
December 31, 2013	​	​	​	​	​	​	​	​	​
With no related allowance recorded:	​			​			​
Commercial, financial and agricultural	​	$	2,467	​	$	2,593	​	$	0
Real estate - construction residential	​	​	44	​	​	80	​	​	0
Real estate - construction commercial	​	​	6,101	​	​	7,148	​	​	0
Real estate - residential	​	​	2,121	​	​	2,654	​	​	0
Real estate - commercial	​	​	7,817	​	​	8,056	​	​	0
Consumer	​	​	259	​	​	282	​	​	0
Total	​	$	18,809	​	$	20,813	​	$	0
With an allowance recorded:	​	​	​	​	​	​	​	​	​
Commercial, financial and agricultural	​	$	1,548	​	$	1,607	​	$	721
Real estate - construction residential	​	​	2,160	​	​	2,331	​	​	392
Real estate - construction commercial	​	​	514	​	​	514	​	​	304
Real estate - residential	​	​	4,396	​	​	4,570	​	​	1,374
Real estate - commercial	​	​	7,605	​	​	7,925	​	​	1,989
Consumer	​	​	43	​	​	45	​	​	16
Total	​	$	16,266	​	$	16,992	​	$	4,796
Total impaired loans	​	$	35,075	​	$	37,805	​	$	4,796

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2014 and 2013:

​

2014

2013

(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

​

$

3,141

​

$

94

​

$

2,693

​

$

108

Real estate - construction residential

​

​

610

​

​

2

​

​

80

​

​

0

Real estate - construction commercial

​

​

5,950

​

​

0

​

​

7,437

​

​

6

Real estate - residential

​

​

3,517

​

​

46

​

​

2,612

​

​

51

Real estate - commercial

​

​

13,703

​

​

400

​

​

8,461

​

​

170

Consumer

​

​

11

​

​

0

​

​

290

​

​

3

Total

​

$

26,932

​

$

542

​

$

21,573

​

$

338

With an allowance recorded:

​

​

​

​

Commercial, financial and agricultural

​

$

1,773

​

$

19

​

$

1,677

​

$

29

Real estate - construction residential

​

​

1,697

​

​

0

​

​

2,409

​

​

0

Real estate - construction commercial

​

​

42

​

​

0

​

​

514

​

​

0

Real estate - residential

​

​

5,118

​

​

129

​

​

4,596

​

​

24

Real estate - commercial

​

​

3,810

​

​

11

​

​

8,157

​

​

113

Consumer

​

​

312

​

​

0

​

​

45

​

​

0

Total

​

$

12,752

​

$

159

​

$

17,398

​

$

166

Total impaired loans

​

$

39,684

​

$

701

​

$

38,971

​

$

504

48

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $542,000 and $338,000, for the years ended December 31, 2014 and 2013, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the years reported. Contractual interest lost on loans in non-accrual status was $1.1 million and $1.2 million, for the years ended December 31, 2014 and 2013, respectively.

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due.

The following table provides aging information for the Company’s past due and non-accrual loans at December 31, 2014 and 2013.

(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

December 31, 2014

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Commercial, Financial, and Agricultural

​

$

149,366

​

$

189

​

$

0

​

$

5,279

​

$

154,834

Real Estate Construction - Residential

​

​

16,352

​

​

0

​

​

0

​

​

1,751

​

​

18,103

Real Estate Construction - Commercial

​

​

46,670

​

​

0

​

​

56

​

​

2,096

​

​

48,822

Real Estate Mortgage - Residential

​

​

239,469

​

​

3,229

​

​

0

​

​

4,419

​

​

247,117

Real Estate Mortgage - Commercial

​

​

366,653

​

​

1,203

​

​

0

​

​

4,465

​

​

372,321

Installment and Other Consumer

​

​

19,551

​

​

230

​

​

2

​

​

233

​

​

20,016

Total

​

$

838,061

​

$

4,851

​

$

58

​

$

18,243

​

$

861,213

December 31, 2013

​

​

​

​

​

Commercial, Financial, and Agricultural

​

$

139,219

​

$

942

​

$

0

​

$

1,684

​

$

141,845

Real Estate Construction - Residential

​

​

18,738

​

​

66

​

​

0

​

​

2,204

​

​

21,008

Real Estate Construction - Commercial

​

​

48,230

​

​

595

​

​

0

​

​

6,251

​

​

55,076

Real Estate Mortgage - Residential

​

​

217,268

​

​

4,068

​

​

129

​

​

4,165

​

​

225,630

Real Estate Mortgage - Commercial

​

​

365,787

​

​

725

​

​

100

​

​

9,074

​

​

375,686

Installment and Other Consumer

​

​

19,695

​

​

291

​

​

14

​

​

302

​

​

20,302

Total

​

$

808,937

​

$

6,687

​

$

243

​

$

23,680

​

$

839,547

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch status when one or more weaknesses that may result in the deterioration of the repayment exits or the Company’s credit position at some future date. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected,

49

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.

The following table presents the risk categories by class at December 31, 2014 and 2013.

(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 December 31, 2014

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Watch

​

$

13,651

​

$

1,103

​

$

4,757

​

$

27,172

​

$

18,191

​

$

199

​

$

65,073

Substandard

​

​

3,188

​

​

90

​

​

1,211

​

​

6,583

​

​

16,101

​

​

139

​

​

27,312

Non-accrual

​

​

5,279

​

​

1,751

​

​

2,096

​

​

4,419

​

​

4,465

​

​

233

​

​

18,243

Total

​

$

22,118

​

$

2,944

​

$

8,064

​

$

38,174

​

$

38,757

​

$

571

​

$

110,628

At December 31, 2013

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Watch

​

$

15,016

​

$

2,007

​

$

6,111

​

$

26,331

​

$

23,662

​

$

388

​

$

73,515

Substandard

​

​

7,553

​

​

92

​

​

1,403

​

​

8,579

​

​

14,510

​

​

281

​

​

32,418

Non-accrual

​

​

1,684

​

​

2,204

​

​

6,251

​

​

4,165

​

​

9,074

​

​

302

​

​

23,680

Total

​

$

24,253

​

$

4,303

​

$

13,765

​

$

39,075

​

$

47,246

​

$

971

​

$

129,613

Troubled Debt Restructurings

At December 31, 2014, loans classified as troubled debt restructurings (TDRs) totaled $19.3 million, of which $1.6 million were on non-accrual status and $17.7 million were on accrual status. At December 31, 2013, loans classified as troubled debt restructurings (TDRs) totaled $21.5 million, of which $10.1 million were on non-accrual status and $11.4 million were on accrual status. 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  $1.0 million and $2.2 million related to TDRs were allocated to the allowance for loan losses at December 31, 2014 and 2013, respectively.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2014 and 2013.

​

2014

2013

​

Recorded Investment (1)

Recorded Investment (1)

(in thousands)

Number of Contracts

Pre- Modification

Post- Modification

Number of Contracts

Pre- Modification

Post- Modification

Troubled Debt Restructurings

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Commercial, financial and agricultural

​

3

​

$

244

​

$

208

​

0

​

$

0

​

$

0

Real estate mortgage - residential

​

1

​

​

1,256

​

​

1,170

​

3

​

​

2,156

​

​

1,992

Real estate mortgage - commercial

​

0

​

​

0

​

​

0

​

1

​

​

1,282

​

​

1,282

Total

​

4

​

$

1,500

​

$

1,378

​

4

​

$

3,438

​

$

3,274

(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 such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, charged-off, or the collateral for the loan is foreclosed and sold. The Company considers a loan in TDR status in default when the borrower’s payment according to the modified terms is at least 90 days past due or has defaulted due to

50

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

expiration of the loan’s maturity date. Four loans were modified in each of the years ending December 31, 2014 and 2013 meeting the TDR criteria. There were two loans modified as a TDR that defaulted during the year December 31, 2014, and within twelve months of their modification date compared to no loans during the year ended December 31, 2013.

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

(in thousands)	2014			2013
Commercial	​	$	0	​	$	0
Real estate construction - residential	​	​	23	​	​	114
Real estate construction - commercial	​	​	9,831	​	​	10,020
Real estate mortgage - residential	​	​	417	​	​	830
Real estate mortgage - commercial	​	​	4,831	​	​	8,537
Repossessed assets	​	​	38	​	​	41
Total	​	$	15,140	​	$	19,542
Less valuation allowance for other real estate owned	​	​	(3,255)	​	​	(4,675)
Total other real estate owned and foreclosed assets	​	$	11,885	​	$	14,867

Changes in the net carrying amount of other real estate owned and repossessed assets for the years ended December 31, 2012 2013, and 2014, respectively, were as follows:

Balance at December 31, 2012	$	29,729
Additions	​	4,613
Proceeds from sales	​	(9,641)
Charge-offs against the valuation allowance for other real estate owned	​	(4,829)
Repossessed assets impairment write-downs	​	(189)
Net gain on sales	​	(141)
Balance at December 31, 2013	$	19,542
Additions	​	1,975
Proceeds from sales	​	(4,560)
Charge-offs against the valuation allowance for other real estate owned, net	​	(2,005)
Net loss on sales	​	188
Total other real estate owned and repossessed assets	$	15,140
Less valuation allowance for other real estate owned	​	(3,255)
Balance at December 31, 2014	$	11,885

During the years ended December 31, 2014 and 2013, net charge-offs against the allowance for loan losses at the time of foreclosure were approximately $335,000 and $800,000, respectively.

51

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2014, 2013 and 2012, respectively, is summarized as follows:

(in thousands)	2014			2013			2012
Balance, beginning of year	​	$	4,675	​	$	6,137	​	$	6,977
Provision for other real estate owned	​	​	585	​	​	3,367	​	​	713
Charge-offs	​	​	(2,005)	​	​	(4,829)	​	​	(1,553)
Balance, end of year	​	$	3,255	​	$	4,675	​	$	6,137

(4)   Investment Securities

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2014 and 2013 are as follows:

(in thousands)

Amortized cost

Gross unrealized gains

Gross losses

Fair value

December 31, 2014

​

​

​

​

Government sponsored enterprises

​

$

57,002

​

$

240

​

$

143

​

$

57,099

Asset-backed securities

​

​

106,726

​

​

855

​

​

1,119

​

​

106,462

Obligations of states and political subdivisions

​

​

34,925

​

​

583

​

​

71

​

​

35,437

Total available for sale securities

​

$

198,653

​

$

1,678

​

$

1,333

​

$

198,998

December 31, 2013

​

​

​

​

​

​

​

​

​

​

​

​

U.S. Treasury

​

$

1,000

​

$

3

​

$

0

​

$

1,003

Government sponsored enterprises

​

​

61,006

​

​

377

​

​

767

​

​

60,616

Asset-backed securities

​

​

112,747

​

​

817

​

​

3,191

​

​

110,373

Obligations of states and political subdivisions

​

​

33,637

​

​

568

​

​

212

​

​

33,993

Total available for sale securities

​

$

208,390

​

$

1,765

​

$

4,170

​

$

205,985

All of the Company’s investment securities are classified as available for sale. Agency bonds and notes, 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.

Investment securities that are classified as restricted equity securities primarily consist of Federal Home Loan Bank stock and the Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of  $4.7 million and $4.0 million as of December 31, 2014 and 2013, respectively.

Debt securities with carrying values aggregating approximately $145.5 million and $145.8 million at December 31, 2014 and December 31, 2013, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2014, 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.

52

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(in thousands)	Amortized cost			Fair value
Due in one year or less	​	$	12,322	​	$	12,421
Due after one year through five years	​	​	56,138	​	​	56,327
Due after five years through ten years	​	​	21,409	​	​	21,767
Due after ten years	​	​	2,058	​	​	2,021
Total	​	​	91,927	​	​	92,536
Asset-backed securities	​	​	106,726	​	​	106,462
Total available for sale securities	​	$	198,653	​	$	198,998

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2014 and December 31, 2013 were as follows:

​

Less than 12 months

12 months or more

Total

Total

(in thousands)

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

Fair Value

Unrealized Losses

At December 31, 2014

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Government sponsored enterprises

​

$

2,983

​

$

(4)

​

$

17,862

​

$

(139)

​

$

20,845

​

$

(143)

Asset-backed securities

​

​

10,314

​

​

(50)

​

​

45,445

​

​

(1,069)

​

​

55,759

​

​

(1,119)

Obligations of states and political subdivisions

​

​

3,667

​

​

(15)

​

​

1,942

​

​

(56)

​

​

5,609

​

​

(71)

Total

​

$

16,964

​

$

(69)

​

$

65,249

​

$

(1,264)

​

$

82,213

​

$

(1,333)

(in thousands)

At December 31, 2013

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Government sponsored enterprises

​

$

25,771

​

$

(767)

​

$

0

​

$

0

​

$

25,771

​

$

(767)

Asset-backed securities

​

​

76,048

​

​

(2,940)

​

​

5,941

​

​

(251)

​

​

81,989

​

​

(3,191)

Obligations of states and political subdivisions

​

​

6,907

​

​

(159)

​

​

450

​

​

(53)

​

​

7,357

​

​

(212)

Total

​

$

108,726

​

$

(3,866)

​

$

6,391

​

$

(304)

​

$

115,117

​

$

(4,170)

The total available for sale portfolio consisted of approximately 300 securities at December 31, 2014. The portfolio included 74 securities having an aggregate fair value of  $82.2 million that were in a loss position at December 31, 2014. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $65.2 million at fair value. The $1.3 million aggregate unrealized loss included in accumulated other comprehensive income at December 31, 2014 was caused by interest rate fluctuations. The total available for sale portfolio consisted of approximately 348 securities at December 31, 2013. The portfolio included 96 securities having an aggregate fair value of  $115.1 million that were in a loss position at December 31, 2013. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $6.4 million at fair value. The $4.2 million aggregate unrealized loss included in accumulated other comprehensive income at December 31, 2013 was caused by interest rate fluctuations. Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments were not considered other-than-temporarily impaired at December 31, 2014 and 2013, respectively.

53

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

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

(in thousands)	2014			2013			2012
Gains realized on sales	​	$	86	​	$	786	​	$	26
Losses realized on sales	​	​	(66)	​	​	(8)	​	​	0
Other-than-temporary impairment recognized	​	​	0	​	​	0	​	​	0
Investment securities gains	​	$	20	​	$	778	​	$	26

(5)   Premises and Equipment

A summary of premises and equipment at December 31, 2014 and 2013 is as follows:

(in thousands)	2014			2013
Land and land improvements	​	$	10,152	​	$	10,073
Buildings and improvements	​	​	35,504	​	​	33,730
Furniture and equipment	​	​	12,016	​	​	11,627
Construction in progress	​	​	523	​	​	2,402
Total	​	​	58,195	​	​	57,832
Less accumulated depreciation	​	​	20,697	​	​	19,753
Premises and equipment, net	​	$	37,498	​	$	38,079

Depreciation expense for the years ended December 31, 2014, 2013, and 2012 was as follows:

(in thousands)	2014			2013			2012
Depreciation expense	​	$	1,758	​	$	1,605	​	$	1,858

(6)   Intangible Assets

Core Deposit Intangible Asset

Core deposit intangible assets in the amount of  $4.8 million were fully amortized as of June 30, 2013. Amortization expense was $0, $135,000 and $408,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Changes in the net carrying amount of core deposit intangible assets for the years ended December 31, 2014, 2013, and 2012 is as follows:

(in thousands)	2014			2013			2012
Balance at beginning of year	​	$	0	​	$	135	​	$	543
Additions	​	​	0	​	​	0	​	​	0
Amortization	​	​	0	​	​	(135)	​	​	(408)
Balance at end of year	​	$	0	​	$	0	​	$	135

Mortgage Servicing Rights

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting

54

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

principle of  $459,890, which was recorded as an increase to beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights have been recognized in earnings in non-interest income in the period in which the change occurred.

At December 31, 2014 and 2013, respectively, the Company serviced mortgage loans for others totaling $313.9 million and $322.5 million, respectively. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $895,000, $901,000, and $878,000, for the years ended December 31, 2014, 2013, and 2012, respectively.

The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2014, 2013, and 2012.

(in thousands)	2014			2013			2012
Balance at beginning of year	​	$	3,036	​	$	2,549	​	$	2,308
Re-measurement to fair value upon election to measure servicing rights at fair value	​	​	0	​	​	0	​	​	742
Originated mortgage servicing rights	​	​	302	​	​	512	​	​	830
Changes in fair value:	​	​	​	​	​	​	​	​	​
Due to change in model inputs and assumptions (1)	​	​	66	​	​	723	​	​	241
Other changes in fair value (2)	​	​	(642)	​	​	(748)	​	​	(1,572)
Amortization	​	​	0	​	​	0	​	​	0
Balance at end of year	​	$	2,762	​	$	3,036	​	$	2,549

(1)

The change in fair value resulting from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

(2)

Other changes in fair value reflect changes due to customer payments and passage of time. The year ended December 31, 2012 includes a one time adjustment of a $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years.

The following key data and assumptions were used in estimating the fair value of the Company’s mortgage servicing rights as of the years ended December 31, 2014 and 2013:

​	2014		2013
Weighted-Average Constant Prepayment Rate	​	10.54%	​	9.48%
Weighted-Average Note Rate	​	3.99%	​	4.01%
Weighted-Average Discount Rate	​	9.21%	​	9.06%
Weighted-Average Expected Life (in years)	​	5.70	​	6.10

55

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(7)   Deposits

The scheduled maturities of total time deposits as of the years ended December 31, 2014 and 2013 were as follows:

(in thousands)	2014			2013
Due within:	​			​
One year	​	$	204,638	​	$	231,644
Two years	​	​	58,177	​	​	58,844
Three years	​	​	33,551	​	​	30,767
Four years	​	​	16,760	​	​	12,662
Five years	​	​	5,282	​	​	16,087
Thereafter	​	​	1,347	​	​	0
Total	​	$	319,755	​	$	350,004

At December 31, 2014 and 2013, the Company had certificates and other time deposits in denominations of  $100,000 or more with maturities as follows:

(in thousands)	2014			2013
Due within:	​	​	​	​	​	​
Three months or less	​	$	33,488	​	$	46,306
Over three months through six months	​	​	29,381	​	​	18,398
Over six months through twelve months	​	​	35,308	​	​	42,624
Over twelve months	​	​	36,768	​	​	38,629
Total	​	$	134,945	​	$	145,957

The Federal Reserve Bank required the Bank to maintain cash or balances of  $1.6 million and $1.3 million at December 31, 2014 and 2013, respectively, to satisfy reserve requirements.

Average compensating balances held at correspondent banks were $408,000 and $315,000 at December 31, 2014 and 2013, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks.

56

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(8)   Borrowings

Federal Funds Purchased and Securities Sold under Agreements to Repurchase (Repurchase Agreements)

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

(in thousands)

Year End Weighted Rate

Average Weighted Rate

Average Balance Outstanding

Maximum Outstanding at any Month End

Balance at December 31,

2014

​

​

​

​

​

​

​

​

​

​

​

​

​

Federal funds purchased

​

0.45%

​

0.38%

​

$

404

​

$

0

​

$

0

Short-term repurchase agreements

​

0.12

​

0.10

​

​

19,819

​

​

22,849

​

​

17,970

Total

​

​

​

​

​

$

20,223

​

$

22,849

​

$

17,970

2013

​

​

​

​

​

Federal funds purchased

​

0.40%

​

0.41%

​

$

635

​

$

13,503

​

$

13,503

Short-term repurchase agreements

​

0.13

​

0.11

​

​

19,913

​

​

25,007

​

​

17,581

Total

​

​

​

​

​

$

20,548

​

$

38,510

​

$

31,084

The securities underlying the agreements to repurchase are under the control of the Bank. All securities sold under agreements to repurchase are secured by a portion of the Bank’s investment portfolio.

Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $40.0 million on an unsecured basis and $7.8 million on a secured basis at December 31, 2014.

Subordinated Notes and Other Borrowings

Other borrowings of the Company consisted of the following:

(in thousands)

​

​

​

2014

2013

​

Borrower

Maturity Date

Year End Balance

Year End Weighted Rate

Year End Balance

Year End Weighted Rate

FHLB advances

The Bank

​

2015

​

$

8,000

​

0.30%

​

$

0

​

na%

​

​

​

2016

​

​

8,000

​

0.67%

​

​

3,000

​

0.64%

​

​

​

2017

​

​

5,000

​

1.07%

​

​

3,000

​

0.91%

​

​

​

2018

​

​

20,000

​

2.00%

​

​

18,000

​

2.00%

​

​

​

2019-20

​

​

2,000

​

1.97%

​

​

0

​

na%

Total Bank

​

​

​

​

$

43,000

​

​

​

$

24,000

​

​

Subordinated notes

The Company

​

2034

​

$

25,774

​

2.94%

​

$

25,774

​

2.94%

​

​

​

2035

​

​

23,712

​

2.07%

​

​

23,712

​

2.07%

Total Company

​

​

​

​

$

49,486

​

​

​

$

49,486

​

​

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has access to term financing from the FHLB. These borrowings are secured under a blanket agreement which assigns all investment in FHLB stock, as well as qualifying first mortgage loans as collateral to secure amounts borrowed by the Bank. The outstanding balance of  $43.0 million includes $10.0 million, which the FHLB may call for early payment within the next year. Based upon the collateral pledged to the FHLB at December 31, 2014, the Bank could borrow up to an additional $230.6 million under the agreement.

On March 17, 2005, Exchange Statutory Trust II, a business trust and subsidiary of the Company, issued $23.0 million of 30-year floating rate Trust Preferred Securities (TPS) to a TPS Pool. The floating rate is equal to a three-month LIBOR rate plus 1.83% and reprices quarterly (2.07% at December 31, 2014). The TPS can be prepaid without penalty at any time after five years from the issuance date.

57

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

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

On March 17, 2004, Exchange Statutory Trust I, a business trust and subsidiary of the Company issued $25.0 million of floating rate TPS to a TPS Pool. The floating rate is equal to the three-month LIBOR rate plus 2.70% and reprices quarterly (2.94% at December 31, 2014). The TPS are fully, irrevocably, and unconditionally guaranteed on a subordinated basis by the Company. The proceeds of the TPS were invested in junior subordinated debentures of the Company. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The TPS mature on March 17, 2034. That maturity date may be shortened if certain conditions are met.

The Exchange Statutory Trusts are not consolidated in the Company’s financial statements. Accordingly, the Company does not report the securities issued by the Exchange Statutory Trusts as liabilities, and instead reports the subordinated notes issued by the Company and held by the Exchange Statutory Trusts as liabilities. The amount of the subordinated notes as of December 31, 2014 and 2013 was $49.5 million, respectively. The Company has recorded the investments in the common securities issued by the Exchange Statutory Trusts aggregating $1.5 million, and the corresponding obligations under the subordinated notes, as well as the interest income and interest expense on such investments and obligations in its consolidated financial statements.

(9)   Income Taxes

The composition of income tax expense for the years ended December 31, 2014, 2013, and 2012 was as follows:

(in thousands)	2014			2013			2012
Current:	​			​			​
Federal	​	$	1,105	​	$	584	​	$	651
State	​	​	137	​	​	71	​	​	156
Total current	​	​	1,242	​	​	655	​	​	807
Deferred:	​			​			​
Federal	​	​	2,353	​	​	1,485	​	​	(197)
State	​	​	447	​	​	282	​	​	(64)
Total deferred	​	​	2,800	​	​	1,767	​	​	(261)
Total income tax expense	​	$	4,042	​	$	2,422	​	$	546

58

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Applicable income tax expense for financial reporting purposes differs from the amount computed by applying the statutory federal income tax rate for the reasons noted in the table for the years ended December 31, 2014, 2013, and 2012 are as follows:

(in thousands)	2014					2013					2011
​	Amount			%		Amount			%		Amount			%
Income before provision for income tax expense	​	$	11,696	​	​	​	$	7,396	​	​	​	$	3,368	​	​
Tax at statutory federal income tax rate	​	$	3,977	​	34.00%	​	$	2,515	​	34.00%	​	$	1,145	​	34.00%
Tax-exempt income	​	​	(348)	​	(2.98)	​	​	(353)	​	(4.77)	​	​	(380)	​	(11.27)
State income tax, net of federal tax benefit	​	​	385	​	3.30	​	​	233	​	3.15	​	​	61	​	1.81
Release of prior year over accrual	​	​	0	​	0.00	​	​	0	​	0.00	​	​	(371)	​	(11.01)
Other, net	​	​	28	​	0.24	​	​	27	​	0.37	​	​	91	​	2.70
Provision for income tax expense	​	$	4,042	​	34.56%	​	$	2,422	​	32.75%	​	$	546	​	16.23%

The components of deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are as follows:

(in thousands)	2014			2013
Deferred tax assets:	​			​
Allowance for loan losses	​	$	3,458	​	$	5,213
Impairment of other real estate owned	​	​	1,233	​	​	1,771
Goodwill	​	​	1,786	​	​	2,134
Available-for-sale securities	​	​	0	​	​	914
Deferred taxes on pension	​	​	0	​	​	0
Nonaccrual loan interest	​	​	1,069	​	​	1,015
Core deposit intangible	​	​	689	​	​	822
Pension	​	​	985	​	​	896
Deferred taxes on pension	​	​	998	​	​	0
Deferred compensation	​	​	130	​	​	44
Other	​	​	250	​	​	322
Total deferred tax assets	​	$	10,598	​	$	13,131
Deferred tax liabilities:	​			​
Available-for-sale securities	​	$	131	​	$	0
Premises and equipment	​	​	1,160	​	​	988
Mortgage servicing rights	​	​	1,022	​	​	1,114
Deferred taxes on pension	​	​	0	​	​	328
Assets held for sale	​	​	114	​	​	112
FHLB stock dividend	​	​	0	​	​	100
Other	​	​	53	​	​	72
Total deferred tax liabilities	​	​	2,480	​	​	2,714
Net deferred tax assets	​	$	8,118	​	$	10,417

59

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income 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 strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences at December 31, 2014 and, therefore, did not establish a valuation reserve.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. As of December 31, 2014, 2013, and 2012, respectively, the Company did not have any uncertain tax provisions.

(10)   Stockholders’ Equity

Accumulated Other Comprehensive (Loss) Income

The following details the change in the components of the Company’s accumulated other comprehensive (loss) income for the years ended December 31, 2013 and 2014, respectively:

(in thousands)	Unrealized Loss on Securities (1)			Unrecognized Net Pension and Postretirement Costs (2)			Accumulated Other Comprehensive (Loss) Income
Balance, December 31, 2012	​	$	3,266	​	$	(1,441)	​	$	1,825
Other comprehensive (loss) income, before reclassifications	​	​	(6,980)	​	​	3,378	​	​	(3,602)
Amounts reclassified from accumulated other comprehensive income	​	​	(778)	​	​	110	​	​	(668)
Current period other comprehensive (loss) income, before tax	​	​	(7,758)	​	​	3,488	​	​	(4,270)
Income tax benefit (expense)	​	​	3,001	​	​	(1,325)	​	​	1,676
Current period other comprehensive (loss) income, net of tax	​	​	(4,757)	​	​	2,163	​	​	(2,594)
Balance, December 31, 2013	​	$	(1,491)	​	$	722	​	$	(769)
Other comprehensive (loss) income, before reclassifications	​	​	2,770	​	​	(3,568)	​	​	(798)
Amounts reclassified from accumulated other comprehensive income	​	​	(20)	​	​	79	​	​	59
Current period other comprehensive (loss) income, before tax	​	​	2,750	​	​	(3,489)	​	​	(739)
Income tax benefit (expense)	​	​	(1,045)	​	​	1,325	​	​	280
Current period other comprehensive (loss) income, net of tax	​	​	1,705	​	​	(2,164)	​	​	(459)
Balance, December 31, 2014	​	$	214	​	$	(1,442)	​	$	(1,228)

(1)

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

(2)

The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost. See Note 11.

60

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(11)   Employee Benefit Plans

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

(in thousands)	2014			2013			2012
Payroll taxes	​	$	1,081	​	$	1,106	​	$	1,127
Medical plans	​	​	1,974	​	​	1,915	​	​	1,772
401(k) match	​	​	310	​	​	309	​	​	298
Pension plan	​	​	960	​	​	1,173	​	​	1,224
Profit-sharing	​	​	201	​	​	118	​	​	58
Other	​	​	122	​	​	219	​	​	317
Total employee benefits	​	$	4,648	​	$	4,840	​	$	4,796

The Company’s profit-sharing plan includes a matching 401(k) portion, in which the Company matches the first 3% of eligible employee contributions. The Company made annual contributions in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown. In addition, employees were able to make additional tax-deferred contributions.

Pension

The Company provides a noncontributory defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company has not made any contributions to the defined benefit plan for the current plan year. There is no minimum required contribution for the 2015 plan year.

Obligations and Funded Status at December 31,

(in thousands)	2014			2013
Change in projected benefit obligation:	​	​	​	​	​	​
Balance, January 1	​	$	14,852	​	$	15,342
Service cost	​	​	981	​	​	1,174
Interest cost	​	​	732	​	​	646
Actuarial gain	​	​	3,813	​	​	(1,991)
Benefits paid	​	​	(401)	​	​	(319)
Balance, December 31	​	$	19,977	​	$	14,852
Change in plan assets:	​	​	​	​	​	​
Fair value, January 1	​	$	13,532	​	$	11,707
Actual return on plan assets	​	​	1,118	​	​	2,220
Employer contribution	​	​	725	​	​	0
Expenses paid	​	​	(41)	​	​	(76)
Benefits paid	​	​	(401)	​	​	(319)
Fair value, December 31	​	$	14,933	​	$	13,532
Funded status at end of year	​	$	(5,044)	​	$	(1,320)
Accumulated benefit obligation	​	$	16,595	​	$	12,298

61

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

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

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

(in thousands)	2014			2013			2012
Service cost—benefits earned during the year	​	$	981	​	$	1,174	​	$	1,168
Interest costs on projected benefit obligations	​	​	732	​	​	646	​	​	667
Expected return on plan assets	​	​	(872)	​	​	(797)	​	​	(776)
Expected administrative expenses	​	​	40	​	​	40	​	​	40
Amortization of prior service cost	​	​	79	​	​	79	​	​	79
Amortization of unrecognized net loss	​	​	0	​	​	31	​	​	46
Net periodic pension expense	​	$	960	​	$	1,173	​	$	1,224

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive (loss) income at December 31, 2014 and 2013 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

(in thousands)	2014			2013
Prior service costs	​	$	(443)	​	$	(522)
Net accumulated actuarial net (loss) gain	​	​	(2,008)	​	​	1,560
Accumulated other comprehensive (loss) gain	​	​	(2,451)	​	​	1,038
Net periodic benefit cost in excess of cumulative employer contributions	​	​	(2,593)	​	​	(2,358)
Net amount recognized at December 31, balance sheet	​	$	(5,044)	​	$	(1,320)
Net (loss) gain arising during period	​	$	(3,568)	​	$	3,378
Prior service cost amortization	​	​	79	​	​	79
Amortization of net actuarial loss	​	​	0	​	​	31
Total recognized in other comprehensive (loss) income	​	$	(3,489)	​	$	3,488
Total recognized in net periodic pension cost and other comprehensive (loss) income	​	$	4,449	​	$	(2,315)

The estimated prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic cost in 2014 is $79,000. During 2014, there is no estimated amount of actuarial loss subject to amortization into net periodic pension cost.

Assumptions utilized to determine benefit obligations as of December 31, 2014, 2013 and 2012 and to determine pension expense for the years then ended are as follows:

​	2014		2013		2012
Determination of benefit obligation at year end:	​	​	​	​	​	​
Discount rate	​	4.25%	​	5.00%	​	4.25%
Annual rate of compensation increase	​	3.78%	​	3.73%	​	3.61%
Determination of pension expense for year ended:	​	​	​	​	​	​
Discount rate for the service cost	​	5.00%	​	4.25%	​	4.75%
Annual rate of compensation increase	​	3.73%	​	3.61%	​	4.50%
Expected long-term rate of return on plan assets	​	7.00%	​	7.00%	​	7.00%

The assumed overall expected long-term rate of return on pension plan assets used in calculating 2014 pension expense was 7.0%. Determination of the plan’s rate of return is based upon historical returns for equities and fixed income indexes. During the past five years, the Company’s plan assets have experienced

62

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

the following annual returns: 8.3% in 2014, 19.1% in 2013, 11.4% in 2012, 0.1% in 2011, and 12.4% in 2010. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. With a traditional investment mix of over half of the plan’s investments in equities, the actual return for any one plan year may fluctuate significantly with changes in the stock market. Due to a decrease in discount rates used in the actuarial calculation of plan income, the Company expects to incur $1.4 million of expense in 2015 compared to $960,000 in 2014.

Plan Assets

The investment policy of the pension plan is designed for growth in value while minimizing risk to the overall portfolio. The Company diversifies the assets through investments in domestic and international fixed income securities and domestic and international equity securities. The assets are readily marketable and can be sold to fund benefit payment obligations as they become payable. The Company’s long-term investment target mix for the plan is 70% equity securities and 30% fixed income. The Company regularly reviews its policies on the investment mix and may make changes depending on economic conditions and perceived investment mix.

The fair value of the Company’s pension plan assets at December 31, 2014 and 2013 by asset category were as follows:

​

​

​

​

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)

December 31, 2014

​

​

​

​

Cash equivalents

​

$

1,937

​

$

1,937

​

$

0

​

$

0

Equity securities:

​

​

​

​

U.S. large-cap (a)

​

​

7,252

​

​

7,252

​

​

0

​

​

0

U.S. mid-cap (b)

​

​

921

​

​

921

​

​

0

​

​

0

U.S. small-cap (c)

​

​

1,131

​

​

1,131

​

​

0

​

​

0

International (d)

​

​

1,895

​

​

1,895

​

​

0

​

​

0

Real estate (e)

​

​

486

​

​

486

​

​

0

​

​

0

Commodities (f)

​

​

264

​

​

264

​

​

0

​

​

0

Fixed income securities:

​

​

​

​

U.S. gov’t agency obligations (g)

​

​

1,047

​

​

0

​

​

1,047

​

​

0

Total

​

$

14,933

​

$

13,886

​

$

1,047

​

$

0

December 31, 2013

​

​

​

​

Cash equivalents

​

$

675

​

$

675

​

$

0

​

$

0

Equity securities:

​

​

​

​

U.S. large-cap (a)

​

​

6,506

​

​

6,506

​

​

0

​

​

0

U.S. mid-cap (b)

​

​

820

​

​

820

​

​

0

​

​

0

U.S. small-cap (c)

​

​

1,151

​

​

1,151

​

​

0

​

​

0

International (d)

​

​

2,016

​

​

2,016

​

​

0

​

​

0

Real estate (e)

​

​

387

​

​

387

​

​

0

​

​

0

Commodities (f)

​

​

319

​

​

319

​

​

0

​

​

0

Fixed income securities:

​

​

​

​

U.S. gov’t agency obligations (g)

​

​

1,450

​

​

0

​

​

1,450

​

​

0

Corporate investment grade (g)

​

​

209

​

​

0

​

​

209

​

​

0

Total

​

$

13,533

​

$

11,874

​

$

1,659

​

$

0

(a)

This category is comprised of low-cost equity index funds not actively managed that track the S&P 500.

63

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(b)

This category is comprised of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.

(c)

This category is comprised of actively managed mutual funds.

(d)

At December 31, 2014 and 2013, 31% and 32%, respectively, of this category is comprised of low-cost equity index funds not actively managed that track the MSCI EAFE.

(e)

This category is comprised of low-cost real estate index exchange traded funds.

(f)

This category is comprised of exchange traded funds investing in agricultural and energy commodities.

(g)

This category is comprised of individual bonds.

The following future benefit payments are expected to be paid:

Year	Pension benefits
(in thousands)	​	​	​
2015	​	$	514
2016	​	​	539
2017	​	​	598
2018	​	​	626
2019	​	​	648
2020 to 2024	​	​	4,784

(12)   Stock Compensation

The Company’s stock option plan provides for the grant of options to purchase up to 569,392 shares of the Company’s common stock to officers and other key employees of the Company and its subsidiaries.

The following table summarizes the Company’s stock option activity:

​	Number of shares December 31						Weighted average exercise price December 31
​	2014		2013		2012		2014			2013			2012
Outstanding, beginning of year	​	126,286	​	232,947	​	297,962	​	$	23.21	​	$	22.82	​	$	21.61
Granted	​	0	​	0	​	0	​	​	0.00	​	​	0.00	​	​	0.00
Exercised	​	0	​	0	​	0	​	​	0.00	​	​	0.00	​	​	0.00
Forfeited or expired	​	(29,805)	​	(106,661)	​	(65,015)	​	​	25.75	​	​	22.37	​	​	17.26
Outstanding, end of year	​	96,481	​	126,286	​	232,947	​	$	22.42	​	$	23.21	​	$	22.82
Exercisable, end of year	​	85,160	​	111,188	​	213,878	​	$	22.82	​	$	23.49	​	$	22.90

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2014.

Total stock-based compensation expense for the years ended December 31, 2014, 2013, and 2012 was $20,000, $19,000, and $29,000, respectively. As of December 31, 2014, the total unrecognized compensation expense related to non-vested stock awards was $31,000 and the related weighted average period over which it is expected to be recognized is approximately 1.3 years.

Options outstanding at December 31, 2014 had a weighted average remaining contractual life of approximately 1.9 years and no intrinsic value. Options outstanding at December 31, 2013 had a weighted average remaining contractual life of approximately 2.5 years and no intrinsic value. No stock options were granted during the years presented above.

Options exercisable at December 31, 2014 had a weighted average remaining contractual life of approximately 1.7 years and no intrinsic value. Options exercisable at December 31, 2013 had a weighted

64

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

average remaining contractual life of approximately 2.3 years and no intrinsic value. No stock options were exercised during the years presented above.

(13)   Earnings per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the year. The calculations of basic and diluted earnings per share are as follows for the years indicated:

​	2014			2013			2012
Basic earnings per common share:	​	​	​	​	​	​	​	​	​
Net income	​	$	7,654	​	$	4,974	​	$	2,822
Less:	​	​	​	​	​	​	​	​	​
Preferred stock dividends and accretion of discount	​	​	0	​	​	615	​	​	1,784
Net income available to common shareholders	​	$	7,654	​	$	4,359	​	$	1,038
Basic earnings per share	​	$	1.46	​	$	0.83	​	$	0.20
Diluted earnings per common share:	​			​			​
Net income	​	$	7,654	​	$	4,974	​	$	2,822
Less:	​	​	​	​	​	​	​	​	​
Preferred stock dividends and accretion of discount	​	​	0	​	​	615	​	​	1,784
Net income available to common shareholders	​	$	7,654	​	$	4,359	​	$	1,038
Average shares outstanding	​	​	5,233,986	​	​	5,233,986	​	​	5,233,986
Effect of dilutive stock options	​	​	0	​	​	0	​	​	0
Average shares outstanding including dilutive stock options	​	​	5,233,986	​	​	5,233,986	​	​	5,233,986
Diluted earnings per share	​	$	1.46	​	$	0.83	​	$	0.20

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when the Company has a loss from continuing operations available to common shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

The following options to purchase shares during the years ended December 31, 2014, 2013 and 2012 were not included in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.

​	2014		2013		2012
Anti-dilutive shares - option shares	​	96,481	​	126,286	​	232,947
Anti-dilutive shares - warrant shares	​	0	​	0	​	310,563
Total anti-dilutive shares	​	96,481	​	126,286	​	543,510

65

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(14)   Capital Requirements

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

Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of December 31, 2014 and 2013, the Company and the Bank met all capital adequacy requirements.

As of December 31, 2014, the most recent notification from the regulatory authorities categorized the bank as well-capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since the notification that management believes have changed the Bank’s categories.

​

Actual

Minimum Capital Requirements

Well-Capitalized Capital Requirements

(in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

December 31, 2014

Total capital (to risk-weighted assets):

Company

​

$

138,619

​

15.78%

​

$

70,282

​

8.00%

​

​

N.A.

​

N.A.%

Bank

​

​

128,311

​

14.78

​

​

69,430

​

8.00

​

$

86,788

​

10.00

Tier I capital (to risk-weighted assets):

Company

​

$

108,785

​

12.38%

​

$

35,141

​

4.00%

​

​

N.A.

​

N.A.%

Bank

​

​

119,212

​

13.74

​

​

34,715

​

4.00

​

$

52,788

​

6.00

Tier I capital (to adjusted average assets):

Company

​

$

108,785

​

9.42%

​

$

34,648

​

3.00%

​

$

N.A.

​

N.A.%

Bank

​

​

119,212

​

10.42

​

​

34,338

​

3.00

​

​

57,230

​

5.00

(in thousands)

December 31, 2013

Total capital (to risk-weighted assets):

Company

​

$

133,638

​

15.33%

​

$

69,729

​

8.00%

​

​

N.A.

​

N.A.%

Bank

​

​

122,959

​

14.29

​

​

68,842

​

8.00

​

$

86,052

​

10.00

Tier I capital (to risk-weighted assets):

Company

​

$

99,398

​

11.40%

​

$

34,864

​

4.00%

​

​

N.A.

​

N.A.%

Bank

​

​

112,166

​

13.03

​

​

34,421

​

4.00

​

$

51,631

​

6.00

Tier I capital (to adjusted average assets):

Company

​

$

99,398

​

8.79%

​

$

33,876

​

3.00%

​

$

N.A.

​

N.A.%

Bank

​

​

112,166

​

10.04

​

​

33,517

​

3.00

​

​

55,862

​

5.00

(15)   Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In

66

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

this standard, FASB clarified the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of December 31, 2014 and 2013, respectively, there were no transfers into or out of Levels 1-3.

The fair value hierarchy is as follows:

Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

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

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

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

The Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred.

Valuation methods for instruments measured at fair value on a recurring basis

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

Available-for-sale securities

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.

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 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.

67

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

​

​

​

​

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)

December 31, 2014

Assets:

​

​

​

​

Government sponsored enterprises

​

$

57,099

​

$

0

​

​

57,099

​

$

0

Asset-backed securities

​

​

106,462

​

​

0

​

​

106,462

​

​

0

Obligations of states and political subdivisions

​

​

35,437

​

​

0

​

​

35,437

​

​

0

Mortgage servicing rights

​

​

2,762

​

​

0

​

​

0

​

​

2,762

Total

​

$

201,760

​

$

0

​

$

198,998

​

$

2,762

December 31, 2013

Assets:

​

​

​

​

U.S. treasury

​

$

1,003

​

$

1,003

​

$

0

​

$

0

Government sponsored enterprises

​

​

60,616

​

​

0

​

​

60,616

​

​

0

Asset-backed securities

​

​

110,373

​

​

0

​

​

110,373

​

​

0

Obligations of states and political subdivisions

​

​

33,993

​

​

0

​

​

33,993

​

​

0

Mortgage servicing rights

​

​

3,036

​

​

0

​

​

0

​

​

3,036

Total

​

$

209,021

​

$

1,003

​

$

204,982

​

$

3,036

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

(in thousands)	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Mortgage Servicing Rights
Balance at December 31, 2012	​	$	2,549
Total gains or losses (realized/unrealized):	​
Included in earnings	​	​	(25)
Included in other comprehensive income	​	​	0
Purchases	​	​	0
Sales	​	​	0
Issues	​	​	512
Settlements	​	​	0
Balance at December 31, 2013	​	$	3,036
Total gains or losses (realized/unrealized):	​
Included in earnings	​	​	(576)
Included in other comprehensive income	​	​	0
Purchases	​	​	0
Sales	​	​	0
Issues	​	​	302
Settlements	​	​	0
Balance at December 31, 2014	​	$	2,762

68

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Total gains for the years ended included in earnings attributable to the change in unrealized gains or losses related to assets still held were $66,000 and $723,000 at December 31, 2014 and 2013, respectively.

​	Quantitative Information about Level 3 Fair Value Measurements		​	​	​	​
​	Valuation Technique	Unobservable Inputs	Input Value
​	​	​	2014		2013
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate	​	10.54%	​	9.48%
​	​	Weighted average discount rate	​	9.21%	​	9.06%
​	​	Weighted average expected life (in years)	​	5.70	​	6.10

Valuation methods for instruments measured at fair value on a nonrecurring basis

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

Impaired Loans

The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of December 31, 2014, the Company identified $7.4 million in impaired loans that had specific allowances for losses aggregating $1.7 million. Related to these loans, there was $5.4 million in charge-offs recorded during the year ended December 31, 2014. As of December 31, 2013, the Company identified $16.3 million in impaired loans that had specific allowances for losses aggregating $4.8 million. Related to these loans, there was $3.2 million in charge-offs recorded during the year ended December 31, 2013.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consisted of loan collateral that has been repossessed through foreclosure. This collateral comprises of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

69

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

​

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)

Total Gains (Losses)*

December 31, 2014

Assets:

​

​

​

​

​

Impaired loans:

​

​

​

​

​

Commercial, financial, & agricultural

​

$

1,386

​

$

0

​

$

0

​

$

1,386

​

$

(1,105)

Real estate construction - residential

​

​

0

​

​

0

​

​

0

​

​

0

​

​

(350)

Real estate construction - commercial

​

​

0

​

​

0

​

​

0

​

​

0

​

​

(491)

Real estate mortgage - residential

​

​

3,322

​

​

0

​

​

0

​

​

3,322

​

​

(332)

Real estate mortgage - commercial

​

​

809

​

​

0

​

​

0

​

​

809

​

​

(2,937)

Consumer

​

​

172

​

​

0

​

​

0

​

​

172

​

​

(148)

Total

​

$

5,689

​

$

0

​

$

0

​

$

5,689

​

$

(5,363)

Other real estate owned and repossessed assets

​

$

11,885

​

$

0

​

$

0

​

$

11,885

​

$

(1,870)

December 31, 2013

Assets:

​

​

​

​

​

Impaired loans:

​

​

​

​

​

Commercial, financial, & agricultural

​

$

827

​

$

0

​

$

0

​

$

827

​

$

(735)

Real estate construction - residential

​

​

1,768

​

​

0

​

​

0

​

​

1,768

​

​

(119)

Real estate construction - commercial

​

​

210

​

​

0

​

​

0

​

​

210

​

​

(498)

Real estate mortgage - residential

​

​

3,022

​

​

0

​

​

0

​

​

3,022

​

​

(376)

Real estate mortgage - commercial

​

​

5,616

​

​

0

​

​

0

​

​

5,616

​

​

(1,457)

Consumer

​

​

27

​

​

0

​

​

0

​

​

27

​

​

0

Total

​

$

11,470

​

$

0

​

$

0

​

$

11,470

​

$

(3,185)

Other real estate owned and repossessed assets

​

$

14,867

​

$

0

​

$

0

​

$

14,867

​

$

(5,395)

*

Total gains (losses) reported for other real estate owned and repossessed assets includes charge-offs, valuation write-downs, and net losses taken during the periods reported.

(16)   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

The fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans could be made to borrowers with similar credit ratings and for the same remaining maturities. The net carrying amount of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

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.

70

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Federal Home Loan Bank (FHLB) Stock

Ownership of equity securities of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.

Federal Funds Sold, Cash, and Due from Banks

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

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 rates, and other ancillary income, including late fees.

Cash Surrender Value – Life Insurance

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

Accrued Interest Receivable and Payable

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

Deposits

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

Securities Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury

For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, 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.

71

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

A summary of the carrying amounts and fair values of the Company’s financial instruments at December 31, 2014 and 2013 is as follows:

​

​

​

​

​

​

​

December 31, 2014 Fair Value Measurements

​

December 31, 2014

Quoted Prices in Active Markets for Identical

Other Observable

Net Significant Unobservable

(in thousands)

Carrying amount

Fair value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)

Assets:

​

​

​

​

​

Cash and due from banks

​

$

22,364

​

$

22,364

​

$

22,364

​

$

0

​

$

0

Federal funds sold and overnight interest-bearing deposits

​

​

20,445

​

​

20,445

​

​

20,445

​

​

0

​

​

0

Investment in available-for-sale securities

​

​

198,998

​

​

198,998

​

​

0

​

​

198,998

​

​

0

Loans, net

​

​

852,114

​

​

854,062

​

​

0

​

​

0

​

​

854,062

Investment in FHLB stock

​

​

3,075

​

​

3,075

​

​

0

​

​

3,075

​

​

0

Mortgage servicing rights

​

​

2,762

​

​

2,762

​

​

0

​

​

0

​

​

2,762

Cash surrender value - life insurance

​

​

2,284

​

​

2,284

​

​

0

​

​

2,284

​

​

0

Accrued interest receivable

​

​

4,816

​

​

4,816

​

​

4,816

​

​

0

​

​

0

​

​

$

1,106,858

​

$

1,108,806

​

$

47,625

​

$

204,357

​

$

856,824

Liabilities:

​

​

​

​

​

Deposits:

​

​

​

​

​

Non-interest bearing demand

​

$

207,700

​

$

207,700

​

$

207,700

​

$

0

​

$

0

Savings, interest checking and money market

​

​

442,059

​

​

442,059

​

​

442,059

​

​

0

​

​

0

Time deposits

​

​

319,755

​

​

321,041

​

​

0

​

​

0

​

​

321,041

Federal funds purchased and securities sold under agreements to repurchase

​

​

17,970

​

​

17,970

​

​

17,970

​

​

0

​

​

0

Subordinated notes

​

​

49,486

​

​

33,371

​

​

0

​

​

33,371

​

​

0

Federal Home Loan Bank advances

​

​

43,000

​

​

44,396

​

​

0

​

​

44,396

​

​

0

Accrued interest payable

​

​

373

​

​

373

​

​

373

​

​

0

​

​

0

​

​

$

1,080,343

​

$

1,066,910

​

$

668,102

​

$

77,767

​

$

321,041

​

​

​

​

​

​

​

December 31, 2013 Fair Value Measurements

​

December 31, 2013

Quoted Prices in Active Markets for Identical

Other Observable

Net Significant Unobservable

(in thousands)

Carrying amount

Fair value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)

Assets:

​

​

​

​

​

Cash and due from banks

​

$

27,079

​

$

27,079

​

$

27,079

​

$

0

​

$

0

Federal funds sold and overnight interest-bearing deposits

​

​

1,360

​

​

1,360

​

​

1,360

​

​

0

​

​

0

Investment in available-for-sale securities

​

​

205,985

​

​

205,985

​

​

1,003

​

​

204,982

​

​

0

Loans, net

​

​

825,828

​

​

829,223

​

​

0

​

​

0

​

​

829,223

Investment in FHLB stock

​

​

2,354

​

​

2,354

​

​

0

​

​

2,354

​

​

0

Mortgage servicing rights

​

​

3,036

​

​

3,036

​

​

0

​

​

0

​

​

3,036

Cash surrender value - life insurance

​

​

2,213

​

​

2,213

​

​

0

​

​

2,213

​

​

0

Accrued interest receivable

​

​

4,999

​

​

4,999

​

​

4,999

​

​

0

​

​

0

​

​

$

1,072,854

​

$

1,076,249

​

$

34,441

​

$

209,549

​

$

832,259

72

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

​

​

​

​

​

​

​

December 31, 2013 Fair Value Measurements

​

December 31, 2013

Quoted Prices in Active Markets for Identical

Other Observable

Net Significant Unobservable

(in thousands)

Carrying amount

Fair value

Assets (Level 1)

Inputs (Level 2)

Inputs (Level 3)

Liabilities:

​

​

​

​

​

Deposits:

​

​

​

​

​

Non-interest bearing demand

​

$

187,382

​

$

187,382

​

$

187,382

​

$

0

​

$

0

Savings, interest checking and money market

​

​

419,085

​

​

419,085

​

​

419,085

​

​

0

​

​

0

Time deposits

​

​

350,004

​

​

352,432

​

​

0

​

​

0

​

​

352,432

Federal funds purchased and securities sold under agreements to repurchase

​

​

31,084

​

​

31,084

​

​

31,084

​

​

0

​

​

0

Subordinated notes

​

​

49,486

​

​

32,048

​

​

0

​

​

32,048

​

​

0

Federal Home Loan Bank advances

​

​

24,000

​

​

25,366

​

​

0

​

​

25,366

​

​

0

Accrued interest payable

​

​

426

​

​

426

​

​

426

​

​

0

​

​

0

​

​

$

1,061,467

​

$

1,047,823

​

$

637,977

​

$

57,414

​

$

352,432

Off-Balance-Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates.

Limitations

The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.

(17)   Repurchase Reserve Liability

The Company’s repurchase reserve liability for estimated losses incurred on sold loans was $160,000 at both December 31, 2014, and 2013. This liability represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans originated for sale that may arise from representation and warranty claims that could relate to a variety of issues, including but not limited to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines. The Company has not experienced any repurchase losses during the year ended December 31, 2014. At December 31, 2014, the Company was servicing 3,057 loans sold to the secondary market with a balance of approximately $313.9 million compared to 3,114 loans sold with a balance of approximately $322.5 million at December 31, 2013.

(18)   Commitments and Contingencies

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

73

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At December 31, 2014, no amounts have been accrued for any estimated losses for these financial instruments.

The contractual amount of off-balance-sheet financial instruments as of December 31, 2014 and 2013 is as follows:

(in thousands)	2014			2013
Commitments to extend credit	​	$	135,137	​	$	117,880
Commitments to originate residential first and second mortgage loans	​	​	1,640	​	​	1,852
Standby letters of credit	​	​	1,621	​	​	1,826

Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby letters of credit range from one month to five years at December 31, 2014.

Pending Litigation

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

74

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(19)   Condensed Financial Information of the Parent Company Only

Following are the condensed financial statements of Hawthorn Bancshares, Inc. (Parent only) as of and for the years indicated:

Condensed Balance Sheets
​	December 31,
(in thousands)	2014			2013
Assets	​			​
Cash and due from bank subsidiaries	​	$	1,024	​	$	450
Investment in equity securities	​	​	1,486	​	​	1,486
Investment in subsidiaries	​	​	130,728	​	​	122,413
Premises and equipment	​	​	0	​	​	0
Deferred tax asset	​	​	1,989	​	​	130
Other assets	​	​	308	​	​	1,011
Total assets	​	$	135,535	​	$	125,490
Liabilities and Stockholders’ Equity
Subordinated notes	​	$	49,486	​	$	49,486
Other liabilities	​	​	5,481	​	​	1,624
Stockholders’ equity	​	​	80,568	​	​	74,380
Total liabilities and stockholders’ equity	​	$	135,535	​	$	125,490

Condensed Statements of Income
​	For the Years Ended December 31,
​	2014			2013			2012
Income	​			​			​
Interest and dividends received from subsidiaries	​	$	2,538	​	$	15,039	​	$	4,596
Total income	​	​	2,538	​	​	15,039	​	​	4,596
Expenses	​			​			​
Interest on subordinated notes	​	​	1,264	​	​	1,284	​	​	1,381
Other	​	​	1,730	​	​	1,778	​	​	2,889
Total expenses	​	​	2,994	​	​	3,062	​	​	4,270
Income before income tax benefit and equity in undistributed income of subsidiaries	​	​	(456)	​	​	11,977	​	​	326
Income tax benefit	​	​	1,100	​	​	1,126	​	​	2,257
Equity in undistributed (losses) income of subsidiaries	​	​	7,010	​	​	(8,129)	​	​	239
Net income	​	$	7,654	​	$	4,974	​	$	2,822

75

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

Condensed Statements of Cash Flows
​	For the Years Ended December 31,
(in thousands)	2014			2013			2012
Cash flows from operating activities:	​	​	​	​	​	​	​	​	​
Net income	​	$	7,654	​	$	4,974	​	$	2,822
Adjustments to reconcile net income to net cash provided by operating activities:	​	​	​	​	​	​	​	​	​
Depreciation	​	​	0	​	​	1	​	​	1
Equity in undistributed (income) losses of subsidiaries	​	​	(7,010)	​	​	8,129	​	​	(239)
Stock based compensation expense	​	​	20	​	​	19	​	​	29
(Increase) decrease in deferred tax asset	​	​	(1,415)	​	​	1,325	​	​	(148)
Other, net	​	​	1,942	​	​	(182)	​	​	(813)
Net cash provided by operating activities	​	$	1,191	​	$	14,266	​	$	1,652
Cash flows from investing activities:	​	​	​	​	​	​	​	​	​
Investment in subsidiary	​	$	400	​	$	4,550	​	$	1,072
Net cash provided by investing activities	​	$	400	​	$	4,550	​	$	1,072
Cash flows from financing activities:	​	​	​	​	​	​	​	​	​
Redemption of 18,255 and 12,000 shares, respectively, of preferred stock	​	$	0	​	$	(18,255)	​	$	(12,000)
Cash dividends paid - preferred stock	​	​	0	​	​	(456)	​	​	(1,203)
Cash dividends paid - common stock	​	​	(1,017)	​	​	(978)	​	​	(940)
Warrant redemption	​	​	0	​	​	(540)	​	​	0
Net cash used in financing activities	​	$	(1,017)	​	$	(20,229)	​	$	(14,143)
Net (decrease) increase in cash and due from banks	​	​	574	​	​	(1,413)	​	​	(11,419)
Cash and due from banks at beginning of year	​	​	450	​	​	1,863	​	​	13,282
Cash and due from banks at end of year	​	$	1,024	​	$	450	​	$	1,863

76

HAWTHORN BANCSHARES, INC.
AND SUBSIDIARIES

Notes to the Consolidated Financial Statements

December 31, 2014, 2013, and 2012
 

(20)   Quarterly Financial Information (Unaudited)

(In thousands except per share data)

First quarter

Second quarter

Third quarter

Fourth quarter

Year to Date

Year Ended December 31, 2014

​

​

​

​

​

Interest income

​

$

10,963

​

$

11,125

​

$

11,196

​

$

11,214

​

$

44,498

Interest expense

​

​

1,309

​

​

1,278

​

​

1,240

​

​

1,217

​

​

5,044

Net interest income

​

​

9,654

​

​

9,847

​

​

9,956

​

​

9,997

​

​

39,454

Provision for loan losses

​

​

0

​

​

0

​

​

0

​

​

0

​

​

0

Noninterest income

​

​

2,085

​

​

2,183

​

​

2,313

​

​

2,168

​

​

8,749

Noninterest expense

​

​

8,707

​

​

8,811

​

​

9,899

​

​

9,090

​

​

36,507

Income tax expense

​

​

1,045

​

​

1,121

​

​

802

​

​

1,074

​

​

4,042

Net income available to common stockholders

​

$

1,987

​

$

2,098

​

$

1,568

​

$

2,001

​

$

7,654

Net income per share:

​

​

​

​

​

Basic earnings per share

​

$

0.38

​

$

0.40

​

$

0.30

​

$

0.38

​

$

1.46

Diluted earnings per share

​

​

0.38

​

​

0.40

​

​

0.30

​

​

0.38

​

​

1.46

Year Ended December 31, 2013

​

​

​

​

​

Interest income

​

$

11,545

​

$

11,592

​

$

11,298

​

$

11,230

​

$

45,665

Interest expense

​

​

1,816

​

​

1,777

​

​

1,433

​

​

1,316

​

​

6,342

Net interest income

​

​

9,729

​

​

9,815

​

​

9,865

​

​

9,914

​

​

39,323

Provision for loan losses

​

​

1,000

​

​

1,000

​

​

0

​

​

30

​

​

2,030

Noninterest income

​

​

3,007

​

​

3,088

​

​

2,447

​

​

2,324

​

​

10,866

Noninterest expense

​

​

11,934

​

​

9,281

​

​

9,972

​

​

9,576

​

​

40,763

Income tax (benefit) expense

​

​

(62)

​

​

810

​

​

771

​

​

903

​

​

2,422

Net (loss) income

​

$

(136)

​

$

1,812

​

$

1,569

​

$

1,729

​

$

4,974

Preferred stock dividends and Accretion of discount

​

​

295

​

​

320

​

​

0

​

​

0

​

​

615

Net income (loss) available to common stockholders

​

$

(431)

​

$

1,492

​

$

1,569

​

$

1,729

​

$

4,359

Net income (loss) per share:

​

​

​

​

​

Basic (loss) earnings per share

​

$

(0.08)

​

$

0.29

​

$

0.30

​

$

0.33

​

$

0.83

Diluted (loss) earnings per share

​

​

(0.08)

​

​

0.29

​

​

0.30

​

​

0.33

​

​

0.83

77

 

MARKET PRICE OF AND DIVIDENDS ON EQUITY SECURITIES AND RELATED MATTERS

Market Price

The Company’s common stock trades on Nasdaq’s global select market under the stock symbol of HWBK. The following table sets forth the range of high and low bid prices of the Company’s common stock by quarter for each quarter in 2014 and 2013 in which the stock was traded.

​	High			Low
2014	​			​
First Quarter	​	$	13.64	​	$	11.05
Second Quarter	​	$	13.64	​	$	12.41
Third Quarter	​	$	14.04	​	$	11.90
Fourth Quarter	​	$	16.83	​	$	13.00
2013	​			​
First Quarter	​	$	11.52	​	$	7.08
Second Quarter	​	$	12.94	​	$	10.66
Third Quarter	​	$	14.99	​	$	12.00
Fourth Quarter	​	$	14.29	​	$	11.85

Shares Outstanding

As of January 31, 2015, the Company had issued 5,395,844 shares of common stock, of which 5,233,986 shares were outstanding. The outstanding shares were held of record by approximately 1,269 shareholders.

Dividends

The following table sets forth information on dividends paid by the Company in 2014 and 2013.

Month Paid	Dividends Per Share
January, 2014	​	$	0.05
April, 2014	​	​	0.05
July, 2014	​	​	0.05
October, 2014	​	​	0.05
Total for 2014	​	$	0.20
January, 2013	​	$	0.05
April, 2013	​	​	0.05
July, 2013	​	​	0.05
October, 2013	​	​	0.05
Total for 2013	​	$	0.20

The board of directors intends that the Company will continue to pay quarterly dividends. The actual amount of quarterly dividends and the payment, as well as the amount, of any special dividend ultimately will depend on the payment of sufficient dividends by the subsidiary Bank to the Company. The payment by the Bank of dividends to the Company will depend upon such factors as the Bank’s financial condition, results of operations and current and anticipated cash needs, including capital requirements.

78

 

Stock Performance Graph

The following performance graph shows a comparison of cumulative total returns for the Company, the Nasdaq Stock Market (U.S. Companies), and a peer index of financial institutions having total assets of between $1 billion and $5 billion for the period from December 31, 2009, through December 31, 2014. The cumulative total return on investment for each of the periods for the Company, the Nasdaq Stock Market (U.S. Companies) and the peer index is based on the stock price or index at December 31, 2009. The performance graph assumes that the value of an investment in the Company’s common stock and each index was $100 at December 31, 2009 and that all dividends were reinvested. The information presented in the performance graph is historical in nature and is not intended to represent or guarantee future returns.

 

The comparison of cumulative total returns presented in the above graph was plotted using the following index values and common stock price values:

​	12/31/09			12/31/10			12/31/11			12/31/12			12/31/13			12/31/14
Hawthorn Bancshares, Inc.	​	$	100.00	​	$	95.98	​	$	72.19	​	$	95.32	​	$	163.19	​	$	202.01
Nasdaq Composite (U.S. Companies)	​	$	100.00	​	$	118.15	​	$	117.22	​	$	138.02	​	$	193.47	​	$	222.16
Index of financial institutions ($1 billion to $5 billion)	​	$	100.00	​	$	113.35	​	$	103.38	​	$	127.47	​	$	185.36	​	$	193.81

79

 

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Name	Position with The Company	Position with Subsidiary Bank	Principal Occupation
David T. Turner	Chairman, Chief Executive Officer, President and Director-Class III	Chairman, Chief Executive Officer, President and Director	Position with Hawthorn Bancshares, Inc. and Hawthorn Bank
Kevin L. Riley	Director-Class III	Director	Co-owner, Riley Chevrolet, Buick, GMC Cadillac, and Riley Toyota Scion, Jefferson City, Missouri
Frank E. Burkhead	Director-Class II	Director	Owner, Burkhead Wealth Management, Co-owner, Burkhead & Associates, LLC, Pro 356, LLC, and FACT Properties, LLC,
Gus S. Wetzel, II	Director-Class II	Director	Physician, Wetzel Clinic, Clinton, Missouri
Philip D. Freeman	Director-Class I	Director	Owner, Freeman Properties, JCMO, LLC, Jefferson City, Missouri
James E. Smith	Director-Class I	Director	Retired
W. Bruce Phelps	Chief Financial Officer	Senior Vice President and Chief Financial Officer	Position with Hawthorn Bancshares, Inc. and Hawthorn Bank
Kathleen L. Bruegenhemke	Senior Vice President, Corporate Secretary	Senior Vice President and Columbia Market President	Position with Hawthorn Bancshares, Inc. and Hawthorn Bank

ANNUAL REPORT ON FORM 10-K

A copy of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the Securities and Exchange Commission, excluding exhibits, will be furnished without charge to shareholders entitled to vote at the 2015 annual meeting of shareholders upon written request to Kathleen L. Bruegenhemke, Corporate Secretary, Hawthorn Bancshares, Inc., 132 East High Street, Jefferson City, Missouri 65101. The Company will provide a copy of any exhibit to the Form 10-K to any such person upon written request and the payment of the Company’s reasonable expenses in furnishing such exhibits.

80

EX-23

Exhibit 23

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Hawthorn Bancshares, Inc.:

We consent to the incorporation by reference in the registration statements (No. 333-68366 and No. 333-136477) on Form S-8 of Hawthorn Bancshares, Inc. of our reports dated March 31, 2015, with respect to the consolidated balance sheets of Hawthorn Bancshares, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014, which report appears in the December 31, 2014 annual report to shareholders incorporated by reference in the December 31, 2014 Form 10-K of Hawthorn Bancshares, Inc., and with respect to the effectiveness of internal control over financial reporting as of December 31, 2014, which report appears in the December 31, 2014 Form 10-K of Hawthorn Bancshares, Inc.

	/s/ KPMG LLP
St. Louis, Missouri
March 31, 2015

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, David T. Turner, certify that:

1.   I have reviewed this report on Form 10-K of Hawthorn Bancshares, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 31, 2015
	/s/ David T. Turner
	David T. Turner
	Chairman of the Board and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, W. Bruce Phelps, certify that:

1. I have reviewed this report on Form 10-K of Hawthorn Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 31, 2015
	/s/ W. Bruce Phelps
	W. Bruce Phelps
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer

In connection with the Annual Report of Hawthorn Bancshares, Inc. (the Company) on Form 10-K for the period ended December 31, 2014 as filed with the Securities and Exchange Commission (the Report), I, David T. Turner, Chairman of the Board and Chief Executive Officer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(a)              The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(b)              The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated:  March 31, 2015
	/s/ David T. Turner
	David T. Turner
	Chairman of the Board and Chief Executive Officer

“A signed original of this written statement required by Section 906 has been provided to Hawthorn Bancshares, Inc. and will be retained by Hawthorn Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.”

EX-32.2

Exhibit 32.2

Certification of Chief Financial Officer

In connection with the Annual Report of Hawthorn Bancshares, Inc. (the Company) on Form 10-K for the period ended December 31, 2014 as filed with the Securities and Exchange Commission (the Report), I, W. Bruce Phelps, Chief Financial Officer of the Company, hereby certify in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(a)             The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(b)             The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated:  March 31, 2015
	/s/ W. Bruce Phelps
	W. Bruce Phelps
	Chief Financial Officer

“A signed original of this written statement required by Section 906 has been provided to Hawthorn Bancshares, Inc. and will be retained by Hawthorn Bancshares, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.”

XML

Stockholders' Equity (Tables)

12 Months Ended

Dec. 31, 2014

Stockholders' Equity Note [Abstract]

Schedule of the change in the components of the accumulated other comprehensive income (loss)

							Accumulated
				Unrecognized Net			Other
				Pension and			Comprehensive
	Unrealized Loss			Postretirement			(Loss)
(in thousands)	on Securities (1)			Costs (2)			Income
Balance, December 31, 2012	$	3,266		$	(1,441	)	$	1,825
Other comprehensive (loss) income, before reclassifications		(6,980	)		3,378			(3,602	)
Amounts reclassified from accumulated other comprehensive income		(778	)		110			(668	)
Current period other comprehensive (loss) income, before tax		(7,758	)		3,488			(4,270	)
Income tax benefit (expense)		3,001			(1,325	)		1,676
Current period other comprehensive (loss) income, net of tax		(4,757	)		2,163			(2,594	)
Balance, December 31, 2013	$	(1,491	)	$	722		$	(769	)
Other comprehensive (loss) income, before reclassifications		2,770			(3,568	)		(798	)
Amounts reclassified from accumulated other comprehensive income		(20	)		79			59
Current period other comprehensive (loss) income, before tax		2,750			(3,489	)		(739	)
Income tax benefit (expense)		(1,045	)		1,325			280
Current period other comprehensive (loss) income, net of tax		1,705			(2,164	)		(459	)
Balance, December 31, 2014	$	214		$	(1,442	)	$	(1,228	)

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

(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost. See Note 11.

XML

Commitments and Contingencies (Detail Textuals) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014
Contractual amount of off-balance-sheet financial instruments
Amounts accrued for estimated losses for the financial instruments	0
Minimum
Contractual amount of off-balance-sheet financial instruments
Remaining term of standby letters of credit	1 month
Maximum
Contractual amount of off-balance-sheet financial instruments
Remaining term of standby letters of credit	5 years

XML

Loans and Allowance for Loan Losses (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Summary of the allowance for loan losses
Balance at beginning of period				$ 13,719				$ 14,842	$ 13,719	$ 14,842	$ 13,809
Additions:
Provision for loan losses	0	0	0	0	30	0	1,000	1,000	0	2,030	8,900
Deductions:
Loans charged off									5,828	4,180	8,789
Less recoveries on loans									(1,208)	(1,027)	(922)
Net loans charged off									4,620	3,153	7,867
Balance at end of period	9,099				13,719				9,099	13,719	14,842
Commercial, Financial, and Agricultural
Summary of the allowance for loan losses
Balance at beginning of period				2,374				1,937	2,374	1,937	1,804
Additions:
Provision for loan losses									371	992	1,732
Deductions:
Loans charged off									1,285	895	1,760
Less recoveries on loans									(319)	(340)	(161)
Net loans charged off									966	555	1,599
Balance at end of period	1,779				2,374				1,779	2,374	1,937
Real Estate Construction - Residential
Summary of the allowance for loan losses
Balance at beginning of period				931				732	931	732	1,188
Additions:
Provision for loan losses									(592)	318	(523)
Deductions:
Loans charged off									349	119	0
Less recoveries on loans									(181)	0	(67)
Net loans charged off									168	119	(67)
Balance at end of period	171				931				171	931	732
Real Estate Construction - Commercial
Summary of the allowance for loan losses
Balance at beginning of period				631				1,711	631	1,711	1,562
Additions:
Provision for loan losses									326	(452)	126
Deductions:
Loans charged off									491	633	0
Less recoveries on loans									0	(5)	(23)
Net loans charged off									491	628	(23)
Balance at end of period	466				631				466	631	1,711
Real Estate Mortgage - Residential
Summary of the allowance for loan losses
Balance at beginning of period				2,959				3,387	2,959	3,387	3,251
Additions:
Provision for loan losses									(226)	273	955
Deductions:
Loans charged off									408	812	977
Less recoveries on loans									(202)	(111)	(158)
Net loans charged off									206	701	819
Balance at end of period	2,527				2,959				2,527	2,959	3,387
Real Estate Mortgage - Commercial
Summary of the allowance for loan losses
Balance at beginning of period				6,523				6,834	6,523	6,834	5,734
Additions:
Provision for loan losses									(107)	622	6,318
Deductions:
Loans charged off									2,890	1,301	5,466
Less recoveries on loans									(320)	(368)	(248)
Net loans charged off									2,570	933	5,218
Balance at end of period	3,846				6,523				3,846	6,523	6,834
Installment Loans to Individuals
Summary of the allowance for loan losses
Balance at beginning of period				294				239	294	239	267
Additions:
Provision for loan losses									195	272	293
Deductions:
Loans charged off									405	420	586
Less recoveries on loans									(186)	(203)	(265)
Net loans charged off									219	217	321
Balance at end of period	270				294				270	294	239
Unallocated
Summary of the allowance for loan losses
Balance at beginning of period				7				2	7	2	3
Additions:
Provision for loan losses									33	5	(1)
Deductions:
Loans charged off									0	0	0
Less recoveries on loans									0	0	0
Net loans charged off									0	0	0
Balance at end of period	$ 40				$ 7				$ 40	$ 7	$ 2

XML

Quarterly Financial Information (Unaudited) (Tables)

12 Months Ended

Dec. 31, 2014

Quarterly Financial Information (Unaudited)

Schedule of quarterly financial data (unaudited)

										Year
	First			Second		Third		Fourth		to
(In thousands except per share data)	quarter			quarter		quarter		quarter		Date
Year Ended December 31, 2014
Interest income	$	10,963		$	11,125	$	11,196	$	11,214	$	44,498
Interest expense		1,309			1,278		1,240		1,217		5,044
Net interest income		9,654			9,847		9,956		9,997		39,454
Provision for loan losses		0			0		0		0		0
Noninterest income		2,085			2,183		2,313		2,168		8,749
Noninterest expense		8,707			8,811		9,899		9,090		36,507
Income tax expense		1,045			1,121		802		1,074		4,042
Net income available to common stockholders	$	1,987		$	2,098	$	1,568	$	2,001	$	7,654
Net income per share:
Basic earnings per share	$	0.38		$	0.40	$	0.30	$	0.38	$	1.46
Diluted earnings per share		0.38			0.40		0.30		0.38		1.46
Year Ended December 31, 2013
Interest income	$	11,545		$	11,592	$	11,298	$	11,230	$	45,665
Interest expense		1,816			1,777		1,433		1,316		6,342
Net interest income		9,729			9,815		9,865		9,914		39,323
Provision for loan losses		1,000			1,000		0		30		2,030
Noninterest income		3,007			3,088		2,447		2,324		10,866
Noninterest expense		11,934			9,281		9,972		9,576		40,763
Income tax (benefit) expense		(62	)		810		771		903		2,422
Net (loss) income	$	(136	)	$	1,812	$	1,569	$	1,729	$	4,974
Preferred stock dividends and Accretion of discount		295			320		0		0		615
Net income (loss) available to common stockholders	$	(431	)	$	1,492	$	1,569	$	1,729	$	4,359
Net income (loss) per share:
Basic (loss) earnings per share	$	(0.08	)	$	0.29	$	0.30	$	0.33	$	0.83
Diluted (loss) earnings per share		(0.08	)		0.29		0.30		0.33		0.83

XML

Investment Securities (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Investments Debt And Equity Securities [Abstract]
Gains realized on sales	$ 86	$ 786	$ 26
Losses realized on sales	(66)	(8)	0
Other-than-temporary impairment recognized	0	0	0
Investment securities gains	$ 20	$ 778	$ 26

XML

Loans and Allowance for Loan Losses (Details 3) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Allowance for loan losses:
Individually evaluated for impairment	$ 1,749	$ 4,796
Collectively evaluated for impairment	7,350	8,923
Total	9,099	13,719	14,842	13,809
Loans outstanding:
Individually evaluated for impairment	35,963	34,816
Collectively evaluated for impairment	825,250	804,731
Total	861,213	839,547
Commercial, Financial, and Agricultural
Allowance for loan losses:
Individually evaluated for impairment	134	721
Collectively evaluated for impairment	1,645	1,653
Total	1,779	2,374	1,937	1,804
Loans outstanding:
Individually evaluated for impairment	7,541	4,015
Collectively evaluated for impairment	147,293	137,830
Total	154,834	141,845
Real Estate Construction - Residential
Allowance for loan losses:
Individually evaluated for impairment	0	392
Collectively evaluated for impairment	171	539
Total	171	931	732	1,188
Loans outstanding:
Individually evaluated for impairment	1,750	2,204
Collectively evaluated for impairment	16,353	18,804
Total	18,103	21,008
Real Estate Construction - Commercial
Allowance for loan losses:
Individually evaluated for impairment	0	304
Collectively evaluated for impairment	466	327
Total	466	631	1,711	1,562
Loans outstanding:
Individually evaluated for impairment	2,096	6,615
Collectively evaluated for impairment	46,726	48,461
Total	48,822	55,076
Real Estate Mortgage - Residential
Allowance for loan losses:
Individually evaluated for impairment	1,343	1,374
Collectively evaluated for impairment	1,184	1,585
Total	2,527	2,959	3,387	3,251
Loans outstanding:
Individually evaluated for impairment	7,878	6,517
Collectively evaluated for impairment	239,239	219,113
Total	247,117	225,630
Real Estate Mortgage - Commercial
Allowance for loan losses:
Individually evaluated for impairment	246	1,989
Collectively evaluated for impairment	3,600	4,534
Total	3,846	6,523	6,834	5,734
Loans outstanding:
Individually evaluated for impairment	16,464	15,422
Collectively evaluated for impairment	355,857	360,264
Total	372,321	375,686
Installment Loans to Individuals
Allowance for loan losses:
Individually evaluated for impairment	26	16
Collectively evaluated for impairment	244	278
Total	270	294	239	267
Loans outstanding:
Individually evaluated for impairment	234	43
Collectively evaluated for impairment	19,782	20,259
Total	20,016	20,302
Un-allocated
Allowance for loan losses:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	40	7
Total	40	7	2	3
Loans outstanding:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	0	0
Total	$ 0	$ 0

XML

Deposits (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Due within:
One year	$ 204,638	$ 231,644
Two years	58,177	58,844
Three years	33,551	30,767
Four years	16,760	12,662
Five years	5,282	16,087
Thereafter	1,347	0
Total	$ 319,755	$ 350,004

XML

Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Assets:
Available for sale debt securities, fair value	$ 198,998	$ 205,985
Mortgage servicing rights, fair value	2,762	3,036
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Available for sale debt securities, fair value	0	1,003
Mortgage servicing rights, fair value	0	0
Other Observable Inputs (Level 2)
Assets:
Available for sale debt securities, fair value	198,998	204,982
Mortgage servicing rights, fair value	0	0
Significant Unobservable Inputs (Level 3)
Assets:
Available for sale debt securities, fair value	0	0
Mortgage servicing rights, fair value	2,762	3,036
Recurring
Assets:
Assets, Total	201,760	209,021
Recurring | U.S. Treasury
Assets:
Available for sale debt securities, fair value		1,003
Recurring | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	57,099	60,616
Recurring | Asset-backed securities
Assets:
Available for sale debt securities, fair value	106,462	110,373
Recurring | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	35,437	33,993
Recurring | Mortgage servicing rights
Assets:
Mortgage servicing rights, fair value	2,762	3,036
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Assets, Total	0	1,003
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | U.S. Treasury
Assets:
Available for sale debt securities, fair value		1,003
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Asset-backed securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Mortgage servicing rights
Assets:
Mortgage servicing rights, fair value	0	0
Recurring | Other Observable Inputs (Level 2)
Assets:
Assets, Total	198,998	204,982
Recurring | Other Observable Inputs (Level 2) | U.S. Treasury
Assets:
Available for sale debt securities, fair value		0
Recurring | Other Observable Inputs (Level 2) | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	57,099	60,616
Recurring | Other Observable Inputs (Level 2) | Asset-backed securities
Assets:
Available for sale debt securities, fair value	106,462	110,373
Recurring | Other Observable Inputs (Level 2) | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	35,437	33,993
Recurring | Other Observable Inputs (Level 2) | Mortgage servicing rights
Assets:
Mortgage servicing rights, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3)
Assets:
Assets, Total	2,762	3,036
Recurring | Significant Unobservable Inputs (Level 3) | U.S. Treasury
Assets:
Available for sale debt securities, fair value		0
Recurring | Significant Unobservable Inputs (Level 3) | Government sponsored enterprises
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Asset-backed securities
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Obligations of states and political subdivisions
Assets:
Available for sale debt securities, fair value	0	0
Recurring | Significant Unobservable Inputs (Level 3) | Mortgage servicing rights
Assets:
Mortgage servicing rights, fair value	$ 2,762	$ 3,036

XML

Commitments and Contingencies (Tables)

12 Months Ended

Dec. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

Schedule of contractual amount of off-balance-sheet financial instruments

(in thousands)	2014		2013
Commitments to extend credit	$	135,137	$	117,880
Commitments to originate residential first and second mortgage loans		1,640		1,852
Standby letters of credit		1,621		1,826

XML

Investment Securities (Tables)

12 Months Ended

Dec. 31, 2014

Investments Debt And Equity Securities [Abstract]

Schedule of amortized cost and fair value of debt securities classified as available-for-sale

			Gross		Gross
	Amortized		unrealized		unrealized
(in thousands)	cost		gains		losses		Fair value
December 31, 2014
Government sponsored enterprises	$	57,002	$	240	$	143	$	57,099
Asset-backed securities		106,726		855		1,119		106,462
Obligations of states and political subdivisions		34,925		583		71		35,437
Total available for sale securities	$	198,653	$	1,678	$	1,333	$	198,998
December 31, 2013
U.S. Treasury	$	1,000	$	3	$	0	$	1,003
Government sponsored enterprises		61,006		377		767		60,616
Asset-backed securities		112,747		817		3,191		110,373
Obligations of states and political subdivisions		33,637		568		212		33,993
Total available for sale securities	$	208,390	$	1,765	$	4,170	$	205,985

Schedule of amortized cost and fair value of debt securities classified as available-for-sale by contractual maturity

	Amortized		Fair
(in thousands)	cost		value
Due in one year or less	$	12,322	$	12,421
Due after one year through five years		56,138		56,327
Due after five years through ten years		21,409		21,767
Due after ten years		2,058		2,021
Total		91,927		92,536
Asset-backed securities		106,726		106,462
Total available for sale securities	$	198,653	$	198,998

Schedule of gross unrealized losses on debt securities and fair value of related securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position

	Less than 12 months					12 months or more					Total		Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
At December 31, 2014
Government sponsored enterprises	$	2,983	$	(4	)	$	17,862	$	(139	)	$	20,845	$	(143	)
Asset-backed securities		10,314		(50	)		45,445		(1,069	)		55,759		(1,119	)
Obligations of states and political subdivisions		3,667		(15	)		1,942		(56	)		5,609		(71	)
Total	$	16,964	$	(69	)	$	65,249	$	(1,264	)	$	82,213	$	(1,333	)
(in thousands)
At December 31, 2013
Government sponsored enterprises	$	25,771	$	(767	)	$	0	$	0		$	25,771	$	(767	)
Asset-backed securities		76,048		(2,940	)		5,941		(251	)		81,989		(3,191	)
Obligations of states and political subdivisions		6,907		(159	)		450		(53	)		7,357		(212	)
Total	$	108,726	$	(3,866	)	$	6,391	$	(304	)	$	115,117	$	(4,170	)

Schedule of components of investment securities gains (losses), which are recognized in earnings

(in thousands)	2014			2013			2012
Gains realized on sales	$	86		$	786		$	26
Losses realized on sales		(66	)		(8	)		0
Other-than-temporary impairment recognized		0			0			0
Investment securities gains	$	20		$	778		$	26

XML

Deposits (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Due within:
Three months or less	$ 33,488	$ 46,306
Over three months through six months	29,381	18,398
Over six months through twelve months	35,308	42,624
Over twelve months	36,768	38,629
Total	$ 134,945	$ 145,957

XML

Premises and Equipment (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Depreciation expense
Depreciation expense	$ 1,758	$ 1,605	$ 1,858

XML

Employee Benefit Plans (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Summary of employee benefits charged to operating expenses
Payroll taxes	$ 1,081	$ 1,106	$ 1,127
Medical plans	1,974	1,915	1,772
401(k) match	310	309	298
Pension plan	960	1,173	1,224
Profit-sharing	201	118	58
Other	122	219	317
Total employee benefits	$ 4,648	$ 4,840	$ 4,796

XML

Loans and Allowance for Loan Losses (Details 5) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Financing Receivable, Impaired [Line Items]
Recorded Investment, With no related allowance recorded	$ 28,525	$ 18,809
Unpaid Principal Balance, With no related allowance recorded	33,066	20,813
Recorded Investment, With an allowance recorded	7,438	16,266
Unpaid Principal Balance, With an allowance recorded	6,482	16,992
Specific Reserves, With an allowance recorded	1,749	4,796
Total impaired loans, Recorded Investment	35,963	35,075
Total impaired loans, Unpaid Principal Balance	39,548	37,805
Commercial, financial, and agricultural
Financing Receivable, Impaired [Line Items]
Recorded Investment, With no related allowance recorded	6,021	2,467
Unpaid Principal Balance, With no related allowance recorded	6,232	2,593
Recorded Investment, With an allowance recorded	1,520	1,548
Unpaid Principal Balance, With an allowance recorded	1,528	1,607
Specific Reserves, With an allowance recorded	134	721
Real estate - construction residential
Financing Receivable, Impaired [Line Items]
Recorded Investment, With no related allowance recorded	1,750	44
Unpaid Principal Balance, With no related allowance recorded	2,259	80
Recorded Investment, With an allowance recorded	0	2,160
Unpaid Principal Balance, With an allowance recorded	0	2,331
Specific Reserves, With an allowance recorded	0	392
Real estate - construction commercial
Financing Receivable, Impaired [Line Items]
Recorded Investment, With no related allowance recorded	2,096	6,101
Unpaid Principal Balance, With no related allowance recorded	2,319	7,148
Recorded Investment, With an allowance recorded	0	514
Unpaid Principal Balance, With an allowance recorded	0	514
Specific Reserves, With an allowance recorded	0	304
Real estate - residential
Financing Receivable, Impaired [Line Items]
Recorded Investment, With no related allowance recorded	3,213	2,121
Unpaid Principal Balance, With no related allowance recorded	3,270	2,654
Recorded Investment, With an allowance recorded	4,665	4,396
Unpaid Principal Balance, With an allowance recorded	3,546	4,570
Specific Reserves, With an allowance recorded	1,343	1,374
Real estate - commercial
Financing Receivable, Impaired [Line Items]
Recorded Investment, With no related allowance recorded	15,409	7,817
Unpaid Principal Balance, With no related allowance recorded	18,950	8,056
Recorded Investment, With an allowance recorded	1,055	7,605
Unpaid Principal Balance, With an allowance recorded	1,171	7,925
Specific Reserves, With an allowance recorded	246	1,989
Consumer
Financing Receivable, Impaired [Line Items]
Recorded Investment, With no related allowance recorded	36	259
Unpaid Principal Balance, With no related allowance recorded	36	282
Recorded Investment, With an allowance recorded	198	43
Unpaid Principal Balance, With an allowance recorded	237	45
Specific Reserves, With an allowance recorded	$ 26	$ 16

XML

Fair Value of Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Assets:
Cash and due from banks	$ 22,364	$ 27,079
Federal funds sold and overnight interest-bearing deposits	20,445	1,360
Investment in available-for-sale securities, at fair value	198,998	205,985
Mortgage servicing rights	2,762	3,036
Accrued interest receivable	4,816	4,999
Deposits:
Non-interest bearing demand	207,700	187,382
Savings, interest checking and money market	442,059	419,085
Time deposits	319,755	350,004
Accrued interest payable	373	426
Quoted Prices in Active Markets for Identical Assets (Level 1)
Assets:
Cash and due from banks	22,364	27,079
Federal funds sold and overnight interest-bearing deposits	20,445	1,360
Investment in available-for-sale securities, at fair value	0	1,003
Loans, net	0	0
Investment in FHLB stock	0	0
Mortgage servicing rights	0	0
Cash surrender value - life insurance	0	0
Accrued interest receivable	4,816	4,999
Assets, Total	47,625	34,441
Deposits:
Non-interest bearing demand	207,700	187,382
Savings, interest checking and money market	442,059	419,085
Time deposits	0	0
Federal funds purchased and securities sold under agreements to repurchase	17,970	31,084
Subordinated notes	0	0
Federal Home Loan Bank advances	0	0
Accrued interest payable	373	426
Liabilities, Fair Value Disclosure, Total	668,102	637,977
Other Observable Inputs (Level 2)
Assets:
Cash and due from banks	0	0
Federal funds sold and overnight interest-bearing deposits	0	0
Investment in available-for-sale securities, at fair value	198,998	204,982
Loans, net	0	0
Investment in FHLB stock	3,075	2,354
Mortgage servicing rights	0	0
Cash surrender value - life insurance	2,284	2,213
Accrued interest receivable	0	0
Assets, Total	204,357	209,549
Deposits:
Non-interest bearing demand	0	0
Savings, interest checking and money market	0	0
Time deposits	0	0
Federal funds purchased and securities sold under agreements to repurchase	0	0
Subordinated notes	33,371	32,048
Federal Home Loan Bank advances	44,396	25,366
Accrued interest payable	0	0
Liabilities, Fair Value Disclosure, Total	77,767	57,414
Net Significant Unobservable Inputs (Level 3)
Assets:
Cash and due from banks	0	0
Federal funds sold and overnight interest-bearing deposits	0	0
Investment in available-for-sale securities, at fair value	0	0
Loans, net	854,062	829,223
Investment in FHLB stock	0	0
Mortgage servicing rights	2,762	3,036
Cash surrender value - life insurance	0	0
Accrued interest receivable	0	0
Assets, Total	856,824	832,259
Deposits:
Non-interest bearing demand	0	0
Savings, interest checking and money market	0	0
Time deposits	321,041	352,432
Federal funds purchased and securities sold under agreements to repurchase	0	0
Subordinated notes	0	0
Federal Home Loan Bank advances	0	0
Accrued interest payable	0	0
Liabilities, Fair Value Disclosure, Total	321,041	352,432
Carrying Amount
Assets:
Cash and due from banks	22,364	27,079
Federal funds sold and overnight interest-bearing deposits	20,445	1,360
Investment in available-for-sale securities, at fair value	198,998	205,985
Loans, net	852,114	825,828
Investment in FHLB stock	3,075	2,354
Mortgage servicing rights	2,762	3,036
Cash surrender value - life insurance	2,284	2,213
Accrued interest receivable	4,816	4,999
Assets, Total	1,106,858	1,072,854
Deposits:
Non-interest bearing demand	207,700	187,382
Savings, interest checking and money market	442,059	419,085
Time deposits	319,755	350,004
Federal funds purchased and securities sold under agreements to repurchase	17,970	31,084
Subordinated notes	49,486	49,486
Federal Home Loan Bank advances	43,000	24,000
Accrued interest payable	373	426
Liabilities, Fair Value Disclosure, Total	1,080,343	1,061,467
Fair Value
Assets:
Cash and due from banks	22,364	27,079
Federal funds sold and overnight interest-bearing deposits	20,445	1,360
Investment in available-for-sale securities, at fair value	198,998	205,985
Loans, net	854,062	829,223
Investment in FHLB stock	3,075	2,354
Mortgage servicing rights	2,762	3,036
Cash surrender value - life insurance	2,284	2,213
Accrued interest receivable	4,816	4,999
Assets, Total	1,108,806	1,076,249
Deposits:
Non-interest bearing demand	207,700	187,382
Savings, interest checking and money market	442,059	419,085
Time deposits	321,041	352,432
Federal funds purchased and securities sold under agreements to repurchase	17,970	31,084
Subordinated notes	33,371	32,048
Federal Home Loan Bank advances	44,396	25,366
Accrued interest payable	373	426
Liabilities, Fair Value Disclosure, Total	$ 1,066,910	$ 1,047,823

XML

Intangible Assets (Details 2) (Mortgage servicing rights (MSRs))	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Mortgage servicing rights (MSRs)
Assumptions used in estimating the fair value of mortgage service rights
Weighted-Average Constant Prepayment Rate (as a percent)	10.54%	9.48%
Weighted-Average Note Rate (as a percent)	3.99%	4.01%
Weighted-Average Discount Rate (as a percent)	9.21%	9.06%
Weighted-Average Expected Life (in years)	5 years 8 months 12 days	6 years 1 month 6 days

XML

Income Taxes (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Income Tax Disclosure [Abstract]
Income before provision for income tax expense									$ 11,696	$ 7,396	$ 3,368
Tax at statutory federal income tax rate									3,977	2,515	1,145
Tax-exempt income									(348)	(353)	(380)
State income tax, net of federal tax benefit									385	233	61
Release of prior year over accrual									0	0	(371)
Other, net									28	27	91
Total income tax expense	$ 1,074	$ 802	$ 1,121	$ 1,045	$ 903	$ 771	$ 810	$ (62)	$ 4,042	$ 2,422	$ 546
Tax at statutory federal income tax rate (in percent)									34.00%	34.00%	34.00%
Tax-exempt income (in percent)									(2.98%)	(4.77%)	(11.27%)
State income tax, net of federal tax benefit (in percent)									3.30%	3.15%	1.81%
Release of prior year over accrual (in percent)									0.00%	0.00%	(11.01%)
Other, net (in percent)									0.24%	0.37%	2.70%
Provision for income tax expense (in percent)									34.56%	32.75%	16.23%

XML

Borrowings (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Borrowings
Average Balance Outstanding	$ 20,223	$ 20,548
Maximum Outstanding at any Month End	22,849	38,510
Balance	17,970	31,084
Federal funds purchased
Borrowings
Year End Weighted Rate (as a percent)	0.45%	0.40%
Average Weighted Rate (as a percent)	0.38%	0.41%
Average Balance Outstanding	404	635
Maximum Outstanding at any Month End	0	13,503
Balance	0	13,503
Short-term repurchase agreements
Borrowings
Year End Weighted Rate (as a percent)	0.12%	0.13%
Average Weighted Rate (as a percent)	0.10%	0.11%
Average Balance Outstanding	19,819	19,913
Maximum Outstanding at any Month End	22,849	25,007
Balance	$ 17,970	$ 17,581

XML

Income Taxes (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Deferred tax assets:
Allowance for loan losses	$ 3,458	$ 5,213
Impairment of other real estate owned	1,233	1,771
Goodwill	1,786	2,134
Available-for-sale securities	0	914
Deferred taxes on pension	0	0
Nonaccrual loan interest	1,069	1,015
Core deposit intangible	689	822
Pension	985	896
Deferred taxes on pension	998	0
Deferred compensation	130	44
Other	250	322
Total deferred tax assets	10,598	13,131
Deferred tax liabilities:
Available-for-sale securities	131	0
Premises and equipment	1,160	988
Mortgage servicing rights	1,022	1,114
Deferred taxes on pension	0	328
Assets held for sale	114	112
FHLB stock dividend	0	100
Other	53	72
Total deferred tax liabilities	2,480	2,714
Net deferred tax assets	$ 8,118	$ 10,417

XML

Intangible Assets (Detail Textuals) (USD $)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Jun. 30, 2013
Finite-Lived Intangible Assets [Line Items]
Amortization expense	$ 0	$ 135,000	$ 408,000
Core Deposit Intangible Asset
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount				4,800,000
Amortization expense	0	135,000	408,000
Mortgage servicing rights (MSRs)
Finite-Lived Intangible Assets [Line Items]
Mortgage loans serviced for others	313,900,000	322,500,000
Mortgage loan servicing fees reported as other non-interest income	895,000	901,000	878,000
Amortization	0	0	0
Mortgage servicing rights (MSRs) | Error adjustment related to amortization method of MSR's
Finite-Lived Intangible Assets [Line Items]
Cumulative effect of change in accounting principle as increase to retained earnings	459,890
Amortization			$ 538,000

XML

Investment Securities (Detail Textuals) (USD $)	12 Months Ended
	Dec. 31, 2014 Security	Dec. 31, 2013 Security
Investments Debt And Equity Securities [Abstract]
Available for sale securities, restricted	$ 4,700,000	$ 4,000,000
Available for sale securities, pledged	145,500,000	145,800,000
Number of securities consisted in portfolio	300	348
Number of securities in loss position	74	96
Unrealized loss included in other comprehensive	82,200,000	115,100,000
12 months or more	65,249,000	6,391,000
Gross Unrealized Losses	$ 1,300,000	$ 4,200,000

XML

Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2014

Financial Instruments, Owned, at Fair Value [Abstract]

Fair Value of Financial Instruments

(16) 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

The fair values of loans are estimated by discounting the expected future cash flows using the current rates at which similar loans could be made to borrowers with similar credit ratings and for the same remaining maturities. The net carrying amount of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.

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.

Federal Home Loan Bank (FHLB) Stock

Ownership of equity securities of FHLB is restricted and there is no established market for their resale. The carrying amount is a reasonable estimate of fair value.

Federal Funds Sold, Cash, and Due from Banks

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

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 rates, and other ancillary income, including late fees.

Cash Surrender Value – Life Insurance

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

Accrued Interest Receivable and Payable

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

Deposits

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

Securities Sold under Agreements to Repurchase and Interest-bearing Demand Notes to U.S. Treasury

For securities sold under agreements to repurchase and interest-bearing demand notes to U.S. Treasury, the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period.

Subordinated Notes and Other Borrowings

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

A summary of the carrying amounts and fair values of the Company’s financial instruments at December 31, 2014 and 2013 is as follows:

					December 31, 2014
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2014				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	22,364	$	22,364	$	22,364	$	0	$	0
Federal funds sold and overnight interest-bearing deposits		20,445		20,445		20,445		0		0
Investment in available-for-sale securities		198,998		198,998		0		198,998		0
Loans, net		852,114		854,062		0		0		854,062
Investment in FHLB stock		3,075		3,075		0		3,075		0
Mortgage servicing rights		2,762		2,762		0		0		2,762
Cash surrender value - life insurance		2,284		2,284		0		2,284		0
Accrued interest receivable		4,816		4,816		4,816		0		0
	$	1,106,858	$	1,108,806	$	47,625	$	204,357	$	856,824
Liabilities:
Deposits:
Non-interest bearing demand	$	207,700	$	207,700	$	207,700	$	0	$	0
Savings, interest checking and money market		442,059		442,059		442,059		0		0
Time deposits		319,755		321,041		0		0		321,041
Federal funds purchased and securities sold under agreements to repurchase		17,970		17,970		17,970		0		0
Subordinated notes		49,486		33,371		0		33,371		0
Federal Home Loan Bank advances		43,000		44,396		0		44,396		0
Accrued interest payable		373		373		373		0		0
	$	1,080,343	$	1,066,910	$	668,102	$	77,767	$	321,041

					December 31, 2013
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2013				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	27,079	$	27,079	$	27,079	$	0	$	0
Federal funds sold and overnight interest-bearing deposits		1,360		1,360		1,360		0		0
Investment in available-for-sale securities		205,985		205,985		1,003		204,982		0
Loans, net		825,828		829,223		0		0		829,223
Investment in FHLB stock		2,354		2,354		0		2,354		0
Mortgage servicing rights		3,036		3,036		0		0		3,036
Cash surrender value - life insurance		2,213		2,213		0		2,213		0
Accrued interest receivable		4,999		4,999		4,999		0		0
	$	1,072,854	$	1,076,249	$	34,441	$	209,549	$	832,259
Liabilities:
Deposits:
Non-interest bearing demand	$	187,382	$	187,382	$	187,382	$	0	$	0
Savings, interest checking and money market		419,085		419,085		419,085		0		0
Time deposits		350,004		352,432		0		0		352,432
Federal funds purchased and securities sold under agreements to repurchase		31,084		31,084		31,084		0		0
Subordinated notes		49,486		32,048		0		32,048		0
Federal Home Loan Bank advances		24,000		25,366		0		25,366		0
Accrued interest payable		426		426		426		0		0
	$	1,061,467	$	1,047,823	$	637,977	$	57,414	$	352,432

Off-Balance-Sheet Financial Instruments

The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms that are competitive in the markets in which it operates.

Limitations

The fair value estimates provided are made at a point in time based on market information and information about the financial instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the fair value estimates.

XML

Summary of Significant Accounting Policies (Detail Textuals 1) (USD $) In Thousands, except Share data, unless otherwise specified	0 Months Ended	1 Months Ended	12 Months Ended			0 Months Ended
	Jun. 11, 2013	Dec. 19, 2008	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	May 15, 2013	May 09, 2012
Class of Stock [Line Items]
Term of warrants		10 years
Total repurchase price			$ 0	$ 18,255	$ 12,000
Repurchase price of warrant	540		0	540	0
Repurchase price of warrant (in dollars per warrant share)	$ 1.88
Common Stock
Class of Stock [Line Items]
Number of common shares called per warrant		287,133
Preferred Stock
Class of Stock [Line Items]
Number of shares issued		30,255
Par value of share issued (in dollars per share)		1,000
Number of shares redeemed						18,255	12,000
Total repurchase price						$ 18,500	$ 12,100

XML

Earnings per Share (Tables)

12 Months Ended

Dec. 31, 2014

Earnings Per Share [Abstract]

Schedule of calculations of basic and diluted earnings (loss) per share

	2014		2013		2012
Basic earnings per common share:
Net income	$	7,654	$	4,974	$	2,822
Less:
Preferred stock dividends and accretion of discount		0		615		1,784
Net income available to common shareholders	$	7,654	$	4,359	$	1,038
Basic earnings per share	$	1.46	$	0.83	$	0.20
Diluted earnings per common share:
Net income	$	7,654	$	4,974	$	2,822
Less:
Preferred stock dividends and accretion of discount		0		615		1,784
Net income available to common shareholders	$	7,654	$	4,359	$	1,038
Average shares outstanding		5,233,986		5,233,986		5,233,986
Effect of dilutive stock options		0		0		0
Average shares outstanding including dilutive stock options		5,233,986		5,233,986		5,233,986
Diluted earnings per share	$	1.46	$	0.83	$	0.20

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	2014		2013		2012
Anti-dilutive shares - option shares		96,481		126,286		232,947
Anti-dilutive shares - warrant shares		0		0		310,563
Total anti-dilutive shares		96,481		126,286		543,510

XML

Intangible Assets (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014		Dec. 31, 2013		Dec. 31, 2012
Changes in fair value:
Balance at end of year	$ 2,762		$ 3,036
Mortgage servicing rights (MSRs)
Changes in mortgage servicing rights
Balance at beginning of year	3,036		2,549		2,308
Re-measurement to fair value upon election to measure servicing rights at fair value	0		0		742
Originated mortgage servicing rights	302		512		830
Changes in fair value:
Due to change in model inputs and assumptions	66	[1]	723	[1]	241	[1]
Other changes in fair value	(642)	[2]	(748)	[2]	(1,572)	[2]
Amortization	0		0		0
Balance at end of year	$ 2,762		$ 3,036		$ 2,549

[1] The change in fair value resulting from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

[2] Other changes in fair value reflect changes due to customer payments and passage of time. The year ended December 31, 2012 includes a one time adjustment of a $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years.

XML

Employee Benefit Plans (Detail Textuals) (USD $)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2010
Compensation and Retirement Disclosure [Abstract]
Employer match	3.00%
Defined benefit plan contributions by employer percent	6.00%
Estimated prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic cost	$ 79,000
Assumed overall expected long-term rate of return on pension plan assets (in percent)	7.00%	7.00%	7.00%
Annual return on plan assets	8.30%	19.10%	11.40%	0.10%	12.40%
Estimated pension expense in 2015	1,400,000
Pension Expense	$ 960,000	$ 1,173,000	$ 1,224,000

XML

Borrowings (Tables)

12 Months Ended

Dec. 31, 2014

Borrowings

Schedule of information relating to federal funds purchased and repurchase agreements

(in thousands)	Year End Weighted Rate			Average Weighted Rate			Average Balance Outstanding		Maximum Outstanding at any Month End		Balance at December 31,
2014
Federal funds purchased		0.45	%		0.38	%	$	404	$	0	$	0
Short-term repurchase agreements		0.12			0.10			19,819		22,849		17,970
Total							$	20,223	$	22,849	$	17,970
2013
Federal funds purchased		0.40	%		0.41	%	$	635	$	13,503	$	13,503
Short-term repurchase agreements		0.13			0.11			19,913		25,007		17,581
Total							$	20,548	$	38,510	$	31,084

Schedule of other borrowings

(in thousands)				2014					2013
	Borrower	Maturity Date		Year End Balance		Year End Weighted Rate			Year End Balance		Year End Weighted Rate
FHLB advances	The Bank		2015	$	8,000		0.30	%	$	0		na	%
			2016		8,000		0.67	%		3,000		0.64	%
			2017		5,000		1.07	%		3,000		0.91	%
			2018		20,000		2.00	%		18,000		2.00	%
			2019-20		2,000		1.97	%		0		na	%
Total Bank				$	43,000				$	24,000
Subordinated notes	The Company		2034	$	25,774		2.94	%	$	25,774		2.94	%
			2035		23,712		2.07	%		23,712		2.07	%
Total Company				$	49,486				$	49,486

XML

Loans and Allowance for Loan Losses (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Summary of loans, by major class within Company's loan portfolio
Total loans	$ 861,213	$ 839,547
Commercial, financial, and agricultural
Summary of loans, by major class within Company's loan portfolio
Total loans	154,834	141,845
Real estate construction - residential
Summary of loans, by major class within Company's loan portfolio
Total loans	18,103	21,008
Real estate construction - commercial
Summary of loans, by major class within Company's loan portfolio
Total loans	48,822	55,076
Real estate mortgage - residential
Summary of loans, by major class within Company's loan portfolio
Total loans	247,117	225,630
Real estate mortgage - commercial
Summary of loans, by major class within Company's loan portfolio
Total loans	372,321	375,686
Installment and other consumer
Summary of loans, by major class within Company's loan portfolio
Total loans	$ 20,016	$ 20,302

XML

Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Amortized cost and fair value of debt securities
Amortized Cost	$ 198,653	$ 208,390
Gross Unrealized Gains	1,678	1,765
Gross Unrealized Losses	1,333	4,170
Fair value, Total	198,998	205,985
U.S. Treasury
Amortized cost and fair value of debt securities
Amortized Cost		1,000
Gross Unrealized Gains		3
Gross Unrealized Losses		0
Fair value, Total		1,003
Government sponsored enterprises
Amortized cost and fair value of debt securities
Amortized Cost	57,002	61,006
Gross Unrealized Gains	240	377
Gross Unrealized Losses	143	767
Fair value, Total	57,099	60,616
Asset-backed securities
Amortized cost and fair value of debt securities
Amortized Cost	106,726	112,747
Gross Unrealized Gains	855	817
Gross Unrealized Losses	1,119	3,191
Fair value, Total	106,462	110,373
Obligations of states and political subdivisions
Amortized cost and fair value of debt securities
Amortized Cost	34,925	33,637
Gross Unrealized Gains	583	568
Gross Unrealized Losses	71	212
Fair value, Total	$ 35,437	$ 33,993

XML

Commitments and Contingencies (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Commitments to extend credit
Contractual amount of off-balance-sheet financial instruments
Total contractual amount of off-balance-sheet financial instruments	$ 117,880	$ 135,137
Commitments to originate residential first and second mortgage loans
Contractual amount of off-balance-sheet financial instruments
Total contractual amount of off-balance-sheet financial instruments	1,640	1,852
Standby letters of credit
Contractual amount of off-balance-sheet financial instruments
Total contractual amount of off-balance-sheet financial instruments	$ 1,621	$ 1,826

XML

Loans and Allowance for Loan Losses (Details 9) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014 Contract	Dec. 31, 2013 Contract
Loans that were modified as TDRs
Number of Contracts	4	4
Pre- Modification	$ 1,500	$ 3,438
Post- Modification	1,378	3,274
Commercial, financial, and agricultural
Loans that were modified as TDRs
Number of Contracts	3	0
Pre- Modification	244	0
Post- Modification	208	0
Real estate mortgage - residential
Loans that were modified as TDRs
Number of Contracts	1	3
Pre- Modification	1,256	2,156
Post- Modification	1,170	1,992
Real estate mortgage - commercial
Loans that were modified as TDRs
Number of Contracts	0	1
Pre- Modification	0	1,282
Post- Modification	$ 0	$ 1,282

XML

Condensed Financial Information of the Parent Company Only (Tables)

12 Months Ended

Dec. 31, 2014

Condensed Financial Information of the Parent Company Only

Schedule of Condensed Balance Sheets

Condensed Balance Sheets
	December 31,
(in thousands)	2014		2013
Assets
Cash and due from bank subsidiaries	$	1,024	$	450
Investment in equity securities		1,486		1,486
Investment in subsidiaries		130,728		122,413
Premises and equipment		0		0
Deferred tax asset		1,989		130
Other assets		308		1,011
Total assets	$	135,535	$	125,490
Liabilities and Stockholders’ Equity
Subordinated notes	$	49,486	$	49,486
Other liabilities		5,481		1,624
Stockholders’ equity		80,568		74,380
Total liabilities and stockholders’ equity	$	135,535	$	125,490

Schedule of Condensed Statements of Income

Condensed Statements of Income
	For the Years Ended December 31,
	2014			2013			2012
Income
Interest and dividends received from subsidiaries	$	2,538		$	15,039		$	4,596
Total income		2,538			15,039			4,596
Expenses
Interest on subordinated notes		1,264			1,284			1,381
Other		1,730			1,778			2,889
Total expenses		2,994			3,062			4,270
Income before income tax benefit and
equity in undistributed income of subsidiaries		(456	)		11,977			326
Income tax benefit		1,100			1,126			2,257
Equity in undistributed (losses) income of subsidiaries		7,010			(8,129	)		239
Net income	$	7,654		$	4,974		$	2,822

Schedule of Condensed Statements of Cash Flows

Condensed Statements of Cash Flows
	For the Years Ended December 31,
(in thousands)	2014			2013			2012
Cash flows from operating activities:
Net income	$	7,654		$	4,974		$	2,822
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		0			1			1
Equity in undistributed (income) losses of subsidiaries		(7,010	)		8,129			(239	)
Stock based compensation expense		20			19			29
(Increase) decrease in deferred tax asset		(1,415	)		1,325			(148	)
Other, net		1,942			(182	)		(813	)
Net cash provided by operating activities	$	1,191		$	14,266		$	1,652
Cash flows from investing activities:
Investment in subsidiary	$	400		$	4,550		$	1,072
Net cash provided by investing activities	$	400		$	4,550		$	1,072
Cash flows from financing activities:
Redemption of 18,255 and 12,000 shares, respectively, of preferred stock	$	0		$	(18,255	)	$	(12,000	)
Cash dividends paid - preferred stock		0			(456	)		(1,203	)
Cash dividends paid - common stock		(1,017	)		(978	)		(940	)
Warrant redemption		0			(540	)		0
Net cash used in financing activities	$	(1,017	)	$	(20,229	)	$	(14,143	)
Net (decrease) increase in cash and due from banks		574			(1,413	)		(11,419	)
Cash and due from banks at beginning of year		450			1,863			13,282
Cash and due from banks at end of year	$	1,024		$	450		$	1,863

XML

Consolidated Statements of Cash Flows (Parentheticals) (Preferred Stock)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Preferred Stock
Redemption of preferred shares	18,255	12,000

XML

Quarterly Financial Information (Unaudited) (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Quarterly Financial Information (Unaudited)
Interest income	$ 11,214	$ 11,196	$ 11,125	$ 10,963	$ 11,230	$ 11,298	$ 11,592	$ 11,545	$ 44,498	$ 45,665	$ 49,114
Interest expense	1,217	1,240	1,278	1,309	1,316	1,433	1,777	1,816	5,044	6,342	7,905
Net interest income	9,997	9,956	9,847	9,654	9,914	9,865	9,815	9,729	39,454	39,323	41,209
Provision for loan losses	0	0	0	0	30	0	1,000	1,000	0	2,030	8,900
Noninterest income	2,168	2,313	2,183	2,085	2,324	2,447	3,088	3,007	8,749	10,866	9,726
Noninterest expense	9,090	9,899	8,811	8,707	9,576	9,972	9,281	11,934	36,507	40,763	38,667
Income tax (benefit) expense	1,074	802	1,121	1,045	903	771	810	(62)	4,042	2,422	546
Net income					1,729	1,569	1,812	(136)	7,654	4,974	2,822
Preferred stock dividends					0	0	320	295
Net income available to common shareholders	$ 2,001	$ 1,568	$ 2,098	$ 1,987	$ 1,729	$ 1,569	$ 1,492	$ (431)	$ 7,654	$ 4,359	$ 1,038
Net income (loss) per share:
Basic (loss) earnings per share (in dollars per share)	$ 0.38	$ 0.30	$ 0.40	$ 0.38	$ 0.33	$ 0.30	$ 0.29	$ (0.08)	$ 1.46	$ 0.83	$ 0.20
Diluted (loss) earnings per share (in dollars per share)	$ 0.38	$ 0.30	$ 0.40	$ 0.38	$ 0.33	$ 0.30	$ 0.29	$ (0.08)	$ 1.46	$ 0.83	$ 0.20

XML

Loans and Allowance for Loan Losses (Detail Textuals) (USD $)	12 Months Ended
	Dec. 31, 2014 Contract	Dec. 31, 2013 Contract
Financing Receivable, Impaired [Line Items]
Carrying amount of loans pledged as collateral to the Federal Home Loan Bank	$ 411,800,000
Fair value amount of loans pledged as collateral to the Federal Home Loan Bank	405,500,000
Impaired loans individually evaluated for impairment	35,963,000	34,816,000
Impaired loans were evaluated based on the fair value of the loan's collateral	15,600,000	21,800,000
Specific allowance related to impaired loans	1,749,000	4,796,000
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	28,525,000	18,809,000
Impaired Financing Receivable With No Related Allowance Recorded Investment Percentage	79.00%	54.00%
Contractual interest lost on nonaccrual loans	1,100,000	1,200,000
Interest income on impaired loans continuing to accrue interest	542,000	338,000
Amount of specific reserves related to TDRs which were allocated to the allowance for loan losses	1,000,000	2,200,000
Troubled debt restructurings	19,300,000	21,500,000
Troubled debt restructurings, non-accrual status	1,600,000	10,100,000
Troubled debt restructurings, accrual status	17,720,000	11,395,000
Number of contracts modified	4	4
Consumer
Financing Receivable, Impaired [Line Items]
Non-accrual loans that were collectively evaluated for impairment		259,000
Specific allowance related to impaired loans	26,000	16,000
Impaired Financing Receivable, with No Related Allowance, Recorded Investment	36,000	259,000
Interest income on impaired loans continuing to accrue interest	$ 0	$ 3,000

XML

Capital Requirements (Tables)

12 Months Ended

Dec. 31, 2014

Capital Requirements

Schedule of minimum total risk-based, Tier I risk-based and Tier I leverage ratios to be maintained for bank to be categorized as well capitalized

​

Actual

Minimum Capital Requirements

Well-Capitalized Capital Requirements

(in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

December 31, 2014

Total capital (to risk-weighted assets):

Company

​

$

138,619

​

15.78%

​

$

70,282

​

8.00%

​

​

N.A.

​

N.A.%

Bank

​

​

128,311

​

14.78

​

​

69,430

​

8.00

​

$

86,788

​

10.00

Tier I capital (to risk-weighted assets):

Company

​

$

108,785

​

12.38%

​

$

35,141

​

4.00%

​

​

N.A.

​

N.A.%

Bank

​

​

119,212

​

13.74

​

​

34,715

​

4.00

​

$

52,788

​

6.00

Tier I capital (to adjusted average assets):

Company

​

$

108,785

​

9.42%

​

$

34,648

​

3.00%

​

$

N.A.

​

N.A.%

Bank

​

​

119,212

​

10.42

​

​

34,338

​

3.00

​

​

57,230

​

5.00

(in thousands)

December 31, 2013

Total capital (to risk-weighted assets):

Company

​

$

133,638

​

15.33%

​

$

69,729

​

8.00%

​

​

N.A.

​

N.A.%

Bank

​

​

122,959

​

14.29

​

​

68,842

​

8.00

​

$

86,052

​

10.00

Tier I capital (to risk-weighted assets):

Company

​

$

99,398

​

11.40%

​

$

34,864

​

4.00%

​

​

N.A.

​

N.A.%

Bank

​

​

112,166

​

13.03

​

​

34,421

​

4.00

​

$

51,631

​

6.00

Tier I capital (to adjusted average assets):

Company

​

$

99,398

​

8.79%

​

$

33,876

​

3.00%

​

$

N.A.

​

N.A.%

Bank

​

​

112,166

​

10.04

​

​

33,517

​

3.00

​

​

55,862

​

5.00

XML

Quarterly Financial Information (Unaudited)

12 Months Ended

Dec. 31, 2014

Quarterly Financial Information (Unaudited)

Quarterly Financial Information (Unaudited)

(20) Quarterly Financial Information (Unaudited)

										Year
	First			Second		Third		Fourth		to
(In thousands except per share data)	quarter			quarter		quarter		quarter		Date
Year Ended December 31, 2014
Interest income	$	10,963		$	11,125	$	11,196	$	11,214	$	44,498
Interest expense		1,309			1,278		1,240		1,217		5,044
Net interest income		9,654			9,847		9,956		9,997		39,454
Provision for loan losses		0			0		0		0		0
Noninterest income		2,085			2,183		2,313		2,168		8,749
Noninterest expense		8,707			8,811		9,899		9,090		36,507
Income tax expense		1,045			1,121		802		1,074		4,042
Net income available to common stockholders	$	1,987		$	2,098	$	1,568	$	2,001	$	7,654
Net income per share:
Basic earnings per share	$	0.38		$	0.40	$	0.30	$	0.38	$	1.46
Diluted earnings per share		0.38			0.40		0.30		0.38		1.46
Year Ended December 31, 2013
Interest income	$	11,545		$	11,592	$	11,298	$	11,230	$	45,665
Interest expense		1,816			1,777		1,433		1,316		6,342
Net interest income		9,729			9,815		9,865		9,914		39,323
Provision for loan losses		1,000			1,000		0		30		2,030
Noninterest income		3,007			3,088		2,447		2,324		10,866
Noninterest expense		11,934			9,281		9,972		9,576		40,763
Income tax (benefit) expense		(62	)		810		771		903		2,422
Net (loss) income	$	(136	)	$	1,812	$	1,569	$	1,729	$	4,974
Preferred stock dividends and Accretion of discount		295			320		0		0		615
Net income (loss) available to common stockholders	$	(431	)	$	1,492	$	1,569	$	1,729	$	4,359
Net income (loss) per share:
Basic (loss) earnings per share	$	(0.08	)	$	0.29	$	0.30	$	0.33	$	0.83
Diluted (loss) earnings per share		(0.08	)		0.29		0.30		0.33		0.83

XML

Condensed Financial Information of the Parent Company Only

12 Months Ended

Dec. 31, 2014

Condensed Financial Information of the Parent Company Only

Condensed Financial Information of the Parent Company Only

(19) Condensed Financial Information of the Parent Company Only

Following are the condensed financial statements of Hawthorn Bancshares, Inc. (Parent only) as of and for the years indicated:

Condensed Balance Sheets
				December 31,
(in thousands)				2014			2013
Assets
Cash and due from bank subsidiaries				$	1,024		$	450
Investment in equity securities					1,486			1,486
Investment in subsidiaries					130,728			122,413
Premises and equipment					0			0
Deferred tax asset					1,989			130
Other assets					308			1,011
Total assets				$	135,535		$	125,490
Liabilities and Stockholders’ Equity
Subordinated notes				$	49,486		$	49,486
Other liabilities					5,481			1,624
Stockholders’ equity					80,568			74,380
Total liabilities and stockholders’ equity				$	135,535		$	125,490
Condensed Statements of Income
	For the Years Ended December 31,
	2014			2013			2012
Income
Interest and dividends received from subsidiaries	$	2,538		$	15,039		$	4,596
Total income		2,538			15,039			4,596
Expenses
Interest on subordinated notes		1,264			1,284			1,381
Other		1,730			1,778			2,889
Total expenses		2,994			3,062			4,270
Income before income tax benefit and
equity in undistributed income of subsidiaries		(456	)		11,977			326
Income tax benefit		1,100			1,126			2,257
Equity in undistributed (losses) income of subsidiaries		7,010			(8,129	)		239
Net income	$	7,654		$	4,974		$	2,822

Condensed Statements of Cash Flows
	For the Years Ended December 31,
(in thousands)	2014			2013			2012
Cash flows from operating activities:
Net income	$	7,654		$	4,974		$	2,822
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		0			1			1
Equity in undistributed (income) losses of subsidiaries		(7,010	)		8,129			(239	)
Stock based compensation expense		20			19			29
(Increase) decrease in deferred tax asset		(1,415	)		1,325			(148	)
Other, net		1,942			(182	)		(813	)
Net cash provided by operating activities	$	1,191		$	14,266		$	1,652
Cash flows from investing activities:
Investment in subsidiary	$	400		$	4,550		$	1,072
Net cash provided by investing activities	$	400		$	4,550		$	1,072
Cash flows from financing activities:
Redemption of 18,255 and 12,000 shares, respectively, of preferred stock	$	0		$	(18,255	)	$	(12,000	)
Cash dividends paid - preferred stock		0			(456	)		(1,203	)
Cash dividends paid - common stock		(1,017	)		(978	)		(940	)
Warrant redemption		0			(540	)		0
Net cash used in financing activities	$	(1,017	)	$	(20,229	)	$	(14,143	)
Net (decrease) increase in cash and due from banks		574			(1,413	)		(11,419	)
Cash and due from banks at beginning of year		450			1,863			13,282
Cash and due from banks at end of year	$	1,024		$	450		$	1,863

XML

Stock Compensation (Detail Textuals) (USD $)	0 Months Ended	12 Months Ended
	Jul. 01, 2014	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]
Grant of options to purchase (in shares)		569,392
Stock dividend (in percent)	4.00%
Stock based compensation expense		$ 20,000	$ 19,000	$ 29,000
Total unrecognized compensation expense related to non-vested stock awards		$ 31,000
Weighted average period is expected to be recognized		1 year 3 months 18 days
Weighted average remaining contractual life for options outstanding		1 year 10 months 24 days	2 years 6 months
Weighted average remaining contractual life for options exercisable		1 year 8 months 12 days	2 years 3 months 18 days

XML

Loans and Allowance for Loan Losses (Details 4) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Categories of impaired loans
Non-accrual loans	$ 18,243	$ 23,680
Troubled debt restructurings continuing to accrue interest	17,720	11,395
Total impaired loans	$ 35,963	$ 35,075

XML

Fair Value Measurements (Tables)

12 Months Ended

Dec. 31, 2014

Fair Value Disclosures [Abstract]

Schedule of assets and liabilities recorded at fair value on a recurring basis

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2014
Assets:
Government sponsored enterprises	$	57,099	$	0		57,099	$	0
Asset-backed securities		106,462		0		106,462		0
Obligations of states and political subdivisions		35,437		0		35,437		0
Mortgage servicing rights		2,762		0		0		2,762
Total	$	201,760	$	0	$	198,998	$	2,762
December 31, 2013
Assets:
U.S. treasury	$	1,003	$	1,003	$	0	$	0
Government sponsored enterprises		60,616		0		60,616		0
Asset-backed securities		110,373		0		110,373		0
Obligations of states and political subdivisions		33,993		0		33,993		0
Mortgage servicing rights		3,036		0		0		3,036
Total	$	209,021	$	1,003	$	204,982	$	3,036

Schedule of summary of changes in Level 3 assets and liabilities measured at fair value on a recurring basis

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
(in thousands)	Mortgage Servicing Rights
Balance at December 31, 2012	$	2,549
Total gains or losses (realized/unrealized):
Included in earnings		(25	)
Included in other comprehensive income		0
Purchases		0
Sales		0
Issues		512
Settlements		0
Balance at December 31, 2013	$	3,036
Total gains or losses (realized/unrealized):
Included in earnings		(576	)
Included in other comprehensive income		0
Purchases		0
Sales		0
Issues		302
Settlements		0
Balance at December 31, 2014	$	2,762

Schedule of quantitative Information about Level 3 Fair Value Measurements

​	Quantitative Information about Level 3 Fair Value  Measurements		​	​	​	​
​	Valuation Technique	Unobservable Inputs	Input Value
​	​	​	2014		2013
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate	​	10.54%	​	9.48%
​	​	Weighted average discount rate	​	9.21%	​	9.06%
​	​	Weighted average expected life (in years)	​	5.70	​	6.10

Schedule of valuation methods for instruments measured at fair value on a nonrecurring basis

			Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total		Assets		Inputs		Inputs		Total Gains
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Losses)*
December 31, 2014
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	1,386	$	0	$	0	$	1,386	$	(1,105	)
Real estate construction - residential		0		0		0		0		(350	)
Real estate construction - commercial		0		0		0		0		(491	)
Real estate mortgage - residential		3,322		0		0		3,322		(332	)
Real estate mortgage - commercial		809		0		0		809		(2,937	)
Consumer		172		0		0		172		(148	)
Total	$	5,689	$	0	$	0	$	5,689	$	(5,363	)
Other real estate owned and repossessed assets	$	11,885	$	0	$	0	$	11,885	$	(1,870	)
December 31, 2013
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	827	$	0	$	0	$	827	$	(735	)
Real estate construction - residential		1,768		0		0		1,768		(119	)
Real estate construction - commercial		210		0		0		210		(498	)
Real estate mortgage - residential		3,022		0		0		3,022		(376	)
Real estate mortgage - commercial		5,616		0		0		5,616		(1,457	)
Consumer		27		0		0		27		0
Total	$	11,470	$	0	$	0	$	11,470	$	(3,185	)
Other real estate owned and repossessed assets	$	14,867	$	0	$	0	$	14,867	$	(5,395	)

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

XML

Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2014

Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation

In December of 2008 and March of 2010, the Company formed Hawthorn Real Estate, LLC, and Real Estate Holdings of Missouri, LLC, respectively (the Real Estate Companies); both are wholly owned subsidiaries of the Company. The consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), and the Real Estate Companies. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans

Loans

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

Loans Held for Sale

The Bank originates certain loans, which are sold in the secondary market. These long-term, fixed rate loans are typically classified as held for sale upon origination based on management’s intent to sell and are accounted for at the lower of adjusted cost or fair value. Adjusted cost reflects the funded loan amount and any loan origination costs and fees. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. At December 31, 2014, there were no mortgage loans that were held for sale in comparison to $95,882 loans held for sale at December 31, 2013.

Impaired Loans

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

Non-Accrual Loans

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

Restructured Loans

A modified or restructured loan is accounted for as a troubled debt restructuring (TDR) for any loans in which concessions are made to the borrower for economic or legal reasons that the Company would not otherwise consider and the borrower is experiencing financial difficulty. A loan classified as a TDR will generally retain such classification until the loan is paid in full. Non-accrual TDRs are returned to accruing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months. The Company includes all accruing and non-accruing TDRs in the impaired and non-performing asset totals. TDRs are measured for impairment loss by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows.

Allowance for Loan Losses

Allowance for Loan Losses

Management has identified the accounting policy related to the allowance for loan losses as critical to the understanding of the Company’s results of operations, since the application of this policy requires significant management assumptions and estimates that could result in materially different amounts to be reported if conditions or underlying circumstances were to change. 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.

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. When loans become 90 days past due, they are generally placed on nonaccrual status or charged off unless extenuating circumstances justify leaving the loan on accrual basis. When loans reach 120 days past due and there is little likelihood of repayment, they are charged off. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated. 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 adjusted for certain qualitative factors to reflect current risk characteristics of the portfolio. In addition, the combined historical loan loss rates and qualitative factors are multiplied by loss emergence periods which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a potential loss. Although the allowance for loan losses are comprised of specific and general allocations, the entire allowance is available to absorb credit losses.

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by 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, delinquencies, current economic conditions, loan risk ratings, and industry concentration adjusted for certain qualitative factors to reflect current risk characteristics of the portfolio. In addition, the combined historical loan loss rates and qualitative factors 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 determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The Company’s methodology includes qualitative factors that allow management to adjust its estimates of losses based on the most recent information available. These factors reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

Investment in Debt and Equity Securities

Investment in Debt and Equity Securities

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

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

Capital Stock of the Federal Home Loan Bank

Capital Stock of the Federal Home Loan Bank

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

Premises and Equipment

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improve-ments and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such lives are estimated to be 5 to 40 years for buildings and improvements and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.

Core Deposit Intangibles

Core Deposit Intangibles

Intangible assets that have finite useful lives, such as core deposit intangibles, are amortized over their estimated useful lives. Core deposit intangibles are amortized over periods of 7 to 8 years representing their estimated lives using straight line and accelerated methods.

When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the carrying value based upon future cash flows expected to result from the use of the underlying asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the underlying asset, the Company recognizes an impairment loss. The impairment loss recognized represents the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset.

Mortgage Servicing Rights

Mortgage Servicing Rights

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

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

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of  $459,890, which was recorded as an increase to beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights have been recognized in real estate servicing fees, net in non-interest income in the Company’s Consolidated Statements of Income in the period in which the change occurred.

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

Other Real Estate Owned and Repossessed Assets

Other Real Estate Owned and Repossessed Assets

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

Pension Plan

Pension Plan

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

The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation – Retirement Plans under the subtopic Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the funded status of a plan as of the date of its fiscal year-end, with limited exceptions. Additional disclosures are required to provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures.

Income Taxes

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Judgment is required in addressing the Company’s future tax consequences of events that have been recognized in the consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forwards and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, the Company would adjust the recorded value of our deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Likewise, the Company would reverse the valuation allowance when it is expected to realize the deferred tax asset. The Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions as of December 31, 2014, 2013, and 2012.

Trust Department

Trust Department

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

Consolidated Statements of Cash Flows

Consolidated Statements of Cash Flows

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

Stock-Based Compensation

The Company’s stock-based employee compensation plan is described in Note 12, Stock Compensation. In accordance with FASB ASC Topic 718, Compensation – Stock Compensation, the Company measures the cost of the stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The expense recognized is based on an estimation of the number of awards for which the requisite service is expected to be rendered, and is included in salaries and employee benefits in the accompanying Consolidated Statements of Income. The standard also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.

Treasury Stock

Treasury Stock

The purchase of the Company’s common stock is recorded at cost. Purchases of the stock are made both in the open market and through negotiated private purchases based on market prices. At the date of subsequent reissue, the treasury stock account is reduced by the cost associated with such stock on a first-in-first-out basis.

Reclassifications

Reclassifications

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

XML

Loans and Allowance for Loan Losses (Tables)

12 Months Ended

Dec. 31, 2014

Loans and Leases Receivable Disclosure [Abstract]

Schedule of summary of loans, by major class within the Company's loan portfolio

(in thousands)	2014		2013
Commercial, financial, and agricultural	$	154,834	$	141,845
Real estate construction - residential		18,103		21,008
Real estate construction - commercial		48,822		55,076
Real estate mortgage - residential		247,117		225,630
Real estate mortgage - commercial		372,321		375,686
Installment and other consumer		20,016		20,302
Total loans	$	861,213	$	839,547

Schedule of loans to directors and executive officers

(in thousands)
Balance at December 31, 2013	$	4,837
New loans		478
Amounts collected		(375	)
Balance at December 31, 2014	$	4,940

Schedule of summary of the allowance for loan losses

	Commercial,			Real Estate			Real Estate			Real Estate			Real Estate			Installment
	Financial, &			Construction -			Construction -			Mortgage -			Mortgage -			Loans to			Un-
(in thousands)	Agricultural			Residential			Commercial			Residential			Commercial			Individuals			allocated			Total
Balance at December 31, 2011	$	1,804		$	1,188		$	1,562		$	3,251		$	5,734		$	267		$	3		$	13,809
Additions:
Provision for loan losses		1,732			(523	)		126			955			6,318			293			(1	)		8,900
Deductions:
Loans charged off		1,760			0			0			977			5,466			586			0			8,789
Less recoveries on loans		(161	)		(67	)		(23	)		(158	)		(248	)		(265	)		0			(922	)
Net loans charged off		1,599			(67	)		(23	)		819			5,218			321			0			7,867
Balance at December 31, 2012	$	1,937		$	732		$	1,711		$	3,387		$	6,834		$	239		$	2		$	14,842
Additions:
Provision for loan losses		992			318			(452	)		273			622			272			5			2,030
Deductions:
Loans charged off		895			119			633			812			1,301			420			0			4,180
Less recoveries on loans		(340	)		0			(5	)		(111	)		(368	)		(203	)		0			(1,027	)
Net loans charged off		555			119			628			701			933			217			0			3,153
Balance at December 31, 2013	$	2,374		$	931		$	631		$	2,959		$	6,523		$	294		$	7		$	13,719
Additions:
Provision for loan losses		371			(592	)		326			(226	)		(107	)		195			33			0
Deductions:
Loans charged off		1,285			349			491			408			2,890			405			0			5,828
Less recoveries on loans		(319	)		(181	)		0			(202	)		(320	)		(186	)		0			(1,208	)
Net loans charged off		966			168			491			206			2,570			219			0			4,620
Balance at December 31, 2014	$	1,779		$	171		$	466		$	2,527		$	3,846		$	270		$	40		$	9,099

	Commercial,		Real Estate		Real Estate		Real Estate		Real Estate		Installment
	Financial, and		Construction -		Construction -		Mortgage -		Mortgage -		Loans to		Un-
(in thousands)	Agricultural		Residential		Commercial		Residential		Commercial		Individuals		allocated		Total
December 31, 2014
Allowance for loan losses:
Individually evaluated for impairment	$	134	$	0	$	0	$	1,343	$	246	$	26	$	0	$	1,749
Collectively evaluated for impairment		1,645		171		466		1,184		3,600		244		40		7,350
Total	$	1,779	$	171	$	466	$	2,527	$	3,846	$	270	$	40	$	9,099
Loans outstanding:
Individually evaluated for impairment	$	7,541	$	1,750	$	2,096	$	7,878	$	16,464	$	234	$	0	$	35,963
Collectively evaluated for impairment		147,293		16,353		46,726		239,239		355,857		19,782		0		825,250
Total	$	154,834	$	18,103	$	48,822	$	247,117	$	372,321	$	20,016	$	0	$	861,213
December 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	721	$	392	$	304	$	1,374	$	1,989	$	16	$	0	$	4,796
Collectively evaluated for impairment		1,653		539		327		1,585		4,534		278		7		8,923
Total	$	2,374	$	931	$	631	$	2,959	$	6,523	$	294	$	7	$	13,719
Loans outstanding:
Individually evaluated for impairment	$	4,015	$	2,204	$	6,615	$	6,517	$	15,422	$	43	$	0	$	34,816
Collectively evaluated for impairment		137,830		18,804		48,461		219,113		360,264		20,259		0		804,731
Total	$	141,845	$	21,008	$	55,076	$	225,630	$	375,686	$	20,302	$	0	$	839,547

Schedule of impaired loans

(in thousands)	2014		2013
Non-accrual loans	$	18,243	$	23,680
Troubled debt restructurings continuing to accrue interest		17,720		11,395
Total impaired loans	$	35,963	$	35,075

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2014
With no related allowance recorded:
Commercial, financial and agricultural	$	6,021	$	6,232	$	0
Real estate - construction residential		1,750		2,259		0
Real estate - construction commercial		2,096		2,319		0
Real estate - residential		3,213		3,270		0
Real estate - commercial		15,409		18,950		0
Consumer		36		36		0
Total	$	28,525	$	33,066	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,520	$	1,528	$	134
Real estate - construction residential		0		0		0
Real estate - construction commercial		0		0		0
Real estate - residential		4,665		3,546		1,343
Real estate - commercial		1,055		1,171		246
Consumer		198		237		26
Total	$	7,438	$	6,482	$	1,749
Total impaired loans	$	35,963	$	39,548	$	1,749

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2013
With no related allowance recorded:
Commercial, financial and agricultural	$	2,467	$	2,593	$	0
Real estate - construction residential		44		80		0
Real estate - construction commercial		6,101		7,148		0
Real estate - residential		2,121		2,654		0
Real estate - commercial		7,817		8,056		0
Consumer		259		282		0
Total	$	18,809	$	20,813	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,548	$	1,607	$	721
Real estate - construction residential		2,160		2,331		392
Real estate - construction commercial		514		514		304
Real estate - residential		4,396		4,570		1,374
Real estate - commercial		7,605		7,925		1,989
Consumer		43		45		16
Total	$	16,266	$	16,992	$	4,796
Total impaired loans	$	35,075	$	37,805	$	4,796

	2014				2013
			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	$	3,141	$	94	$	2,693	$	108
Real estate - construction residential		610		2		80		0
Real estate - construction commercial		5,950		0		7,437		6
Real estate - residential		3,517		46		2,612		51
Real estate - commercial		13,703		400		8,461		170
Consumer		11		0		290		3
Total	$	26,932	$	542	$	21,573	$	338
With an allowance recorded:
Commercial, financial and agricultural	$	1,773	$	19	$	1,677	$	29
Real estate - construction residential		1,697		0		2,409		0
Real estate - construction commercial		42		0		514		0
Real estate - residential		5,118		129		4,596		24
Real estate - commercial		3,810		11		8,157		113
Consumer		312		0		45		0
Total	$	12,752	$	159	$	17,398	$	166
Total impaired loans	$	39,684	$	701	$	38,971	$	504

Schedule of aging information for the Company's past due and non-accrual loans

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
December 31, 2014
Commercial, Financial, and Agricultural	$	149,366	$	189	$	0	$	5,279	$	154,834
Real Estate Construction - Residential		16,352		0		0		1,751		18,103
Real Estate Construction - Commercial		46,670		0		56		2,096		48,822
Real Estate Mortgage - Residential		239,469		3,229		0		4,419		247,117
Real Estate Mortgage - Commercial		366,653		1,203		0		4,465		372,321
Installment and Other Consumer		19,551		230		2		233		20,016
Total	$	838,061	$	4,851	$	58	$	18,243	$	861,213
December 31, 2013
Commercial, Financial, and Agricultural	$	139,219	$	942	$	0	$	1,684	$	141,845
Real Estate Construction - Residential		18,738		66		0		2,204		21,008
Real Estate Construction - Commercial		48,230		595		0		6,251		55,076
Real Estate Mortgage - Residential		217,268		4,068		129		4,165		225,630
Real Estate Mortgage - Commercial		365,787		725		100		9,074		375,686
Installment and Other Consumer		19,695		291		14		302		20,302
Total	$	808,937	$	6,687	$	243	$	23,680	$	839,547

Schedule of risk categories by class

(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 December 31, 2014
Watch	$	13,651	$	1,103	$	4,757	$	27,172	$	18,191	$	199	$	65,073
Substandard		3,188		90		1,211		6,583		16,101		139		27,312
Non-accrual		5,279		1,751		2,096		4,419		4,465		233		18,243
Total	$	22,118	$	2,944	$	8,064	$	38,174	$	38,757	$	571	$	110,628
At December 31, 2013
Watch	$	15,016	$	2,007	$	6,111	$	26,331	$	23,662	$	388	$	73,515
Substandard		7,553		92		1,403		8,579		14,510		281		32,418
Non-accrual		1,684		2,204		6,251		4,165		9,074		302		23,680
Total	$	24,253	$	4,303	$	13,765	$	39,075	$	47,246	$	971	$	129,613

Schedule of summary of loans that were modified as TDRs

	2014						2013
	Recorded Investment (1)						Recorded Investment (1)
(in thousands)	Number of  Contracts		Pre- Modification		Post- Modification		Number of  Contracts		Pre- Modification		Post- Modification
Troubled Debt Restructurings
Commercial, financial and agricultural		3	$	244	$	208		0	$	0	$	0
Real estate mortgage - residential		1		1,256		1,170		3		2,156		1,992
Real estate mortgage - commercial		0		0		0		1		1,282		1,282
Total		4	$	1,500	$	1,378		4	$	3,438	$	3,274

(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.

XML

Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Cash flows from operating activities:
Net income	$ 7,654	$ 4,974	$ 2,822
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	0	2,030	8,900
Depreciation expense	1,758	1,605	1,858
Net amortization of investment securities, premiums, and discounts	1,058	1,211	1,161
Amortization of intangible assets	0	135	408
Stock based compensation expense	20	19	29
Change in fair value of mortgage servicing rights	576	25	1,331
Gain on sale of investment securities	(20)	(778)	(26)
Gain on sales and dispositions of premises and equipment	(60)	(6)	(79)
Gain (loss) on sales and dispositions of other real estate owned and repossessed assets	(188)	330	(317)
Provision for other real estate owned	585	3,367	713
Decrease in accrued interest receivable	183	191	151
Increase in cash surrender value - life insurance	(71)	(77)	(72)
(Increase) decrease in other assets	(479)	4,311	949
Decrease (increase) in income tax receivable	(826)	524	(644)
Decrease in accrued interest payable	(53)	(483)	(145)
Increase in other liabilities	966	1,113	253
Origination of mortgage loans for sale	(35,434)	(72,100)	(99,420)
Proceeds from the sale of mortgage loans	36,623	75,961	99,797
Gain on sale of mortgage loans, net	(1,093)	(1,665)	(2,669)
Other, net	2,355	(444)	(125)
Net cash provided by operating activities	13,554	20,243	14,875
Cash flows from investing activities:
Net increase in loans	(28,357)	(2,525)	(26,499)
Purchase of available-for-sale debt securities	(48,942)	(88,137)	(76,498)
Proceeds from maturities of available-for-sale debt securities	23,702	33,341	42,735
Proceeds from calls of available-for-sale debt securities	28,605	8,275	45,170
Proceeds from sales of available-for-sale debt securities	5,334	32,590	790
Proceeds from sales of FHLB stock	439	536	460
Purchases of FHLB stock	(1,160)	(612)	0
Purchases of premises and equipment	(1,342)	(2,680)	(1,375)
Proceeds from sales of premises and equipment	65	23	272
Proceeds from sales of other real estate owned and repossessed assets	4,560	9,641	8,571
Net cash used by investing activities	(17,096)	(9,548)	(6,374)
Cash flows from financing activities:
Net increase (decrease) in demand deposits	20,318	(4,889)	33,084
Net increase in interest-bearing transaction accounts	22,974	13,383	21,103
Net decrease in time deposits	(30,249)	(43,298)	(21,136)
Net (decrease) increase in federal funds purchased and securities sold under agreements to repurchase	(13,114)	10,026	(3,458)
Repayment of FHLB advances	(10,000)	(15,126)	(8,284)
FHLB advances	29,000	19,000	0
Redemption of 18,255 and 12,000 shares, respectively, of preferred stock	0	(18,255)	(12,000)
Warrant redemption	0	(540)	0
Cash dividends paid - preferred stock	0	(456)	(1,203)
Cash dividends paid - common stock	(1,017)	(978)	(940)
Net cash provided (used) by financing activities	17,912	(41,133)	7,166
Net increase (decrease) in cash and cash equivalents	14,370	(30,438)	15,667
Cash and cash equivalents, beginning of year	28,439	58,877	43,210
Cash and cash equivalents, end of year	42,809	28,439	58,877
Cash paid during the year for:
Interest	5,097	6,825	8,420
Income taxes	2,265	131	1,591
Supplemental schedule of noncash investing and financing activities:
Other real estate and repossessions acquired in settlement of loans	$ 1,975	$ 4,613	$ 16,869

XML

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

12 Months Ended

Dec. 31, 2014

Other Real Estate [Abstract]

Schedule of summary of real estate and other assets acquired in settlement of loans

(in thousands)	2014			2013
Commercial	$	0		$	0
Real estate construction - residential		23			114
Real estate construction - commercial		9,831			10,020
Real estate mortgage - residential		417			830
Real estate mortgage - commercial		4,831			8,537
Repossessed assets		38			41
Total	$	15,140		$	19,542
Less valuation allowance for other real estate owned		(3,255	)		(4,675	)
Total other real estate owned and foreclosed assets	$	11,885		$	14,867

Schedule of changes in the net carrying amount of other real estate owned and repossessed assets

Balance at December 31, 2012	$	29,729
Additions		4,613
Proceeds from sales		(9,641	)
Charge-offs against the valuation allowance for other real estate owned		(4,829	)
Repossessed assets impairment write-downs		(189	)
Net gain on sales		(141	)
Balance at December 31, 2013	$	19,542
Additions		1,975
Proceeds from sales		(4,560	)
Charge-offs against the valuation allowance for other real estate owned, net		(2,005	)
Net loss on sales		188
Total other real estate owned and repossessed assets	$	15,140
Less valuation allowance for other real estate owned		(3,255	)
Balance at December 31, 2014	$	11,885

Schedule of summary of activity in valuation allowance for other real estate owned in settlement of loans

(in thousands)	2014			2013			2012
Balance, beginning of year	$	4,675		$	6,137		$	6,977
Provision for other real estate owned		585			3,367			713
Charge-offs		(2,005	)		(4,829	)		(1,553	)
Balance, end of year	$	3,255		$	4,675		$	6,137

XML

Borrowings (Detail Textuals) (USD $)	Dec. 31, 2014	Dec. 31, 2013
Short-term Debt [Line Items]
Long-term Federal Home Loan Bank Advances	$ 43,000,000	$ 24,000,000
Bank
Short-term Debt [Line Items]
Long-term Federal Home Loan Bank Advances	43,000,000	24,000,000
Federal funds purchased | Bank
Short-term Debt [Line Items]
Maximum borrowing capacity of federal funds on unsecured basis	40,000,000
Maximum borrowing capacity of federal funds on secured basis	7,800,000
Amount of FHLB advances which may be called early	10,000,000
Maximum additional borrowing amount under agreement with FHLB	$ 230,600,000

XML

Condensed Financial Information of the Parent Company Only (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Income
Interest and dividends received from subsidiaries	$ 11,214	$ 11,196	$ 11,125	$ 10,963	$ 11,230	$ 11,298	$ 11,592	$ 11,545	$ 44,498	$ 45,665	$ 49,114
Expenses
Interest on subordinated notes									1,264	1,284	1,381
Other									3,218	3,632	4,403
Income tax benefit	(1,074)	(802)	(1,121)	(1,045)	(903)	(771)	(810)	62	(4,042)	(2,422)	(546)
Net income					1,729	1,569	1,812	(136)	7,654	4,974	2,822
HAWTHORN BANCSHARES, INC.
Income
Interest and dividends received from subsidiaries									2,538	15,039	4,596
Total income									2,538	15,039	4,596
Expenses
Interest on subordinated notes									1,264	1,284	1,381
Other									1,730	1,778	2,889
Total expenses									2,994	3,062	4,270
Income before income tax benefit and equity in undistributed income of subsidiaries									(456)	11,977	326
Income tax benefit									1,100	1,126	2,257
Equity in undistributed (losses) income of subsidiaries									7,010	(8,129)	239
Net income									$ 7,654	$ 4,974	$ 2,822

XML

Employee Benefit Plans (Tables)

12 Months Ended

Dec. 31, 2014

Compensation and Retirement Disclosure [Abstract]

Schedule of summary of employee benefits charged to operating expenses

(in thousands)	2014		2013		2012
Payroll taxes	$	1,081	$	1,106	$	1,127
Medical plans		1,974		1,915		1,772
401(k) match		310		309		298
Pension plan		960		1,173		1,224
Profit-sharing		201		118		58
Other		122		219		317
Total employee benefits	$	4,648	$	4,840	$	4,796

Schedule of obligations and funded status

(in thousands)	2014			2013
Change in projected benefit obligation:
Balance, January 1	$	14,852		$	15,342
Service cost		981			1,174
Interest cost		732			646
Actuarial gain		3,813			(1,991	)
Benefits paid		(401	)		(319	)
Balance, December 31	$	19,977		$	14,852
Change in plan assets:
Fair value, January 1	$	13,532		$	11,707
Actual return on plan assets		1,118			2,220
Employer contribution		725			0
Expenses paid		(41	)		(76	)
Benefits paid		(401	)		(319	)
Fair value, December 31	$	14,933		$	13,532
Funded status at end of year	$	(5,044	)	$	(1,320	)
Accumulated benefit obligation	$	16,595		$	12,298

Schedule of components of net pension cost

(in thousands)	2014			2013			2012
Service cost—benefits earned during the year	$	981		$	1,174		$	1,168
Interest costs on projected benefit obligations		732			646			667
Expected return on plan assets		(872	)		(797	)		(776	)
Expected administrative expenses		40			40			40
Amortization of prior service cost		79			79			79
Amortization of unrecognized net loss		0			31			46
Net periodic pension expense	$	960		$	1,173		$	1,224

Schedule of amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss), including amounts recognized in other comprehensive income

(in thousands)	2014			2013
Prior service costs	$	(443	)	$	(522	)
Net accumulated actuarial net (loss) gain		(2,008	)		1,560
Accumulated other comprehensive (loss) gain		(2,451	)		1,038
Net periodic benefit cost in excess of cumulative employer contributions		(2,593	)		(2,358	)
Net amount recognized at December 31, balance sheet	$	(5,044	)	$	(1,320	)
Net (loss) gain arising during period	$	(3,568	)	$	3,378
Prior service cost amortization		79			79
Amortization of net actuarial loss		0			31
Total recognized in other comprehensive (loss) income	$	(3,489	)	$	3,488
Total recognized in net periodic pension cost and other comprehensive (loss) income	$	4,449		$	(2,315	)

Schedule of assumptions utilized to determine benefit obligations and to determine pension expense

	2014			2013			2012
Determination of benefit obligation at year end:
Discount rate		4.25	%		5.00	%		4.25	%
Annual rate of compensation increase		3.78	%		3.73	%		3.61	%
Determination of pension expense for year ended:
Discount rate for the service cost		5.00	%		4.25	%		4.75	%
Annual rate of compensation increase		3.73	%		3.61	%		4.50	%
Expected long-term rate of return on plan assets		7.00	%		7.00	%		7.00	%

Schedule of fair value of the Company's pension plan assets, by asset category

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2014
Cash equivalents	$	1,937	$	1,937	$	0	$	0
Equity securities:
U.S. large-cap (a)		7,252		7,252		0		0
U.S. mid-cap (b)		921		921		0		0
U.S. small-cap (c)		1,131		1,131		0		0
International (d)		1,895		1,895		0		0
Real estate (e)		486		486		0		0
Commodities (f)		264		264		0		0
Fixed income securities:
U.S. gov't agency obligations (g)		1,047		0		1,047		0
Total	$	14,933	$	13,886	$	1,047	$	0
December 31, 2013
Cash equivalents	$	675	$	675	$	0	$	0
Equity securities:
U.S. large-cap (a)		6,506		6,506		0		0
U.S. mid-cap (b)		820		820		0		0
U.S. small-cap (c)		1,151		1,151		0		0
International (d)		2,016		2,016		0		0
Real estate (e)		387		387		0		0
Commodities (f)		319		319		0		0
Fixed income securities:
U.S. gov't agency obligations (g)		1,450		0		1,450		0
Corporate investment grade (g)		209		0		209		0
Total	$	13,533	$	11,874	$	1,659	$	0

(a) This category is comprised of low-cost equity index funds not actively managed that track the S&P 500.

(b) This category is comprised of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.

(c) This category is comprised of actively managed mutual funds.

(d) At December 31, 2014 and 2013, 31% and 32%, respectively, of this category is comprised of low-cost equity index funds not actively managed that track the MSCI EAFE.

(e) This category is comprised of low-cost real estate index exchange traded funds.

(f) This category is comprised of exchange traded funds investing in agricultural and energy commodities.

(g) This category is comprised of individual bonds.

Schedule of future benefit payments expected to be paid

Year	Pension benefits
(in thousands)
2015	$	514
2016		539
2017		598
2018		626
2019		648
2020 to 2024		4,784

XML

Loans and Allowance for Loan Losses (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014
Loans and Leases Receivable, Related Parties [Roll Forward]
Balance at December 31, 2013	$ 4,837
New loans	478
Amounts collected	(375)
Balance at December 31, 2014	$ 4,940

XML

Premises and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Summary of premises and equipment
Total, premises and equipment	$ 58,195	$ 57,832
Less accumulated depreciation	20,697	19,753
Premises and equipment, net	37,498	38,079
Land and land improvements
Summary of premises and equipment
Total, premises and equipment	10,152	10,073
Buildings and improvements
Summary of premises and equipment
Total, premises and equipment	35,504	33,730
Furniture and equipment
Summary of premises and equipment
Total, premises and equipment	12,016	11,627
Construction in progress
Summary of premises and equipment
Total, premises and equipment	$ 523	$ 2,402

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
ASSETS
Cash and due from banks	$ 22,364	$ 27,079
Federal funds sold and other overnight interest-bearing deposits	20,445	1,360
Cash and cash equivalents	42,809	28,439
Investment in available-for-sale securities, at fair value	198,998	205,985
Other investments and securities, at cost	4,722	4,001
Total investment securities	203,720	209,986
Loans	861,213	839,547
Allowances for loan losses	(9,099)	(13,719)
Net loans	852,114	825,828
Premises and equipment - net	37,498	38,079
Mortgage servicing rights	2,762	3,036
Other real estate owned and repossessed assets - net	11,885	14,867
Accrued interest receivable	4,816	4,999
Cash surrender value - life insurance	2,284	2,213
Other assets	11,843	12,675
Total assets	1,169,731	1,140,122
Deposits
Non-interest bearing demand	207,700	187,382
Savings, interest checking and money market	442,059	419,085
Time deposits $100,000 and over	134,945	145,957
Other time deposits	184,810	204,047
Total deposits	969,514	956,471
Federal funds purchased and securities sold under agreements to repurchase	17,970	31,084
Subordinated notes	49,486	49,486
Federal Home Loan Bank advances	43,000	24,000
Accrued interest payable	373	426
Other liabilities	8,820	4,275
Total liabilities	1,089,163	1,065,742
Stockholders' equity:
Common stock, $1 par value, authorized 15,000,000 shares; Issued 5,395,844 and 5,194,537 shares, respectively	5,396	5,195
Surplus	35,901	33,385
Retained earnings	44,016	40,086
Accumulated other comprehensive loss, net of tax	(1,228)	(769)
Treasury stock; 161,858 shares, at cost	(3,517)	(3,517)
Total stockholders' equity	80,568	74,380
Total liabilities and stockholders' equity	$ 1,169,731	$ 1,140,122

XML

Fair Value of Financial Instruments (Tables)

12 Months Ended

Dec. 31, 2014

Financial Instruments, Owned, at Fair Value [Abstract]

Schedule of summary of the carrying amounts and fair values of financial instruments

					December 31, 2014
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2014				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	22,364	$	22,364	$	22,364	$	0	$	0
Federal funds sold and overnight interest-bearing deposits		20,445		20,445		20,445		0		0
Investment in available-for-sale securities		198,998		198,998		0		198,998		0
Loans, net		852,114		854,062		0		0		854,062
Investment in FHLB stock		3,075		3,075		0		3,075		0
Mortgage servicing rights		2,762		2,762		0		0		2,762
Cash surrender value - life insurance		2,284		2,284		0		2,284		0
Accrued interest receivable		4,816		4,816		4,816		0		0
	$	1,106,858	$	1,108,806	$	47,625	$	204,357	$	856,824
Liabilities:
Deposits:
Non-interest bearing demand	$	207,700	$	207,700	$	207,700	$	0	$	0
Savings, interest checking and money market		442,059		442,059		442,059		0		0
Time deposits		319,755		321,041		0		0		321,041
Federal funds purchased and securities sold under agreements to repurchase		17,970		17,970		17,970		0		0
Subordinated notes		49,486		33,371		0		33,371		0
Federal Home Loan Bank advances		43,000		44,396		0		44,396		0
Accrued interest payable		373		373		373		0		0
	$	1,080,343	$	1,066,910	$	668,102	$	77,767	$	321,041

					December 31, 2013
					Fair Value Measurements
					Quoted Prices
					in Active				Net
					Markets for		Other		Significant
	December 31, 2013				Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	amount		value		(Level 1)		(Level 2)		(Level 3)
Assets:
Cash and due from banks	$	27,079	$	27,079	$	27,079	$	0	$	0
Federal funds sold and overnight interest-bearing deposits		1,360		1,360		1,360		0		0
Investment in available-for-sale securities		205,985		205,985		1,003		204,982		0
Loans, net		825,828		829,223		0		0		829,223
Investment in FHLB stock		2,354		2,354		0		2,354		0
Mortgage servicing rights		3,036		3,036		0		0		3,036
Cash surrender value - life insurance		2,213		2,213		0		2,213		0
Accrued interest receivable		4,999		4,999		4,999		0		0
	$	1,072,854	$	1,076,249	$	34,441	$	209,549	$	832,259
Liabilities:
Deposits:
Non-interest bearing demand	$	187,382	$	187,382	$	187,382	$	0	$	0
Savings, interest checking and money market		419,085		419,085		419,085		0		0
Time deposits		350,004		352,432		0		0		352,432
Federal funds purchased and securities sold under agreements to repurchase		31,084		31,084		31,084		0		0
Subordinated notes		49,486		32,048		0		32,048		0
Federal Home Loan Bank advances		24,000		25,366		0		25,366		0
Accrued interest payable		426		426		426		0		0
	$	1,061,467	$	1,047,823	$	637,977	$	57,414	$	352,432

XML

Employee Benefit Plans (Details 6) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014
Future benefit payments expected to be paid
Pension benefits, 2015	$ 514
Pension benefits, 2016	539
Pension benefits, 2017	598
Pension benefits, 2018	626
Pension benefits, 2019	648
Pension benefits, 2010 to 2024	$ 4,784

XML

Condensed Financial Information of the Parent Company Only (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Assets
Cash and due from bank subsidiaries	$ 22,364	$ 27,079
Premises and equipment	37,498	38,079
Deferred tax asset	10,598	13,131
Other assets	11,843	12,675
Total assets	1,169,731	1,140,122
Liabilities and Stockholders' Equity
Subordinated notes	49,486	49,486
Other liabilities	8,820	4,275
Stockholders' equity	80,568	74,380	92,220	103,036
Total liabilities and stockholders' equity	1,169,731	1,140,122
HAWTHORN BANCSHARES, INC.
Assets
Cash and due from bank subsidiaries	1,024	450
Investment in equity securities	1,486	1,486
Investment in subsidiaries	130,728	122,413
Premises and equipment	0	0
Deferred tax asset	1,989	130
Other assets	308	1,011
Total assets	135,535	125,490
Liabilities and Stockholders' Equity
Subordinated notes	49,486	49,486
Other liabilities	5,481	1,624
Stockholders' equity	80,568	74,380
Total liabilities and stockholders' equity	$ 135,535	$ 125,490

XML

Consolidated Statements of Stockholders' Equity (USD $) In Thousands, unless otherwise specified	Preferred Stock	Common Stock	Surplus	Retained Earnings	Accumulated Other Comprehensive (Loss) Income	Treasury Stock	Total
Balance at Dec. 31, 2011 (Previously reported)	$ 29,318	$ 4,815	$ 30,266	$ 40,354	$ 1,340	$ (3,517)	$ 102,576
Balance (Cumulative effect of change in accounting principle)	0	0	0	460	0	0	460
Balance at Dec. 31, 2011	29,318	4,815	30,266	40,814	1,340	(3,517)	103,036
Increase (Decrease) in Stockholders' Equity
Net income	0	0	0	2,822	0	0	2,822
Other comprehensive income (loss)	0	0	0	0	485	0	485
Stock based compensation expense	0	0	29	0	0	0	29
Accretion of preferred stock discount	659	0	0	(659)	0	0	0
Redemption of 12,000 and 18,255 shares of preferred stock for 2012 and 2013 respectively	(12,000)	0	0	0	0	0	(12,000)
Stock dividend	0	186	1,521	(1,707)	0	0	0
Cash dividends declared, preferred stock	0	0	0	(1,203)	0	0	(1,203)
Cash dividends declared, common stock	0	0	0	(949)	0	0	(949)
Balance at Dec. 31, 2012	17,977	5,001	31,816	39,118	1,825	(3,517)	92,220
Increase (Decrease) in Stockholders' Equity
Net income	0	0	0	4,974	0	0	4,974
Other comprehensive income (loss)	0	0	0	0	(2,594)	0	(2,594)
Stock based compensation expense	0	0	19	0	0	0	19
Accretion of preferred stock discount	278	0	0	(278)	0	0	0
Redemption of 12,000 and 18,255 shares of preferred stock for 2012 and 2013 respectively	(18,255)	0	0	0	0	0	(18,255)
Redemption of common stock warrant	0	0	(540)	0	0	0	(540)
Stock dividend	0	194	2,090	(2,284)	0	0	0
Cash dividends declared, preferred stock	0	0	0	(456)	0	0	(456)
Cash dividends declared, common stock	0	0	0	(988)	0	0	(988)
Balance at Dec. 31, 2013	0	5,195	33,385	40,086	(769)	(3,517)	74,380
Increase (Decrease) in Stockholders' Equity
Net income	0	0	0	7,654	0	0	7,654
Other comprehensive income (loss)	0	0	0	0	(459)	0	(459)
Stock based compensation expense	0	0	20	0	0	0	20
Stock dividend	0	201	2,496	(2,697)	0	0	0
Cash dividends declared, common stock	0	0	0	(1,027)	0	0	(1,027)
Balance at Dec. 31, 2014	$ 0	$ 5,396	$ 35,901	$ 44,016	$ (1,228)	$ (3,517)	$ 80,568

XML

Employee Benefit Plans (Details 5) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014		Dec. 31, 2013		Dec. 31, 2012
Defined Benefit Plan Disclosure [Line Items]
Fair Value	$ 14,933		$ 13,532		$ 11,707
Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	13,886		11,874
Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,047		1,659
Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0		0
Cash equivalents
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,937		675
Cash equivalents | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,937		675
Cash equivalents | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0		0
Cash equivalents | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0		0
U.S. large-cap
Defined Benefit Plan Disclosure [Line Items]
Fair Value	7,252	[1]	6,506	[1]
U.S. large-cap | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	7,252	[1]	6,506	[1]
U.S. large-cap | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[1]	0	[1]
U.S. large-cap | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[1]	0	[1]
U.S. mid-cap
Defined Benefit Plan Disclosure [Line Items]
Fair Value	921	[2]	820	[2]
U.S. mid-cap | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	921	[2]	820	[2]
U.S. mid-cap | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[2]	0	[2]
U.S. mid-cap | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[2]	0	[2]
U.S. small-cap
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,131	[3]	1,151	[3]
U.S. small-cap | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,131	[3]	1,151	[3]
U.S. small-cap | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[3]	0	[3]
U.S. small-cap | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[3]	0	[3]
International
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,895	[4]	2,016	[4]
International | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,895	[4]	2,016	[4]
International | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[4]	0	[4]
International | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[4]	0	[4]
Real estate
Defined Benefit Plan Disclosure [Line Items]
Fair Value	486	[5]	387	[5]
Real estate | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	486	[5]	387	[5]
Real estate | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[5]	0	[5]
Real estate | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[5]	0	[5]
Commodities
Defined Benefit Plan Disclosure [Line Items]
Fair Value	264	[6]	319	[6]
Commodities | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	264	[6]	319	[6]
Commodities | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[6]	0	[6]
Commodities | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[6]	0	[6]
U.S. gov't agency obligations
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,047	[7]	1,450	[7]
U.S. gov't agency obligations | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[7]	0	[7]
U.S. gov't agency obligations | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	1,047	[7]	1,450	[7]
U.S. gov't agency obligations | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value	0	[7]	0	[7]
Corporate investment grade
Defined Benefit Plan Disclosure [Line Items]
Fair Value			209	[7]
Corporate investment grade | Quoted Prices in Active Markets for Identical Assets (Level 1)
Defined Benefit Plan Disclosure [Line Items]
Fair Value			0	[7]
Corporate investment grade | Other Observable Inputs (Level 2)
Defined Benefit Plan Disclosure [Line Items]
Fair Value			209	[7]
Corporate investment grade | Significant Unobservable Inputs (Level 3)
Defined Benefit Plan Disclosure [Line Items]
Fair Value			$ 0	[7]

[1] This category is comprised of low-cost equity index funds not actively managed that track the S&P 500.

[2] This category is comprised of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.

[3] This category is comprised of actively managed mutual funds.

[4] At December 31, 2014 and 2013, 31% and 32%, respectively, of this category is comprised of low-cost equity index funds not actively managed that track the MSCI EAFE.

[5] This category is comprised of low-cost real estate index exchange traded funds.

[6] This category is comprised of exchange traded funds investing in agricultural and energy commodities.

[7] This category is comprised of individual bonds.

XML

Loans and Allowance for Loan Losses (Details 7) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	$ 838,061	$ 808,937
30 - 89 Days Past Due	4,851	6,687
90 Days Past Due And Still Accruing	58	243
Non-Accrual	18,243	23,680
Total	861,213	839,547
Commercial, Financial, and Agricultural
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	149,366	139,219
30 - 89 Days Past Due	189	942
90 Days Past Due And Still Accruing	0	0
Non-Accrual	5,279	1,684
Total	154,834	141,845
Real Estate Construction - Residential
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	16,352	18,738
30 - 89 Days Past Due	0	66
90 Days Past Due And Still Accruing	0	0
Non-Accrual	1,751	2,204
Total	18,103	21,008
Real Estate Construction - Commercial
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	46,670	48,230
30 - 89 Days Past Due	0	595
90 Days Past Due And Still Accruing	56	0
Non-Accrual	2,096	6,251
Total	48,822	55,076
Real Estate Mortgage - Residential
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	239,469	217,268
30 - 89 Days Past Due	3,229	4,068
90 Days Past Due And Still Accruing	0	129
Non-Accrual	4,419	4,165
Total	247,117	225,630
Real Estate Mortgage - Commercial
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	366,653	365,787
30 - 89 Days Past Due	1,203	725
90 Days Past Due And Still Accruing	0	100
Non-Accrual	4,465	9,074
Total	372,321	375,686
Installment and other consumer
Aging information for the Company's past due and non-accrual loans
Current or Less Than 30 Days Past Due	19,551	19,695
30 - 89 Days Past Due	230	291
90 Days Past Due And Still Accruing	2	14
Non-Accrual	233	302
Total	$ 20,016	$ 20,302

XML

Stock Compensation (Details) (USD $)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Number of shares
Outstanding, beginning of year (in shares)	126,286	232,947	297,962
Granted (in shares)	0	0	0
Exercised (in shares)	0	0	0
Forfeited (in shares)	(29,805)	(106,661)	(65,015)
Outstanding, end of year (in shares)	96,481	126,286	232,947
Exercisable, end of year (in shares)	85,160	111,188	213,878
Weighted average exercise price
Outstanding, beginning of year (in dollars per share)	$ 23.21	$ 22.82	$ 21.61
Granted (in dollars per share)	$ 0	$ 0	$ 0
Exercised (in dollars per share)	$ 0	$ 0	$ 0
Forfeited (in dollars per share)	$ 25.75	$ 22.37	$ 17.26
Outstanding, end of year (in dollars per share)	$ 22.42	$ 23.21	$ 22.82
Exercisable, end of year (in dollars per share)	$ 22.82	$ 23.49	$ 22.9

XML

Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2014

Intangible Assets

Schedule of summary of core deposit intangible assets

(in thousands)	2014		2013			2012
Balance at beginning of year	$	0	$	135		$	543
Additions		0		0			0
Amortization		0		(135	)		(408	)
Balance at end of year	$	0	$	0		$	135

Schedule of changes in mortgage servicing rights (MSRs)

(in thousands)	2014			2013			2012
Balance at beginning of year	$	3,036		$	2,549		$	2,308
Re-measurement to fair value upon election to measure servicing rights at fair value		0			0			742
Originated mortgage servicing rights		302			512			830
Changes in fair value:
Due to change in model inputs and assumptions (1)		66			723			241
Other changes in fair value (2)		(642	)		(748	)		(1,572	)
Amortization		0			0			0
Balance at end of year	$	2,762		$	3,036		$	2,549

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

(2) Other changes in fair value reflect changes due to customer payments and passage of time. The year ended December 31, 2012 includes a one time adjustment of a $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years.

Schedule of key data and assumptions used in estimating the fair value of the Company's MSRs

	2014			2013
Weighted-Average Constant Prepayment Rate		10.54	%		9.48	%
Weighted-Average Note Rate		3.99	%		4.01	%
Weighted-Average Discount Rate		9.21	%		9.06	%
Weighted-Average Expected Life (in years)		5.70			6.10

XML

Real Estate and Other Assets Acquired in Settlement of Loans (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Summary of activity in valuation allowance for other real estate owned in settlement of loans
Balance, beginning of year	$ 4,675	$ 6,137	$ 6,977
Provision for other real estate owned	585	3,367	713
Charge-offs	(2,005)	(4,829)	(1,553)
Balance, end of year	$ 3,255	$ 4,675	$ 6,137

XML

Earnings per Share

12 Months Ended

Dec. 31, 2014

Earnings Per Share [Abstract]

Earnings per Share

(13) Earnings per Share

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the year. The calculations of basic and diluted earnings per share are as follows for the years indicated:

	2014		2013		2012
Basic earnings per common share:
Net income	$	7,654	$	4,974	$	2,822
Less:
Preferred stock dividends and accretion of discount		0		615		1,784
Net income available to common shareholders	$	7,654	$	4,359	$	1,038
Basic earnings per share	$	1.46	$	0.83	$	0.20
Diluted earnings per common share:
Net income	$	7,654	$	4,974	$	2,822
Less:
Preferred stock dividends and accretion of discount		0		615		1,784
Net income available to common shareholders	$	7,654	$	4,359	$	1,038
Average shares outstanding		5,233,986		5,233,986		5,233,986
Effect of dilutive stock options		0		0		0
Average shares outstanding including dilutive stock options		5,233,986		5,233,986		5,233,986
Diluted earnings per share	$	1.46	$	0.83	$	0.20

Under the treasury stock method, outstanding stock options are dilutive when the average market price of the Company’s common stock, when combined with the effect of any unamortized compensation expense, exceeds the option price during the period, except when the Company has a loss from continuing operations available to common shareholders. In addition, proceeds from the assumed exercise of dilutive options along with the related tax benefit are assumed to be used to repurchase common shares at the average market price of such stock during the period.

The following options to purchase shares during the years ended December 31, 2014, 2013 and 2012 were not included in the respective computations of diluted earnings per share because the exercise price of the option, when combined with the effect of the unamortized compensation expense, was greater than the average market price of the common shares and were considered anti-dilutive.

	2014		2013		2012
Anti-dilutive shares - option shares		96,481		126,286		232,947
Anti-dilutive shares - warrant shares		0		0		310,563
Total anti-dilutive shares		96,481		126,286		543,510

XML

Deposits (Tables)

12 Months Ended

Dec. 31, 2014

Deposits

Schedule of maturities of total time deposits

(in thousands)	2014		2013
Due within:
One year	$	204,638	$	231,644
Two years		58,177		58,844
Three years		33,551		30,767
Four years		16,760		12,662
Five years		5,282		16,087
Thereafter		1,347		0
Total	$	319,755	$	350,004

Schedule of maturities of certificates and other time deposits in denominations of $100,000 or more

(in thousands)	2014		2013
Due within:
Three months or less	$	33,488	$	46,306
Over three months through six months		29,381		18,398
Over six months through twelve months		35,308		42,624
Over twelve months		36,768		38,629
Total	$	134,945	$	145,957

XML

Employee Benefit Plans (Detail Textuals 1)	12 Months Ended
	Dec. 31, 2014
Equity securities
Defined Benefit Plan Disclosure [Line Items]
Long-term investment target mix for the plan	70.00%
Fixed income
Defined Benefit Plan Disclosure [Line Items]
Long-term investment target mix for the plan	30.00%

XML

Fair Value Measurements

12 Months Ended

Dec. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Measurements

(15) Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain financial and nonfinancial assets and liabilities. The FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The standard applies whenever other standards require (permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, FASB clarified the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, the standard establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. As of December 31, 2014 and 2013, respectively, there were no transfers into or out of Levels 1-3.

The fair value hierarchy is as follows:

Level 1 – Inputs are unadjusted quoted prices for identical assets or liabilities in active markets.

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

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

ASC Topic 820 also provides guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and on identifying circumstances when a transaction may not be considered orderly.

The Company is required to disclose assets and liabilities measured at fair value on a recurring basis separate from those measured at fair value on a nonrecurring basis. Nonfinancial assets measured at fair value on a nonrecurring basis would include foreclosed real estate, long-lived assets, and core deposit intangible assets, which are reviewed when circumstances or other events indicate that impairment may have occurred. 

Valuation methods for instruments measured at fair value on a recurring basis

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

Available-for-sale securities

The fair value measurements of the Company’s investment securities are determined by a third party pricing service which considers observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value measurements are subject to independent verification to another pricing source by management each quarter for reasonableness. Securities classified as available-for-sale are reported at fair value utilizing Level 2 inputs.

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

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2014
Assets:
Government sponsored enterprises	$	57,099	$	0		57,099	$	0
Asset-backed securities		106,462		0		106,462		0
Obligations of states and political subdivisions		35,437		0		35,437		0
Mortgage servicing rights		2,762		0		0		2,762
Total	$	201,760	$	0	$	198,998	$	2,762
December 31, 2013
Assets:
U.S. treasury	$	1,003	$	1,003	$	0	$	0
Government sponsored enterprises		60,616		0		60,616		0
Asset-backed securities		110,373		0		110,373		0
Obligations of states and political subdivisions		33,993		0		33,993		0
Mortgage servicing rights		3,036		0		0		3,036
Total	$	209,021	$	1,003	$	204,982	$	3,036

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

	Fair Value Measurements Using
	Significant Unobservable Inputs
	(Level 3)
(in thousands)	Mortgage Servicing Rights
Balance at December 31, 2012	$	2,549
Total gains or losses (realized/unrealized):
Included in earnings		(25	)
Included in other comprehensive income		0
Purchases		0
Sales		0
Issues		512
Settlements		0
Balance at December 31, 2013	$	3,036
Total gains or losses (realized/unrealized):
Included in earnings		(576	)
Included in other comprehensive income		0
Purchases		0
Sales		0
Issues		302
Settlements		0
Balance at December 31, 2014	$	2,762

Total gains for the years ended included in earnings attributable to the change in unrealized gains or losses related to assets still held were $66,000 and $723,000 at December 31, 2014 and 2013, respectively.

	Quantitative Information about Level 3 Fair Value Measurements
	Valuation Technique	Unobservable Inputs	Input Value
			2014			2013
Mortgage servicing rights	Discounted cash flows	Weighted average constant prepayment rate		10.54	%		9.48	%
		Weighted average discount rate		9.21	%		9.06	%
		Weighted average expected life (in years)		5.70			6.10

Valuation methods for instruments measured at fair value on a nonrecurring basis

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

Impaired Loans

The Company does not record loans at fair value on a recurring basis other than loans that are considered impaired. The net carrying value of impaired loans is generally based on fair values of the underlying collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. Once the fair value of the collateral has been determined and any impairment amount calculated, a specific reserve allocation is made. Because many of these inputs are not observable, the measurements are classified as Level 3. As of December 31, 2014, the Company identified $7.4 million in impaired loans that had specific allowances for losses aggregating $1.7 million. Related to these loans, there was $5.4 million in charge-offs recorded during the year ended December 31, 2014. As of December 31, 2013, the Company identified $16.3 million in impaired loans that had specific allowances for losses aggregating $4.8 million. Related to these loans, there was $3.2 million in charge-offs recorded during the year ended December 31, 2013.

Other Real Estate Owned and Repossessed Assets

Other real estate owned and repossessed assets consisted of loan collateral that has been repossessed through foreclosure. This collateral comprises of commercial and residential real estate and other non-real estate property, including autos, manufactured homes, and construction equipment. Other real estate owned assets are recorded as held for sale initially at the lower of the loan balance or fair value of the collateral less estimated selling costs. The Company relies on external appraisals and assessment of property values by internal staff. In the case of non-real estate collateral, reliance is placed on a variety of sources, including external estimates of value and judgment based on experience and expertise of internal specialists. Subsequent to foreclosure, valuations are updated periodically, and the assets may be written down to reflect a new cost basis. Because many of these inputs are not observable, the measurements are classified as Level 3.

			Fair Value Measurements Using
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Total		Assets		Inputs		Inputs		Total Gains
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)		(Losses)*
December 31, 2014
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	1,386	$	0	$	0	$	1,386	$	(1,105	)
Real estate construction - residential		0		0		0		0		(350	)
Real estate construction - commercial		0		0		0		0		(491	)
Real estate mortgage - residential		3,322		0		0		3,322		(332	)
Real estate mortgage - commercial		809		0		0		809		(2,937	)
Consumer		172		0		0		172		(148	)
Total	$	5,689	$	0	$	0	$	5,689	$	(5,363	)
Other real estate owned and repossessed assets	$	11,885	$	0	$	0	$	11,885	$	(1,870	)
December 31, 2013
Assets:
Impaired loans:
Commercial, financial, & agricultural	$	827	$	0	$	0	$	827	$	(735	)
Real estate construction - residential		1,768		0		0		1,768		(119	)
Real estate construction - commercial		210		0		0		210		(498	)
Real estate mortgage - residential		3,022		0		0		3,022		(376	)
Real estate mortgage - commercial		5,616		0		0		5,616		(1,457	)
Consumer		27		0		0		27		0
Total	$	11,470	$	0	$	0	$	11,470	$	(3,185	)
Other real estate owned and repossessed assets	$	14,867	$	0	$	0	$	14,867	$	(5,395	)

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

XML

Investment Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Amortized Cost
Due in one year or less	$ 12,322
Due after one year through five years	56,138
Due after five year through ten years	21,409
Due after ten years	2,058
Total	91,927
Asset-backed securities	106,726
Amortized Cost, Total	198,653	208,390
Fair Value
Due in one year or less	12,421
Due after one year through five years	56,327
Due after five year through ten years	21,767
Due after ten years	2,021
Total	92,536
Asset-backed securities	106,462
Fair value, Total	$ 198,998	$ 205,985

XML

Fair Value Measurements (Detail Textuals) (USD $)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Fair Value Disclosures [Abstract]
Gains included in earnings attributable to change in unrealized gains or losses	$ 66,000	$ 723,000
Impaired loans with a specific allowance	7,438,000	16,266,000
Specific allowance related to impaired loans	1,749,000	4,796,000
Impaired financing receivable charge offs	$ 5,400,000	$ 3,200,000

XML

Consolidated Statements of Stockholders' Equity (Parentheticals) (Preferred Stock)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Preferred Stock
Redemption of preferred shares	18,255	12,000

XML

Consolidated Balance Sheets (Parentheticals) (USD $)	Dec. 31, 2014	Dec. 31, 2013
Statement of Financial Position [Abstract]
Common stock, par value (in dollars per share)	$ 1	$ 1
Common stock, shares authorized	15,000,000	15,000,000
Common stock, shares issued	5,395,844	5,194,537
Treasury stock, shares	161,858	161,858

XML

Borrowings

12 Months Ended

Dec. 31, 2014

Borrowings

Borrowings

(8) Borrowings

Federal Funds Purchased and Securities Sold under Agreements to Repurchase (Repurchase Agreements)

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

(in thousands)	Year End Weighted Rate			Average Weighted Rate			Average Balance Outstanding		Maximum Outstanding at any Month End		Balance at December 31,
2014
Federal funds purchased		0.45	%		0.38	%	$	404	$	0	$	0
Short-term repurchase agreements		0.12			0.10			19,819		22,849		17,970
Total							$	20,223	$	22,849	$	17,970
2013
Federal funds purchased		0.40	%		0.41	%	$	635	$	13,503	$	13,503
Short-term repurchase agreements		0.13			0.11			19,913		25,007		17,581
Total							$	20,548	$	38,510	$	31,084

The securities underlying the agreements to repurchase are under the control of the Bank. All securities sold under agreements to repurchase are secured by a portion of the Bank’s investment portfolio.

Under agreements with unaffiliated banks, the Bank may borrow federal funds up to $40.0 million on an unsecured basis and $7.8 million on a secured basis at December 31, 2014.

Subordinated Notes and Other Borrowings

Other borrowings of the Company consisted of the following:

(in thousands)

​

​

​

2014

2013

​

Borrower

Maturity Date

Year End Balance

Year End Weighted Rate

Year End Balance

Year End Weighted Rate

FHLB advances

The Bank

​

2015

​

$

8,000

​

0.30%

​

$

0

​

na%

​

​

​

2016

​

​

8,000

​

0.67%

​

​

3,000

​

0.64%

​

​

​

2017

​

​

5,000

​

1.07%

​

​

3,000

​

0.91%

​

​

​

2018

​

​

20,000

​

2.00%

​

​

18,000

​

2.00%

​

​

​

2019-20

​

​

2,000

​

1.97%

​

​

0

​

na%

Total Bank

​

​

​

​

$

43,000

​

​

​

$

24,000

​

​

Subordinated notes

The Company

​

2034

​

$

25,774

​

2.94%

​

$

25,774

​

2.94%

​

​

​

2035

​

​

23,712

​

2.07%

​

​

23,712

​

2.07%

Total Company

​

​

​

​

$

49,486

​

​

​

$

49,486

​

​

The Bank is a member of the Federal Home Loan Bank of Des Moines (FHLB) and has access to term financing from the FHLB. These borrowings are secured under a blanket agreement which assigns all investment in FHLB stock, as well as qualifying first mortgage loans as collateral to secure amounts borrowed by the Bank. The outstanding balance of $43.0 million includes $10.0 million, which the FHLB may call for early payment within the next year. Based upon the collateral pledged to the FHLB at December 31, 2014, the Bank could borrow up to an additional $230.6 million under the agreement.

On March 17, 2005, Exchange Statutory Trust II, a business trust and subsidiary of the Company, issued $23.0 million of 30-year floating rate Trust Preferred Securities (TPS) to a TPS Pool. The floating rate is equal to a three-month LIBOR rate plus 1.83% and reprices quarterly (2.07% at December 31, 2014). The TPS can be prepaid without penalty at any time after five years from the issuance date.

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

On March 17, 2004, Exchange Statutory Trust I, a business trust and subsidiary of the Company issued $25.0 million of floating rate TPS to a TPS Pool. The floating rate is equal to the three-month LIBOR rate plus 2.70% and reprices quarterly (2.94% at December 31, 2014). The TPS are fully, irrevocably, and unconditionally guaranteed on a subordinated basis by the Company. The proceeds of the TPS were invested in junior subordinated debentures of the Company. Distributions on the TPS are payable quarterly on March 17, June 17, September 17, and December 17 of each year that the TPS are outstanding. The TPS mature on March 17, 2034. That maturity date may be shortened if certain conditions are met.

The Exchange Statutory Trusts are not consolidated in the Company’s financial statements. Accordingly, the Company does not report the securities issued by the Exchange Statutory Trusts as liabilities, and instead reports the subordinated notes issued by the Company and held by the Exchange Statutory Trusts as liabilities. The amount of the subordinated notes as of December 31, 2014 and 2013 was $49.5 million, respectively. The Company has recorded the investments in the common securities issued by the Exchange Statutory Trusts aggregating $1.5 million, and the corresponding obligations under the subordinated notes, as well as the interest income and interest expense on such investments and obligations in its consolidated financial statements.

XML

Capital Requirements (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
The actual and required capital amounts and ratios for the Company and the Bank
Total capital (to risk-weighted assets), Actual Amount	$ 138,619	$ 133,638
Total capital (to risk-weighted assets), Actual Ratio (as a percent)	15.78%	15.33%
Total capital (to risk-weighted assets), Minimum Capital requirements, Amount	70,282	69,729
Total capital (to risk-weighted assets), Minimum Capital requirements, Ratio (as a percent)	8.00%	8.00%
Tier I capital (to risk-weighted assets), Actual Amount	108,785	99,398
Tier I capital (to risk-weighted assets), Actual, Ratio (as a percent)	12.38%	11.40%
Tier I capital (to risk-weighted assets), Minimum Capital requirements, Amount	35,141	34,864
Tier I capital (to risk-weighted assets), Minimum Capital requirements, Ratio (as a percent)	4.00%	4.00%
Tier I Capital (to adjusted average assets), Actual Amount	108,785	99,398
Tier I Capital (to adjusted average assets), Actual Ratio (as a percent)	9.42%	8.79%
Tier I Capital (to adjusted average assets), Minimum Capital requirements, Amount	34,648	33,876
Tier I capital (to adjusted average assets), Minimum Capital requirements, Ratio (as a percent)	3.00%	3.00%
Bank
The actual and required capital amounts and ratios for the Company and the Bank
Total capital (to risk-weighted assets), Actual Amount	128,311	122,959
Total capital (to risk-weighted assets), Actual Ratio (as a percent)	14.78%	14.29%
Total capital (to risk-weighted assets), Minimum Capital requirements, Amount	69,430	68,842
Total capital (to risk-weighted assets), Minimum Capital requirements, Ratio (as a percent)	8.00%	8.00%
Total capital (to risk-weighted assets), Well-Capitalized Capital requirements, Amount	86,788	86,052
Total capital (to risk-weighted assets), Well-Capitalized Capital requirements, Ratio (as a percent)	10.00%	10.00%
Tier I capital (to risk-weighted assets), Actual Amount	119,212	112,166
Tier I capital (to risk-weighted assets), Actual, Ratio (as a percent)	13.74%	13.03%
Tier I capital (to risk-weighted assets), Minimum Capital requirements, Amount	34,715	34,421
Tier I capital (to risk-weighted assets), Minimum Capital requirements, Ratio (as a percent)	4.00%	4.00%
Tier I capital (to risk-weighted assets), Well-Capitalized Capital requirements, Amount	52,788	51,631
Tier I capital (to risk-weighted assets), Well-Capitalized Capital requirements, Ratio (as a percent)	6.00%	6.00%
Tier I Capital (to adjusted average assets), Actual Amount	119,212	112,166
Tier I Capital (to adjusted average assets), Actual Ratio (as a percent)	10.42%	10.04%
Tier I Capital (to adjusted average assets), Minimum Capital requirements, Amount	34,338	33,517
Tier I capital (to adjusted average assets), Minimum Capital requirements, Ratio (as a percent)	3.00%	3.00%
Tier I capital (to adjusted average assets), Well-Capitalized Capital requirements, Amount	$ 57,230	$ 55,862
Tier I capital (to adjusted average assets), Well-Capitalized Capital requirements, Ratio (as a percent)	5.00%	5.00%

XML

Employee Benefit Plans (Details 4)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Determination of benefit obligation at year end:
Discount rate	4.25%	5.00%	4.25%
Annual rate of compensation increase	3.78%	3.73%	3.61%
Determination of pension expense for year ended:
Discount rate for the service cost	5.00%	4.25%	4.75%
Annual rate of compensation increase	3.73%	3.61%	4.50%
Expected long-term rate of return on plan assets	7.00%	7.00%	7.00%

XML

Employee Benefit Plans (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Components of net pension cost
Service cost - benefits earned during the year	$ 981	$ 1,174	$ 1,168
Interest costs on projected benefit obligations	732	646	667
Expected return on plan assets	(872)	(797)	(776)
Expected administrative expenses	40	40	40
Amortization of prior service cost	79	79	79
Amortization of unrecognized net loss	0	31	46
Net periodic pension expense	$ 960	$ 1,173	$ 1,224

XML

Document and Entity Information (USD $)	12 Months Ended
	Dec. 31, 2014	Mar. 31, 2015	Jun. 30, 2014
Document And Entity Information Abstract
Entity Registrant Name	HAWTHORN BANCSHARES, INC.
Entity Central Index Key	0000893847
Trading Symbol	hwbk
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding		5,233,986
Entity Public Float			$ 50,199,289
Document Type	10-K
Document Period End Date	Dec. 31, 2014
Amendment Flag	false
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	FY

XML

Income Taxes

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Income Taxes

(9) Income Taxes

The composition of income tax expense for the years ended December 31, 2014, 2013, and 2012 was as follows:

Current:
Federal	$	1,105	$	584	$	651
State		137		71		156
Total current		1,242		655		807
Deferred:
Federal		2,353		1,485		(197	)
State		447		282		(64	)
Total deferred		2,800		1,767		(261	)
Total income tax expense	$	4,042	$	2,422	$	546

Applicable income tax expense for financial reporting purposes differs from the amount computed by applying the statutory federal income tax rate for the reasons noted in the table for the years ended December 31, 2014, 2013, and 2012 are as follows:

(in thousands)	2014					2013					2011
​	Amount			%		Amount			%		Amount			%
Income before provision for income tax expense	​	$	11,696	​	​	​	$	7,396	​	​	​	$	3,368	​	​
Tax at statutory federal income tax rate	​	$	3,977	​	34.00%	​	$	2,515	​	34.00%	​	$	1,145	​	34.00%
Tax-exempt income	​	​	(348)	​	(2.98)	​	​	(353)	​	(4.77)	​	​	(380)	​	(11.27)
State income tax, net of federal tax benefit	​	​	385	​	3.30	​	​	233	​	3.15	​	​	61	​	1.81
Release of prior year over accrual	​	​	0	​	0.00	​	​	0	​	0.00	​	​	(371)	​	(11.01)
Other, net	​	​	28	​	0.24	​	​	27	​	0.37	​	​	91	​	2.70
Provision for income tax expense	​	$	4,042	​	34.56%	​	$	2,422	​	32.75%	​	$	546	​	16.23%

The components of deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 are as follows:

(in thousands)	2014		2013
Deferred tax assets:
Allowance for loan losses	$	3,458	$	5,213
Impairment of other real estate owned		1,233		1,771
Goodwill		1,786		2,134
Available-for-sale securities		0		914
Deferred taxes on pension		0		0
Nonaccrual loan interest		1,069		1,015
Core deposit intangible		689		822
Pension		985		896
Deferred taxes on pension		998		0
Deferred compensation		130		44
Other		250		322
Total deferred tax assets	$	10,598	$	13,131
Deferred tax liabilities:
Available-for-sale securities	$	131	$	0
Premises and equipment		1,160		988
Mortgage servicing rights		1,022		1,114
Deferred taxes on pension		0		328
Assets held for sale		114		112
FHLB stock dividend		0		100
Other		53		72
Total deferred tax liabilities		2,480		2,714
Net deferred tax assets	$	8,118	$	10,417

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income 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 strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these temporary differences at December 31, 2014 and, therefore, did not establish a valuation reserve.

The Company follows ASC Topic 740, Income Taxes, which addresses the accounting for uncertain tax positions. As of December 31, 2014, 2013, and 2012, respectively, the Company did not have any uncertain tax provisions.

XML

Deposits (Detail Textuals) (USD $)	Dec. 31, 2014	Dec. 31, 2013
Deposits
Minimum cash required	$ 1,600,000	$ 1,300,000
Average compensating balances	$ 408,000	$ 315,000

XML

Employee Benefit Plans (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Change in projected benefit obligation:
Balance, January 1	$ 14,852	$ 15,342
Service cost	981	1,174	1,168
Interest cost	732	646	667
Actuarial gain	3,813	(1,991)
Benefits paid	(401)	(319)
Balance, December 31	19,977	14,852	15,342
Defined Benefit Plan, Change in Fair Value of Plan Assets [Roll Forward]
Fair value, January 1	13,532	11,707
Actual return on plan assets	1,118	2,220
Employer contribution	725	0
Expenses paid	(41)	(76)
Benefits paid	(401)	(319)
Fair value, December 31	14,933	13,532	11,707
Funded status at end of year	(5,044)	(1,320)
Accumulated benefit obligation	$ 16,595	$ 12,298

XML

Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
INTEREST INCOME
Interest and fees on loans	$ 40,274	$ 41,110	$ 43,957
Interest on investment securities:
Taxable	3,394	3,592	4,100
Nontaxable	722	844	909
Federal funds sold and other overnight interest-bearing deposits	28	37	46
Dividends on other securities	80	82	102
Total interest income	44,498	45,665	49,114
Interest on deposits:
Savings, interest checking and money market	968	974	1,146
Time deposit accounts $100,000 and over	940	1,142	1,345
Other time deposits	1,384	2,498	3,481
Interest on federal funds purchased and securities sold under agreements to repurchase	21	24	21
Interest on subordinated notes	1,264	1,284	1,381
Interest on Federal Home Loan Bank advances	467	420	531
Total interest expense	5,044	6,342	7,905
Net interest income	39,454	39,323	41,209
Provision for loan losses	0	2,030	8,900
Net interest income after provision for loan losses	39,454	37,293	32,309
NON-INTEREST INCOME
Service charges on deposit accounts	5,265	5,556	5,439
Trust department income	844	796	893
Real estate servicing fees, net	319	876	(453)
Gain on sale of mortgage loans, net	1,093	1,665	2,669
Gain on sale of investment securities	20	778	26
Other	1,208	1,195	1,152
Total non-interest income	8,749	10,866	9,726
NON-INTEREST EXPENSE
Salaries and employee benefits	20,377	19,542	19,165
Occupancy expense, net	2,660	2,630	2,598
Furniture and equipment expense	1,823	2,007	1,840
FDIC insurance assessment	933	992	993
Legal, examination, and professional fees	1,159	982	1,189
Advertising and promotion	1,274	1,301	1,083
Postage, printing, and supplies	1,117	1,210	1,144
Processing expense	3,101	3,543	3,593
Other real estate expense, net	845	4,924	2,659
Other	3,218	3,632	4,403
Total non-interest expense	36,507	40,763	38,667
Income before income taxes	11,696	7,396	3,368
Income tax expense	4,042	2,422	546
Net income	7,654	4,974	2,822
Preferred stock dividends and accretion of discount	0	615	1,784
Net income available to common shareholders	$ 7,654	$ 4,359	$ 1,038
Basic earnings per share (in dollars per share)	$ 1.46	$ 0.83	$ 0.20
Diluted earnings per share (in dollars per share)	$ 1.46	$ 0.83	$ 0.20

XML

Real Estate and Other Assets Acquired in Settlement of Loans

12 Months Ended

Dec. 31, 2014

Other Real Estate [Abstract]

Real Estate and Other Assets Acquired in Settlement of Loans

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

(in thousands)	2014			2013
Commercial	$	0		$	0
Real estate construction - residential		23			114
Real estate construction - commercial		9,831			10,020
Real estate mortgage - residential		417			830
Real estate mortgage - commercial		4,831			8,537
Repossessed assets		38			41
Total	$	15,140		$	19,542
Less valuation allowance for other real estate owned		(3,255	)		(4,675	)
Total other real estate owned and foreclosed assets	$	11,885		$	14,867

Changes in the net carrying amount of other real estate owned and repossessed assets for the years ended December 31, 2012 2013, and 2014, respectively, were as follows:

Balance at December 31, 2012	$	29,729
Additions		4,613
Proceeds from sales		(9,641	)
Charge-offs against the valuation allowance for other real estate owned		(4,829	)
Repossessed assets impairment write-downs		(189	)
Net gain on sales		(141	)
Balance at December 31, 2013	$	19,542
Additions		1,975
Proceeds from sales		(4,560	)
Charge-offs against the valuation allowance for other real estate owned, net		(2,005	)
Net loss on sales		188
Total other real estate owned and repossessed assets	$	15,140
Less valuation allowance for other real estate owned		(3,255	)
Balance at December 31, 2014	$	11,885

During the years ended December 31, 2014 and 2013, net charge-offs against the allowance for loan losses at the time of foreclosure were approximately $335,000 and $800,000, respectively.

Activity in the valuation allowance for other real estate owned in settlement of loans for the years ended December 31, 2014, 2013 and 2012, respectively, is summarized as follows:

(in thousands)	2014			2013			2012
Balance, beginning of year	$	4,675		$	6,137		$	6,977
Provision for other real estate owned		585			3,367			713
Charge-offs		(2,005	)		(4,829	)		(1,553	)
Balance, end of year	$	3,255		$	4,675		$	6,137

XML

Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2014

Loans and Leases Receivable Disclosure [Abstract]

Loans and Allowance for Loan Losses

(2) Loans and Allowance for Loan Losses

Loans

A summary of loans, by major class within the Company’s loan portfolio, at December 31, 2014 and 2013 is as follows:

(in thousands)	2014		2013
Commercial, financial, and agricultural	$	154,834	$	141,845
Real estate construction - residential		18,103		21,008
Real estate construction - commercial		48,822		55,076
Real estate mortgage - residential		247,117		225,630
Real estate mortgage - commercial		372,321		375,686
Installment and other consumer		20,016		20,302
Total loans	$	861,213	$	839,547

The Bank grants real estate, commercial, installment, and other consumer loans to customers located within the communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, Branson and Lee’s Summit, Missouri. As such, the Bank is susceptible to changes in the economic environment in these communities. The Bank does not have a concentration of credit in any one economic sector. Installment and other consumer loans consist primarily of the financing of vehicles. At December 31, 2014, loans with a carrying value of $411.8 million, or $405.5 million fair value, were pledged to the Federal Home Loan Bank as collateral for borrowings and letters of credit.

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

(in thousands)
Balance at December 31, 2013	$	4,837
New loans		478
Amounts collected		(375	)
Balance at December 31, 2014	$	4,940

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

Allowance for loan losses

The following is a summary of the allowance for loan losses for the years ended December 31, 2014, 2013, and 2012:

(in thousands)

Commercial, Financial, & Agricultural

Real Estate Construction - Residential

Real Estate Construction - Commercial

Real Estate Mortgage - Residential

Real Estate Mortgage - Commercial

Installment Loans to Individuals

Un- allocated

Total

Balance at December 31, 2011

​

$

1,804

​

$

1,188

​

$

1,562

​

$

3,251

​

$

5,734

​

$

267

​

$

3

​

$

13,809

Additions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Provision for loan losses

​

​

1,732

​

​

(523)

​

​

126

​

​

955

​

​

6,318

​

​

293

​

​

(1)

​

​

8,900

Deductions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans charged off

​

​

1,760

​

​

0

​

​

0

​

​

977

​

​

5,466

​

​

586

​

​

0

​

​

8,789

Less recoveries on loans

​

​

(161)

​

​

(67)

​

​

(23)

​

​

(158)

​

​

(248)

​

​

(265)

​

​

0

​

​

(922)

Net loans charged off

​

​

1,599

​

​

(67)

​

​

(23)

​

​

819

​

​

5,218

​

​

321

​

​

0

​

​

7,867

Balance at December 31, 2012

​

$

1,937

​

$

732

​

$

1,711

​

$

3,387

​

$

6,834

​

$

239

​

$

2

​

$

14,842

Additions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Provision for loan losses

​

​

992

​

​

318

​

​

(452)

​

​

273

​

​

622

​

​

272

​

​

5

​

​

2,030

Deductions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans charged off

​

​

895

​

​

119

​

​

633

​

​

812

​

​

1,301

​

​

420

​

​

0

​

​

4,180

Less recoveries on loans

​

​

(340)

​

​

0

​

​

(5)

​

​

(111)

​

​

(368)

​

​

(203)

​

​

0

​

​

(1,027)

Net loans charged off

​

​

555

​

​

119

​

​

628

​

​

701

​

​

933

​

​

217

​

​

0

​

​

3,153

Balance at December 31, 2013

​

$

2,374

​

$

931

​

$

631

​

$

2,959

​

$

6,523

​

$

294

​

$

7

​

$

13,719

Additions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Provision for loan losses

​

​

371

​

​

(592)

​

​

326

​

​

(226)

​

​

(107)

​

​

195

​

​

33

​

​

0

Deductions:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Loans charged off

​

​

1,285

​

​

349

​

​

491

​

​

408

​

​

2,890

​

​

405

​

​

0

​

​

5,828

Less recoveries on loans

​

​

(319)

​

​

(181)

​

​

0

​

​

(202)

​

​

(320)

​

​

(186)

​

​

0

​

​

(1,208)

Net loans charged off

​

​

966

​

​

168

​

​

491

​

​

206

​

​

2,570

​

​

219

​

​

0

​

​

4,620

Balance at December 31, 2014

​

$

1,779

​

$

171

​

$

466

​

$

2,527

​

$

3,846

​

$

270

​

$

40

​

$

9,099

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.

The following table provides the balance in the allowance for loan losses at December 31, 2014 and 2013, and the related loan balance by impairment methodology.

(in thousands)

Commercial, Financial, and Agricultural

Real Estate Construction - Residential

Real Estate Construction - Commercial

Real Estate Mortgage - Residential

Real Estate Mortgage - Commercial

Installment Loans to Individuals

Un- allocated

Total

December 31, 2014

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Allowance for loan losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually evaluated for impairment

​

$

134

​

$

0

​

$

0

​

$

1,343

​

$

246

​

$

26

​

$

0

​

$

1,749

Collectively evaluated for impairment

​

​

1,645

​

​

171

​

​

466

​

​

1,184

​

​

3,600

​

​

244

​

​

40

​

​

7,350

Total

​

$

1,779

​

$

171

​

$

466

​

$

2,527

​

$

3,846

​

$

270

​

$

40

​

$

9,099

Loans outstanding:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually evaluated for impairment

​

$

7,541

​

$

1,750

​

$

2,096

​

$

7,878

​

$

16,464

​

$

234

​

$

0

​

$

35,963

Collectively evaluated for impairment

​

​

147,293

​

​

16,353

​

​

46,726

​

​

239,239

​

​

355,857

​

​

19,782

​

​

0

​

​

825,250

Total

​

$

154,834

​

$

18,103

​

$

48,822

​

$

247,117

​

$

372,321

​

$

20,016

​

$

0

​

$

861,213

December 31, 2013

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Allowance for loan losses:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually evaluated for impairment

​

$

721

​

$

392

​

$

304

​

$

1,374

​

$

1,989

​

$

16

​

$

0

​

$

4,796

Collectively evaluated for impairment

​

​

1,653

​

​

539

​

​

327

​

​

1,585

​

​

4,534

​

​

278

​

​

7

​

​

8,923

Total

​

$

2,374

​

$

931

​

$

631

​

$

2,959

​

$

6,523

​

$

294

​

$

7

​

$

13,719

Loans outstanding:

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

​

Individually evaluated for impairment

​

$

4,015

​

$

2,204

​

$

6,615

​

$

6,517

​

$

15,422

​

$

43

​

$

0

​

$

34,816

Collectively evaluated for impairment

​

​

137,830

​

​

18,804

​

​

48,461

​

​

219,113

​

​

360,264

​

​

20,259

​

​

0

​

​

804,731

Total

​

$

141,845

​

$

21,008

​

$

55,076

​

$

225,630

​

$

375,686

​

$

20,302

​

$

0

​

$

839,547

Impaired loans

Loans evaluated under ASC 310-10-35 include loans which are individually evaluated for impairment. All other loans are collectively evaluated for impairment under ASC 450-20. Impaired loans totaled $36.0 million and $35.1 million at December 31, 2014 and 2013, respectively, and are comprised of loans on non-accrual status and loans, which have been classified as troubled debt restructurings. Total impaired loans of $36.0 million at December 31, 2014 were individually evaluated for impairment compared to $35.1 million at December 31, 2013. The $35.1 million of total impaired loans individually evaluated for impairment as December 31, 2013, includes $34.8 million of impaired loans individually evaluated for impairment and $259,000 of non-accrual consumer loans that were collectively evaluated for impairment. Beginning in 2014, consumer non-accrual loans were included in the individually evaluated impairment calculations.

The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals or internal evaluations, or by discounting the total expected future cash flows. At December 31, 2014 and 2013, $15.6 million and $21.8 million, respectively, of impaired loans were evaluated based on the fair value less estimated selling costs of the loan’s collateral. Once the impairment amount is calculated, a specific reserve allocation is recorded. At December 31, 2014, $1.7 million of the Company’s allowance for loan losses was allocated to impaired loans totaling $36.0 million compared to $4.8 million of the Company's allowance for loan losses allocated to impaired loans totaling approximately $35.1 million at December 31, 2013. Management determined that $28.5 million, or 79%, of total impaired loans required no reserve allocation at December 31, 2014 compared to $18.8 million, or 54%, at December 31, 2013 primarily due to adequate collateral values, acceptable payment history and adequate cash flow ability.

The categories of impaired loans at December 31, 2014 and 2013 are as follows:

(in thousands)	2014		2013
Non-accrual loans	$	18,243	$	23,680
Troubled debt restructurings continuing to accrue interest		17,720		11,395
Total impaired loans	$	35,963	$	35,075

The following tables provide additional information about impaired loans at December 31, 2014 and 2013, respectively, segregated between loans for which an allowance has been provided and loans for which no allowance has been provided.

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2014
With no related allowance recorded:
Commercial, financial and agricultural	$	6,021	$	6,232	$	0
Real estate - construction residential		1,750		2,259		0
Real estate - construction commercial		2,096		2,319		0
Real estate - residential		3,213		3,270		0
Real estate - commercial		15,409		18,950		0
Consumer		36		36		0
Total	$	28,525	$	33,066	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,520	$	1,528	$	134
Real estate - construction residential		0		0		0
Real estate - construction commercial		0		0		0
Real estate - residential		4,665		3,546		1,343
Real estate - commercial		1,055		1,171		246
Consumer		198		237		26
Total	$	7,438	$	6,482	$	1,749
Total impaired loans	$	35,963	$	39,548	$	1,749

			Unpaid
	Recorded		Principal		Specific
(in thousands)	Investment		Balance		Reserves
December 31, 2013
With no related allowance recorded:
Commercial, financial and agricultural	$	2,467	$	2,593	$	0
Real estate - construction residential		44		80		0
Real estate - construction commercial		6,101		7,148		0
Real estate - residential		2,121		2,654		0
Real estate - commercial		7,817		8,056		0
Consumer		259		282		0
Total	$	18,809	$	20,813	$	0
With an allowance recorded:
Commercial, financial and agricultural	$	1,548	$	1,607	$	721
Real estate - construction residential		2,160		2,331		392
Real estate - construction commercial		514		514		304
Real estate - residential		4,396		4,570		1,374
Real estate - commercial		7,605		7,925		1,989
Consumer		43		45		16
Total	$	16,266	$	16,992	$	4,796
Total impaired loans	$	35,075	$	37,805	$	4,796

The following table presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the years ended December 31, 2014 and 2013:

	2014				2013
			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	$	3,141	$	94	$	2,693	$	108
Real estate - construction residential		610		2		80		0
Real estate - construction commercial		5,950		0		7,437		6
Real estate - residential		3,517		46		2,612		51
Real estate - commercial		13,703		400		8,461		170
Consumer		11		0		290		3
Total	$	26,932	$	542	$	21,573	$	338
With an allowance recorded:
Commercial, financial and agricultural	$	1,773	$	19	$	1,677	$	29
Real estate - construction residential		1,697		0		2,409		0
Real estate - construction commercial		42		0		514		0
Real estate - residential		5,118		129		4,596		24
Real estate - commercial		3,810		11		8,157		113
Consumer		312		0		45		0
Total	$	12,752	$	159	$	17,398	$	166
Total impaired loans	$	39,684	$	701	$	38,971	$	504

The recorded investment varies from the unpaid principal balance primarily due to partial charge-offs taken resulting from current appraisals received. The amount recognized as interest income on impaired loans continuing to accrue interest, primarily related to troubled debt restructurings, was $542,000 and $338,000, for the years ended December 31, 2014 and 2013, respectively. The average recorded investment in impaired loans is calculated on a monthly basis during the years reported. Contractual interest lost on loans in non-accrual status was $1.1 million and $1.2 million, for the years ended December 31, 2014 and 2013, respectively.

Delinquent and Non-Accrual Loans

The delinquency status of loans is determined based on the contractual terms of the notes. Borrowers are generally classified as delinquent once payments become 30 days or more past due.

The following table provides aging information for the Company’s past due and non-accrual loans at December 31, 2014 and 2013.

	Current or				90 Days
	Less Than				Past Due
	30 Days		30 - 89 Days		And Still
(in thousands)	Past Due		Past Due		Accruing		Non-Accrual		Total
December 31, 2014
Commercial, Financial, and Agricultural	$	149,366	$	189	$	0	$	5,279	$	154,834
Real Estate Construction - Residential		16,352		0		0		1,751		18,103
Real Estate Construction - Commercial		46,670		0		56		2,096		48,822
Real Estate Mortgage - Residential		239,469		3,229		0		4,419		247,117
Real Estate Mortgage - Commercial		366,653		1,203		0		4,465		372,321
Installment and Other Consumer		19,551		230		2		233		20,016
Total	$	838,061	$	4,851	$	58	$	18,243	$	861,213
December 31, 2013
Commercial, Financial, and Agricultural	$	139,219	$	942	$	0	$	1,684	$	141,845
Real Estate Construction - Residential		18,738		66		0		2,204		21,008
Real Estate Construction - Commercial		48,230		595		0		6,251		55,076
Real Estate Mortgage - Residential		217,268		4,068		129		4,165		225,630
Real Estate Mortgage - Commercial		365,787		725		100		9,074		375,686
Installment and Other Consumer		19,695		291		14		302		20,302
Total	$	808,937	$	6,687	$	243	$	23,680	$	839,547

Credit Quality

The Company categorizes loans into risk categories based upon an internal rating system reflecting management’s risk assessment. Loans are placed on watch status when one or more weaknesses that may result in the deterioration of the repayment exits or the Company’s credit position at some future date. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Loans so classified may have a well defined weakness or weaknesses that jeopardize the repayment of the debt. Such loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. It is the Company’s policy to discontinue the accrual of interest income on loans when management believes that the collection of interest or principal is doubtful. Loans are placed on non-accrual status when (1) deterioration in the financial condition of the borrower exists for which payment of full principal and interest is not expected, or (2) payment of principal or interest has been in default for a period of 90 days or more and the asset is not both well secured and in the process of collection. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectability of such principal; otherwise, such receipts are recorded as interest income on a cash basis.

The following table presents the risk categories by class at December 31, 2014 and 2013.

(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 December 31, 2014
Watch	$	13,651	$	1,103	$	4,757	$	27,172	$	18,191	$	199	$	65,073
Substandard		3,188		90		1,211		6,583		16,101		139		27,312
Non-accrual		5,279		1,751		2,096		4,419		4,465		233		18,243
Total	$	22,118	$	2,944	$	8,064	$	38,174	$	38,757	$	571	$	110,628
At December 31, 2013
Watch	$	15,016	$	2,007	$	6,111	$	26,331	$	23,662	$	388	$	73,515
Substandard		7,553		92		1,403		8,579		14,510		281		32,418
Non-accrual		1,684		2,204		6,251		4,165		9,074		302		23,680
Total	$	24,253	$	4,303	$	13,765	$	39,075	$	47,246	$	971	$	129,613

Troubled Debt Restructurings

At December 31, 2014, loans classified as troubled debt restructurings (TDRs) totaled $19.3 million, of which $1.6 million were on non-accrual status and $17.7 million were on accrual status. At December 31, 2013, loans classified as troubled debt restructurings (TDRs) totaled $21.5 million, of which $10.1 million were on non-accrual status and $11.4 million were on accrual status. 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 $1.0 million and $2.2 million related to TDRs were allocated to the allowance for loan losses at December 31, 2014 and 2013, respectively.

The following table summarizes loans that were modified as TDRs during the years ended December 31, 2014 and 2013.

	2014						2013
	Recorded Investment (1)						Recorded Investment (1)
(in thousands)	Number of  Contracts		Pre- Modification		Post- Modification		Number of  Contracts		Pre- Modification		Post- Modification
Troubled Debt Restructurings
Commercial, financial and agricultural		3	$	244	$	208		0	$	0	$	0
Real estate mortgage - residential		1		1,256		1,170		3		2,156		1,992
Real estate mortgage - commercial		0		0		0		1		1,282		1,282
Total		4	$	1,500	$	1,378		4	$	3,438	$	3,274

(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 such as interest rates below the current market rate, deferring principal payments, and extending maturity dates. Once a loan becomes a TDR, it will continue to be reported as a TDR until it is ultimately repaid in full, charged-off, or the collateral for the loan is foreclosed and sold. The Company considers a loan in TDR status in default when the borrower’s payment according to the modified terms is at least 90 days past due or has defaulted due to expiration of the loan’s maturity date. Four loans were modified in each of the years ending December 31, 2014 and 2013 meeting the TDR criteria. There were two loans modified as a TDR that defaulted during the year December 31, 2014, and within twelve months of their modification date compared to no loans during the year ended December 31, 2013.

XML

Capital Requirements

12 Months Ended

Dec. 31, 2014

Capital Requirements

Capital Requirements

(14) Capital Requirements

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

Quantitative measures established by regulations to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to adjusted-average assets. Management believes, as of December 31, 2014 and 2013, the Company and the Bank met all capital adequacy requirements.

As of December 31, 2014, the most recent notification from the regulatory authorities categorized the bank as well- capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since the notification that management believes have changed the Bank’s categories.

						Minimum					Well-Capitalized
	Actual					Capital Requirements					Capital Requirements
(in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2014
Total capital (to risk-weighted assets):
Company	$	138,619		15.78	%	$	70,282		8.00	%		N.A.		N.A.	%
Bank		128,311		14.78			69,430		8.00		$	86,788		10.00
Tier I capital (to risk-weighted assets):
Company	$	108,785		12.38	%	$	35,141		4.00	%		N.A.		N.A.	%
Bank		119,212		13.74			34,715		4.00		$	52,788		6.00
Tier I capital (to adjusted average assets):
Company	$	108,785		9.42	%	$	34,648		3.00	%		$ N.A.		N.A.	%
Bank		119,212		10.42			34,338		3.00			57,230		5.00
(in thousands)
December 31, 2013
Total capital (to risk-weighted assets):
Company	$	133,638		15.33	%	$	69,729		8.00	%		N.A.		N.A.	%
Bank		122,959		14.29			68,842		8.00		$	86,052		10.00
Tier I capital (to risk-weighted assets):
Company	$	99,398		11.40	%	$	34,864		4.00	%		N.A.		N.A.	%
Bank		112,166		13.03			34,421		4.00		$	51,631		6.00
Tier I capital (to adjusted average assets):
Company	$	99,398		8.79	%	$	33,876		3.00	%		$ N.A.		N.A.	%
Bank		112,166		10.04			33,517		3.00			55,862		5.00

XML

Stockholders' Equity

12 Months Ended

Dec. 31, 2014

Stockholders' Equity Note [Abstract]

Stockholders' Equity

(10) Stockholders’ Equity

Accumulated Other Comprehensive (Loss) Income

The following details the change in the components of the Company’s accumulated other comprehensive (loss) income for the years ended December 31, 2013 and 2014, respectively:

							Accumulated
				Unrecognized Net			Other
				Pension and			Comprehensive
	Unrealized Loss			Postretirement			(Loss)
(in thousands)	on Securities (1)			Costs (2)			Income
Balance, December 31, 2012	$	3,266		$	(1,441	)	$	1,825
Other comprehensive (loss) income, before reclassifications		(6,980	)		3,378			(3,602	)
Amounts reclassified from accumulated other comprehensive income		(778	)		110			(668	)
Current period other comprehensive (loss) income, before tax		(7,758	)		3,488			(4,270	)
Income tax benefit (expense)		3,001			(1,325	)		1,676
Current period other comprehensive (loss) income, net of tax		(4,757	)		2,163			(2,594	)
Balance, December 31, 2013	$	(1,491	)	$	722		$	(769	)
Other comprehensive (loss) income, before reclassifications		2,770			(3,568	)		(798	)
Amounts reclassified from accumulated other comprehensive income		(20	)		79			59
Current period other comprehensive (loss) income, before tax		2,750			(3,489	)		(739	)
Income tax benefit (expense)		(1,045	)		1,325			280
Current period other comprehensive (loss) income, net of tax		1,705			(2,164	)		(459	)
Balance, December 31, 2014	$	214		$	(1,442	)	$	(1,228	)

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

(2) The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost. See Note 11.

XML

Borrowings (Detail Textuals 1) (USD $)	12 Months Ended	1 Months Ended
	Dec. 31, 2014	Mar. 17, 2005	Mar. 17, 2004	Dec. 31, 2013
Borrowings
Investment in common interests of the trust during the period	$ 712,000
Investment in preferred interests of the trust by a third party during the period	23,000,000
Subordinated notes	49,486,000			49,486,000
Investment in common securities of the trust	1,500,000
Exchange Statutory Trust II
Borrowings
Trust preferred securities issued		23,000,000
Term		30 years
Description of variable rate	three-month LIBOR
Basis spread on variable rate (as a percent)	1.83%
Interest rate at end of period (as a percent)	2.70%
Period of time after issuance in which TPS can be repaid without penalty	5 years
Exchange Statutory Trust I
Borrowings
Trust preferred securities issued			$ 25,000,000
Description of variable rate	three-month LIBOR
Basis spread on variable rate (as a percent)	2.70%
Interest rate at end of period (as a percent)	2.94%

XML

Intangible Assets

12 Months Ended

Dec. 31, 2014

Intangible Assets

Intangible Assets

(6) Intangible Assets

Core Deposit Intangible Asset

Core deposit intangible assets in the amount of $4.8 million were fully amortized as of June 30, 2013. Amortization expense was $0, $135,000 and $408,000 for the years ended December 31, 2014, 2013 and 2012, respectively.

Changes in the net carrying amount of core deposit intangible assets for the years ended December 31, 2014, 2013, and 2012 is as follows:

(in thousands)	2014		2013			2012
Balance at beginning of year	$	0	$	135		$	543
Additions		0		0			0
Amortization		0		(135	)		(408	)
Balance at end of year	$	0	$	0		$	135

Mortgage Servicing Rights

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights have been recognized in earnings in non-interest income in the period in which the change occurred.

At December 31, 2014 and 2013, respectively, the Company serviced mortgage loans for others totaling $313.9 million and $322.5 million, respectively. Mortgage loan servicing fees, reported as non-interest income, earned on loans sold were $895,000, $901,000, and $878,000, for the years ended December 31, 2014, 2013, and 2012, respectively.

The table below presents changes in mortgage servicing rights (MSRs) for the years ended December 31, 2014, 2013, and 2012.

(in thousands)	2014			2013			2012
Balance at beginning of year	$	3,036		$	2,549		$	2,308
Re-measurement to fair value upon election to measure servicing rights at fair value		0			0			742
Originated mortgage servicing rights		302			512			830
Changes in fair value:
Due to change in model inputs and assumptions (1)		66			723			241
Other changes in fair value (2)		(642	)		(748	)		(1,572	)
Amortization		0			0			0
Balance at end of year	$	2,762		$	3,036		$	2,549

(1) The change in fair value resulting from changes in valuation inputs or assumptions used in the valuation model reflects the change in discount rates and prepayment speed assumptions primarily due to changes in interest rates.

(2) Other changes in fair value reflect changes due to customer payments and passage of time. The year ended December 31, 2012 includes a one time adjustment of a $538,000 correction of an immaterial prior period error due to changing from the straight-line amortization method to an accelerated amortization method of accounting for amortizing MSRs in prior years.

The following key data and assumptions were used in estimating the fair value of the Company’s mortgage servicing rights as of the years ended December 31, 2014 and 2013:

​	2014		2013
Weighted-Average Constant Prepayment Rate	​	10.54%	​	9.48%
Weighted-Average Note Rate	​	3.99%	​	4.01%
Weighted-Average Discount Rate	​	9.21%	​	9.06%
Weighted-Average Expected Life (in years)	​	5.70	​	6.10

XML

Loans and Allowance for Loan Losses (Details 8) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	$ 861,213	$ 839,547
Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	65,073	73,515
Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	27,312	32,418
Non-accrual
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	18,243	23,680
Total Watch, Substandard, and Non-Accrual Loans
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	110,628	129,613
Commercial, Financial, and Agricultural
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	154,834	141,845
Commercial, Financial, and Agricultural | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	13,651	15,016
Commercial, Financial, and Agricultural | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	3,188	7,553
Commercial, Financial, and Agricultural | Non-accrual
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	5,279	1,684
Commercial, Financial, and Agricultural | Total Watch, Substandard, and Non-Accrual Loans
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	22,118	24,253
Real Estate Construction - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	18,103	21,008
Real Estate Construction - Residential | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	1,103	2,007
Real Estate Construction - Residential | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	90	92
Real Estate Construction - Residential | Non-accrual
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	1,751	2,204
Real Estate Construction - Residential | Total Watch, Substandard, and Non-Accrual Loans
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,944	4,303
Real Estate Construction - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	48,822	55,076
Real Estate Construction - Commercial | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	4,757	6,111
Real Estate Construction - Commercial | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	1,211	1,403
Real Estate Construction - Commercial | Non-accrual
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	2,096	6,251
Real Estate Construction - Commercial | Total Watch, Substandard, and Non-Accrual Loans
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	8,064	13,765
Real Estate Mortgage - Residential
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	247,117	225,630
Real Estate Mortgage - Residential | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	27,172	26,331
Real Estate Mortgage - Residential | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	6,583	8,579
Real Estate Mortgage - Residential | Non-accrual
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	4,419	4,165
Real Estate Mortgage - Residential | Total Watch, Substandard, and Non-Accrual Loans
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	38,174	39,075
Real Estate Mortgage - Commercial
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	372,321	375,686
Real Estate Mortgage - Commercial | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	18,191	23,662
Real Estate Mortgage - Commercial | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	16,101	14,510
Real Estate Mortgage - Commercial | Non-accrual
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	4,465	9,074
Real Estate Mortgage - Commercial | Total Watch, Substandard, and Non-Accrual Loans
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	38,757	47,246
Installment and other Consumer | Watch
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	199	388
Installment and other Consumer | Substandard
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	139	281
Installment and other Consumer | Non-accrual
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	233	302
Installment and other Consumer | Total Watch, Substandard, and Non-Accrual Loans
Credit quality of the loan portfolio using internal rating system reflecting management's risk assessment
Financing receivable	$ 571	$ 971

XML

Repurchase Reserve Liability (Detail Textuals) (USD $)	12 Months Ended
	Dec. 31, 2014 Loans	Dec. 31, 2013 Loans
Repurchase Reserve Liability [Abstract]
Repurchase reserve liability	$ 160,000	$ 160,000
Number of loans sold to the secondary market	3,057	3,114
Balance of loans sold to the secondary market	$ 313,900,000	$ 322,500,000

XML

Investment Securities

12 Months Ended

Dec. 31, 2014

Investments Debt And Equity Securities [Abstract]

Investment Securities

(4) Investment Securities

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2014 and 2013 are as follows:

			Gross		Gross
	Amortized		unrealized		unrealized
(in thousands)	cost		gains		losses		Fair value
December 31, 2014
Government sponsored enterprises	$	57,002	$	240	$	143	$	57,099
Asset-backed securities		106,726		855		1,119		106,462
Obligations of states and political subdivisions		34,925		583		71		35,437
Total available for sale securities	$	198,653	$	1,678	$	1,333	$	198,998
December 31, 2013
U.S. Treasury	$	1,000	$	3	$	0	$	1,003
Government sponsored enterprises		61,006		377		767		60,616
Asset-backed securities		112,747		817		3,191		110,373
Obligations of states and political subdivisions		33,637		568		212		33,993
Total available for sale securities	$	208,390	$	1,765	$	4,170	$	205,985

All of the Company’s investment securities are classified as available for sale. Agency bonds and notes, 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.

Investment securities that are classified as restricted equity securities primarily consist of Federal Home Loan Bank stock and the Company’s interest in statutory trusts. These securities are reported at cost in other assets in the amount of $4.7 million and $4.0 million as of December 31, 2014 and 2013, respectively.

Debt securities with carrying values aggregating approximately $145.5 million and $145.8 million at December 31, 2014 and December 31, 2013, respectively, were pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

The amortized cost and fair value of debt securities classified as available-for-sale at December 31, 2014, 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	$	12,322	$	12,421
Due after one year through five years		56,138		56,327
Due after five years through ten years		21,409		21,767
Due after ten years		2,058		2,021
Total		91,927		92,536
Asset-backed securities		106,726		106,462
Total available for sale securities	$	198,653	$	198,998

Gross unrealized losses on debt securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2014 and December 31, 2013 were as follows:

	Less than 12 months					12 months or more					Total		Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(in thousands)	Value		Losses			Value		Losses			Value		Losses
At December 31, 2014
Government sponsored enterprises	$	2,983	$	(4	)	$	17,862	$	(139	)	$	20,845	$	(143	)
Asset-backed securities		10,314		(50	)		45,445		(1,069	)		55,759		(1,119	)
Obligations of states and political subdivisions		3,667		(15	)		1,942		(56	)		5,609		(71	)
Total	$	16,964	$	(69	)	$	65,249	$	(1,264	)	$	82,213	$	(1,333	)
(in thousands)
At December 31, 2013
Government sponsored enterprises	$	25,771	$	(767	)	$	0	$	0		$	25,771	$	(767	)
Asset-backed securities		76,048		(2,940	)		5,941		(251	)		81,989		(3,191	)
Obligations of states and political subdivisions		6,907		(159	)		450		(53	)		7,357		(212	)
Total	$	108,726	$	(3,866	)	$	6,391	$	(304	)	$	115,117	$	(4,170	)

The total available for sale portfolio consisted of approximately 300 securities at December 31, 2014. The portfolio included 74 securities having an aggregate fair value of $82.2 million that were in a loss position at December 31, 2014. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $65.2 million at fair value. The $1.3 million aggregate unrealized loss included in accumulated other comprehensive income at December 31, 2014 was caused by interest rate fluctuations. The total available for sale portfolio consisted of approximately 348 securities at December 31, 2013. The portfolio included 96 securities having an aggregate fair value of $115.1 million that were in a loss position at December 31, 2013. Securities identified as temporarily impaired which had been in a loss position for 12 months or longer totaled $6.4 million at fair value. The $4.2 million aggregate unrealized loss included in accumulated other comprehensive income at December 31, 2013 was caused by interest rate fluctuations. Because the decline in fair value is attributable to changes in interest rates and not credit quality these investments were not considered other-than-temporarily impaired at December 31, 2014 and 2013, respectively.

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

(in thousands)	2014			2013			2012
Gains realized on sales	$	86		$	786		$	26
Losses realized on sales		(66	)		(8	)		0
Other-than-temporary impairment recognized		0			0			0
Investment securities gains	$	20		$	778		$	26

XML

Premises and Equipment

12 Months Ended

Dec. 31, 2014

Premises and Equipment

Premises and Equipment

(5) Premises and Equipment

A summary of premises and equipment at December 31, 2014 and 2013 is as follows:

(in thousands)	2014		2013
Land and land improvements	$	10,152	$	10,073
Buildings and improvements		35,504		33,730
Furniture and equipment		12,016		11,627
Construction in progress		523		2,402
Total		58,195		57,832
Less accumulated depreciation		20,697		19,753
Premises and equipment, net	$	37,498	$	38,079

Depreciation expense for the years ended December 31, 2014, 2013, and 2012 was as follows:

(in thousands)	2014		2013		2012
Depreciation expense	$	1,758	$	1,605	$	1,858

XML

Deposits

12 Months Ended

Dec. 31, 2014

Deposits

Deposits

(7) Deposits

The scheduled maturities of total time deposits as of the years ended December 31, 2014 and 2013 were as follows:

(in thousands)	2014		2013
Due within:
One year	$	204,638	$	231,644
Two years		58,177		58,844
Three years		33,551		30,767
Four years		16,760		12,662
Five years		5,282		16,087
Thereafter		1,347		0
Total	$	319,755	$	350,004

At December 31, 2014 and 2013, the Company had certificates and other time deposits in denominations of $100,000 or more with maturities as follows:

(in thousands)	2014		2013
Due within:
Three months or less	$	33,488	$	46,306
Over three months through six months		29,381		18,398
Over six months through twelve months		35,308		42,624
Over twelve months		36,768		38,629
Total	$	134,945	$	145,957

The Federal Reserve Bank required the Bank to maintain cash or balances of $1.6 million and $1.3 million at December 31, 2014 and 2013, respectively, to satisfy reserve requirements.

Average compensating balances held at correspondent banks were $408,000 and $315,000 at December 31, 2014 and 2013, respectively. The Bank maintains such compensating balances with correspondent banks to offset charges for services rendered by those banks.

XML

Real Estate and Other Assets Acquired in Settlement of Loans (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Schedule of real estate acquired in settlement of loans
Balance at beginning of period	$ 19,542	$ 29,729
Additions	1,975	4,613
Proceeds from sales	(4,560)	(9,641)	(8,571)
Charge-offs against the valuation allowance for other real estate owned	(2,005)	(4,829)
Repossessed assets impairment write-downs		(189)
Net (loss) gain on sales	188	(141)
Total other real estate and repossessed assets	15,140	19,542	29,729
Less valuation allowance for other real estate owned	(3,255)
Balance at end of period	$ 11,885	$ 14,867

XML

Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Current:
Federal									$ 1,105	$ 584	$ 651
State									137	71	156
Total current									1,242	655	807
Deferred:
Federal									2,353	1,485	(197)
State									447	282	(64)
Total deferred									2,800	1,767	(261)
Total income tax expense	$ 1,074	$ 802	$ 1,121	$ 1,045	$ 903	$ 771	$ 810	$ (62)	$ 4,042	$ 2,422	$ 546

XML

Real Estate and Other Assets Acquired in Settlement of Loans (Detail Textuals) (USD $)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Other Real Estate [Abstract]
Net charge-offs against allowance for loan losses	$ 335,000	$ 800,000

XML

Earnings per Share (Detail Textuals)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Summary of anti-dilutive shares
Anti-dilutive shares	96,481	126,286	543,510
Option shares
Summary of anti-dilutive shares
Anti-dilutive shares	96,481	126,286	232,947
Warrant shares
Summary of anti-dilutive shares
Anti-dilutive shares	0	0	310,563

XML

Real Estate and Other Assets Acquired in Settlement of Loans (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Summary of real estate and other assets acquired in settlement of loans
Repossessed assets	$ 38	$ 41
Total	15,140	19,542	29,729
Less valuation allowance for other real estate owned	(3,255)	(4,675)	(6,137)	(6,977)
Total other real estate and repossessed assets	11,885	14,867
Commercial
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	0	0
Real estate construction - residential
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	23	114
Real estate construction - commercial
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	9,831	10,020
Real estate mortgage - residential
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	417	830
Real estate mortgage - commercial
Summary of real estate and other assets acquired in settlement of loans
Real estate acquired through foreclosure	$ 4,831	$ 8,537

XML

Employee Benefit Plans (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Compensation and Retirement Disclosure [Abstract]
Prior service costs	$ (443)	$ (522)
Net accumulated actuarial net (loss) gain	(2,008)	1,560
Accumulated other comprehensive (loss) gain	(2,451)	1,038
Net periodic benefit cost in excess of cumulative employer contributions	(2,593)	(2,358)
Net amount recognized at December 31, balance sheet	(5,044)	(1,320)
Net (loss) gain arising during period	(3,568)	3,378
Prior service cost amortization	79	79
Amortization of net actuarial loss	0	31
Total recognized in other comprehensive (loss) income	(3,489)	3,488
Total recognized in net periodic pension cost and other comprehensive (loss) income	$ 4,449	$ (2,315)

XML

Premises and Equipment (Tables)

12 Months Ended

Dec. 31, 2014

Premises and Equipment

Schedule of summary of premises and equipment

(in thousands)	2014		2013
Land and land improvements	$	10,152	$	10,073
Buildings and improvements		35,504		33,730
Furniture and equipment		12,016		11,627
Construction in progress		523		2,402
Total		58,195		57,832
Less accumulated depreciation		20,697		19,753
Premises and equipment, net	$	37,498	$	38,079

Schedule of depreciation expense

(in thousands)	2014		2013		2012
Depreciation expense	$	1,758	$	1,605	$	1,858

XML

Summary of Significant Accounting Policies (Detail Textuals 2) (USD $)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Summary Of Significant Accounting Policies [Line Items]
Mortgage loans held for sale		$ 95,882
Depreciation methods	straight-line and accelerated methods
Amortization method	straight line and accelerated methods
Sustained period of repayment performance for non-accrual TDRs	6 months
Period of employees highest compensation before retirement	10 years
Core deposit intangible | Minimum
Summary Of Significant Accounting Policies [Line Items]
Estimated lives	7 years
Core deposit intangible | Maximum
Summary Of Significant Accounting Policies [Line Items]
Estimated lives	8 years
Mortgage servicing rights | Error adjustment related to amortization method of MSR's
Summary Of Significant Accounting Policies [Line Items]
Cumulative effect of change in accounting principle as increase to retained earnings	$ 459,890
Buildings and improvements
Summary Of Significant Accounting Policies [Line Items]
Estimated useful lives	5 to 40 years
Furniture and equipment
Summary Of Significant Accounting Policies [Line Items]
Estimated useful lives	3 to 15 years
Federal Home Loan Bank of Des Moines
Summary Of Significant Accounting Policies [Line Items]
Investment in capital stock of the Federal Home Loan Bank of total assets	0.12%
Investment in capital stock of Federal Home Loan Bank required percentage of advances	4.00%

XML

Stock Compensation

12 Months Ended

Dec. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Compensation

(12) Stock Compensation

The Company’s stock option plan provides for the grant of options to purchase up to 569,392 shares of the Company’s common stock to officers and other key employees of the Company and its subsidiaries.

The following table summarizes the Company’s stock option activity:

​	Number of shares December 31						Weighted average exercise price December 31
​	2014		2013		2012		2014			2013			2012
Outstanding, beginning of year	​	126,286	​	232,947	​	297,962	​	$	23.21	​	$	22.82	​	$	21.61
Granted	​	0	​	0	​	0	​	​	0.00	​	​	0.00	​	​	0.00
Exercised	​	0	​	0	​	0	​	​	0.00	​	​	0.00	​	​	0.00
Forfeited or expired	​	(29,805)	​	(106,661)	​	(65,015)	​	​	25.75	​	​	22.37	​	​	17.26
Outstanding, end of year	​	96,481	​	126,286	​	232,947	​	$	22.42	​	$	23.21	​	$	22.82
Exercisable, end of year	​	85,160	​	111,188	​	213,878	​	$	22.82	​	$	23.49	​	$	22.90

Options have been adjusted to reflect a 4% stock dividend paid on July 1, 2014.

Total stock-based compensation expense for the years ended December 31, 2014, 2013, and 2012 was $20,000, $19,000, and $29,000, respectively. As of December 31, 2014, the total unrecognized compensation expense related to non-vested stock awards was $31,000 and the related weighted average period over which it is expected to be recognized is approximately 1.3 years.

Options outstanding at December 31, 2014 had a weighted average remaining contractual life of approximately 1.9 years and no intrinsic value. Options outstanding at December 31, 2013 had a weighted average remaining contractual life of approximately 2.5 years and no intrinsic value. No stock options were granted during the years presented above.

Options exercisable at December 31, 2014 had a weighted average remaining contractual life of approximately 1.7 years and no intrinsic value. Options exercisable at December 31, 2013 had a weighted average remaining contractual life of approximately 2.3 years and no intrinsic value. No stock options were exercised during the years presented above.

XML

Condensed Financial Information of the Parent Company Only (Details 2) (USD $) In Thousands, unless otherwise specified	0 Months Ended	3 Months Ended				12 Months Ended
	Jun. 11, 2013	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Cash flows from operating activities:
Net income		$ 1,729	$ 1,569	$ 1,812	$ (136)	$ 7,654	$ 4,974	$ 2,822
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation						1,758	1,605	1,858
Stock based compensation expense						20	19	29
Other, net						2,355	(444)	(125)
Net cash provided by operating activities						13,554	20,243	14,875
Cash flows from investing activities:
Net cash used by investing activities						(17,096)	(9,548)	(6,374)
Cash flows from financing activities:
Redemption of 18,255 and 12,000 shares, respectively, of preferred stock						0	(18,255)	(12,000)
Cash dividends paid - preferred stock						0	(456)	(1,203)
Cash dividends paid - common stock						(1,017)	(978)	(940)
Warrant redemption	(540)					0	(540)	0
Net cash provided (used) by financing activities						17,912	(41,133)	7,166
Net increase (decrease) in cash and cash equivalents						14,370	(30,438)	15,667
Cash and cash equivalents, beginning of year					58,877	28,439	58,877	43,210
Cash and cash equivalents, end of year		28,439				42,809	28,439	58,877
HAWTHORN BANCSHARES, INC.
Cash flows from operating activities:
Net income						7,654	4,974	2,822
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation						0	1	1
Equity in undistributed (income) losses of subsidiaries						(7,010)	8,129	(239)
Stock based compensation expense						20	19	29
(Increase) decrease in deferred tax asset						(1,415)	1,325	(148)
Other, net						1,942	(182)	(813)
Net cash provided by operating activities						1,191	14,266	1,652
Cash flows from investing activities:
Investment in subsidiary						400	4,550	1,072
Net cash used by investing activities						400	4,550	1,072
Cash flows from financing activities:
Redemption of 18,255 and 12,000 shares, respectively, of preferred stock						0	(18,255)	(12,000)
Cash dividends paid - preferred stock						0	(456)	(1,203)
Cash dividends paid - common stock						(1,017)	(978)	(940)
Warrant redemption						0	(540)	0
Net cash provided (used) by financing activities						(1,017)	(20,229)	(14,143)
Net increase (decrease) in cash and cash equivalents						574	(1,413)	(11,419)
Cash and cash equivalents, beginning of year					1,863	450	1,863	13,282
Cash and cash equivalents, end of year		$ 450				$ 1,024	$ 450	$ 1,863

XML

Repurchase Reserve Liability

12 Months Ended

Dec. 31, 2014

Repurchase Reserve Liability [Abstract]

Repurchase Reserve Liability

(17) Repurchase Reserve Liability

The Company’s repurchase reserve liability for estimated losses incurred on sold loans was $160,000 at both December 31, 2014, and 2013. This liability represents management’s estimate of the potential repurchase or make-whole liability for residential mortgage loans originated for sale that may arise from representation and warranty claims that could relate to a variety of issues, including but not limited to, misrepresentation of facts, appraisal issues, or program requirements that may not meet investor guidelines. The Company has not experienced any repurchase losses during the year ended December 31, 2014. At December 31, 2014, the Company was servicing 3,057 loans sold to the secondary market with a balance of approximately $313.9 million compared to 3,114 loans sold with a balance of approximately $322.5 million at December 31, 2013.

XML

Employee Benefit Plans (Parentheticals) (Details 5)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Compensation and Retirement Disclosure [Abstract]
Percentage of securities comprising of low-cost equity index funds not actively managed that track the MSCI EAFE	31.00%	32.00%

XML

Summary of Significant Accounting Policies (Detail Textuals) (USD $)	0 Months Ended	3 Months Ended	12 Months Ended
	Jul. 01, 2014	Sep. 30, 2014	Dec. 31, 2014
Accounting Policies [Abstract]
Employee fraud resulting in gross loss		$ 421,000
Net loss recorded due to employee fraud			136,000
Net of expected insurance proceeds		$ 285,000
Percentage of special stock dividend paid to shareholders	4.00%

XML

Fair Value Measurements (Details 1) (Recurring, Significant Unobservable Inputs (Level 3), Mortgage servicing rights, USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Recurring | Significant Unobservable Inputs (Level 3) | Mortgage servicing rights
Fair value of assets
Balance at beginning of period	$ 3,036	$ 2,549
Total gains or losses (realized/unrealized) Included in earnings	(576)	(25)
Total gains or losses (realized/unrealized) Included in other comprehensive income	0	0
Purchases	0	0
Sales	0	0
Issues	302	512
Settlements	0	0
Balance at end of period	$ 2,762	$ 3,036

XML

Stock Compensation (Tables)

12 Months Ended

Dec. 31, 2014

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of summary of Company's stock option activity

										Weighted average
	Number of shares									exercise price
	December 31									December 31
	2014			2013			2012			2014		2013		2012
Outstanding, beginning of year		126,286			232,947			297,962		$	23.21	$	22.82	$	21.61
Granted		0			0			0			0.00		0.00		0.00
Exercised		0			0			0			0.00		0.00		0.00
Forfeited or expired		(29,805	)		(106,661	)		(65,015	)		25.75		22.37		17.26
Outstanding, end of year		96,481			126,286			232,947		$	22.42	$	23.21	$	22.82
Exercisable, end of year		85,160			111,188			213,878		$	22.82	$	23.49	$	22.90

XML

Fair Value Measurements (Details 3) (Nonrecurring, USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014		Dec. 31, 2013
Total Gains (Losses)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Gains (losses) on impaired loans	$ (5,363)	[1]	$ (3,185)	[1]
Gains (losses) on other real estate owned and repossessed assets	(1,870)	[1]	(5,395)	[1]
Total Fair Value
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	5,689		11,470
Other real estate owned and repossessed assets	11,885		14,867
Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Other real estate owned and repossessed assets	0		0
Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Other real estate owned and repossessed assets	0		0
Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	5,689		11,470
Other real estate owned and repossessed assets	11,885		14,867
Commercial, financial, and agricultural | Total Gains (Losses)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Gains (losses) on impaired loans	(1,105)	[1]	(735)	[1]
Commercial, financial, and agricultural | Total Fair Value
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	1,386		827
Commercial, financial, and agricultural | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Commercial, financial, and agricultural | Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Commercial, financial, and agricultural | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	1,386		827
Real estate construction - residential | Total Gains (Losses)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Gains (losses) on impaired loans	(350)	[1]	(119)	[1]
Real estate construction - residential | Total Fair Value
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		1,768
Real estate construction - residential | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Real estate construction - residential | Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Real estate construction - residential | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		1,768
Real estate construction - commercial | Total Gains (Losses)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Gains (losses) on impaired loans	(491)	[1]	(498)	[1]
Real estate construction - commercial | Total Fair Value
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		210
Real estate construction - commercial | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Real estate construction - commercial | Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Real estate construction - commercial | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		210
Real estate mortgage - residential | Total Gains (Losses)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Gains (losses) on impaired loans	(332)	[1]	(376)	[1]
Real estate mortgage - residential | Total Fair Value
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	3,322		3,022
Real estate mortgage - residential | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Real estate mortgage - residential | Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Real estate mortgage - residential | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	3,322		3,022
Real estate mortgage - commercial | Total Gains (Losses)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Gains (losses) on impaired loans	(2,937)	[1]	(1,457)	[1]
Real estate mortgage - commercial | Total Fair Value
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	809		5,616
Real estate mortgage - commercial | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Real estate mortgage - commercial | Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Real estate mortgage - commercial | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	809		5,616
Consumer | Total Gains (Losses)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Gains (losses) on impaired loans	(148)	[1]	0	[1]
Consumer | Total Fair Value
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	172		27
Consumer | Quoted Prices in Active Markets for Identical Assets (Level 1)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Consumer | Other Observable Inputs (Level 2)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	0		0
Consumer | Significant Unobservable Inputs (Level 3)
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Impaired loans	$ 172		$ 27

[1] Total gains (losses) reported for other real estate owned and repossessed assets includes charge-offs, valuation write-downs, and net losses taken during the periods reported.

XML

Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Consolidated Statements of Comprehensive Income
Net income	$ 7,654	$ 4,974	$ 2,822
Securities available for sale:
Unrealized gain (loss) on investment securities available-for-sale, net of tax	1,717	(4,275)	(123)
Adjustment for gain on sales of investment securities, net of tax	(12)	(482)	(16)
Defined benefit pension plans:
Net (loss) gain arising during the year, net of tax	(2,212)	2,095	547
Amortization of prior service cost included in net periodic pension cost, net of tax	48	68	77
Other comprehensive income	(459)	(2,594)	485
Total comprehensive income	$ 7,195	$ 2,380	$ 3,307

XML

Stockholders' Equity (Details) (USD $) In Thousands, unless otherwise specified	Unrealized Gain on Securities		Unrecognized Net Pension and Postretirement Costs		Accumulated Other Comprehensive (Loss) Income	Total
Balance at the beginning at Dec. 31, 2011
Accumulated Other Comprehensive Income (Loss)
Current period other comprehensive (loss) income, net of tax					$ 485	$ 485
Balance at the end at Dec. 31, 2012	3,266	[1]	(1,441)	[2]	1,825
Accumulated Other Comprehensive Income (Loss)
Other comprehensive (loss) income, before reclassifications	(6,980)	[1]	3,378	[2]	(3,602)
Amounts reclassified from accumulated other comprehensive income	(778)	[1]	110	[2]	(668)
Current period other comprehensive (loss) income, before tax	(7,758)	[1]	3,488	[2]	(4,270)
Income tax benefit (expense)	3,001	[1]	(1,325)	[2]	1,676
Current period other comprehensive (loss) income, net of tax	(4,757)	[1]	2,163	[2]	(2,594)	(2,594)
Balance at the end at Dec. 31, 2013	(1,491)	[1]	722	[2]	(769)	(769)
Accumulated Other Comprehensive Income (Loss)
Other comprehensive (loss) income, before reclassifications	2,770	[1]	(3,568)	[2]	(798)
Amounts reclassified from accumulated other comprehensive income	(20)	[1]	79	[2]	59
Current period other comprehensive (loss) income, before tax	2,750	[1]	(3,489)	[2]	(739)
Income tax benefit (expense)	(1,045)	[1]	1,325	[2]	280
Current period other comprehensive (loss) income, net of tax	1,705	[1]	(2,164)	[2]	(459)	(459)
Balance at the end at Dec. 31, 2014	$ 214	[1]	$ (1,442)	[2]	$ (1,228)	$ (1,228)

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

[2] The pre-tax amounts reclassified from accumulated other comprehensive income are included in the computation of net periodic pension cost. See Note 11.

XML

Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2014

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

(1) Summary of Significant Accounting Policies

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

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

During the third quarter of, 2014, the Company’s management discovered employee fraud resulting in the loss of an aggregate $421,000 of cash over an extended period of time. As a result of the discovery, the Company recorded a $136,000 loss in its consolidated financial statements as of December 31, 2014, representing the $421,000 gross loss, net of expected insurance proceeds of $285,000. The Company determined that any adjustments relating to prior-period financial statements were immaterial

Stock Dividend On July 1, 2014, the Company paid a special stock dividend of four percent to common shareholders of record at the close of business on June 15, 2014. For all periods presented, share information, including basic and diluted earnings per share, has been adjusted retroactively to reflect this change.

Preferred Stock On December 19, 2008, the Company announced its participation in the U.S. Treasury Department’s Capital Purchase Program (CPP), a voluntary program that provides capital to financially healthy banks. Participation in this program included the Company’s issuance of 30,255 shares of senior preferred stock (with a par value of  $1,000 per share) and a ten year warrant to purchase approximately 287,133 shares of common stock. On May 9, 2012, the Company redeemed 12,000 of the 30,255 shares of preferred stock issued under the U.S. Treasury’s CPP program for a total purchase price of  $12.1 million, and on May 15, 2013, the remaining 18,255 shares were redeemed for a total purchase price of  $18.5 million.

On June 11, 2013, the common stock warrant issued under the U.S. Treasury Department’s CPP program was repurchased by the Company for a total purchase price of  $540,000, or $1.88 per warrant share. The purchase price was based on the fair market value of the warrant as agreed upon by the Company and the Treasury. The repurchase of the warrant ended the Company’s participation in the U.S. Treasury Department’s CPP.

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

Principles of Consolidation

In December of 2008 and March of 2010, the Company formed Hawthorn Real Estate, LLC, and Real Estate Holdings of Missouri, LLC, respectively (the Real Estate Companies); both are wholly owned subsidiaries of the Company. The consolidated financial statements include the accounts of the Company, Hawthorn Bank (the Bank), and the Real Estate Companies. All significant intercompany accounts and transactions have been eliminated in consolidation.

Loans

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

Loans Held for Sale

The Bank originates certain loans, which are sold in the secondary market. These long-term, fixed rate loans are typically classified as held for sale upon origination based on management’s intent to sell and are accounted for at the lower of adjusted cost or fair value. Adjusted cost reflects the funded loan amount and any loan origination costs and fees. In order to manage the risk associated with such activities, the Company upon locking in an interest rate with the borrower enters into an agreement to sell such loans in the secondary market. Loans held for sale are typically sold with servicing rights retained and without recourse except for normal and customary representation and warranty provisions. At December 31, 2014, there were no mortgage loans that were held for sale in comparison to $95,882 loans held for sale at December 31, 2013.

Impaired Loans

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

Non-Accrual Loans

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

Restructured Loans

A modified or restructured loan is accounted for as a troubled debt restructuring (TDR) for any loans in which concessions are made to the borrower for economic or legal reasons that the Company would not otherwise consider and the borrower is experiencing financial difficulty. A loan classified as a TDR will generally retain such classification until the loan is paid in full. Non-accrual TDRs are returned to accruing status once the borrower demonstrates the ability to pay under the terms of the restructured note through a sustained period of repayment performance, which is generally six months. The Company includes all accruing and non-accruing TDRs in the impaired and non-performing asset totals. TDRs are measured for impairment loss by using fair values of the underlying collateral obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows.

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. 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.

Loans, or portions of loans, are charged off to the extent deemed uncollectible or a loss is confirmed. When loans become 90 days past due, they are generally placed on nonaccrual status or charged off unless extenuating circumstances justify leaving the loan on accrual basis. When loans reach 120 days past due and there is little likelihood of repayment, they are charged off. Loan charge-offs reduce the allowance for loan losses, and recoveries of loans previously charged off are added back to the allowance. If management determines that it is probable that all amounts due on a loan will not be collected under the original terms of the loan agreement, the loan is considered to be impaired. These loans are evaluated individually for impairment, and in conjunction with current economic conditions and loss experience, specific reserves are estimated. 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 adjusted for certain qualitative factors to reflect current risk characteristics of the portfolio. In addition, the combined historical loan loss rates and qualitative factors are multiplied by loss emergence periods which represent the estimated time period between a borrower first experiencing financial difficulty and the recognition of a potential loss. Although the allowance for loan losses are comprised of specific and general allocations, the entire allowance is available to absorb credit losses.

The specific reserve component applies to loans evaluated individually for impairment. The net carrying value of impaired loans is generally based on the fair values of collateral obtained through independent appraisals and/or internal evaluations, or by discounting the total expected future cash flows. Once the impairment amount is calculated, a specific reserve allocation is recorded. The incurred loss component of the general reserve, or loans collectively evaluated for impairment, is determined by applying loss rates to pools of loans by 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, delinquencies, current economic conditions, loan risk ratings, and industry concentration adjusted for certain qualitative factors to reflect current risk characteristics of the portfolio. In addition, the combined historical loan loss rates and qualitative factors 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 determined that the previous twelve quarters were reflective of the loss characteristics of the Company’s loan portfolio during the recent economic environment. These historical loss rates for each risk group are used as the starting point to determine loss rates for measurement purposes. The Company’s methodology includes qualitative factors that allow management to adjust its estimates of losses based on the most recent information available. These factors reflect actual changes and anticipated changes such as changes in specific allowances on loans and real estate acquired through foreclosure, any gains and losses on final disposition of real estate acquired through foreclosure, changes in national and local economic conditions and developments, including general economic and business conditions affecting the Company’s key lending areas, credit quality trends, specific industry conditions within portfolio segments, bank regulatory examination results, and findings of the internal loan review department. These risk factors are generally reviewed and updated quarterly, as appropriate.

Investment in Debt and Equity Securities

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

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

Capital Stock of the Federal Home Loan Bank

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

Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation applicable to buildings and improve-ments and furniture and equipment is charged to expense using straight-line and accelerated methods over the estimated useful lives of the assets. Such lives are estimated to be 5 to 40 years for buildings and improvements and 3 to 15 years for furniture and equipment. Maintenance and repairs are charged to expense as incurred.

Core Deposit Intangibles

Intangible assets that have finite useful lives, such as core deposit intangibles, are amortized over their estimated useful lives. Core deposit intangibles are amortized over periods of 7 to 8 years representing their estimated lives using straight line and accelerated methods.

When facts and circumstances indicate potential impairment of amortizable intangible assets, the Company evaluates the recoverability of the carrying value based upon future cash flows expected to result from the use of the underlying asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying value of the underlying asset, the Company recognizes an impairment loss. The impairment loss recognized represents the amount by which the carrying value of the underlying asset exceeds the fair value of the underlying asset.

Mortgage Servicing Rights

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

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

On January 1, 2012, the Company opted to measure mortgage servicing rights at fair value as permitted by Accounting Standards Codification (ASC) Topic 860-50, Accounting for Servicing Financial Assets. The election of this option resulted in the recognition of a cumulative effect of change in accounting principle of $459,890, which was recorded as an increase to beginning retained earnings. As such, effective January 1, 2012, changes in the fair value of mortgage servicing rights have been recognized in real estate servicing fees, net in non-interest income in the Company’s Consolidated Statements of Income in the period in which the change occurred.

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

Other Real Estate Owned and Repossessed Assets

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

Pension Plan

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

The Company follows authoritative guidance included in the FASB ASC Topic 715, Compensation – Retirement Plans under the subtopic Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. ASC Topic 715 requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its consolidated balance sheet and to recognize changes in the funded status in the year in which the changes occur through comprehensive income. This guidance also requires an employer to measure the funded status of a plan as of the date of its fiscal year-end, with limited exceptions. Additional disclosures are required to provide users with an understanding of how investment allocation decisions are made, major categories of plan assets, and fair value measurement of plan assets as defined in ASC Topic 820, Fair Value Measurements and Disclosures.

Income Taxes

Income taxes are accounted for under the asset / liability method by recognizing the amount of taxes payable or refundable for the current period and deferred tax assets and liabilities for future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Judgment is required in addressing the Company’s future tax consequences of events that have been recognized in the consolidated financial statements or tax returns such as realization of the effects of temporary differences, net operating loss carry forwards and changes in tax laws or interpretations thereof. A valuation allowance is established when in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. In this case, the Company would adjust the recorded value of our deferred tax asset, which would result in a direct charge to income tax expense in the period that the determination was made. Likewise, the Company would reverse the valuation allowance when it is expected to realize the deferred tax asset. The Company has not recognized any tax liabilities or any interest or penalties in income tax expense related to uncertain tax positions as of December 31, 2014, 2013, and 2012.

Trust Department

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

Consolidated Statements of Cash Flows

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

Stock-Based Compensation

The Company’s stock-based employee compensation plan is described in Note 12, Stock Compensation. In accordance with FASB ASC Topic 718, Compensation – Stock Compensation, the Company measures the cost of the stock-based compensation based on the grant-date fair value of the award, recognizing the cost over the requisite service period. The fair value of an award is estimated using the Black-Scholes option-pricing model. The expense recognized is based on an estimation of the number of awards for which the requisite service is expected to be rendered, and is included in salaries and employee benefits in the accompanying Consolidated Statements of Income. The standard also requires that excess tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.

Treasury Stock

The purchase of the Company’s common stock is recorded at cost. Purchases of the stock are made both in the open market and through negotiated private purchases based on market prices. At the date of subsequent reissue, the treasury stock account is reduced by the cost associated with such stock on a first-in-first-out basis.

Reclassifications

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

XML

Loans and Allowance for Loan Losses (Details 6) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Average Recorded Investment
With no related allowance recorded	$ 26,932	$ 21,573
With an allowance recorded	12,752	17,398
Total impaired loans	39,684	38,971
Interest Recognized For the Period Ended
With no related allowance recorded	542	338
With an allowance recorded	159	166
Total impaired loans	701	504
Commercial, financial, and agricultural
Average Recorded Investment
With no related allowance recorded	3,141	2,693
With an allowance recorded	1,773	1,677
Interest Recognized For the Period Ended
With no related allowance recorded	94	108
With an allowance recorded	19	29
Real estate - construction residential
Average Recorded Investment
With no related allowance recorded	610	80
With an allowance recorded	1,697	2,409
Interest Recognized For the Period Ended
With no related allowance recorded	2	0
With an allowance recorded	0	0
Real estate - construction commercial
Average Recorded Investment
With no related allowance recorded	5,950	7,437
With an allowance recorded	42	514
Interest Recognized For the Period Ended
With no related allowance recorded	0	6
With an allowance recorded	0	0
Real estate - residential
Average Recorded Investment
With no related allowance recorded	3,517	2,612
With an allowance recorded	5,118	4,596
Interest Recognized For the Period Ended
With no related allowance recorded	46	51
With an allowance recorded	129	24
Real estate - commercial
Average Recorded Investment
With no related allowance recorded	13,703	8,461
With an allowance recorded	3,810	8,157
Interest Recognized For the Period Ended
With no related allowance recorded	400	170
With an allowance recorded	11	113
Consumer
Average Recorded Investment
With no related allowance recorded	11	290
With an allowance recorded	312	45
Interest Recognized For the Period Ended
With no related allowance recorded	0	3
With an allowance recorded	$ 0	$ 0

XML

Borrowings (Details 1) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Borrowings
Year End Balance - Total Bank	$ 43,000	$ 24,000
Year End Balance - Total Company	49,486	49,486
Bank
Borrowings
Year End Balance - Total Bank	43,000	24,000
FHLB advances | Bank
Borrowings
2015	8,000	0
2016	8,000	3,000
2017	5,000	3,000
2018	20,000	18,000
2019-20	2,000	0
2015 (as a percent)	0.30%
2016 (as a percent)	0.67%	0.64%
2017 (as a percent)	1.07%	0.91%
2018 (as a percent)	2.00%	2.00%
2019-20 (as a percent)	1.97%
Subordinated notes due 2034
Borrowings
Year End Balance - Total Company	25,774	25,774
Year End Weighted Rate (as a percent)	2.94%	2.94%
Subordinated notes due 2035
Borrowings
Year End Balance - Total Company	$ 23,712	$ 23,712
Year End Weighted Rate (as a percent)	2.07%	2.07%

XML

Fair Value Measurements (Details 2) (Recurring, Significant Unobservable Inputs (Level 3), Mortgage servicing rights)	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013
Recurring | Significant Unobservable Inputs (Level 3) | Mortgage servicing rights
Quantitative Information
Weighted average constant prepayment rate (as a percent)	10.54%	9.48%
Weighted average discount rate (as a percent)	9.21%	9.06%
Weighted average expected life (in years)	5 years 8 months 12 days	6 years 1 month 6 days

XML

Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2014	Dec. 31, 2013
Fair Value
Less than 12 months	$ 16,964	$ 108,726
12 months or more	65,249	6,391
Total	82,213	115,117
Unrealized Losses
Less than 12 months	(69)	(3,866)
12 months or more	(1,264)	(304)
Total	(1,333)	(4,170)
Government sponsored enterprises
Fair Value
Less than 12 months	2,983	25,771
12 months or more	17,862	0
Total	20,845	25,771
Unrealized Losses
Less than 12 months	(4)	(767)
12 months or more	(139)	0
Total	(143)	(767)
Asset-backed securities
Fair Value
Less than 12 months	10,314	76,048
12 months or more	45,445	5,941
Total	55,759	81,989
Unrealized Losses
Less than 12 months	(50)	(2,940)
12 months or more	(1,069)	(251)
Total	(1,119)	(3,191)
Obligations of states and political subdivisions
Fair Value
Less than 12 months	3,667	6,907
12 months or more	1,942	450
Total	5,609	7,357
Unrealized Losses
Less than 12 months	(15)	(159)
12 months or more	(56)	(53)
Total	$ (71)	$ (212)

XML

Commitments and Contingencies

12 Months Ended

Dec. 31, 2014

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

(18) Commitments and Contingencies

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

The Company’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At December 31, 2014, no amounts have been accrued for any estimated losses for these financial instruments.

The contractual amount of off-balance-sheet financial instruments as of December 31, 2014 and 2013 is as follows:

(in thousands)	2014		2013
Commitments to extend credit	$	135,137	$	117,880
Commitments to originate residential first and second mortgage loans		1,640		1,852
Standby letters of credit		1,621		1,826

Commitments

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments and letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, furniture and equipment, and real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Company’s customers. The approximate remaining term of standby letters of credit range from one month to five years at December 31, 2014.

Pending Litigation

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

XML

Intangible Assets (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Finite-Lived Intangible Assets [Line Items]
Amortization	$ 0	$ (135)	$ (408)
Core Deposit Intangible Asset
Finite-Lived Intangible Assets [Line Items]
Balance at beginning of year	0	135	543
Additions	0	0	0
Amortization	0	(135)	(408)
Balance at end of year	$ 0	$ 0	$ 135

XML

Income Taxes (Tables)

12 Months Ended

Dec. 31, 2014

Income Tax Disclosure [Abstract]

Schedule of composition of income tax expense (benefit)

The composition of income tax expense for the years ended December 31, 2014, 2013, and 2012 was as follows:

(in thousands)	2014			2013			2012
Current:	​			​			​
Federal	​	$	1,105	​	$	584	​	$	651
State	​	​	137	​	​	71	​	​	156
Total current	​	​	1,242	​	​	655	​	​	807
Deferred:	​			​			​
Federal	​	​	2,353	​	​	1,485	​	​	(197)
State	​	​	447	​	​	282	​	​	(64)
Total deferred	​	​	2,800	​	​	1,767	​	​	(261)
Total income tax expense	​	$	4,042	​	$	2,422	​	$	546

Schedule of the applicable income tax (benefit) expense for financial reporting purposes differs from the amount computed by applying the statutory Federal income tax rate

(in thousands)	2014						2013						2011
	Amount			%			Amount			%			Amount			%
Income before provision for income tax expense	$	11,696					$	7,396					$	3,368
Tax at statutory federal income tax rate	$	3,977			34.00	%	$	2,515			34.00	%	$	1,145			34.00	%
Tax-exempt income		(348	)		(2.98	)		(353	)		(4.77	)		(380	)		(11.27	)
State income tax, net of federal tax benefit		385			3.30			233			3.15			61			1.81
Release of prior year over accrual		0			0.00			0			0.00			(371	)		(11.01	)
Other, net		28			0.24			27			0.37			91			2.70
Provision for income tax expense	$	4,042			34.56	%	$	2,422			32.75	%	$	546			16.23	%

Schedule of components of deferred tax assets and deferred tax liabilities

(in thousands)	2014		2013
Deferred tax assets:
Allowance for loan losses	$	3,458	$	5,213
Impairment of other real estate owned		1,233		1,771
Goodwill		1,786		2,134
Available-for-sale securities		0		914
Deferred taxes on pension		0		0
Nonaccrual loan interest		1,069		1,015
Core deposit intangible		689		822
Pension		985		896
Deferred taxes on pension		998		0
Deferred compensation		130		44
Other		250		322
Total deferred tax assets	$	10,598	$	13,131
Deferred tax liabilities:
Available-for-sale securities	$	131	$	0
Premises and equipment		1,160		988
Mortgage servicing rights		1,022		1,114
Deferred taxes on pension		0		328
Assets held for sale		114		112
FHLB stock dividend		0		100
Other		53		72
Total deferred tax liabilities		2,480		2,714
Net deferred tax assets	$	8,118	$	10,417

XML

Employee Benefit Plans

12 Months Ended

Dec. 31, 2014

Compensation and Retirement Disclosure [Abstract]

Employee Benefit Plans

(11) Employee Benefit Plans

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

(in thousands)	2014		2013		2012
Payroll taxes	$	1,081	$	1,106	$	1,127
Medical plans		1,974		1,915		1,772
401(k) match		310		309		298
Pension plan		960		1,173		1,224
Profit-sharing		201		118		58
Other		122		219		317
Total employee benefits	$	4,648	$	4,840	$	4,796

The Company’s profit-sharing plan includes a matching 401(k) portion, in which the Company matches the first 3% of eligible employee contributions. The Company made annual contributions in an amount up to 6% of income before income taxes and before contributions to the profit-sharing and pension plans for all participants, limited to the maximum amount deductible for federal income tax purposes, for each of the periods shown. In addition, employees were able to make additional tax-deferred contributions.

Pension

The Company provides a noncontributory defined benefit pension plan for all full-time employees. An employer is required to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Under the Company’s funding policy for the defined benefit pension plan, contributions are made to a trust as necessary to provide for current service and for any unfunded accrued actuarial liabilities over a reasonable period. To the extent that these requirements are fully covered by assets in the trust, a contribution might not be made in a particular year. The Company has not made any contributions to the defined benefit plan for the current plan year. There is no minimum required contribution for the 2015 plan year.

Obligations and Funded Status at December 31,

(in thousands)	2014			2013
Change in projected benefit obligation:
Balance, January 1	$	14,852		$	15,342
Service cost		981			1,174
Interest cost		732			646
Actuarial gain		3,813			(1,991	)
Benefits paid		(401	)		(319	)
Balance, December 31	$	19,977		$	14,852
Change in plan assets:
Fair value, January 1	$	13,532		$	11,707
Actual return on plan assets		1,118			2,220
Employer contribution		725			0
Expenses paid		(41	)		(76	)
Benefits paid		(401	)		(319	)
Fair value, December 31	$	14,933		$	13,532
Funded status at end of year	$	(5,044	)	$	(1,320	)
Accumulated benefit obligation	$	16,595		$	12,298

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

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

(in thousands)	2014			2013			2012
Service cost—benefits earned during the year	​	$	981	​	$	1,174	​	$	1,168
Interest costs on projected benefit obligations	​	​	732	​	​	646	​	​	667
Expected return on plan assets	​	​	(872)	​	​	(797)	​	​	(776)
Expected administrative expenses	​	​	40	​	​	40	​	​	40
Amortization of prior service cost	​	​	79	​	​	79	​	​	79
Amortization of unrecognized net loss	​	​	0	​	​	31	​	​	46
Net periodic pension expense	​	$	960	​	$	1,173	​	$	1,224

 

Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive (loss) income at December 31, 2014 and 2013 are shown below, including amounts recognized in other comprehensive income during the periods. All amounts are shown on a pre-tax basis.

(in thousands)	2014			2013
Prior service costs	​	$	(443)	​	$	(522)
Net accumulated actuarial net (loss) gain	​	​	(2,008)	​	​	1,560
Accumulated other comprehensive (loss) gain	​	​	(2,451)	​	​	1,038
Net periodic benefit cost in excess of cumulative employer contributions	​	​	(2,593)	​	​	(2,358)
Net amount recognized at December 31, balance sheet	​	$	(5,044)	​	$	(1,320)
Net (loss) gain arising during period	​	$	(3,568)	​	$	3,378
Prior service cost amortization	​	​	79	​	​	79
Amortization of net actuarial loss	​	​	0	​	​	31
Total recognized in other comprehensive (loss) income	​	$	(3,489)	​	$	3,488
Total recognized in net periodic pension cost and other comprehensive (loss) income	​	$	4,449	​	$	(2,315)

The estimated prior service cost for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic cost in 2014 is $79,000. During 2014, there is no estimated amount of actuarial loss subject to amortization into net periodic pension cost.

Assumptions utilized to determine benefit obligations as of December 31, 2014, 2013 and 2012 and to determine pension expense for the years then ended are as follows:

	2014			2013			2012
Determination of benefit obligation at year end:
Discount rate		4.25	%		5.00	%		4.25	%
Annual rate of compensation increase		3.78	%		3.73	%		3.61	%
Determination of pension expense for year ended:
Discount rate for the service cost		5.00	%		4.25	%		4.75	%
Annual rate of compensation increase		3.73	%		3.61	%		4.50	%
Expected long-term rate of return on plan assets		7.00	%		7.00	%		7.00	%

The assumed overall expected long-term rate of return on pension plan assets used in calculating 2014 pension expense was 7.0%. Determination of the plan’s rate of return is based upon historical returns for equities and fixed income indexes. During the past five years, the Company’s plan assets have experienced the following annual returns: 8.3% in 2014, 19.1% in 2013, 11.4% in 2012, 0.1% in 2011, and 12.4% in 2010. The rate used in plan calculations may be adjusted by management for current trends in the economic environment. With a traditional investment mix of over half of the plan’s investments in equities, the actual return for any one plan year may fluctuate significantly with changes in the stock market. Due to a decrease in discount rates used in the actuarial calculation of plan income, the Company expects to incur $1.4 million of expense in 2015 compared to $960,000 in 2014.

Plan Assets

The investment policy of the pension plan is designed for growth in value while minimizing risk to the overall portfolio. The Company diversifies the assets through investments in domestic and international fixed income securities and domestic and international equity securities. The assets are readily marketable and can be sold to fund benefit payment obligations as they become payable. The Company’s long-term investment target mix for the plan is 70% equity securities and 30% fixed income.

The Company regularly reviews its policies on the investment mix and may make changes depending on economic conditions and perceived investment mix.

The fair value of the Company’s pension plan assets at December 31, 2014 and 2013 by asset category were as follows:

			Fair Value Measurements
			Quoted Prices
			in Active
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
(in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
December 31, 2014
Cash equivalents	$	1,937	$	1,937	$	0	$	0
Equity securities:
U.S. large-cap (a)		7,252		7,252		0		0
U.S. mid-cap (b)		921		921		0		0
U.S. small-cap (c)		1,131		1,131		0		0
International (d)		1,895		1,895		0		0
Real estate (e)		486		486		0		0
Commodities (f)		264		264		0		0
Fixed income securities:
U.S. gov't agency obligations (g)		1,047		0		1,047		0
Total	$	14,933	$	13,886	$	1,047	$	0
December 31, 2013
Cash equivalents	$	675	$	675	$	0	$	0
Equity securities:
U.S. large-cap (a)		6,506		6,506		0		0
U.S. mid-cap (b)		820		820		0		0
U.S. small-cap (c)		1,151		1,151		0		0
International (d)		2,016		2,016		0		0
Real estate (e)		387		387		0		0
Commodities (f)		319		319		0		0
Fixed income securities:
U.S. gov't agency obligations (g)		1,450		0		1,450		0
Corporate investment grade (g)		209		0		209		0
Total	$	13,533	$	11,874	$	1,659	$	0

(a) This category is comprised of low-cost equity index funds not actively managed that track the S&P 500.

(b) This category is comprised of low-cost equity index funds not actively managed that track the MSCI U.S. mid-cap 450.

(c) This category is comprised of actively managed mutual funds.

(d) At December 31, 2014 and 2013, 31% and 32%, respectively, of this category is comprised of low-cost equity index funds not actively managed that track the MSCI EAFE.

(e) This category is comprised of low-cost real estate index exchange traded funds.

(f) This category is comprised of exchange traded funds investing in agricultural and energy commodities.

(g) This category is comprised of individual bonds.

The following future benefit payments are expected to be paid:

Year	Pension benefits
(in thousands)
2015	$	514
2016		539
2017		598
2018		626
2019		648
2020 to 2024		4,784

XML

Earnings per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2014	Dec. 31, 2013	Dec. 31, 2012
Basic earnings per common share:
Net income					$ 1,729	$ 1,569	$ 1,812	$ (136)	$ 7,654	$ 4,974	$ 2,822
Less:Preferred stock dividends and accretion of discount									0	615	1,784
Net income available to common shareholders	2,001	1,568	2,098	1,987	1,729	1,569	1,492	(431)	7,654	4,359	1,038
Basic earnings per share (in dollars per share)	$ 0.38	$ 0.30	$ 0.40	$ 0.38	$ 0.33	$ 0.30	$ 0.29	$ (0.08)	$ 1.46	$ 0.83	$ 0.20
Diluted earnings per common share:
Net income					1,729	1,569	1,812	(136)	7,654	4,974	2,822
Preferred stock dividends and accretion of discount									0	615	1,784
Net income available to common shareholders	$ 2,001	$ 1,568	$ 2,098	$ 1,987	$ 1,729	$ 1,569	$ 1,492	$ (431)	$ 7,654	$ 4,359	$ 1,038
Average shares outstanding									5,233,986	5,233,986	5,233,986
Effect of dilutive stock options (in shares)									0	0	0
Average shares outstanding including dilutive stock options (in shares)									5,233,986	5,233,986	5,233,986
Diluted earnings per share (in dollars per share)	$ 0.38	$ 0.30	$ 0.40	$ 0.38	$ 0.33	$ 0.30	$ 0.29	$ (0.08)	$ 1.46	$ 0.83	$ 0.20