Hawthorn Bancshares, Inc. (HWBK) - Q1 2026 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2026. Hawthorn Bancshares, Inc. operates as a community bank holding company with its subsidiary, Hawthorn Bank, serving Missouri communities including Jefferson City, Columbia, and Kansas City. The Company reports two segments: the Bank and Wealth Management. As of March 31, 2026, total assets were $1.86 billion.
Key Financial Metrics
| Metric | Q1 2026 | Q1 2025 |
|---|---|---|
| Net Income | $5.74 million | $5.38 million |
| Earnings Per Share (Diluted) | $0.83 | $0.77 |
| Net Interest Income | $17.10 million | $15.29 million |
| Net Interest Margin (FTE) | 4.07% | 3.67% |
| Non-Interest Income | $3.10 million | $3.46 million |
| Non-Interest Expense | $13.00 million | $12.50 million |
| Efficiency Ratio | 64.29% | 66.64% |
| Return on Average Assets | 1.26% | 1.20% |
| Return on Average Equity | 13.07% | 14.29% |
| Total Loans Held for Investment | $1.45 billion | $1.47 billion |
| Total Deposits | $1.52 billion | $1.54 billion |
| Cash and Cash Equivalents | $101.9 million | $102.3 million |
Material Changes vs. Prior Period
- Profitability: Net income increased 6.7% year-over-year, driven primarily by a $1.8 million increase in Net Interest Income (NII). The Net Interest Margin expanded to 4.07% from 3.67% due to higher yields on loans (6.11% vs 5.89%) outpacing the cost of funds.
- Asset Quality: Non-performing assets (NPA) increased significantly to $6.86 million (0.47% of loans) from $3.13 million (0.21% of loans) in Q1 2025. This increase was largely due to a specific residential mortgage loan moving to non-accrual status. Net charge-offs were $0.06 million compared to net recoveries of $0.02 million in the prior year.
- Expense Management: Non-interest expenses rose 4.0% to $13.0 million. Notable increases included legal and professional fees (up 62.7% due to lease execution fees) and occupancy expenses (up 6.0% due to branch expansion). Despite higher expenses, the efficiency ratio improved to 64.29%.
- Balance Sheet: Total loans decreased $32.6 million quarter-over-quarter. Total deposits decreased $35.8 million, primarily driven by a reduction in interest-bearing transaction accounts.
Guidance, Outlook, Risks, and Unusual Items
- Material Weakness in Internal Controls: Management identified a material weakness in internal control over financial reporting related to the accounting for a non-routine sale-leaseback transaction under ASC 842-40. While no restatement was required, management is implementing remediation measures. Consequently, disclosure controls were deemed ineffective as of March 31, 2026.
- Acquisition Activity: On April 29, 2026, the Company announced a definitive agreement to acquire FSC Bancshares, Inc. and Farmers State Bank in a cash and stock transaction, expected to close in Q3 2026.
- Capital Position: The Company maintains a "well-capitalized" status. Total risk-based capital ratio was 15.84%, and Tier 1 leverage ratio was 12.34%.
- Dividends and Buybacks: The Company declared a quarterly dividend of $0.21 per share. Under its $10 million repurchase program, the Company repurchased 12,000 shares in Q1 2026, with $8.0 million remaining available.
- Investment Portfolio: The available-for-sale securities portfolio held an unrealized loss of $25.2 million, attributed to interest rate fluctuations rather than credit quality.
Investor Verification Checklist
- Internal Control Remediation: Verify the progress of remediation plans for the material weakness regarding sale-leaseback accounting and assess the timeline for re-certification of effective controls.
- Asset Quality Trends: Monitor the specific residential mortgage loan contributing to the rise in non-performing assets to determine if it is an isolated incident or indicative of broader portfolio stress.
- Acquisition Integration: Review the terms and regulatory approval status of the proposed FSC Bancshares acquisition and its projected impact on future earnings and capital ratios.
- Deposit Stability: Analyze the composition of the $35.8 million deposit outflow to ensure core deposit relationships remain stable despite the decline in interest-bearing transaction accounts.
- Expense Run Rate: Confirm whether the elevated legal and occupancy expenses are one-time costs related to the acquisition and branch expansion or indicative of a higher permanent expense base.