Hawthorn Bancshares, Inc. (NASDAQ:HWBK) is a Missouri-based community bank that has been serving its local markets for decades. With a focus on commercial banking, retail mortgage lending, and personal banking services, the company has established itself as a trusted financial institution in the communities it operates in.

Financials

In the latest quarter ended March 31, 2024, Hawthorn Bancshares reported net income of $4.5 million, or $0.63 per diluted share, up 36.2% from $3.3 million, or $0.47 per diluted share, in the same period last year. For the full year 2023, the company reported net income of $956,000 on revenue of $87,957,000. Operating cash flow for the year was $17,609,000, while free cash flow reached $15,512,000.

The company's strong performance in the first quarter of 2024 was driven by a 5.7% increase in net interest income to $14.7 million, compared to $13.9 million in the prior-year quarter. Net interest margin expanded to 3.39% from 3.16% a year earlier, reflecting the company's ability to effectively manage its interest-earning assets and liabilities in a rising rate environment.

Non-interest income, however, declined 5.1% to $3.0 million, primarily due to a decrease in real estate servicing fees and gains on mortgage loan sales. The company sold its mortgage servicing portfolio in January 2024, which resulted in a $0.2 million reduction in real estate servicing fees. Gain on sale of mortgage loans also decreased by $0.2 million to $0.3 million, as the company sold $15.1 million of loans compared to $20.2 million in the prior-year quarter.

On the expense side, non-interest expense increased slightly by 0.8% to $12.6 million, driven by higher processing, network, and bank card expenses, as well as increased legal, examination, and professional fees related to strategic initiatives. The company's efficiency ratio improved to 70.8% from 72.8% in the prior-year quarter, reflecting its ongoing efforts to manage costs and improve operational efficiency.

Balance Sheet and Capital

Hawthorn Bancshares' balance sheet remains strong, with total assets of $1.8 billion as of March 31, 2024. Loans held for investment decreased 1.3% to $1.5 billion, while deposits declined 2.7% to $1.5 billion. The company's capital ratios continue to exceed regulatory requirements, with a total risk-based capital ratio of 13.92% and a Tier 1 leverage ratio of 10.71% as of the end of the first quarter.

Asset Quality

Asset quality remains a focus for the company, with non-performing loans increasing to $8.5 million, or 0.56% of total loans, as of March 31, 2024, compared to $6.4 million, or 0.42%, at the end of 2023. The allowance for credit losses stood at 1.56% of total loans, up from 1.54% at the end of 2023. Management remains vigilant in monitoring the loan portfolio and proactively addressing any potential credit concerns.

Business Overview

In terms of geographic diversification, Hawthorn Bancshares operates primarily in the Missouri communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area. This regional focus has allowed the company to develop deep relationships with its local customer base and understand the unique needs of the communities it serves.

The company's lending portfolio is well-diversified, with commercial, financial, and agricultural loans accounting for 14.3% of the total loan portfolio, real estate construction loans at 6.6%, real estate mortgage loans at 78.0%, and installment and other consumer loans at 1.2% as of March 31, 2024. This diversification helps mitigate concentration risks and provides the company with a balanced revenue stream.

Outlook

Looking ahead, Hawthorn Bancshares remains cautiously optimistic about its future prospects. The company has not provided any formal guidance for the full year 2024, but management has expressed confidence in the bank's ability to navigate the current economic environment and continue delivering solid financial performance.

Risks and Challenges

One potential risk factor for the company is the ongoing interest rate environment. While Hawthorn Bancshares has been able to effectively manage its interest rate risk, a more pronounced or prolonged rise in interest rates could put pressure on its net interest margin and profitability. Additionally, the company's regional focus means it is susceptible to changes in the economic conditions of its local markets, which could impact loan demand and asset quality.

Conclusion

Overall, Hawthorn Bancshares has demonstrated its resilience as a community bank, delivering consistent financial performance and maintaining a strong balance sheet. The company's focus on commercial banking, retail mortgage lending, and personal banking services has allowed it to build a diversified revenue stream and establish deep roots in the communities it serves. As the company continues to navigate the evolving financial landscape, investors will be closely watching its ability to adapt and capitalize on new opportunities while managing any emerging risks.