Business Overview and History

Hawthorn Bancshares, Inc. (NASDAQ: HWBK) is a financial holding company headquartered in Jefferson City, Missouri, with a rich history of serving families and businesses for over 150 years through its subsidiary, Hawthorn Bank. The bank has strategically expanded its footprint, establishing a presence in the greater Kansas City metropolitan area, as well as in Jefferson City, Columbia, Springfield, and Clinton, Missouri, solidifying its position as a prominent community banking institution.

Hawthorn Bancshares was founded in the late 1800s as a small community bank serving the Jefferson City area. Over the decades, the bank has evolved, adapting to the changing needs of its customers and the regional economy. The company steadily grew its operations, expanding to additional locations in cities like Columbia, Clinton, Warsaw, and Springfield. In 1990, the company reorganized as a bank holding company, Hawthorn Bancshares, Inc., to facilitate growth and diversification.

In the early 2000s, Hawthorn Bancshares faced a significant challenge as it navigated the aftermath of the financial crisis. Like many banks, the company had to work through non-performing loans and other fallout from the economic downturn. However, the bank's experienced leadership team successfully guided the company through this difficult period, emerging as a stronger and more resilient institution.

A key milestone in Hawthorn Bancshares' history was the 2007 acquisition of a bank in the greater Kansas City metropolitan area. This strategic move allowed the company to establish a presence in the state's largest market and diversify its geographic footprint. The acquisition integration process was complex, but the Hawthorn Bancshares team executed it effectively, seamlessly bringing the two organizations together.

Today, Hawthorn Bancshares operates a network of branches across central and western Missouri, providing a broad range of commercial and personal banking services. The company has built a reputation as a trusted community bank, focused on developing deep relationships with its customers. Through periods of economic uncertainty and growth, Hawthorn Bancshares has consistently demonstrated its ability to adapt and evolve, while maintaining its commitment to the local markets it serves.

Hawthorn Bank's core business model has remained anchored in traditional community banking, with a focus on commercial lending, residential mortgages, and deposits. As of September 30, 2024, the bank's loan portfolio was diversified across commercial, real estate, and consumer segments, totaling $1.47 billion. The bank's deposit base stood at $1.50 billion, with a healthy mix of non-interest-bearing demand deposits, savings, and time deposits.

Financial Performance and Ratios

Hawthorn Bancshares has demonstrated resilience in its financial performance, navigating the challenges of the past decade. For the nine months ended September 30, 2024, the company reported net income of $13.7 million, or $1.95 per diluted share, compared to $8.4 million, or $1.19 per diluted share, during the same period in 2023, representing a 62.6% increase.

The company's net interest margin, on a fully taxable equivalent (FTE) basis, was 3.36% for the nine months ended September 30, 2024, up from 3.23% for the same period in 2023, reflecting the bank's effective management of its interest-earning assets and interest-bearing liabilities.

Hawthorn Bancshares' balance sheet remains well-capitalized, with a total risk-based capital ratio of 14.91% and a Tier 1 leverage ratio of 11.33% as of September 30, 2024, exceeding regulatory well-capitalized thresholds. The company's tangible book value per share stood at $30.55 as of the same date.

For the most recent fiscal year (2023), Hawthorn Bancshares reported revenue of $55.13 million, net income of $956,000, operating cash flow of $17.61 million, and free cash flow of $15.51 million. In the most recent quarter (Q3 2024), the company achieved revenue of $23,819,000, net income of $4,574,000, operating cash flow of $9,120,000, and free cash flow of $45,202,000. Notably, the company's revenue increased $2,706,000 or 12.8% compared to Q3 2023, while net income increased $2,016,000 or 77.4%. The significant increase in net income was primarily due to a $3,174,000 increase in non-interest income, partially offset by a $390,000 decrease in net interest income.

Lending and Credit Quality

Hawthorn Bank's loan portfolio is diversified across commercial, real estate, and consumer segments, mitigating concentration risks. As of September 30, 2024, the bank's non-performing assets to total loans ratio was 0.58%, a slight increase from 0.53% at the end of 2023, but still well below industry averages.

The allowance for credit losses, which stood at $21.9 million or 1.50% of total loans as of September 30, 2024, reflects the bank's prudent approach to managing credit risk. The company's net loan charge-offs for the nine months ended September 30, 2024, were $2.68 million, or 0.18% of average loans, up from $34,000, or 0.00% of average loans, in the same period of 2023, primarily due to a few larger commercial loan relationships.

Deposits and Liquidity

Hawthorn Bank's deposit base, which totaled $1.50 billion as of September 30, 2024, is primarily composed of core customer deposits, defined as demand, interest checking, savings, and money market accounts, accounting for 93.5% of total deposits. This stable funding base, along with the bank's access to borrowing facilities, such as the Federal Home Loan Bank, provides ample liquidity to support the company's operations and growth initiatives.

As of September 30, 2024, Hawthorn Bancshares had $54.2 million in cash and cash equivalents, and the bank's available borrowing capacity with the Federal Home Loan Bank and other correspondents stood at $324.5 million. The company's solid liquidity position allows it to navigate potential market disruptions and capitalize on lending opportunities.

The company's liquidity position is further strengthened by its cash and cash equivalents of $93.45 million as of December 31, 2023. Hawthorn Bancshares also has access to $35 million in federal funds purchased lines, $8.5 million in secured federal funds purchased lines, and additional borrowing capacity available from the Federal Home Loan Bank. The company's debt-to-equity ratio was 1.10 as of December 31, 2023, while its current ratio stood at 1.20 and quick ratio at 0.95.

Regulatory Environment and Compliance

Hawthorn Bancshares, as a bank holding company, and Hawthorn Bank, as a state-chartered bank, are subject to extensive regulations and oversight by federal and state banking authorities, including the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Missouri Division of Finance.

The company has maintained a strong compliance culture, investing in risk management practices and internal controls to ensure adherence to applicable laws and regulations. This diligence has allowed Hawthorn Bancshares to avoid any significant regulatory enforcement actions or sanctions, preserving its reputation and operational flexibility.

Challenges and Risks

Like many community banks, Hawthorn Bancshares faces ongoing challenges, including intense competition from larger regional and national banks, pressure on net interest margins due to the interest rate environment, and the need to invest in technology and digital banking capabilities to meet evolving customer preferences.

Additionally, the company is exposed to risks associated with its concentrated geographic footprint in Missouri, which could make it vulnerable to economic downturns or adverse events specific to the region. The bank also faces the challenge of attracting and retaining talent in a competitive labor market, which is crucial to maintaining its community-focused culture and delivering superior customer service.

Outlook and Growth Strategies

Hawthorn Bancshares remains committed to its community banking model, leveraging its strong presence in the Missouri markets to drive organic growth and expand its customer base. The company is actively exploring strategic opportunities to enhance its product and service offerings, particularly in the areas of commercial banking, wealth management, and digital banking, to better serve its customers and drive long-term shareholder value.

The bank's leadership team is also focused on improving operational efficiencies, optimizing the branch network, and investing in technology to improve the customer experience and enhance the company's competitive positioning. These initiatives, combined with prudent risk management and a disciplined approach to capital allocation, are expected to support Hawthorn Bancshares' continued growth and profitability in the years ahead.

Product Segments

Hawthorn Bancshares operates through several key product segments:

Commercial Banking: This segment includes commercial, financial, and agricultural loans as well as commercial real estate loans. The commercial loan portfolio consists primarily of loans to small and mid-sized businesses in the bank's local markets for purposes such as equipment financing, operating capital, and commercial real estate development. As of September 30, 2024, commercial loans made up 13.8% of the total loan portfolio, while commercial real estate loans comprised 57.8% of total loans.

Residential Real Estate Lending: This segment includes residential mortgage loans, both for owner-occupied and non-owner-occupied properties. Residential real estate loans accounted for 25.2% of the total loan portfolio as of September 30, 2024. The bank offers a range of residential mortgage products, including fixed-rate and adjustable-rate mortgages, to borrowers in its local markets.

Consumer and Other Lending: This segment includes installment and other consumer loans, which made up 1.0% of the total loan portfolio as of the end of the third quarter of 2024. Products in this segment include personal loans, auto loans, and other consumer financing.

Geographic Markets

Hawthorn Bancshares operates primarily in the Missouri communities surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area. The company does not have any significant concentration of sales outside of this regional market. This focused geographic footprint allows the bank to maintain strong relationships with local customers and businesses while benefiting from the economic diversity of these different Missouri markets.

Industry Trends

The banking industry in Hawthorn Bancshares' regional markets is experiencing moderate growth in commercial and consumer lending, as well as stable deposit levels. These trends align well with the company's focus on growing its commercial banking, retail mortgage lending, and retail banking services through its branch network.

Conclusion

Hawthorn Bancshares has demonstrated its resilience as a community bank, navigating the evolving challenges of the financial services industry while remaining committed to its core values and customer-centric approach. With a strong balance sheet, diversified loan portfolio, and stable deposit base, the company is well-positioned to capitalize on growth opportunities and deliver long-term value to its shareholders. As Hawthorn Bancshares continues to adapt and innovate, it is poised to build upon its rich legacy and solidify its reputation as a trusted financial partner in the communities it serves.