10-Q: Hawthorn Bancshares Q1 2026 Financial Results

Hawthorn Bancshares reported Q1 2026 net income of $5.7 million, up from $5.4 million in the prior year quarter, despite identifying a material weakness in internal controls.

Summary

• Net income for the three months ended March 31, 2026, was $5.7 million, or $0.83 per diluted share, compared to $5.4 million, or $0.77 per diluted share, in Q1 2025.
• Net interest income increased to $17.1 million from $15.3 million in the same period last year.
• Net interest margin (FTE) improved to 4.07% from 3.67% in Q1 2025.
• Total assets were $1.86 billion as of March 31, 2026.
• The company announced a definitive agreement to acquire FSC Bancshares, Inc., expected to close in Q3 2026.

Sentiment

Score: 5

Explanation: StockSavvy.ai views this as a neutral report; while financial performance shows growth, the disclosure of a material weakness in internal controls introduces significant governance and operational risk.

Positives

• Net income grew by approximately 6.7% year-over-year.
• Net interest margin expanded by 40 basis points to 4.07%.
• Wealth management revenue increased by 30.2% to $0.6 million.
• Maintained a strong regulatory capital position with a total risk-based capital ratio of 15.84%.

Negatives

• Management identified a material weakness in internal control over financial reporting related to the accounting for a non-routine sale-leaseback transaction.
• Non-interest income declined by 10.5% to $3.1 million, primarily due to a property write-down.
• Non-interest expense increased by 4.0% to $13.0 million.
• Non-performing loans increased to $6.8 million from $2.5 million in the prior year quarter.

Risks

• Material weakness in internal control over financial reporting could lead to potential misstatements.
• Exposure to economic conditions in Missouri communities, particularly in commercial real estate.
• Interest rate volatility impacting net interest margin and the value of available-for-sale securities.
• Integration risks associated with the pending acquisition of FSC Bancshares, Inc.

Future Outlook

The company expects to close the acquisition of FSC Bancshares, Inc. in the third quarter of 2026, subject to regulatory approvals and closing conditions. Management is currently remediating the identified material weakness in internal controls.

Management Comments

• Management noted that the material weakness did not result in any identified misstatements or require restatement of prior financial statements.
• Management believes the company has adequate liquidity to meet future anticipated needs.

Industry Context

StockSavvy.ai notes that the banking sector continues to face pressure from interest rate volatility and the need for scale, evidenced by Hawthorn's move to acquire FSC Bancshares. The disclosure of a material weakness in internal controls is a significant governance event that often triggers increased regulatory scrutiny.

Comparison to Industry Standards

• The company's total risk-based capital ratio of 15.84% remains robust compared to typical community bank benchmarks.
• The efficiency ratio of 64.29% is generally in line with regional banking peers, though management is focused on controlling non-interest expenses.

Corporate Governance

Legal Proceedings

• The company is involved in various legal actions incidental to its business, but management does not believe these will have a material adverse effect.

Stakeholder Impact

• Shareholders may be concerned by the internal control material weakness disclosure.
• The acquisition of FSC Bancshares may impact customers and employees of both institutions.

Next Steps

• Remediate the material weakness in internal control over financial reporting.
• Complete the acquisition of FSC Bancshares, Inc. in Q3 2026.
• Continue share repurchases under the existing $8.0 million authorization.

Key Dates

Recommendation

The stock is a hold due to the combination of solid earnings growth and the pending acquisition, balanced against the negative impact of the disclosed material weakness in internal controls which requires time to remediate.

Keywords

Hawthorn Bancshares, HWBK, Community Banking, Q1 2026 Earnings, Bank Acquisition, Internal Control Material Weakness