10-Q: Hawthorn Bancshares Reports Strong Q2 2026 Earnings

Hawthorn Bancshares, Inc. announced a significant increase in net income for the second quarter of 2026, driven by higher net interest income and improved operational efficiency.

Summary

• Hawthorn Bancshares, Inc. reported a net income of $7.3 million ($1.06 per diluted share) for the three months ended June 30, 2026, an increase from $6.1 million ($0.88 per diluted share) in the same period of 2025.
• For the six months ended June 30, 2026, net income was $13.1 million ($1.89 per diluted share), up from $11.5 million ($1.65 per diluted share) in the prior year.
• Net interest income increased to $17.3 million for the quarter and $34.4 million for the six months, reflecting a higher net interest margin.
• Total assets stood at $1.77 billion as of June 30, 2026.
• The company is in the process of acquiring FSC Bancshares, Inc. in a cash-and-stock transaction valued at approximately $28.3 million, expected to close in Q3 2026.
• A material weakness in internal control over financial reporting related to non-routine transactions was disclosed, though it did not result in restatements.

Sentiment

Score: 7

Explanation: StockSavvy.ai views this as a positive report, with strong net income growth and improved net interest margin, despite a slight increase in non-performing assets and a disclosed material weakness in internal controls.

Positives

• Net income increased by 20.1% for the quarter and 14.1% for the six months compared to the prior year.
• Diluted earnings per share rose to $1.06 for the quarter and $1.89 for the six months.
• Net interest income grew by 6.5% for the quarter and 9.0% for the six months.
• Net interest margin (FTE basis) improved to 4.16% for the quarter and 4.11% for the six months.
• Return on average total assets improved to 1.63% for the quarter and 1.45% for the six months.
• Efficiency ratio improved to 60.73% for the quarter and 62.44% for the six months.
• The company maintains strong capital ratios, exceeding regulatory requirements for well-capitalized institutions.

Negatives

• Non-performing assets increased to $7.5 million (0.53% of total loans) as of June 30, 2026, from $5.2 million (0.35% of total loans) as of June 30, 2025.
• Net loan charge-offs increased to $0.14 million for the quarter compared to $0.05 million in the prior year quarter.
• A material weakness in internal control over financial reporting related to the evaluation and application of U.S. GAAP to certain non-routine transactions was disclosed and has not yet been remediated.
• Total deposits decreased by $66.0 million to $1.49 billion as of June 30, 2026, compared to December 31, 2025.

Risks

• The company is subject to risks associated with changes in economic conditions, interest rate fluctuations, regulatory policies, and competition.
• A material weakness in internal control over financial reporting related to non-routine transactions could lead to future misstatements if not effectively remediated.
• The pending acquisition of FSC Bancshares, Inc. is subject to customary closing conditions, including shareholder approval, and may not be completed.
• The company's financial performance is dependent on its ability to manage various portfolios and introduce new products and services.

Future Outlook

The company anticipates closing the acquisition of FSC Bancshares, Inc. in the third quarter of 2026, subject to customary conditions. The company expects to continue paying quarterly cash dividends, subject to board discretion and regulatory requirements. Future dividends and stock repurchases will depend on financial condition, liquidity, and regulatory compliance.

Management Comments

• Management believes the company has more than adequate liquidity to meet future anticipated needs.
• Management believes the change in projected net interest income from interest rate shifts is an acceptable level of interest rate risk.
• Management believes the company and the Bank meet all capital adequacy requirements to which they are subject.

Industry Context

StockSavvy.ai notes that Hawthorn Bancshares' performance aligns with a trend of increasing net interest margins observed in the banking sector due to rising interest rates, while also highlighting the ongoing consolidation within the industry with the announced acquisition.

Comparison to Industry Standards

• The company's net interest margin of 4.16% for Q2 2026 is generally competitive within the regional banking sector, though specific peer comparisons would require further analysis.
• The reported return on average assets of 1.63% for Q2 2026 is solid for a community bank, often outperforming larger, more diversified financial institutions in this metric.
• The efficiency ratio of 60.73% for Q2 2026 indicates room for improvement compared to industry leaders who often operate below 55%, suggesting potential for cost optimization.
• The increase in non-performing assets to 0.53% of total loans, while still relatively low, warrants monitoring as it approaches levels seen in broader economic downturns for some regional banks.

Legal Proceedings

• The company and its subsidiaries are defendants in various legal actions incidental to their business activities. Management does not believe these actions will materially adversely affect the consolidated financial condition or results of operations in the near term.

Stakeholder Impact

• Shareholders: Potential for increased value through acquisition and continued dividend payments, but also risk associated with the disclosed material weakness in internal controls.
• Employees: Potential for growth and new opportunities with the acquisition, but also potential impact from integration and any restructuring.
• Customers: Continued access to banking and wealth management services, with potential for expanded offerings post-acquisition.
• Creditors: The company maintains strong capital ratios, indicating a stable financial position.

Next Steps

• Complete the acquisition of FSC Bancshares, Inc. in the third quarter of 2026.
• Continue to monitor and manage interest rate risk.
• Implement remediation measures for the disclosed material weakness in internal controls.
• Continue to manage liquidity and capital ratios to meet regulatory requirements and operational needs.

Key Dates

Recommendation

The company demonstrates solid operational performance with growing net income and improved margins, supported by strong capital. However, the disclosed material weakness in internal controls and the integration risks associated with the pending acquisition warrant a cautious 'hold' stance until these factors are resolved and the acquisition's success is more evident.

Keywords

Hawthorn Bancshares, Quarterly Report, Financial Statements, Net Income, Net Interest Income, Acquisition, FSC Bancshares, Capital Ratios