Hawthorn Bancshares(HWBK) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for Hawthorn Bancshares, Inc Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Hawthorn Bancshares, Inc. and its subsidiaries, including balance sheets, income statements, comprehensive income statements, stockholders' equity statements, and cash flow statements, along with detailed notes explaining significant accounting policies, loan portfolio, investment securities, derivatives, deposits, leases, equity, compensation, retirement plans, earnings per share, fair value measurements, commitments, segment information, and subsequent events Consolidated Balance Sheets This table presents the Company's assets, liabilities, and stockholders' equity at specific dates Consolidated Balance Sheets Summary | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | ASSETS | | | | Cash and cash equivalents | $100,294 | $50,994 | | Available-for-sale debt securities, at fair value | $221,736 | $218,652 | | Net loans | $1,441,328 | $1,444,116 | | Total assets | $1,877,417 | $1,825,185 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Total deposits | $1,517,986 | $1,533,182 | | Federal Home Loan Bank advances and other borrowings | $140,100 | $81,525 | | Total liabilities | $1,720,594 | $1,675,638 | | Total stockholders' equity | $156,823 | $149,547 | | Total liabilities and stockholders' equity | $1,877,417 | $1,825,185 | - Total assets increased by $52.2 million (2.87%) from December 31, 2024, to June 30, 2025, primarily driven by a significant increase in cash and cash equivalents[10] - Total deposits decreased by $15.2 million (0.99%) while Federal Home Loan Bank advances and other borrowings increased by $58.6 million (71.88%) over the six-month period[10] Consolidated Statements of Income This table details the Company's revenues, expenses, and net income over specific periods Consolidated Statements of Income Summary | (dollars in thousands, except per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total interest income | $23,911 | $23,556 | $47,369 | $47,608 | | Total interest expense | $7,769 | $9,384 | $15,933 | $18,688 | | Net interest income | $16,142 | $14,172 | $31,436 | $28,920 | | Total (release of) provision for credit losses | $(51) | $457 | $(391) | $227 | | Total non-interest income | $3,545 | $3,996 | $7,008 | $7,015 | | Total non-interest expense | $12,269 | $12,034 | $24,768 | $24,609 | | Net income | $6,101 | $4,629 | $11,484 | $9,085 | | Basic earnings per share | $0.88 | $0.66 | $1.65 | $1.29 | | Diluted earnings per share | $0.88 | $0.66 | $1.65 | $1.29 | - Net income increased by $1.472 million (31.8%) for the three months ended June 30, 2025, and by $2.399 million (26.4%) for the six months ended June 30, 2025, compared to the respective periods in 2024[12] - The company recorded a release of provision for credit losses of $51 thousand for the three months and $391 thousand for the six months ended June 30, 2025, a significant change from provisions in the prior year[12] Consolidated Statements of Comprehensive Income This table shows net income and other comprehensive income (loss) for the Company Consolidated Statements of Comprehensive Income Summary | (dollars in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $6,101 | $4,629 | $11,484 | $9,085 | | Total other comprehensive income (loss) | $386 | $(1,130) | $554 | $(3,471) | | Total comprehensive income | $6,487 | $3,499 | $12,038 | $5,614 | - Total comprehensive income significantly increased to $6.487 million for the three months and $12.038 million for the six months ended June 30, 2025, compared to $3.499 million and $5.614 million in the prior year periods, primarily due to a positive shift in other comprehensive income[14] - Other comprehensive income (loss) shifted from a loss of $1.130 million in Q2 2024 to a gain of $386 thousand in Q2 2025, and from a loss of $3.471 million in H1 2024 to a gain of $554 thousand in H1 2025[14] Consolidated Statements of Stockholders' Equity This table outlines changes in the Company's equity components over time Consolidated Statements of Stockholders' Equity Summary | (In thousands) | Balance, December 31, 2024 | Net income | Other comprehensive income | Share-based compensation expense | Purchase of treasury stock | Restricted share unit vesting and taxes paid related to net share settlement | Cash dividends declared, common stock | Balance, June 30, 2025 | | :------------- | :------------------------- | :--------- | :------------------------- | :------------------------------- | :------------------------- | :------------------------------------------------------------------------- | :------------------------------------ | :--------------------- | | Common Stock | $7,555 | — | — | — | — | — | — | $7,555 | | Surplus | $76,857 | — | — | $177 | — | $(222) | — | $76,812 | | Retained Earnings | $89,542 | $11,484 | — | — | — | — | $(2,717) | $98,309 | | Accumulated Other Comprehensive Income (Loss) | $(12,443) | — | $554 | — | — | — | — | $(11,889) | | Treasury Stock | $(11,964) | — | — | — | $(2,222) | $222 | — | $(13,964) | | Total Stockholders' Equity | $149,547 | $11,484 | $554 | $177 | $(2,222) | — | $(2,717) | $156,823 | - Total stockholders' equity increased by $7.276 million (4.86%) from December 31, 2024, to June 30, 2025, reaching $156.823 million[17] - Key drivers of the change include net income of $11.484 million and other comprehensive income of $554 thousand, partially offset by cash dividends of $2.717 million and treasury stock purchases of $2.222 million[17] Consolidated Statements of Cash Flows This table summarizes the Company's cash inflows and outflows from operating, investing, and financing activities Consolidated Statements of Cash Flows Summary | (In thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $11,491 | $14,537 | | Net cash used in investing activities | $(692) | $(254) | | Net cash provided by (used in) financing activities | $38,501 | $(31,891) | | Net increase (decrease) in cash and cash equivalents | $49,300 | $(17,608) | | Cash and cash equivalents, end of period | $100,294 | $75,842 | - Cash and cash equivalents significantly increased by $49.3 million in the first six months of 2025, a reversal from a $17.6 million decrease in the same period of 2024[19] - Financing activities provided $38.5 million in cash in H1 2025, a substantial improvement from using $31.9 million in H1 2024, primarily due to increased FHLB advances and demand deposits[19] Notes to the Consolidated Financial Statements This section provides detailed explanations of the Company's significant accounting policies and financial statement line items (1) Summary of Significant Accounting Policies This section outlines the Company's core banking services, its adherence to U.S. GAAP for interim financial reporting, and management's use of estimates. It also details recent accounting pronouncements, including ASU No. 2023-09 on Income Taxes (effective after Dec 15, 2024, not expected to be material) and ASU No. 2024-03/2025-01 on Income Statement Expense Disaggregation (effective after Dec 15, 2026, impact being evaluated) - The Company provides a broad range of banking services to individual and corporate customers in Missouri, operating through its subsidiary, Hawthorn Bank[22] - ASU No. 2023-09, effective for annual periods after December 15, 2024, requires enhanced income tax disclosures but is not expected to materially affect the Company's financial statements[25] - ASU No. 2024-03 (clarified by ASU No. 2025-01), effective for annual periods after December 15, 2026, mandates disaggregated income statement expense disclosures, with the Company currently evaluating its impact[26][27] (2) Loans and Allowance for Credit Losses This note details the Company's loan portfolio composition, the methodology for calculating the allowance for credit losses (ACL) for both on-balance-sheet loans and off-balance-sheet commitments, and the changes in ACL by portfolio segment. It also provides information on collateral-dependent loans, credit quality risk categories, and the status of delinquent and non-accrual loans Loan Portfolio Composition | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Commercial, financial, and agricultural | $212,266 | $202,329 | | Real estate construction − residential | $24,117 | $32,046 | | Real estate construction − commercial | $66,441 | $80,435 | | Real estate mortgage − residential | $381,037 | $361,735 | | Real estate mortgage − commercial | $767,240 | $775,594 | | Installment and other consumer | $11,797 | $14,021 | | Total loans held for investment | $1,462,898 | $1,466,160 | - Total loans held for investment slightly decreased by $3.262 million (0.22%) from December 31, 2024, to June 30, 2025[28] Allowance for Credit Losses on Loans and Unfunded Commitments | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Allowance for credit losses on loans | $21,570 | $22,044 | | Allowance for credit losses on unfunded commitments | $1,000 | $900 | - The allowance for credit losses on loans decreased by $474 thousand (2.15%) from December 31, 2024, to June 30, 2025[10] Non-Accrual and Past Due Loans | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Total Non-accrual loans | $2,256 | $2,537 | | Loans 90 Days Past Due And Still Accruing | $505 | $210 | | Total Non-performing Loans | $2,761 | $2,747 | - Non-accrual loans decreased by $281 thousand (11.08%) from December 31, 2024, to June 30, 2025, while loans 90 days past due and still accruing increased by $295 thousand (140.48%)[42] (3) Other Real Estate and Other Assets Acquired in Settlement of Loans This section provides a summary of the Company's Other Real Estate Owned (OREO) and repossessed assets, including their composition and the activity in the related valuation allowance. The total OREO increased, while the valuation allowance significantly decreased due to charge-offs Other Real Estate Owned and Repossessed Assets | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Total other real estate owned and repossessed assets | $2,425 | $1,446 | | Less valuation allowance for other real estate owned | $(225) | $(2,003) | - Total other real estate owned and repossessed assets increased by $979 thousand (67.7%) from December 31, 2024, to June 30, 2025[49] - The valuation allowance for other real estate owned decreased significantly from $2.003 million at December 31, 2024, to $225 thousand at June 30, 2025, primarily due to $1.962 million in charge-offs during the six months ended June 30, 2025[49][50] (4) Investment Securities This note details the Company's available-for-sale debt securities, including their amortized cost, fair value, and unrealized gains/losses. It also provides a breakdown by contractual maturity and information on other investment securities like FHLB and MIB stock. The total available-for-sale securities increased slightly, with a decrease in total unrealized losses Available-for-Sale Securities Summary | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Total available-for-sale securities (Fair Value) | $221,736 | $218,652 | | Total available-for-sale securities (Amortized Cost) | $251,303 | $249,558 | | Total Gross Unrealized Losses | $(30,428) | $(31,032) | - The fair value of available-for-sale securities increased by $3.084 million (1.41%) from December 31, 2024, to June 30, 2025[51] - Total gross unrealized losses on available-for-sale securities decreased by $604 thousand (1.95%) over the six-month period, primarily due to interest rate fluctuations, not credit quality concerns[51][61] - Debt securities with carrying values of $89.8 million at June 30, 2025, were pledged to secure public funds and other purposes[53] (5) Derivative Instruments This note describes the Company's use of derivative instruments, primarily interest rate swap contracts not designated as hedges, to manage interest rate risk. It provides the fair value and notional amounts of these derivatives, noting their minimal effect on earnings due to mirror-image offsetting contracts - The Company uses interest rate swap contracts, primarily sold to commercial customers and offset by purchased contracts, which do not qualify for hedge accounting[63] Derivative Instruments Fair Value and Notional Amounts | (dollars in thousands) | As of June 30, 2025 | As of December 31, 2024 | | :--------------------- | :------------------ | :---------------------- | | Notional Amount (Interest Rate Products) | $16,542 | $16,542 | | Derivative Assets (Fair Value) | $286 | $66 | | Derivative Liabilities (Fair Value) | $328 | $89 | - The Company did not recognize other income related to client swaps for the three and six months ended June 30, 2025, but recognized a loss of $19 thousand for the six months ended June 30, 2025, compared to a gain of $4 thousand for the three months ended June 30, 2024[66] (6) Deposits This note provides information on time deposits exceeding the FDIC insurance limit and brokered deposits. Time deposits over $250,000 decreased, while brokered deposits remained minimal Time Deposits and Brokered Deposits | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Time deposits with balances > $250,000 | $91,158 | $100,383 | | Brokered deposits | $10 | $13 | - Time deposits with balances greater than $250,000 decreased by $9.225 million (9.19%) from December 31, 2024, to June 30, 2025[73] - Brokered deposits remained low at $10 thousand as of June 30, 2025[73] (7) Leases This note details the Company's operating leases, primarily for office space and bank branches. It provides the ROU assets and liabilities, weighted-average remaining lease term, and discount rate, along with the maturity schedule of lease liabilities - As of June 30, 2025, operating right of use (ROU) assets were $2.7 million and operating lease liabilities were $2.9 million[74] - The weighted-average remaining lease term for operating leases was approximately 5.8 years, with a weighted-average discount rate of approximately 4.4%[74] Operating Lease Liabilities Maturity Schedule | Lease payments due in: | Operating Lease (dollars in thousands) | | :--------------------- | :------------------------------------- | | 2025 remaining | $268 | | 2026 | $550 | | 2027 | $621 | | 2028 | $630 | | 2029 | $420 | | Thereafter | $803 | | Total lease payments | $3,292 | | Less imputed interest | $(401) | | Total lease liabilities, as reported | $2,891 | (8) Stockholders' Equity and Accumulated Other Comprehensive Income (Loss) This note summarizes the changes in Accumulated Other Comprehensive Income (Loss) (AOCI) components, primarily driven by unrealized gains/losses on securities and pension/postretirement costs. It also details the Company's common stock repurchase program, including the new $10.0 million authorization and recent repurchase activity Accumulated Other Comprehensive Income (Loss) Activity | (dollars in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :----------------------------- | :----------------------------- | | Balance of AOCI at beginning of period | $(12,443) | $(13,762) | | Current period other comprehensive income (loss), net of tax | $554 | $(3,471) | | Balance of AOCI at end of period | $(11,889) | $(17,233) | - AOCI improved from a loss of $12.443 million at the beginning of 2025 to a loss of $11.889 million at June 30, 2025, driven by $554 thousand in current period other comprehensive income[79] - The Board approved a new $10.0 million common stock repurchase program on June 5, 2025. The Company repurchased 79,777 shares for $2.2 million in H1 2025, with $9.0 million remaining available[81] (9) Share-Based Compensation This note describes the Company's Equity Incentive Plan, which grants Restricted Share Units (RSUs) to key personnel. It summarizes the RSU activity for the six months ended June 30, 2025 and 2024, and the associated compensation expense - The Company's Equity Incentive Plan allows for the grant of various equity-based awards, including RSUs, to attract and retain service providers[83] Restricted Share Unit Activity | (dollars in thousands, except per share amounts) | June 30, 2025 Quantity | June 30, 2024 Quantity | | :----------------------------------------------- | :--------------------- | :--------------------- | | Non-vested at beginning of period | 35,336 | 18,277 | | Granted | 11,174 | — | | Vested | 7,809 | — | | Non-vested at end of period | 38,701 | 18,277 | - Total share-based compensation expense for RSUs was $0.2 million for the six months ended June 30, 2025, compared to $0.1 million for the same period in 2024[84] (10) Retirement Plans This note details the Company's retirement plans, including a profit-sharing 401(k) plan, a Supplemental Executive Retirement Plan (SERP), and a noncontributory defined benefit pension plan. It provides the expenses associated with each plan and highlights the 'soft freeze' on the pension plan effective July 1, 2017 - The Company's profit-sharing plan includes a 401(k) match (first 3% of contributions) and discretionary employer contributions (up to 6% of income before taxes and contributions)[86] - The SERP accrued liability was $1.7 million at June 30, 2025, with an expense of $0.04 million for the six months ended June 30, 2025[88] Net Periodic Pension Income Components | (dollars in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :----------------------------- | :----------------------------- | | Service cost | $347 | $474 | | Interest costs | $775 | $738 | | Expected return on plan assets | $(1,170) | $(1,179) | | Amortization of unrecognized net gain | $(638) | $(345) | | Net periodic pension income | $(613) | $(258) | - The defined benefit pension plan had a net periodic pension income of $613 thousand for the six months ended June 30, 2025, an increase from $258 thousand in the prior year[91] (11) Earnings per Share This note provides the calculation of basic and diluted earnings per share (EPS) for the Company, along with the weighted-average shares outstanding for the three and six months ended June 30, 2025 and 2024 Earnings per Share Calculation | (dollars in thousands, except per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income available to shareholders | $6,101 | $4,629 | $11,484 | $9,085 | | Basic weighted-average shares outstanding | 6,935,541 | 6,995,956 | 6,959,221 | 7,014,063 | | Diluted weighted-average shares outstanding | 6,945,064 | 6,995,956 | 6,967,513 | 7,014,063 | | Basic earnings per share | $0.88 | $0.66 | $1.65 | $1.29 | | Diluted earnings per share | $0.88 | $0.66 | $1.65 | $1.29 | - Basic and diluted EPS increased to $0.88 for Q2 2025 (from $0.66 in Q2 2024) and to $1.65 for H1 2025 (from $1.29 in H1 2024)[94] - Weighted-average shares outstanding decreased slightly for both basic and diluted calculations in 2025 compared to 2024[94] (12) Fair Value Measurements This note explains the Company's fair value measurement hierarchy (Level 1, 2, and 3 inputs) and the valuation methodologies used for assets and liabilities measured at fair value on both a recurring and non-recurring basis. It provides a detailed table of fair value measurements for various assets and liabilities - Fair value measurements are categorized into a three-level hierarchy based on the observability of inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[97][98][99] - Available-for-sale securities are primarily valued using Level 2 inputs, while U.S. Treasury securities and actively traded equity securities use Level 1 inputs[101][103] - Collateral-dependent impaired loans and Other Real Estate Owned (OREO) are measured using Level 3 inputs due to the unobservable nature of their underlying collateral valuations[110][111] Fair Value Measurements by Level | (dollars in thousands) | June 30, 2025 Fair Value | Level 1 | Level 2 | Level 3 | | :--------------------- | :----------------------- | :------ | :------ | :------ | | Assets: | | | | | | U.S. Treasury | $5,047 | $5,047 | — | — | | Obligations of states and political subdivisions | $97,387 | — | $97,387 | — | | Mortgage-backed securities | $77,325 | — | $77,325 | — | | Derivative instruments, interest rate swaps | $286 | — | $286 | — | | Total Assets | $222,093 | $5,118 | $216,975| — | | Liabilities: | | | | | | Derivative instruments, interest rate swaps | $328 | — | $328 | — | | Total Liabilities | $328 | — | $328 | — | (13) Fair Value of Financial Instruments This note provides the estimated fair values and carrying amounts for various financial instruments, along with the methods and assumptions used for their estimation. It categorizes these instruments by fair value hierarchy levels and discusses limitations of these estimates - The fair value of loans is estimated using discounted cash flows with comparable market rates, adjusted for credit risk and other factors, and is classified as Level 3[114][120] - The fair value of deposits with no stated maturity (demand, NOW, savings, money market) is equal to the amount payable on demand (Level 1), while time deposits are valued using discounted contractual cash flows (Level 3)[118][120] Fair Value of Financial Instruments Summary | (dollars in thousands) | June 30, 2025 Carrying amount | June 30, 2025 Fair value | Level 1 | Level 2 | Level 3 | | :--------------------- | :---------------------------- | :----------------------- | :------ | :------ | :------ | | Assets: | | | | | | | Cash and due from banks | $22,911 | $22,911 | $22,911 | — | — | | Loans, net | $1,441,328 | $1,405,858 | — | — | $1,405,858 | | Liabilities: | | | | | | | Non-interest bearing demand | $419,914 | $419,914 | $419,914| — | — | | Time deposits | $309,856 | $307,866 | — | — | $307,866 | | FHLB advances and other borrowings | $140,100 | $140,131 | — | $140,131| — | (14) Commitments and Contingencies This note outlines the Company's off-balance-sheet financial instruments, including commitments to extend credit and standby letters of credit, and their associated credit risk. It also addresses pending litigation, stating that management does not expect a material adverse effect on financial condition or results of operations Off-Balance Sheet Financial Instruments | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Commitments to extend credit | $334,263 | $305,811 | | Standby letters of credit | $53,699 | $141,807 | | Total | $387,962 | $447,618 | - Total off-balance-sheet financial instruments decreased by $59.656 million (13.33%) from December 31, 2024, to June 30, 2025, primarily due to a significant reduction in standby letters of credit[128] - The allowance for credit losses for unfunded commitments increased to $1.0 million at June 30, 2025, from $0.9 million at December 31, 2024[127] - Management believes pending legal actions will not materially adversely affect the Company's consolidated financial condition or results of operations in the near term[131] (15) Segment Information This note details the Company's segment reporting, which was updated in Q1 2025 to include two aggregated segments: Hawthorn Bank and Wealth Management. It provides a breakdown of revenues, expenses, and net income (loss) for each segment, along with segment assets - Beginning in Q1 2025, the Company reports two segments: Hawthorn Bank (traditional banking products/services) and Wealth Management (financial/investment planning, trust services)[133] Segment Financial Performance Summary | (dollars in thousands) | Hawthorn Bank (H1 2025) | Wealth Management (H1 2025) | Non-Bank (H1 2025) | Total (H1 2025) | | :--------------------- | :---------------------- | :-------------------------- | :----------------- | :-------------- | | Net interest income | $33,092 | — | $(1,656) | $31,436 | | Non-interest income | $5,074 | $1,054 | $880 | $7,008 | | Total operating expenses | $22,706 | $785 | $1,277 | $24,768 | | Net income | $12,837 | $269 | $(1,622) | $11,484 | | Segment assets | $1,866,399 | $20 | $10,998 | $1,877,417 | - For the six months ended June 30, 2025, Hawthorn Bank generated $12.837 million in net income, while Wealth Management contributed $269 thousand[136] (16) Subsequent Events This note discloses subsequent events after the reporting period, including the signing of the One Big Beautiful Bill Act (tax reform, not expected to be material) and the filing of a universal shelf registration statement for up to $150 million in capital offerings - The One Big Beautiful Bill Act, signed on July 4, 2025, is not expected to have a material impact on the Company's results of operations[139] - A universal shelf registration statement for up to $150 million in capital offerings became effective on July 2, 2025, providing financial flexibility[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, including an executive summary, detailed analysis of net interest income, non-interest income and expense, lending and credit management, and liquidity and capital resources. It highlights key performance ratios and balance sheet changes for the periods ended June 30, 2025 and 2024 Forward-Looking Statements This section highlights the inherent uncertainties and risks associated with forward-looking statements in the report - The report contains forward-looking statements subject to risks and uncertainties, including economic conditions, regulatory changes, interest rate fluctuations, and cybersecurity threats[141] - No material changes to the Risk Factors disclosed in the Company's 2024 Annual Report on Form 10-K occurred during the quarter ended June 30, 2025[141] Critical Accounting Policies and Estimates This section identifies key accounting policies requiring significant management judgment, such as the allowance for credit losses - The allowance for credit losses is identified as a critical accounting policy requiring significant management judgment[142] - There have been no changes in the Company's application of critical accounting policies and estimates since December 31, 2024[142] Overview This section provides a general description of the Company's business, including its banking and wealth management services - The Company, with $1.9 billion in assets at June 30, 2025, focuses on commercial banking, retail mortgage lending, and retail banking services through Hawthorn Bank[143] - The Wealth Management business is now reported as a separate segment, offering trust services, estate planning, investment, and asset management[143] - Primary revenue source is net interest income from lending and deposit activities, with business concentrated in commercial, commercial real estate, and residential mortgage lending[144] Executive Summary This section provides a high-level overview of the Company's financial performance and key metrics Key Financial Performance Ratios | (dollars in thousands, except per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $6,101 | $4,629 | $11,484 | $9,085 | | Basic earnings per share | $0.88 | $0.66 | $1.65 | $1.29 | | Return on total assets | 1.36% | 1.02% | 1.28% | 0.99% | | Return on stockholders' equity | 15.85% | 13.75% | 15.08% | 13.43% | | Efficiency ratio | 62.32% | 66.24% | 64.43% | 68.48% | | Net interest margin | 3.89% | 3.33% | 3.78% | 3.36% | - Net income increased by 31.8% for the three months and 26.4% for the six months ended June 30, 2025, compared to the prior year periods[150] - The net interest margin (FTE) improved to 3.89% for Q2 2025 (from 3.33% in Q2 2024) and to 3.78% for H1 2025 (from 3.36% in H1 2024)[150] Results of Operations Highlights This section summarizes key financial results, including net income and net interest income trends - Consolidated net income for Q2 2025 was $6.1 million ($0.88 diluted EPS), up from $4.6 million ($0.66 diluted EPS) in Q2 2024[152] - Net interest income increased to $16.1 million for Q2 2025 (from $14.2 million in Q2 2024) and to $31.4 million for H1 2025 (from $28.9 million in H1 2024)[153] - Non-interest income decreased by $0.5 million (11.3%) for Q2 2025 but remained unchanged at $7.0 million for H1 2025 compared to the prior year periods[154][188] Balance Sheet Highlights This section outlines significant changes and key figures from the Company's balance sheet - Cash and cash equivalents increased by $49.3 million to $100.3 million at June 30, 2025, from $51.0 million at December 31, 2024[156] - Loans held for investment decreased by $3.3 million to $1.46 billion at June 30, 2025, compared to $1.47 billion at December 31, 2024[157] - Non-performing assets totaled $5.2 million (0.35% of total loans) at June 30, 2025, up from $4.2 million (0.29% of total loans) at December 31, 2024, but down from $8.1 million (0.54% of total loans) at June 30, 2024[158] - Total deposits decreased by $15.2 million to $1.52 billion at June 30, 2025, from $1.53 billion at December 31, 2024[160] - FHLB advances and other borrowings increased by $58.6 million to $140.1 million at June 30, 2025, from $81.5 million at December 31, 2024[160] - The Company maintains a 'well capitalized' regulatory capital position, with a total risk-based capital ratio of 15.12% and a Tier 1 leverage ratio of 11.87% at June 30, 2025[161] Average Balance Sheet Data This table presents average balances, interest income/expense, and rates for interest-earning assets and liabilities Average Balance Sheet and Rates | (dollars in thousands) | Average Balance (Q2 2025) | Rate Earned/Paid (Q2 2025) | Average Balance (Q2 2024) | Rate Earned/Paid (Q2 2024) | | :--------------------- | :------------------------ | :------------------------- | :------------------------ | :------------------------- | | Total loans | $1,452,591 | 5.98% | $1,511,609 | 5.75% | | Total investment securities | $221,674 | 4.09% | $182,167 | 3.35% | | Total interest earning assets | $1,702,901 | 5.72% | $1,735,506 | 5.50% | | Total interest bearing deposits | $1,111,328 | 2.35% | $1,131,576 | 2.69% | | Total borrowings | $108,736 | 4.65% | $154,318 | 4.73% | | Total interest bearing liabilities | $1,220,064 | 2.55% | $1,285,894 | 2.94% | | Net interest margin (FTE) | | 3.89% | | 3.33% | - Average interest-earning assets decreased by $32.6 million (1.9%) for Q2 2025, while average interest-bearing liabilities decreased by $65.8 million (5.1%)[171] - The average yield on total interest-earning assets increased to 5.72% for Q2 2025 (from 5.50% in Q2 2024), and the average cost of total interest-bearing liabilities decreased to 2.55% (from 2.94%)[163][173][180] Rate and Volume Analysis This table analyzes changes in net interest income due to fluctuations in average rates and volumes Net Interest Income Rate and Volume Analysis | (dollars in thousands) | Total Change (Q2 2025 vs 2024) | Change due to Average Volume | Change due to Average Rate | | :--------------------- | :----------------------------- | :--------------------------- | :------------------------- | | Total interest income (FTE) | $539 | $(665) | $1,204 | | Total interest expense | $(1,615) | $(478) | $(1,137) | | Net interest income (FTE) | $2,154 | $(187) | $2,341 | - Net interest income (FTE) increased by $2.154 million (15.0%) for Q2 2025 compared to Q2 2024, primarily driven by a $2.341 million increase due to average rates, partially offset by a $187 thousand decrease due to average volume[168][170] - For the six months ended June 30, 2025, net interest income (FTE) increased by $2.740 million (9.3%), with a $3.647 million increase due to average rates and a $907 thousand decrease due to average volume[168][170] Non-interest Income This section details the components of the Company's non-interest income and their changes Non-Interest Income Components | (dollars in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Service charges and other fees | $940 | $777 | $1,853 | $1,594 | | Wealth management revenue | $542 | $450 | $1,016 | $830 | | Gain on sales of mortgage loans, net | $117 | $398 | $242 | $675 | | (Losses) gains on other real estate owned, net | $(177) | $454 | $(156) | $488 | | Total non-interest income | $3,545 | $3,996 | $7,008 | $7,015 | - Total non-interest income decreased by $0.5 million (11.3%) for Q2 2025, primarily due to lower gains on mortgage loan sales and net losses on OREO, partially offset by increases in service charges and wealth management revenue[187][188] - For H1 2025, non-interest income remained largely unchanged at $7.0 million, with earnings on bank-owned life insurance increasing by $378 thousand (59.0%) due to a $35.0 million purchase in Q1 2024[187][188][189] Non-interest Expense This section breaks down the Company's non-interest expenses and their period-over-period changes Non-Interest Expense Components | (dollars in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Salaries | $5,415 | $5,392 | $10,780 | $10,642 | | Occupancy expense, net | $947 | $708 | $1,883 | $1,521 | | Legal, examination, and professional fees | $428 | $512 | $921 | $1,335 | | Advertising and promotion | $212 | $261 | $372 | $524 | | Postage, printing, and supplies | $342 | $190 | $636 | $357 | | Total non-interest expense | $12,269 | $12,034 | $24,768 | $24,609 | - Total non-interest expense increased by $0.2 million (2.0%) for Q2 2025 and $0.2 million (0.6%) for H1 2025 compared to the prior year periods[193] - Occupancy expense increased by $0.2 million (33.8%) for Q2 2025 due to the opening of two new branch locations and one new operations facility[194] - Legal, examination, and professional fees decreased by $0.1 million (16.4%) for Q2 2025, primarily due to lower costs from a contract termination settlement in the prior year[195] Income Taxes This section discusses the Company's income tax expense and effective tax rate - Income taxes as a percentage of earnings before income taxes remained consistent at 18.3% for Q2 and H1 2025, similar to 18.2% and 18.0% for the respective 2024 periods[198] - The effective tax rate was lower than the U.S. federal statutory rate of 21% primarily due to tax-free revenues[198] Lending and Credit Management This section provides an overview of the Company's loan portfolio, credit quality, and allowance for credit losses - Net loans constituted 76.8% of total assets at June 30, 2025, down from 79.1% at December 31, 2024[199] Loan Portfolio Composition | (dollars in thousands) | June 30, 2025 Amount | June 30, 2025 % of Loans | December 31, 2024 Amount | December 31, 2024 % of Loans | | :--------------------- | :------------------- | :----------------------- | :----------------------- | :--------------------------- | | Commercial, financial, and agricultural | $212,266 | 14.5% | $202,329 | 13.8% | | Real estate mortgage − commercial | $767,240 | 52.4% | $775,594 | 53.3% | | Total loans held for investment | $1,462,898 | 100.0% | $1,466,160 | 100.0% | - Commercial real estate (CRE) loans, including non-owner occupied, totaled $589.2 million at June 30, 2025, a decrease from $635.4 million at December 31, 2024[202] - The Allowance for Credit Losses (ACL) on loans included a qualitative adjustment of approximately $10.0 million at June 30, 2025, down from $11.2 million at December 31, 2024[205] Non-Performing Assets This section details the Company's non-performing loans and other real estate owned Non-Performing Assets Summary | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Total non-performing loans | $2,761 | $2,747 | | Other real estate owned and repossessed assets | $2,425 | $1,446 | | Total non-performing assets | $5,186 | $4,193 | | Non-performing assets to total loans | 0.35% | 0.29% | | Allowance for credit losses to non-performing loans | 781.24% | 802.48% | - Total non-performing assets increased by $993 thousand (23.68%) to $5.186 million at June 30, 2025, from $4.193 million at December 31, 2024[206][207] - Non-accrual loans decreased by $0.3 million (11.1%) to $2.3 million at June 30, 2025, while other real estate and repossessed assets increased to $2.4 million[208] Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Commitments This section discusses the allowance for credit losses and related provisions for loans and unfunded commitments Allowance for Credit Losses Summary | (dollars in thousands) | June 30, 2025 | December 31, 2024 | | :--------------------- | :------------ | :---------------- | | Total allowance for credit losses | $21,570 | $22,044 | | Allowance for credit losses to loans | 1.47% | 1.50% | - The allowance for credit losses decreased by $474 thousand (2.15%) to $21.570 million at June 30, 2025, from $22.044 million at December 31, 2024[209] - The Company recognized a release of provision for credit losses of $0.1 million for Q2 2025 and $0.4 million for H1 2025, contrasting with provisions in the prior year periods[210] Net Loan Recoveries (Charge-Offs) This section reports the Company's net loan charge-offs or recoveries for the period Net Loan Charge-offs (Recoveries) | (dollars in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Net Charge-offs (Recoveries) | $(51) | $(1,977) | $(33) | $(2,046) | - The Company reported net loan recoveries of $51 thousand for Q2 2025 and $33 thousand for H1 2025, a significant improvement from net charge-offs of $2.0 million for both periods in 2024[213] Loans Held for Sale This section provides information on loans designated for sale and related activity - There were no loans held for sale at June 30, 2025, or December 31, 2024[214] - The Company sold approximately $2.9 million of mortgage loans to investors during the six months ended June 30, 2025, a substantial decrease from $38.0 million in the same period of 2024[215] Liquidity and Capital Resources This section covers the Company's liquidity management, sources and uses of funds, and capital management strategies Liquidity Management This section details the Company's liquidity management strategy, focusing on balancing fund demands with supply. It outlines liquid assets, pledged securities, core deposit base, and external borrowing capacities, including FHLB advances and federal funds lines, concluding that the Company has adequate liquidity - The Company's most liquid assets, including other interest-bearing deposits, certificates of deposit, and available-for-sale investment securities, totaled $300.1 million at June 30, 2025, up from $247.0 million at December 31, 2024[219] - Unpledged available-for-sale securities totaled approximately $132.0 million at June 30, 2025[220] - Core customer deposits, representing 94.0% of total deposits, totaled $1.4 billion at June 30, 2025, serving as a primary and stable funding source[221] - The Company had $140.0 million in outstanding FHLB borrowings and $49.5 million in subordinated notes at June 30, 2025[224][225] - Total estimated future funding capacity from FHLB, Federal Reserve Bank, and Federal funds purchased lines was $251.9 million at June 30, 2025[226] Sources and Uses of Funds This section analyzes the Company's cash flow activities, highlighting a significant increase in cash and cash equivalents. It details cash provided by operating and financing activities, and cash used in investing activities, along with off-balance sheet commitments and capital allocation strategies like dividends and share repurchases - Cash and cash equivalents increased by $49.3 million to $100.3 million at June 30, 2025[229] - Operating activities provided $11.5 million in cash, while investing activities used $0.7 million, primarily for security purchases[229][230] - Financing activities provided $38.5 million, driven by increased demand deposits and FHLB advances, partially offset by decreased interest-bearing transaction accounts[231] - The Company paid $2.7 million in cash dividends and repurchased $2.2 million of common stock in H1 2025[233][234] Capital Management This section discusses the Company's and the Bank's compliance with regulatory capital requirements under Basel III Capital Rules, including CET1, Tier 1, and total capital ratios. It confirms that both the Company and the Bank exceed the levels established for well-capitalized institutions - The Company and the Bank are subject to Basel III Capital Rules, requiring minimum ratios for CET1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets[238][240] - As of June 30, 2025, both the Company and the Bank met all capital adequacy requirements and exceeded the levels for well-capitalized institutions[240][241][244] Regulatory Capital Ratios | (dollars in thousands) | Company Ratio (June 30, 2025) | Bank Ratio (June 30, 2025) | Minimum Capital Required - Basel III Fully Phased-In Ratio | | :--------------------- | :---------------------------- | :------------------------- | :--------------------------------------------------------- | | Total Capital (to risk-weighted assets) | 15.12% | 14.18% | 10.50% | | Tier 1 Capital (to risk-weighted assets) | 13.87% | 12.93% | 8.50% | | Common Equity Tier 1 Capital (to risk-weighted assets) | 10.82% | 12.93% | 7.00% | | Tier 1 leverage ratio (to adjusted average assets) | 11.87% | 11.06% | 4.00% | Item 3. Quantitative and Qualitative Disclosures about Market Risk This section addresses the Company's management of market risks, primarily interest rate risk, through asset/liability management. It details the use of net interest income simulations and economic value of equity analyses to evaluate risk and establish exposure limits, and briefly discusses the effects of inflation Asset/Liability and Interest Rate Risk This section describes how the Company manages interest rate risk through asset/liability strategies and simulations - The Company manages interest rate risk using net interest income simulations and market value of portfolio equity analyses, with the Asset Liability Committee meeting quarterly[246][247] Net Interest Income Sensitivity Analysis | Hypothetical shift in interest rates (bps) | % Change in projected net interest income (June 30, 2025) | | :----------------------------------------- | :-------------------------------------------------------- | | 200 | (0.58)% | | 100 | (0.14)% | | (100) | (0.65)% | | (200) | (1.97)% | - The Company's interest rate risk position is relatively neutral as of June 30, 2025, with projected net interest income changes within acceptable limits for +/- 200 bps rate shifts[251] Effects of Inflation This section discusses the potential impact of inflation on the Company's financial performance - Inflation's impact on financial institutions differs from other commercial enterprises, with interest rates reacting more to expected inflation and monetary policy[253][254] - Management believes inflation did not have a significant effect on the Company's operations for the three months ended June 30, 2025[255] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures as of June 30, 2025, based on evaluation by the principal executive and financial officers. It also states that there have been no material changes in internal control over financial reporting during the quarter - The Company's disclosure controls and procedures were evaluated as effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported as required[256] - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2025[257] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, other information, and exhibits Item 1. Legal Proceedings This section refers to Note 14 for information on legal proceedings, indicating that the Company is involved in various legal actions incidental to its business activities - Information on legal proceedings is detailed under the caption 'Pending Litigation' in Note 14 - Commitments and Contingencies[259] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes in risk factors have occurred since the Company's Annual Report on Form 10-K for December 31, 2024[260] [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=60&type=sectio