Results
Hawthorn Bancshares Inc.
05/08/2026 | Press release | Distributed by Public on 05/08/2026 10:24
Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, strategy, future performance and business of Hawthorn Bancshares, Inc., and its subsidiaries (collectively, the "Company", "we", "our", or "us"), including, without limitation statements that are not historical in nature, and statements preceded by, followed by or that include the words believes, expects, may, will, should, could, anticipates, estimates, intends, plans, hopes or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, such possible events or factors such as: changes in economic conditions generally or in the Company's market area, changes in policies by regulatory agencies, governmental legislation and regulation, tariffs and trade disruptions, fluctuations in interest rates, changes in liquidity requirements, demand for loans in the Company's market area, changes in accounting and tax principles, estimates made on income taxes, competition with other entities that offer financial services, cybersecurity threats, economic or other disruptions caused by acts of terrorism, war or other conflicts, changes in geopolitical conditions, natural disasters, such as hurricanes, wild fires, freezes, flooding and other man-made disasters, health emergencies, epidemics or pandemics, climate changes or other catastrophic events and such other factors as described in the forward-looking statements under the caption Risk Factors in Item 1A. of the Company's Annual Report on Form 10-K for the year ended December 31, 2025 (the "2025 Form 10-K"), and in other reports filed by us with the Securities and Exchange Commission ("SEC") from time to time. Other factors that have not been identified in this report could also have this effect. You are cautioned not to put undue reliance on any forward-looking statement, which speak only as of the date they were made. Except as required by law, the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in its business, results of operations or financial condition over time. During the quarter ended March 31, 2026, there were no material changes to the Risk Factors disclosed in the Company's 2025 Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Certain accounting policies are considered most critical to the understanding of the Company's financial condition and results of operations. These critical accounting policies and estimates require management's most difficult, subjective and complex judgments about matters that are inherently uncertain. Because these estimates and judgments are based on current circumstances, they may change over time or prove to be inaccurate based on actual experiences. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, the possibility of a materially different financial condition and/or results of operations could reasonably be expected. The Company has identified certain accounting policies as "critical accounting policies and estimates," consisting of those related to the allowance for credit losses, as described in the section captioned "Critical Accounting Policies and Estimates" incorporated by reference in Item 7, Management's Discussion and Analysis of Financial Condition and results of Operations included in the 2025 Form 10-K. There have been no changes in the Company's application of critical accounting policies and estimates since December 31, 2025.
Overview
Crucial to the Company's community banking strategy is growth in its commercial banking services, retail mortgage lending and retail banking services. Through the branch network of its subsidiary bank, Hawthorn Bank (the "Bank"), the Company, with $1.86 billion in assets at March 31, 2026, provides a broad range of commercial and personal banking services. The Bank's specialties include commercial banking for small and mid-sized businesses, including equipment, operating, commercial real estate, Small Business Administration ("SBA") loans, and personal banking services including real estate mortgage lending, installment and consumer loans, certificates of deposit, individual retirement and other time deposit accounts, checking accounts, savings accounts, and money market accounts. The Company also provides other financial services through its Wealth Management business, including trust services, estate planning, investment and asset management services and a comprehensive suite of cash management services. Beginning with the first quarter of 2025, the Company's Wealth Management business is reported as a separate reporting segment, and the Company operates two reporting segments, consisting of the Bank and the Wealth Management business. The geographic areas in which the Company provides products and services include the Missouri communities in and surrounding Jefferson City, Columbia, Clinton, Warsaw, Springfield, and the greater Kansas City metropolitan area.
The Company's primary source of revenue is net interest income derived primarily from lending and deposit taking activities. Much of the Company's business is commercial, commercial real estate development, and residential mortgage lending. The Company's income from mortgage brokerage activities is directly dependent on mortgage rates and the level of home purchases and refinancing activity.
The success of the Company's growth strategy depends primarily on the ability of its banking subsidiary to generate an increasing level of loans and deposits at acceptable risk levels and on acceptable terms without significant increases in non-interest expenses relative to revenues generated. The Company's financial performance also depends, in part, on its ability to manage various portfolios and to successfully introduce additional financial products and services by expanding new and existing customer relationships, utilizing improved technology, and enhancing customer satisfaction. Furthermore, the success of the Company's growth strategy depends on its ability to maintain sufficient regulatory capital levels during periods in which general economic conditions are unfavorable and despite economic conditions being beyond its control.
The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC") to the extent provided by law. The operations of the Bank are supervised and regulated by the FDIC and the Missouri Division of Finance. Periodic examinations of the Bank are conducted by representatives of the FDIC and the Missouri Division of Finance. Such regulations, supervision and examinations are principally for the benefit of depositors, rather than for the benefit of shareholders. The Company is subject to supervision and examination by the Board of Governors of the Federal Reserve System.
The Wealth Management segment was immaterial to the Company's total consolidated operating results for the periods presented in this report. Accordingly, for presentation purposes, the financial information and discussion below is presented on an aggregated basis, except as otherwise noted. Refer to Note 15, "Segment Information," in the Company's consolidated financial statements of further details regarding the financial results of each segment.
Executive Summary
The Company has prepared all of the consolidated financial information in this report in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") and the rules of the SEC. In preparing the consolidated financial statements in accordance with U.S. GAAP, the Company makes estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurances that actual results will not differ from those estimates.
| As of and for the | |||||||||||
| Three Months Ended March 31, | |||||||||||
| (dollars in thousands, except per share data) | 2026 | 2025 | |||||||||
| Net interest income | $ | 17,102 | $ | 15,294 | |||||||
| Provision for (release of) for credit losses | 73 | (340) | |||||||||
| Non-interest income | 3,101 | 3,463 | |||||||||
| Investment securities gains (losses), net | 5 | (2) | |||||||||
| Non-interest expense | 13,003 | 12,499 | |||||||||
| Income before income taxes | 7,132 | 6,596 | |||||||||
| Income tax expense | 1,389 | 1,213 | |||||||||
| Net income | $ | 5,743 | $ | 5,383 | |||||||
| Basic earnings per share | $ | 0.83 | $ | 0.77 | |||||||
| Diluted earnings per share | $ | 0.83 | $ | 0.77 | |||||||
| Performance Ratios | |||||||||||
| Return on average total assets | 1.26% | 1.20% | |||||||||
| Return on average stockholders' equity | 13.07 | 14.29 | |||||||||
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Efficiency ratio (1)
|
64.29 | 66.64 | |||||||||
| Net interest margin, fully tax-equivalent | 4.07 | 3.67 | |||||||||
| Average stockholders' equity to total assets | 9.67 | 8.42 | |||||||||
| Market and per share data | |||||||||||
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Book value per share (2)
|
$ | 25.43 | $ | 21.97 | |||||||
| Market price per share | 33.69 | $ | 28.23 | ||||||||
| Cash dividends declared on common stock | $ | 1,450 | $ | 1,328 | |||||||
(1)Efficiency ratio is calculated as non-interest expense as a percentage of revenue. Total revenue is calculated as net interest income plus non-interest income.
(2)Book value per share is calculated using weighted average shares.
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As of and for the Three Months Ended
|
|||||||||||
| March 31, | |||||||||||
| (dollars in thousands, except per share data) | 2026 | 2025 | |||||||||
| Capital Ratios | |||||||||||
| Stockholders' equity to assets | 9.45% | 8.15% | |||||||||
| Total risk-based capital ratio | 15.84 | 14.94 | |||||||||
| Tier 1 risk-based capital ratio | 14.59 | 13.69 | |||||||||
| Common equity Tier 1 capital | 11.54 | 10.64 | |||||||||
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Tier 1 leverage ratio (1)
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12.34 | 11.64 | |||||||||
| Asset Quality | |||||||||||
| Non-performing loans | $ | 6,791 | $ | 2,461 | |||||||
| Non-performing assets | $ | 6,855 | $ | 3,129 | |||||||
| Net loan charge-offs | $ | 58 | $ | (18) | |||||||
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Net charge-offs to average loans (2)
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0.02% | (0.01)% | |||||||||
| Allowance for credit losses to total loans | 1.44 | 1.48% | |||||||||
| Non-performing loans to total loans | 0.47 | 0.17% | |||||||||
| Non-performing assets to total loans | 0.47 | 0.21% | |||||||||
| Non-performing assets to total assets | 0.37 | 0.17% | |||||||||
(1)Tier 1 leverage ratio is calculated by dividing Tier 1 capital by average total consolidated assets.
(2)Annualized
Results of Operations Highlights:
Consolidated net income was $5.7 million, or $0.83 per diluted share for the three months ended March 31, 2026, compared to $5.4 million, or $0.77 per diluted share, for the three months ended March 31, 2025. For the three months ended March 31, 2026, the return on average assets was 1.26%, the return on average stockholders' equity was 13.07%, and the efficiency ratio was 64.29%.
Net interest income was $17.1 million for the three months ended March 31, 2026, compared to $15.3 million for the three months ended March 31, 2025. Net interest margin, on a fully taxable equivalent ("FTE") basis, was 4.07% for the three months ended March 31, 2026, compared to 3.67% for the three months ended March 31, 2025. The change to net interest margin on an FTE basis is discussed in greater detail under the Average Balance Sheet Data and Rate and Volume Analysis sections.
Non-interest income was $3.1 million for the three months ended March 31, 2026, compared to $3.5 million for the three months ended March 31, 2025. These changes are discussed in greater detail under the Non-interest Income and Expense section.
Non-interest expense was $13.0 million for the three months ended March 31, 2026, compared to $12.5 million for the three months ended March 31, 2025. These changes are discussed in greater detail under the Non-interest Income and Expense section.
Balance Sheet Highlights:
Cash and cash equivalents - Cash and cash equivalents decreased $2.4 million to $101.9 million as of March 31, 2026 compared to $104.3 million as of December 31, 2025, and decreased $0.3 million compared to $102.3 million as of March 31, 2025. See the Liquidity Management section for further discussion.
Loans - Loans held for investment decreased $32.6 million to $1.45 billion as of March 31, 2026 compared to $1.49 billion as of December 31, 2025, and decreased $16.2 million compared to $1.47 billion as of March 31, 2025.
Asset quality - Non-performing assets totaled $6.9 million, or 0.47% of total loans, at March 31, 2026 compared to $7.0 million, or 0.47% of total loans, at December 31, 2025 and $3.1 million, or 0.21% of total loans, at March 31, 2025.
In the first quarter of 2026, the Company had net loan charge-offs of $0.06 million, or 0.02% of average loans, compared to net loan recoveries of $0.02 million, or 0.01% of average loans, in the same prior year quarter.
The allowance for credit losses was $20.9 million, or 1.44% of loans outstanding, at March 31, 2026 compared to $21.1 million, or 1.42% of loans outstanding, at December 31, 2025, and $21.8 million, or 1.48% of loans outstanding, at March 31, 2025. These changes are discussed in greater detail under the Lending and Credit Management section.
Deposits - Total deposits decreased $35.8 million to $1.52 billion as of March 31, 2026 compared to $1.55 billion as of December 31, 2025, and decreased $25.6 million compared to $1.54 billion as of March 31, 2025.
Federal Home Loan Bank ("FHLB") advances and other borrowings - Total FHLB advances and other borrowings decreased $7.7 million to $94.4 million as of March 31, 2026, compared to $102.1 million as of December 31, 2025, and decreased $29.7 million compared to $124.1 million as of March 31, 2025.
Capital - The Company maintains its "well-capitalized" regulatory capital position. At March 31, 2026, capital ratios were as follows: total risk-based capital to risk-weighted assets 15.84%; tier 1 capital to risk-weighted assets 14.59%; tier 1 leverage 12.34%; and stockholders' equity to assets 9.45%.
Average Balance Sheet Data
Net interest income is the largest source of revenue resulting from the Company's lending, investing, borrowing, and deposit gathering activities. It is affected both by changes in the level of interest rates and changes in the amounts and mix of interest earning assets and interest bearing liabilities. The following tables present average balance sheet data, net interest income, average yields of earning assets, average costs of interest bearing liabilities, net interest spread and net interest margin on an FTE basis for each of the three month periods ended March 31, 2026 and 2025, respectively. The average balances used in this table and other statistical data were calculated using average daily balances.
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2026 | 2025 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Average Balance |
Interest Income/ Expense (1)
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Rate Earned/ Paid (1)
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Average Balance |
Interest Income/ Expense (1)
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Rate Earned/ Paid (1)
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| ASSETS | |||||||||||||||||||||||||||||||||||
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Loans: (2)
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| Commercial | $ | 217,801 | $ | 3,749 | 6.98% | $ | 200,696 | $ | 3,171 | 6.41% | |||||||||||||||||||||||||
| Real estate construction - residential | 39,702 | 717 | 7.32 | 33,504 | 620 | 7.50 | |||||||||||||||||||||||||||||
| Real estate construction - commercial | 85,229 | 1,580 | 7.52 | 82,176 | 1,570 | 7.75 | |||||||||||||||||||||||||||||
| Real estate mortgage - residential | 370,366 | 5,225 | 5.72 | 363,327 | 5,175 | 5.78 | |||||||||||||||||||||||||||||
| Real estate mortgage - commercial | 754,259 | 10,827 | 5.82 | 772,401 | 10,520 | 5.52 | |||||||||||||||||||||||||||||
| Installment and other consumer | 9,681 | 161 | 6.74 | 13,204 | 208 | 6.39 | |||||||||||||||||||||||||||||
| Total loans | 1,477,038 | 22,259 | 6.11 | 1,465,308 | 21,264 | 5.89 | |||||||||||||||||||||||||||||
| Loans held for sale | 574 | 4 | 2.83 | 82 | 2 | 9.89 | |||||||||||||||||||||||||||||
| Investment securities: | |||||||||||||||||||||||||||||||||||
| U.S. Treasury | 5,072 | 53 | 4.24 | 4,944 | 53 | 4.35 | |||||||||||||||||||||||||||||
| U.S. government and federal agency obligations | 4,619 | 40 | 3.51 | 13,211 | 140 | 4.30 | |||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | 105,089 | 806 | 3.11 | 101,882 | 784 | 3.12 | |||||||||||||||||||||||||||||
| Mortgage-backed securities | 70,378 | 659 | 3.80 | 80,069 | 782 | 3.96 | |||||||||||||||||||||||||||||
| Other debt securities | 26,090 | 386 | 6.00 | 22,202 | 303 | 5.53 | |||||||||||||||||||||||||||||
| Total investment securities | 211,248 | 1,944 | 3.73 | 222,308 | 2,062 | 3.76 | |||||||||||||||||||||||||||||
| Other investment securities | 5,143 | 113 | 8.91 | 4,820 | 120 | 10.10 | |||||||||||||||||||||||||||||
| Interest bearing deposits in other financial institutions | 44,709 | 436 | 3.95 | 23,198 | 249 | 4.35 | |||||||||||||||||||||||||||||
| Total interest earning assets | 1,738,712 | 24,756 | 5.77% | 1,715,716 | 23,697 | 5.60% | |||||||||||||||||||||||||||||
| All other assets | 125,766 | 121,341 | |||||||||||||||||||||||||||||||||
| Allowance for credit losses | (21,394) | (22,224) | |||||||||||||||||||||||||||||||||
| Total assets | $ | 1,843,084 | $ | 1,814,833 | |||||||||||||||||||||||||||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||
| Savings | $ | 262,580 | $ | 894 | 1.38% | $ | 271,983 | $ | 1,278 | 1.91% | |||||||||||||||||||||||||
| NOW accounts | 178,443 | 699 | 1.59 | 203,921 | 757 | 1.51 | |||||||||||||||||||||||||||||
| Interest checking | 175,163 | 1,307 | 3.03 | 146,283 | 1,378 | 3.82 | |||||||||||||||||||||||||||||
| Money market | 187,628 | 762 | 1.65 | 208,134 | 936 | 1.82 | |||||||||||||||||||||||||||||
| Time deposits | 302,876 | 2,209 | 2.96 | 300,383 | 2,464 | 3.33 | |||||||||||||||||||||||||||||
| Total interest bearing deposits | 1,106,690 | 5,871 | 2.15 | 1,130,704 | 6,813 | 2.44% | |||||||||||||||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 7 | 13 | 753.17 | 29 | - | - | |||||||||||||||||||||||||||||
| Federal Home Loan Bank advances and other borrowings | 83,686 | 635 | 3.08 | 75,521 | 499 | 2.68 | |||||||||||||||||||||||||||||
| Subordinated notes | 49,486 | 773 | 6.34 | 49,486 | 852 | 6.98 | |||||||||||||||||||||||||||||
| Total borrowings | 133,179 | 1,421 | 4.33 | 125,036 | 1,351 | 4.38 | |||||||||||||||||||||||||||||
| Total interest bearing liabilities | 1,239,869 | 7,292 | 2.39% | 1,255,740 | 8,164 | 2.64% | |||||||||||||||||||||||||||||
| Demand deposits | 410,264 | 393,469 | |||||||||||||||||||||||||||||||||
| Other liabilities | 14,710 | 12,896 | |||||||||||||||||||||||||||||||||
| Total liabilities | 1,664,843 | 1,662,105 | |||||||||||||||||||||||||||||||||
| Stockholders' equity | 178,240 | 152,728 | |||||||||||||||||||||||||||||||||
| Total liabilities and stockholders' equity | $ | 1,843,083 | $ | 1,814,833 | |||||||||||||||||||||||||||||||
| Net interest income (FTE) | $ | 17,464 | $ | 15,533 | |||||||||||||||||||||||||||||||
| Net interest spread (FTE) | 3.39% | 2.96% | |||||||||||||||||||||||||||||||||
| Net interest margin (FTE) | 4.07% | 3.67% | |||||||||||||||||||||||||||||||||
(1)Interest income and yields are presented on an FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for the three months ended March 31, 2026 and 2025. Such adjustments totaled $0.4 million and $0.2 million for the three months ended March 31, 2026 and 2025, respectively.
(2)Non-accruing loans are included in the average amounts outstanding.
Rate and Volume Analysis
The following table summarizes the changes in net interest income on an FTE basis, by major category of interest earning assets and interest bearing liabilities, identifying changes related to volumes and rates for the three months ended March 31, 2026 compared to the three months ended March 31, 2025. The change in interest due to the combined rate/volume variance has been allocated to rate and volume changes in proportion to the absolute dollar amounts of change in each.
| Three Months Ended March 31, | |||||||||||||||||
| 2026 vs. 2025 | |||||||||||||||||
| Change due to | |||||||||||||||||
| (dollars in thousands) | Total Change | Average Volume | Average Rate | ||||||||||||||
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Interest income on a fully taxable equivalent basis: (1)
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Loans: (2)
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| Commercial | $ | (10,593) | $ | 215 | $ | (10,808) | |||||||||||
| Real estate construction - residential | (2,592) | (204) | (2,388) | ||||||||||||||
| Real estate construction - commercial | (3,610) | 898 | (4,508) | ||||||||||||||
| Real estate mortgage - residential | (15,704) | 48 | (15,752) | ||||||||||||||
| Real estate mortgage - commercial | (31,130) | (1,453) | (29,677) | ||||||||||||||
| Installment and other consumer | (836) | (314) | (522) | ||||||||||||||
| Loans held for sale | (80) | (33) | (47) | ||||||||||||||
| Investment securities: | |||||||||||||||||
| U.S. Treasury | (5) | 68 | (73) | ||||||||||||||
| U.S. government and federal agency obligations | (602) | (278) | (324) | ||||||||||||||
| Obligations of states and political subdivisions | (2,225) | 30 | (2,255) | ||||||||||||||
| Mortgage-backed securities | (1,282) | 318 | (1,600) | ||||||||||||||
| Other debt securities | (442) | 411 | (853) | ||||||||||||||
| Other investment securities | (450) | (67) | (383) | ||||||||||||||
| Interest bearing deposits in other financial institutions | (1,851) | 124 | (1,975) | ||||||||||||||
| Total interest income | (71,402) | (237) | (71,165) | ||||||||||||||
| Interest expense: | |||||||||||||||||
| Savings | $ | (4,411) | $ | 138 | $ | (4,549) | |||||||||||
| NOW accounts | (2,131) | (290) | (1,841) | ||||||||||||||
| Interest checking | (4,352) | 1,539 | (5,891) | ||||||||||||||
| Money market | (3,968) | (667) | (3,301) | ||||||||||||||
| Time deposits | (9,143) | (760) | (8,383) | ||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 13 | - | 13 | ||||||||||||||
| FHLB advances and other borrowings | (2,460) | (456) | (2,004) | ||||||||||||||
| Subordinated notes | (3,126) | - | (3,126) | ||||||||||||||
| Total interest expense | (29,578) | (496) | (29,082) | ||||||||||||||
| Net interest income on an FTE basis | $ | (41,824) | $ | 259 | $ | (42,083) | |||||||||||
(1)Interest income and yields are presented on an FTE basis using the federal statutory income tax rate of 21%, net of nondeductible interest expense, for both the three months ended March 31, 2026 and 2025. Such adjustments totaled $0.4 million for the three months ended March 31, 2026, compared to $0.2 million for the three months ended March 31, 2025.
(2)Non-accruing loans are included in the average amounts outstanding.
Financial results for the quarter ended March 31, 2026 compared to the quarter ended March 31, 2025, reflected an increase in net interest income on an FTE basis of $1.9 million, or 12.4%. Measured as a percentage of average earning assets, the net interest margin (expressed on an FTE basis) increased to 4.07% for the quarter ended March 31, 2026 compared to 3.67% for the quarter ended March 31, 2025.
Average interest earning assets increased $23.0 million, or 1.3%, to $1.74 billion for the quarter ended March 31, 2026 compared to $1.72 billion for the quarter ended March 31, 2025, and average interest bearing liabilities decreased $15.9 million, or 1.3%, to $1.24 billion for the quarter ended March 31, 2026 compared to $1.26 billion for the quarter ended March 31, 2025.
Total interest income (expressed on an FTE basis) was $24.8 million for the three months ended March 31, 2026, compared to $23.7 million for the three months ended March 31, 2025. The Company's rates earned on interest earning assets were 5.77% for the three months ended March 31, 2026, compared to 5.60% for the three months ended March 31, 2025.
Interest income on loans held for investment (expressed on an FTE basis) was $22.3 million for the three months ended March 31, 2026, compared to $21.3 million for the three months ended March 31, 2025.
Average loans outstanding increased $11.7 million, or 0.8%, to $1.48 billion for the quarter ended March 31, 2026 compared to $1.47 billion for the quarter ended March 31, 2025. The average yield on loans increased to 6.11% for the quarter ended March 31, 2026 compared to 5.89% for the quarter ended March 31, 2025. See the Lending and Credit Management section for further discussion of changes in the composition of the lending portfolio.
Interest income on available-for-sale securities (expressed on an FTE basis) was $1.9 million for the three months ended March 31, 2026, compared to $2.1 million for the three months ended March 31, 2025.
Average securities decreased $11.1 million, or 5.0%, to $211.2 million for the quarter ended March 31, 2026 compared to $222.3 million for the quarter ended March 31, 2025. The average yield on securities decreased to 3.73% for the quarter ended March 31, 2026 compared to 3.76% for the quarter ended March 31, 2025. See the Liquidity Management section for further discussion.
Total interest expense was $7.3 million for the three months ended March 31, 2026, compared to $8.2 million for the three months ended March 31, 2025. The Company's rates paid on interest bearing liabilities were 2.39% for the three months ended March 31, 2026, compared to 2.64% for the three months ended March 31, 2025. See the Liquidity Management section for further discussion.
Interest expense on deposits was $5.9 million for the three months ended March 31, 2026, compared to $6.8 million for the three months ended March 31, 2025.
Average interest bearing deposits decreased $24.0 million, or 2.1%, to $1.11 billion for the quarter ended March 31, 2026 compared to $1.13 billion for the quarter ended March 31, 2025. The average cost of deposits decreased to 2.15% for the quarter ended March 31, 2026 compared to 2.44% for the quarter ended March 31, 2025.
Interest expense on borrowings was $1.4 million for both the three months ended March 31, 2026 and March 31, 2025.
Average borrowings increased $8.1 million, or 6.5%, to $133.2 million for the quarter ended March 31, 2026 compared to $125.0 million for the quarter ended March 31, 2025. The average cost of borrowings decreased to 4.33% for the quarter ended March 31, 2026 compared to 4.38% for the quarter ended March 31, 2025.
Non-interest Income
The following table shows the principal components of non-interest income for the three months ended March 31, 2026 and 2025.
| Three Months Ended March 31, | |||||||||||||||||||||||
| (dollars in thousands) | 2026 | 2025 | $ Change | % Change | |||||||||||||||||||
| Service charges and other fees | $ | 820 | $ | 914 | $ | (94) | (10.3) | % | |||||||||||||||
| Bank card income and fees | 908 | 925 | (17) | (1.8) | |||||||||||||||||||
| Earnings on bank-owned life insurance | 493 | 510 | (17) | (3.3) | |||||||||||||||||||
| Wealth management revenue | 616 | 473 | 143 | 30.2 | |||||||||||||||||||
| Gain on sales of mortgage loans, net | 77 | 126 | (49) | (38.9) | |||||||||||||||||||
| Gains (losses) on other real estate owned, net | (33) | 21 | (54) | (257.1) | |||||||||||||||||||
| Other | 220 | 495 | (275) | (55.6) | |||||||||||||||||||
| Total non-interest income | $ | 3,101 | $ | 3,464 | $ | (363) | (10.5) | % | |||||||||||||||
|
Non-interest income as a % of total revenue (1)
|
15.3 | % | 18.5 | % | |||||||||||||||||||
(1)Total revenue is calculated as net interest income plus non-interest income.
Total non-interest income decreased $0.4 million, or 10.5%, to $3.1 million for the quarter ended March 31, 2026 compared to $3.5 million for the quarter ended March 31, 2025. Compared to the prior year quarter, the decrease was primarily due to a write-down of a bank property held for sale. No such activity occurred in the prior year quarter.
Service charges and other fees decreased $0.1 million, or 10.3%, to $0.8 million for the quarter ended March 31, 2026 compared to $0.9 million for the quarter ended March 31, 2025. The decrease for the three months ended March 31, 2026 was primarily attributable to a decrease in overall service charges on accounts and lower NSF charges.
Earnings on bank-owned life insurance decreased to $0.49 million for the three months ended March 31, 2026 compared to $0.51 million for the three months ended March 31, 2025. The Company purchased $35.0 million in bank-owned life insurance policies in the first quarter of 2024. The earnings generated from these policies are primarily derived from the investment returns on the cash value component.
Wealth management revenue increased $0.1 million, or 30.2%, to $0.6 million for the quarter ended March 31, 2026 compared to $0.5 million for the quarter ended March 31, 2025. The increase for the three month period was primarily attributable to continued growth in accounts.
Gain on sales of mortgage loans decreased to $0.08 million for the three months ended March 31, 2026 compared to $0.13 million for the three months ended March 31, 2025. The Company sold mortgage loans totaling $14.8 million for the three months ended March 31, 2026, compared to $1.2 million for the three months ended March 31, 2025.
Gains (losses) on other real estate owned were losses of $0.03 million for the quarter ended March 31, 2026 compared to gains of $0.02 million for the quarter ended March 31, 2025.
Non-interest Expense
The following table shows the principal components of non-interest expense for the three months ended March 31, 2026 and 2025.
| Three Months Ended March 31, | |||||||||||||||||||||||
| (dollars in thousands) | 2026 | 2025 | $ Change | % Change | |||||||||||||||||||
| Salaries | $ | 5,369 | $ | 5,366 | $ | 3 | 0.1% | ||||||||||||||||
| Employee benefits | 1,445 | 1,546 | (101) | (6.5) | |||||||||||||||||||
| Occupancy expense, net | 991 | 935 | 56 | 6.0 | |||||||||||||||||||
| Furniture and equipment expense | 770 | 793 | (23) | (2.9) | |||||||||||||||||||
| Processing, network and bank card expense | 1,418 | 1,401 | 17 | 1.2 | |||||||||||||||||||
| Legal, examination, and professional fees | 802 | 493 | 309 | 62.7 | |||||||||||||||||||
| Advertising and promotion | 204 | 160 | 44 | 27.5 | |||||||||||||||||||
| Postage, printing, and supplies | 299 | 294 | 5 | 1.7 | |||||||||||||||||||
| Other | 1,705 | 1,511 | 194 | 12.8 | |||||||||||||||||||
| Total non-interest expense | $ | 13,003 | $ | 12,499 | $ | 504 | 4.0% | ||||||||||||||||
|
Efficiency ratio (1)
|
64.4 | % | 66.6 | % | |||||||||||||||||||
| Number of full-time equivalent employees | 276 | 264 | |||||||||||||||||||||
(1)Efficiency ratio is calculated as non-interest expense as a percent of revenue. Total revenue is calculated as net interest income plus non-interest income.
Total non-interest expense increased $0.5 million, or 4.0%, to $13.0 million for the quarter ended March 31, 2026 compared to $12.5 million for the quarter ended March 31, 2025.
Employee Benefits decreased $0.1 million, or 6.5%, to $1.4 million for the quarter ended March 31, 2026 compared to $1.5 million for the quarter ended March 31, 2025. The decrease was primarily due to the timing of bonus payments and related payroll taxes and employer 401k match contributions, and also lower pension costs.
Occupancy expense, net, increased $0.06 million, or 6.0%, to $1.0 million for the quarter ended March 31, 2026 compared to $0.9 million for the quarter ended March 31, 2025. The increase for the three months ended March 31, 2026 primarily resulted from the expansion of one branch and the opening of two new branch locations and one new operations facility in the first quarter of 2026.
Legal, examination, and professional fees increased $0.3 million, or 62.7%, to $0.8 million for the quarter ended March 31, 2026 compared to $0.5 million for the quarter ended March 31, 2025. The increase was due to higher legal fees and fees related to the execution of a lease on a bank building held for sale.
Income Taxes
Income taxes as a percentage of earnings before income taxes as reported in the consolidated financial statements were 19.5% for the three months ended March 31, 2026, compared to 18.4% for the three months ended March 31, 2025. The effective tax rate for each of the three months ended March 31, 2026 and 2025 was lower than the U.S. federal statutory rate of 21% primarily due to tax-free revenues.
Lending and Credit Management
Interest earned on the loan portfolio is a primary source of interest income for the Company. Net loans represented 78.4% of total assets as of March 31, 2026 compared to 78.5% as of December 31, 2025.
Lending activities are conducted pursuant to an established loan policy approved by the Bank's Board of Directors. The Bank's credit review process is overseen by regional loan committees with established loan approval limits. In addition, the executive loan committee reviews all credit relationships in aggregate over an established dollar amount. The executive loan committee meets weekly and is comprised of senior managers of the Bank.
Major classifications within the Company's held-for-investment loan portfolio as of the dates indicated are as follows:
| March 31, 2026 | December 31, 2025 | ||||||||||||||||||||||
| (dollars in thousands) | Amount | % of Loans | Amount | % of Loans | |||||||||||||||||||
| Commercial, financial, and agricultural | $ | 223,378 | 15.4 | % | $ | 227,584 | 15.3 | % | |||||||||||||||
|
Real estate construction − residential
|
42,487 | 2.9 | 39,609 | 2.7 | |||||||||||||||||||
|
Real estate construction − commercial
|
83,666 | 5.8 | 83,846 | 5.6 | |||||||||||||||||||
|
Real estate mortgage − residential
|
367,081 | 25.2 | 369,636 | 24.9 | |||||||||||||||||||
|
Real estate mortgage − commercial
|
728,184 | 50.1 | 755,892 | 50.8 | |||||||||||||||||||
| Installment and other consumer | 9,375 | 0.6 | 10,225 | 0.7 | |||||||||||||||||||
| Total loans held for investment | $ | 1,454,171 | 100.0 | % | $ | 1,486,792 | 100.0 | % | |||||||||||||||
Commercial Real Estate Loans
Commercial real estate loans ("CRE") consist primarily of income-producing investment property loans. Additionally, CRE loans include 1-4 family property loans as well as land and development loans.
The following table shows the categories of the Company's non-owner occupied CRE loan portfolio at March 31, 2026 and December 31, 2025:
| March 31, 2026 | December 31, 2025 | ||||||||||||||||||||||
| (dollars in thousands) | Amount | % of Loans | Amount | % of Loans | |||||||||||||||||||
| Retail | $ | 170,419 | 28.6 | % | $ | 171,366 | 27.9 | % | |||||||||||||||
| Multi Family | 149,706 | 25.1 | 165,663 | 27.0 | |||||||||||||||||||
| Hotel & Food Service | 63,620 | 10.7 | 63,279 | 10.3 | |||||||||||||||||||
| Other Construction | 53,476 | 9.0 | 55,947 | 9.1 | |||||||||||||||||||
| Office Buildings | 47,182 | 7.9 | 48,028 | 7.8 | |||||||||||||||||||
| 1-4 Family Const | 42,487 | 7.1 | 39,609 | 6.4 | |||||||||||||||||||
| Other Real Estate | 24,149 | 4.0 | 24,379 | 4.0 | |||||||||||||||||||
| Land Subdivision | 16,955 | 2.8 | 18,450 | 3.0 | |||||||||||||||||||
| Industrial | 15,480 | 2.6 | 15,765 | 2.6 | |||||||||||||||||||
| Residential Building Construction | 6,670 | 1.1 | 5,906 | 1.0 | |||||||||||||||||||
| Commercial and Institutional Building Construction | 6,565 | 1.1 | 6,228 | 1.0 | |||||||||||||||||||
| Total Commercial Real Estate - Non Owner Occupied | $ | 596,709 | 100.0 | % | $ | 614,620 | 100.0 | % | |||||||||||||||
The Company extends credit to its local community markets through traditional real estate mortgage products. The Company does not participate in credit extension to sub-prime residential real estate markets. The Company does not lend funds for transactions defined as "highly leveraged" by bank regulatory authorities or for foreign loans. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans that are not otherwise disclosed in the loan portfolio composition table.
Risk Elements of the Loan Portfolio
Management, internal loan review and the executive loan committee formally review all loans in excess of certain dollar amounts (periodically established) at least annually. Loans in excess of $2.0 million in the aggregate and all adversely classified credits identified by management are reviewed by the executive loan committee. In addition, all other loans are reviewed on a risk weighted selection process. The executive loan committee reviews and reports to the Board of Directors, at scheduled meetings: past due, classified, and watch list loans in order to classify or reclassify loans as loans requiring attention, special mention, substandard, doubtful, or loss. During this review, management will evaluate individual loans for expected credit losses when those loans do not share similar risk characteristics with loans evaluated using a collective (pooled) basis. If management determines that it is probable that all amounts due on a loan will not be collected under the
original terms of the loan agreement, the loan is individually analyzed and in conjunction with current economic conditions and loss experience, reserves are estimated as further discussed below.
Loans not individually evaluated are aggregated and collectively analyzed. Management determined that segmenting loans not individually analyzed by the federal call report codes represents the most prudent way to consolidate loans by their associated risk qualities.
General reserves are recorded for collectively analyzed loans using a consistent methodology. Two different models are used for calculating the general reserve. The Discounted Cash Flow model considers quantitative peer group historic loss experience, forecasts over the estimated life of the loan pools, industry data, and qualitative or environmental factors, such as: lending policies and procedures; economic conditions; the nature, volume and terms of the portfolio; lending staff and management; past due loans; the loan review system; collateral values; concentrations of credit; and external factors. The Remaining Life model applies a long-term average loss rate calculated using peer data that is adjusted for qualitative or environmental factors such as those previously noted. The model used depends on the loan portfolio segment. Management believes, but there can be no assurance, that these procedures keep management informed of potential problem loans. At March 31, 2026 and December 31, 2025, the ACL on loans included a qualitative adjustment of approximately $10.0 million and $10.3 million, respectively.
Non-Performing Assets
The following table summarizes non-performing assets at the dates indicated:
| March 31, | December 31, | ||||||||||
| (dollars in thousands) | 2026 | 2025 | |||||||||
| Non-accrual loans: | |||||||||||
| Commercial, financial, and agricultural | $ | 834 | $ | 1,003 | |||||||
| Real estate mortgage − residential | 5,714 | 5,656 | |||||||||
| Real estate mortgage − commercial | 191 | 143 | |||||||||
| Installment and other consumer | 44 | 34 | |||||||||
| Total | 6,783 | 6,836 | |||||||||
| Loans contractually past due 90 days or more and still accruing: | |||||||||||
| Commercial, financial, and agricultural | 2 | - | |||||||||
| Real estate mortgage − residential | - | 29 | |||||||||
| Installment and other consumer | 6 | - | |||||||||
| Total | 8 | 29 | |||||||||
|
Total non-performing loans (1)
|
6,791 | 6,865 | |||||||||
| Other real estate owned and repossessed assets | 64 | 98 | |||||||||
|
Total non-performing assets (2)
|
$ | 6,855 | $ | 6,963 | |||||||
| Loans held for investment | $ | 1,454,171 | $ | 1,486,792 | |||||||
| Allowance for credit losses on loans | $ | 20,933 | $ | 21,111 | |||||||
| Allowance for credit losses to loans | 1.44 | % | 1.42 | % | |||||||
| Non-accrual loans to total loans | 0.47 | 0.46 | |||||||||
|
Non-performing loans to loans (1)
|
0.47 | 0.46 | |||||||||
|
Non-performing assets to loans (2)
|
0.47 | 0.47 | |||||||||
|
Non-performing assets to assets (2)
|
0.37 | 0.37 | |||||||||
| Allowance for credit losses to non-accrual loans | 308.61 | 308.82 | |||||||||
| Allowance for credit losses to non-performing loans | 308.25 | 307.52 | |||||||||
(1)Non-performing loans include loans 90 days past due and accruing and non-accrual loans.
(2)Non-performing assets include non-performing loans and other real estate owned and repossessed assets.
Total non-performing assets were $6.9 million, or 0.47% of total loans, at March 31, 2026 compared to $7.0 million, or 0.47% of total loans, at December 31, 2025.
Total non-accrual loans at March 31, 2026 decreased $0.1 million, or 0.8%, to $6.8 million compared to $6.8 million at December 31, 2025. There were $0.01 million in loans past due 90 days and still accruing interest at March 31, 2026 compared to $0.03 million at December 31, 2025. Other real estate and repossessed assets were $0.1 million at both March 31, 2026 and December 31, 2025.
Provision and Allowance for Credit Losses on Loans and Liability for Unfunded Commitments
Allowance for Credit Losses
The following table is a summary of the allocation of the allowance for credit losses at the end of the periods shown below:
| March 31, 2026 | December 31, 2025 | ||||||||||||||||||||||
| (dollars in thousands) | Amount | % of loans to total loans | Amount | % of loans to total loans | |||||||||||||||||||
| Commercial, financial, and agricultural | $ | 4,329 | 15.4 | % | $ | 3,655 | 15.3 | % | |||||||||||||||
| Real estate construction − residential | 1,047 | 2.9 | 975 | 2.7 | |||||||||||||||||||
| Real estate construction − commercial | 1,900 | 5.8 | 1,719 | 5.6 | |||||||||||||||||||
| Real estate mortgage − residential | 4,389 | 25.2 | 4,823 | 24.9 | |||||||||||||||||||
| Real estate mortgage − commercial | 9,172 | 50.1 | 9,839 | 50.8 | |||||||||||||||||||
| Installment and other consumer | 96 | 0.6 | 100 | 0.7 | |||||||||||||||||||
| Total | $ | 20,933 | 100.0 | % | $ | 21,111 | 100.0 | % | |||||||||||||||
The allowance for credit losses was $20.9 million, or 1.44% of loans outstanding, at March 31, 2026 compared to $21.1 million, or 1.42% of loans outstanding, at December 31, 2025. The ratio of the allowance for credit losses to non-performing loans was 308.25% at March 31, 2026, compared to 307.52% at December 31, 2025.
Provision for (Release of) Credit Losses
| Three Months Ended March 31, | |||||||||||
| (dollars in thousands) | 2026 | 2025 | |||||||||
| Release of credit losses on loans | $ | (120) | $ | (282) | |||||||
| Provision for (release of) credit losses for off-balance sheet commitments | 193 | (58) | |||||||||
| Total provision for (release of) credit losses | $ | 73 | $ | (340) | |||||||
The Company recognized provision for credit losses of $0.1 million for the three months ended March 31, 2026, compared to a $0.3 million release of credit losses for the three months ended March 31, 2025.
The following table summarizes the credit loss experience for the periods indicated:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2026 | 2025 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Net (Charge-offs) Recoveries | Average Loans |
Net (Charge-offs) Recoveries / Average Loans (1)
|
Net (Charge-offs) Recoveries | Average Loans |
Net (Charge-offs) Recoveries / Average Loans (1)
|
|||||||||||||||||||||||||||||
| Commercial, financial, and agricultural | $ | 6 | $ | 217,801 | 0.01 | % | $ | 54 | $ | 200,696 | 0.03 | % | |||||||||||||||||||||||
|
Real estate construction − residential
|
- | 39,702 | - | - | 33,504 | - | |||||||||||||||||||||||||||||
|
Real estate construction − commercial
|
- | 85,229 | - | - | 82,176 | - | |||||||||||||||||||||||||||||
|
Real estate mortgage − residential
|
(5) | 370,366 | (0.01) | 2 | 363,327 | - | |||||||||||||||||||||||||||||
|
Real estate mortgage − commercial
|
23 | 754,259 | 0.01 | 25 | 772,402 | - | |||||||||||||||||||||||||||||
| Installment and other consumer | 34 | 9,681 | 1.39 | (63) | 13,204 | (0.48) | |||||||||||||||||||||||||||||
| Total | $ | 58 | $ | 1,477,038 | 0.02 | % | $ | 18 | $ | 1,465,309 | - | % | |||||||||||||||||||||||
(1)Annualized ratio of net (charge-offs) recoveries to average loans by loan type.
Net Loan Charge-Offs/Recoveries
The Company's net charge-offs were $0.06 million for the three months ended March 31, 2026, compared to $0.02 million of net charge-offs for the three months ended March 31, 2025.
Loans Held for Sale
The Company designates certain long-term fixed rate personal real estate loans as held for sale. Loans held for sale are being carried at the lower of cost or estimated fair value. The loans are primarily sold to Freddie Mac, Fannie Mae, PennyMac and various other secondary market investors. There were $1.0 thousand of loans held for sale at March 31, 2026, and $0.6 million loans held for sale at December 31, 2025.
The Company generally does not retain long-term fixed rate residential mortgage loans in its portfolio. Fixed rate loans conforming to standards required by the secondary market are offered to qualified borrowers but are not funded until the Company has a non-recourse purchase commitment from the secondary market at a predetermined price. During the three months ended March 31, 2026, the Company sold approximately $14.8 million of loans to investors compared to $1.2 million for the three months ended March 31, 2025.
Liquidity and Capital Resources
Liquidity Management
The role of liquidity management is to ensure that funds are available to meet depositors' withdrawal and borrowers' credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in the supply of those funds. Liquidity to meet these demands is provided by maturing assets, short-term liquid assets that can be converted to cash and the ability to attract funds from external sources, principally depositors. Due to the nature of services offered by the Company, management prefers to focus on transaction accounts and full-service relationships with customers as the primary sources of funding.
The Company's Asset/Liability Committee ("ALCO"), primarily made up of senior management, has direct oversight responsibility for the Company's liquidity position and profile. A combination of daily, weekly, and monthly reports provided to management detail the following: internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, available pricing and market access to the financial markets for capital, and exposure to contingent draws on the Company's liquidity.
The Company has a number of sources of funds to meet liquidity needs on a daily basis. The Company's most liquid assets are comprised of available-for-sale investment securities, not including other debt securities, federal funds sold, and excess
reserves held at the Federal Reserve. The following table shows the Company's sources of funds as of March 31, 2026 and December 31, 2025.
| (dollars in thousands) | March 31, 2026 | December 31, 2025 | |||||||||
| Other interest bearing deposits | $ | 88,549 | $ | 87,680 | |||||||
| Certificates of deposit in other banks | 1,000 | 1,000 | |||||||||
| Available-for-sale investment securities | 205,193 | 209,939 | |||||||||
| Total | $ | 294,742 | $ | 298,619 | |||||||
Federal funds sold and resale agreements normally have overnight maturities and are used for general daily liquidity purposes. The fair value of the available-for-sale investment portfolio was $205.2 million at March 31, 2026 and included an unrealized net loss of $24.3 million. The portfolio includes projected maturities and mortgage-backed securities pay-downs of approximately $1.5 million over the next twelve months, which offer resources to meet either new loan demand or reductions in the Company's borrowings.
The Company pledges portions of its investment securities portfolio to secure public fund deposits, federal funds purchase lines, securities sold under agreements to repurchase, borrowing capacity at the Federal Reserve Bank, and for other purposes as required or permitted by law. At March 31, 2026 and December 31, 2025, the Company's unpledged securities in the available-for-sale portfolio totaled approximately $99.6 million and $108.5 million, respectively.
Total investment securities pledged for these purposes were as follows as of March 31, 2026 and December 31, 2025:
| (dollars in thousands) | March 31, 2026 | December 31, 2025 | |||||||||
| Federal Reserve Bank borrowings | $ | 8,071 | $ | 8,288 | |||||||
| Other deposits | 97,532 | 93,177 | |||||||||
| Total pledged, at fair value | $ | 105,603 | $ | 101,465 | |||||||
Liquidity is available from the Company's base of core customer deposits, defined as demand, interest checking, savings, money market deposit accounts, and time deposits less than $250,000, less all brokered deposits under $250,000. At March 31, 2026, such deposits totaled $1.42 billion and represented 93.6% of the Company's total deposits. These core deposits are normally less volatile and are often tied to other products of the Company through long lasting relationships.
Core deposits at March 31, 2026 and December 31, 2025 were as follows:
| (dollars in thousands) | March 31, 2026 | December 31, 2025 | |||||||||
| Non-interest bearing demand | $ | 425,433 | $ | 423,568 | |||||||
| Interest checking | 332,366 | 372,595 | |||||||||
| Savings and money market | 451,938 | 453,972 | |||||||||
| Other time deposits | 211,677 | 213,008 | |||||||||
| Total | $ | 1,421,414 | $ | 1,463,143 | |||||||
Estimated uninsured deposits totaled $342.6 million, including $92.9 million of certificates of deposit, at March 31, 2026, compared to $384.6 million, including $90.5 million of certificates of deposit, at December 31, 2025. The Company's brokered deposits were $4.0 million at March 31, 2026 and $0.5 million at December 31, 2025.
Other components of liquidity are the level of borrowings from third-party sources and the availability of future credit. The Company's outside borrowings are comprised of federal funds purchased, advances from the FHLB and subordinated notes. Federal funds purchased are overnight borrowings obtained mainly from upstream correspondent banks with which the Company maintains approved credit lines. As of March 31, 2026, under agreements with these unaffiliated banks, the Bank may borrow up to $35.0 million in federal funds on an unsecured basis and $7.5 million on a secured basis. There were no federal funds purchased outstanding at March 31, 2026. The Company may periodically borrow additional short-
term funds from the Federal Reserve Bank through the discount window, although no such borrowings were outstanding at March 31, 2026.
The Bank is a member of the FHLB and has access to credit products of the FHLB. As of March 31, 2026, the Bank had $94.3 million in outstanding borrowings with the FHLB. In addition, the Company has $49.5 million in outstanding subordinated notes issued to wholly-owned grantor trusts, funded by preferred securities issued by the trusts.
Borrowings outstanding at March 31, 2026 and December 31, 2025 were as follows:
| (dollars in thousands) | March 31, 2026 | December 31, 2025 | |||||||||
| Federal Home Loan Bank advances | $ | 94,290 | $ | 102,000 | |||||||
| Other borrowings | 86 | 86 | |||||||||
| Subordinated notes | 49,486 | 49,486 | |||||||||
| Total | $ | 143,862 | $ | 151,572 | |||||||
The Company pledges certain assets, including loans and investment securities to the Federal Reserve Bank, FHLB, and other correspondent banks as security to establish lines of credit and to borrow from these entities. Based on the type and value of collateral pledged, the FHLB establishes a collateral value from which the Company may draw advances against this collateral. This collateral is also used to enable the FHLB to issue letters of credit in favor of public fund depositors of the Company. The Federal Reserve Bank also establishes a collateral value of assets pledged to support borrowings from the discount window.
The following table reflects collateral value of assets pledged, borrowings, and letters of credit outstanding, in addition to the estimated future funding capacity available to the Company as of March 31, 2026:
| March 31, 2026 | |||||||||||||||||||||||
| (dollars in thousands) | FHLB | Federal Reserve Bank | Federal Funds Purchased Lines | Total | |||||||||||||||||||
| Advance equivalent | $ | 436,042 | $ | 7,518 | $ | 35,000 | $ | 478,560 | |||||||||||||||
| Letters of credit | (32,625) | - | - | (32,625) | |||||||||||||||||||
| Advances outstanding | (94,290) | - | - | (94,290) | |||||||||||||||||||
| Total available | $ | 309,127 | $ | 7,518 | $ | 35,000 | $ | 351,645 | |||||||||||||||
At March 31, 2026, loans of $724.6 million were pledged to the FHLB as collateral for borrowings and letters of credit. At March 31, 2026, investments with a market value of $8.1 million were pledged to secure federal funds purchase lines and borrowing capacity at the Federal Reserve Bank.
Based upon the above, management believes the Company has more than adequate liquidity, both on balance sheet and through additional funding capacity with the FHLB, the Federal Reserve Bank and Federal funds purchased lines, to meet future anticipated liquidity needs in both the short- and long-term.
Sources and Uses of Funds
Cash and cash equivalents were $101.9 million at March 31, 2026 compared to $104.3 million at December 31, 2025 and $102.3 million at March 31, 2025. The $0.3 million decrease since March 31, 2025 resulted from changes in the various cash flows produced by operating, investing, and financing activities of the Company, as shown in the accompanying consolidated statements of cash flows for the three months ended March 31, 2026. Cash flow provided by operating activities consists mainly of net income adjusted for certain non-cash items. Operating activities provided total cash of $8.0 million for the three months ended March 31, 2026.
Investing activities, consisting mainly of purchases, sales and maturities of available-for-sale securities, and changes in the level of the loan portfolio, provided total cash of $33.1 million during the three months ended March 31, 2026. The cash inflow primarily consisted of $5.9 million of proceeds from maturities and calls of available-for-sale securities, a $33.2 million net decrease in loans held for investment, and a $0.4 million net decrease in FHLB stock, partially offset by $4.5 million in purchases of securities.
Financing activities used total cash of $43.4 million during the three months ended March 31, 2026, resulting primarily from a $38.8 million decrease in interest bearing transaction accounts and a $7.7 million net decrease in FHLB advances, partially offset by a $1.1 million increase in time deposits, a $1.9 million increase in demand deposits, and a $1.9 million increase from financing obligations.
In the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company's various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company's liquidity. The Company had $414.4 million in unused loan commitments and standby letters of credit as of March 31, 2026. Although the Company's current liquidity resources are adequate to fund this commitment level, the nature of these commitments is such that the likelihood of such a funding demand is very low.
The Company is a legal entity, separate and distinct from the Bank, which must provide its own liquidity to meet its operating needs. The Company's ongoing liquidity needs primarily include funding its operating expenses, paying cash dividends to its shareholders and, to a lesser extent, repurchasing its shares of common stock. The Company paid cash dividends to its shareholders totaling approximately $1.4 million and $1.3 million during the three months ended March 31, 2026 and 2025, respectively. A large portion of the Company's liquidity is obtained from the Bank in the form of dividends. The Bank declared $6.0 million and $0.0 million in dividends to the Company during the three months ended March 31, 2026 and 2025, respectively. At March 31, 2026 and December 31, 2025, the Company had cash and cash equivalents totaling $28.4 million and $25.5 million, respectively. Subject to declaration by the Company's Board of Directors, the Company expects to continue paying quarterly cash dividends as a part of its current capital allocation strategy. Future dividends will be subject to the determination, declaration and discretion of the Company's Board of Directors and compliance with applicable regulatory capital requirements.
On June 5, 2025, the Company announced that its Board of Directors approved a new common stock repurchase program under which the Company may repurchase up to $10.0 million of its common stock, which replaced the Company's prior common stock repurchase program. Pursuant to the repurchase program, management is given discretion to determine the number and pricing of the shares to be repurchased, as well as the timing of any such repurchases. The timing and total amount of stock repurchases will depend on market and other conditions and may be made from time to time in open market purchases or privately negotiated transactions. The program has no termination date, may be suspended or discontinued at any time and does not obligate the Company to acquire any amount of common stock. The Company repurchased 12,000 common shares under its repurchase programs during the first three months of 2026 at an average cost of $32.68 per share totaling $0.4 million. As of March 31, 2026, $8.0 million remained available for share repurchases pursuant to the Company's current repurchase program.
On June 24, 2025, the Company filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission, which became effective on July 2, 2025. The shelf registration statement is intended to provide us with financial flexibility to raise capital from the offering of up to $150 million of any combination of common stock, preferred stock, debt securities, depositary shares, warrants, purchase contracts, purchase units, subscription rights and units in one or multiple offerings while the shelf registration statement is effective.
Capital Management
The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification of the Company and the Bank are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
The Basel III regulatory capital reforms adopted by U.S. federal regulatory authorities (the "Basel III Capital Rules"), among other things, (i) establish the capital measure called "Common Equity Tier 1" ("CET1"), (ii) specify that Tier 1 capital consists of CET1 and "Additional Tier 1 Capital" instruments meeting stated requirements, (iii) require that most deductions/adjustments to regulatory capital measures be made to CET1 and not to other components of capital and (iv) define the scope of the deductions/adjustments to the capital measures.
Additionally, the Basel III Capital Rules require that the Company maintain a 2.50% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of CET1, Tier 1 and total capital to risk-weighted assets, and of Tier 1 capital to average assets, each as defined in the regulations. Management believes, as of March 31, 2026, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
Financial institutions are categorized as well capitalized or adequately capitalized, based on minimum total risk-based, Tier 1 risk-based, CET1 and Tier 1 leverage ratios. As shown in the table below, the Company's capital ratios exceeded the regulatory definition of adequately capitalized as of both March 31, 2026 and December 31, 2025. Based upon the information in its most recently filed call report, the Bank met the capital ratios necessary to be well-capitalized. The regulatory authorities can apply changes in classification of assets, and such changes may retroactively subject the Company to changes in capital ratios. Any such change could reduce one or more capital ratios below well-capitalized status. In addition, a change may result in imposition of additional assessments by the FDIC or could result in regulatory actions that could have a material effect on our condition and results of operations. In addition, bank holding companies generally are required to maintain a Tier 1 leverage ratio of at least 4%.
Because the Bank had less than $15.0 billion in total consolidated assets as of December 31, 2009, the Company is allowed to continue including its trust preferred securities, all of which were issued prior to May 19, 2010, as Tier 1 capital.
Under the Basel III Capital Rules, at both March 31, 2026 and December 31, 2025, the Company met all capital adequacy requirements and had regulatory capital ratios in excess of the levels established for well-capitalized institutions, as shown in the following table as the dates indicated:
| Actual | Minimum Capital Required - Basel III Fully Phased-In | Required to be Considered Well- Capitalized | |||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||
| March 31, 2026 | |||||||||||||||||||||||||||||||||||
| Total Capital (to risk-weighted assets): | |||||||||||||||||||||||||||||||||||
| Company | $ | 249,579 | 15.84 | % | $ | 165,409 | 10.50 | % | $ | - | N.A. | ||||||||||||||||||||||||
| Bank | 221,740 | 14.19 | 164,021 | 10.50 | 156,210 | 10.00 | % | ||||||||||||||||||||||||||||
| Tier 1 Capital (to risk-weighted assets): | |||||||||||||||||||||||||||||||||||
| Company | $ | 229,857 | 14.59 | % | $ | 133,903 | 8.50 | % | $ | - | N.A. | ||||||||||||||||||||||||
| Bank | 202,181 | 12.94 | 132,779 | 8.50 | 124,968 | 8.00 | % | ||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to risk-weighted assets): | |||||||||||||||||||||||||||||||||||
| Company | $ | 181,857 | 11.54 | % | $ | 110,273 | 7.00 | % | $ | - | N.A. | ||||||||||||||||||||||||
| Bank | 202,181 | 12.94 | 109,347 | 7.00 | 101,537 | 6.50 | % | ||||||||||||||||||||||||||||
| Tier 1 leverage ratio (to adjusted average assets): | |||||||||||||||||||||||||||||||||||
| Company | $ | 229,857 | 12.34 | % | $ | 74,489 | 4.00 | % | $ | - | N.A. | ||||||||||||||||||||||||
| Bank | 202,181 | 10.93 | 74,489 | 4.00 | 93,112 | 5.00 | % | ||||||||||||||||||||||||||||
| December 31, 2025 | |||||||||||||||||||||||||||||||||||
| Total Capital (to risk-weighted assets): | |||||||||||||||||||||||||||||||||||
| Company | $ | 247,190 | 15.49 | % | $ | 167,563 | 10.50 | % | $ | - | N/A | ||||||||||||||||||||||||
| Bank | 222,887 | 14.08 | 166,169 | 10.50 | 158,256 | 10.00 | % | ||||||||||||||||||||||||||||
| Tier 1 Capital (to risk-weighted assets): | |||||||||||||||||||||||||||||||||||
| Company | $ | 227,237 | 14.24 | % | $ | 135,646 | 8.50 | % | $ | - | N/A | ||||||||||||||||||||||||
| Bank | 203,097 | 12.83 | 134,518 | 8.50 | 126,605 | 8.00 | % | ||||||||||||||||||||||||||||
| Common Equity Tier 1 Capital (to risk-weighted assets): | |||||||||||||||||||||||||||||||||||
| Company | $ | 179,237 | 11.23 | % | $ | 111,709 | 7.00 | % | $ | - | N/A | ||||||||||||||||||||||||
| Bank | 203,097 | 12.83 | 110,779 | 7.00 | 102,866 | 6.50 | % | ||||||||||||||||||||||||||||
| Tier 1 leverage ratio: | |||||||||||||||||||||||||||||||||||
| Company | $ | 227,237 | 12.12 | % | $ | 74,994 | 4.00 | % | $ | - | N/A | ||||||||||||||||||||||||
| Bank | 203,097 | 10.90 | 74,546 | 4.00 | 93,183 | 5.00 | % | ||||||||||||||||||||||||||||
Hawthorn Bancshares Inc. published this content on May 08, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on May 08, 2026 at 16:24 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]