Hawthorn Bancshares, Inc. (NASDAQ: HWBK)

Hawthorn Bancshares, Inc., a bank holding company operating under the ticker symbol HWBK, is deeply rooted in the banking industry, with its main business activities centered around owning the outstanding capital stock of Hawthorn Bank and other financial institutions. The company's operations span across several segments, including Hawthorn Bank, Hawthorn Real Estate, LLC, HB Realty, LLC, and Hawthorn Risk Management, Inc.. With Hawthorn Bank as its primary subsidiary, the company operates 21 banking offices across Missouri, offering a wide range of products and services designed to meet the financial needs of its diverse customer base.

Hawthorn Bank functions as a full-service bank, providing a general banking and trust business for its customers. Among the services offered are checking and savings accounts, internet banking, debit cards, certificates of deposit, trust services, brokerage services, safety deposit boxes, and a variety of lending services, such as commercial and industrial loans, single payment personal loans, installment loans, and both commercial and residential real estate loans. The bank's deposit accounts are insured by the Federal Deposit Insurance Corporation (FDIC), offering an added layer of protection for its customers.

Two subsidiaries of Hawthorn Bancshares, Inc., Hawthorn Real Estate, LLC, and HB Realty, LLC, were formed to facilitate the orderly disposition of nonperforming assets and to hold certain mortgage loans and participation interests, respectively. Hawthorn Real Estate, LLC was established in December 2008, with an initial capitalization of approximately $404 million, while HB Realty, LLC was formed in February 2018, holding an approximate aggregate book value of $563 million in mortgage loans as of December 31, 2023.

As a bank holding company, Hawthorn Bancshares, Inc. faces intense competition from both banking and nonbanking sources in all of its activities. The bank's competitors include other commercial banks, thrifts, savings banks, credit unions, and money market mutual funds. The company's principal competition for deposits and loans primarily comes from other banks within its primary service areas, with increasing competition from banks located in its secondary service areas.

The company is subject to supervision and examination by the Federal Reserve System (FRB) and the Missouri Division of Finance. The FRB has the authority to issue cease and desist orders against bank holding companies if their actions are deemed unsafe and unsound or in violation of the law. Additionally, the company is subject to various restrictions and requirements imposed by the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Hawthorn Bancshares, Inc. is required to maintain specific capital ratios as calculated under the Basel III Rules, with minimum requirements plus a 2.5% capital conservation buffer. As of December 31, 2023, the company's capital ratios are as follows: Tier 1 Leverage Ratio (4%) stood at 10.29%, CET1 Risk-Based Capital Ratio (7.0%) was at 9.73%, Tier 1 Risk-Based Capital Ratio (8.5%) was at 12.59%, and Total Risk-Based Capital Ratio (10.5%) was at 13.99%. These ratios demonstrate the company's financial strength and ability to absorb potential losses.

The company's primary source of funds is dividends from the Bank, which is subject to federal and state laws limiting the payment of dividends. Under the FDIA, an FDIC-insured institution may not pay dividends while it is undercapitalized or if payment would cause it to become undercapitalized. Furthermore, the company is subject to the Community Reinvestment Act and implementing regulations, which establish the framework and criteria by which the bank regulatory agencies assess an institution's record of helping to meet the credit needs of its community, including low- and moderate-income neighborhoods.

Hawthorn Bancshares, Inc.'s business and earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies. The company is particularly affected by the policies of the Federal Reserve System (FRB), which regulates the supply of money and credit in the U.S. Among the instruments of monetary policy available to the FRB are conducting open market operations in U.S. government securities, changing the discount rates of borrowings of depository institutions, imposing or changing reserve requirements against depository institutions' deposits, and imposing or changing reserve requirements against certain borrowings by banks and their affiliates.

The company is exposed to various risks, including credit risk, interest rate risk, and economic risk. Additionally, the company's liquidity risk could impair its ability to fund operations and meet its obligations as they become due, and failure to maintain sufficient liquidity could materially adversely affect its growth, business, profitability, and financial condition. The company relies on customer deposits, including brokered deposits, and to a lesser extent on advances from the Federal Home Loan Bank (FHLB) and federal funds purchased to fund its operations.