10-K: Hawthorn Bancshares Reports Improved Financial Performance in 2024 Annual Filing

Hawthorn Bancshares' 2024 annual report reveals a significant increase in net income and strategic initiatives aimed at future growth.

Summary

• Hawthorn Bancshares, Inc. reported a net income of $18.3 million for the year ended December 31, 2024, a substantial increase from the $1.0 million reported in 2023.
• Basic and diluted earnings per share were $2.61, compared to $0.14 in the previous year.
• The company's return on average assets (ROA) was 1.00%, and the return on average stockholders' equity (ROE) was 13.04%.
• Net interest income remained relatively stable at $58.6 million, compared to $59.1 million in 2023.
• Non-interest income increased significantly by 90.0% to $14.3 million, driven by gains in bank-owned life insurance and real estate activities.
• Non-interest expense decreased by 5.4% to $49.5 million, primarily due to reductions in salaries and employee benefits.
• The company maintained a strong capital position, with a total risk-based capital ratio of 14.79% and a Tier 1 leverage ratio of 11.46%.
• The company dissolved its wholly-owned subsidiary, Union, which owned all of the outstanding capital stock of Hawthorn Bank, in order to streamline the Company's ownership of Hawthorn Bank.
• The company dissolved Hawthorn Risk Management, Inc., a non-bank subsidiary of the Company, which was formed and began operations on December 28, 2017, was a Missouri-based captive insurance company which provided property and casualty insurance coverage to the Company and the Bank for which insurance was not then available or economically feasible in the insurance marketplace as of December 1, 2023.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with significant improvements in financial performance and strategic initiatives for future growth. While acknowledging certain risks, the overall tone is optimistic and confident.

Positives

• Significant increase in net income and earnings per share.
• Improved return on average assets and equity.
• Substantial growth in non-interest income.
• Decrease in non-interest expenses due to cost-saving measures.
• Strong capital position exceeding regulatory requirements.
• Decrease in non-performing assets.

Negatives

• Net interest income remained relatively flat compared to the previous year.
• Loans held for investment decreased by $73.0 million.
• Total deposits decreased by $37.7 million.
• Cash and cash equivalents decreased by $42.5 million.
• The company repositioned its balance sheet by selling $83.7 million in book value of investment securities for an after-tax realized loss of $9.1 million in the fourth quarter of 2023.

Risks

• The company's profitability is dependent on the profitability of the Bank, which operates out of central and west-central Missouri, and extends into eastern Kansas as part of the Kansas City metro.
• Interest rate changes may reduce the profitability of the company and the bank.
• The company's business depends on its ability to successfully manage credit risk.
• Adverse market conditions in the U.S. economy and the markets in which we operate could adversely impact the company's business.
• Smaller commercial borrowers may have fewer financial resources, which may impair their ability to repay loans.
• The soundness of other financial institutions could adversely affect us.
• Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.
• Deterioration in the housing market could cause further increases in delinquencies and non-performing assets.
• The FDIC's changes in the calculation of deposit insurance premiums and ability to levy special assessments could increase the company's non-interest expense.
• If we are unable to successfully compete for customers in the company's market area, the company's financial condition and results of operations could be adversely affected.
• We may experience difficulties in managing growth and in effectively integrating newly acquired companies.
• The bank is a community bank and our ability to maintain the bank's reputation is critical to the success of our business.
• The actual or perceived occurrence of fraudulent activity, breaches or failures of our information security controls, or cybersecurity related incidents could damage our reputation.
• The company's success largely depends on the efforts of its executive officers.
• If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
• Severe weather, natural disasters, pandemics, and other external events could significantly impact our business.
• Climate change and responses to climate change may adversely impact our business.
• Public health threats or outbreaks of communicable diseases may adversely affect the company's operations and financial results.
• We may be adversely affected by changes in laws and regulations affecting the financial services industry.
• The federal reserve may require the company to commit capital resources to support the bank.
• The short-term and long-term impact of any change to regulatory capital requirements is uncertain.
• Higher FDIC deposit insurance premiums and assessments could adversely affect our financial condition.
• Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Community Reinvestment Act, Fair Lending Laws or Other Laws and Regulations Could Result in Fines or Sanctions, and Curtail Expansion Opportunities.
• Regulations Relating to Privacy, Cybersecurity, Information Security and Data Protection Could Increase Our Costs, Affect or Limit How We Collect and Use Personal Information and Adversely Affect Our Business Opportunities.
• We are Subject to Numerous Laws Designed to Protect Consumers, Including the Community Reinvestment Act and Fair Lending Laws, and Failure to Comply with These Laws Could Lead to a Wide Variety of Sanctions.
• We may be subject to liability for potential violations of predatory lending laws, which could adversely impact our results of operations, financial condition and business.
• We Are Subject to a Number of Other Laws and Regulations, Which May Adversely Affect the Operation of Our Business and Increase Our Costs.
• We Are Subject to Security and Operational Risks Relating to Our Use of Technology That Could Damage Our Reputation and Our Business.
• The Operation of Our Business, Including Customer Interaction, is Increasingly Done Via Electronic Means, and This Has Increased Our Risks Related to Cybersecurity.
• We Continually Encounter Technological Change, and We Cannot Predict How Changes in Technology May Affect Our Business.
• We Rely On Others to Provide Key Components of Our Business Infrastructure.
• The Price of Our Common Stock Could Fluctuate Significantly, Which Could Make it Difficult for You to Resell Shares of Our Common Stock at Times or at Prices You Find Attractive.
• The Trading Volume in Our Common Stock Has Been Low, and the Sale of a Substantial Number of Shares of Our Common Stock in the Public Market Could Depress the Price of Our Common Stock and Make it Difficult for You to Sell Your Shares.
• Our Common Stock is Not Insured by Any Governmental Entity.
• Additional Factors.

Future Outlook

The CEO's letter emphasizes the need for Hawthorn Bancshares to remain nimble and continue to grow in order to compete effectively against larger institutions and meet the evolving needs of its clients. The company is focused on implementing the right products, promotions, and personnel to drive growth in business deposits and loans.

Management Comments

• In many ways, 2024 was a foundational year.
• We progressed our strategic initiatives, setting the stage for Hawthorn Bancshares, Inc. and Hawthorn Bank to grow in 2025.
• As a community bank competing against big banks, credit unions, and fintech companies, we cannot remain stagnant.
• We need to stay nimble and continue to grow to remain a valuable and easy choice for current and future clients.
• We are putting into place the right products, the right promotions, and the right people using a process that works, with several prospects all laddering-up to meet our priorities.

Industry Context

The announcement reflects the ongoing challenges and opportunities for community banks in a competitive landscape dominated by larger banks, credit unions, and fintech companies. The emphasis on strategic initiatives, cost management, and adapting to changing customer needs aligns with broader industry trends.

Comparison to Industry Standards

• While specific peer comparisons are not provided in the document, the reported ROA of 1.00% and ROE of 13.04% can be benchmarked against industry averages for community banks.
• According to recent FDIC data, the average ROA for community banks in 2024 was around 1.00%, suggesting that Hawthorn Bancshares is performing in line with its peers.
• The efficiency ratio of 67.92% indicates a relatively efficient operation compared to some community banks, but further analysis would be needed to compare against specific peer institutions.
• Capital ratios are strong and exceed regulatory requirements, positioning the company well compared to industry standards.

Stakeholder Impact

• Shareholders: Positive impact due to increased profitability and potential for future growth.
• Employees: Potential for improved job security and career opportunities.
• Customers: Focus on meeting evolving needs and providing valuable services.
• Community: Continued commitment to serving local communities.

Next Steps

• Continue to implement strategic initiatives for growth.
• Focus on developing and promoting the right products and services.
• Optimize personnel and processes to improve efficiency.
• Monitor and manage credit risk effectively.
• Adapt to changing customer needs and market conditions.

Key Dates