10-Q: Hawthorn Bancshares Reports Strong Q2 Earnings Growth

Hawthorn Bancshares, Inc. reported a significant increase in net income and earnings per share for the second quarter and first half of 2025, driven by improved net interest income and efficiency.

Summary

• Consolidated net income for the three months ended June 30, 2025, was $6.1 million, or $0.88 per diluted share, up from $4.6 million, or $0.66 per diluted share, in the prior year quarter.
• For the six months ended June 30, 2025, net income reached $11.5 million, or $1.65 per diluted share, compared to $9.1 million, or $1.29 per diluted share, for the same period in 2024.
• Net interest income increased to $16.1 million for Q2 2025 (up from $14.2 million in Q2 2024) and $31.4 million for H1 2025 (up from $28.9 million in H1 2024).
• The net interest margin (FTE) improved to 3.89% for Q2 2025 (from 3.33% in Q2 2024) and 3.78% for H1 2025 (from 3.36% in H1 2024).
• The efficiency ratio improved to 62.32% for Q2 2025 (from 66.24% in Q2 2024) and 64.43% for H1 2025 (from 68.48% in H1 2024).
• Total non-interest income decreased by $0.5 million to $3.5 million for Q2 2025, but remained flat at $7.0 million for H1 2025.
• Net loan charge-offs significantly decreased to $0.05 million for Q2 2025 (from $1.98 million in Q2 2024) and $0.03 million for H1 2025 (from $2.05 million in H1 2024).
• Total assets increased to $1.88 billion at June 30, 2025, from $1.83 billion at December 31, 2024.
• Loans held for investment slightly decreased to $1.46 billion at June 30, 2025, from $1.47 billion at December 31, 2024.
• Total deposits decreased to $1.52 billion at June 30, 2025, from $1.53 billion at December 31, 2024, with non-interest bearing demand deposits increasing while interest-bearing transaction accounts decreased.
• Federal Home Loan Bank advances and other borrowings increased to $140.1 million at June 30, 2025, from $81.5 million at December 31, 2024.
• Non-performing assets increased to $5.2 million, or 0.35% of total loans, at June 30, 2025, compared to $4.2 million, or 0.29% of total loans, at December 31, 2024.
• The allowance for credit losses was $21.6 million, or 1.47% of loans outstanding, at June 30, 2025.
• The Company's capital ratios remain strong and well above regulatory minimums, with a total risk-based capital ratio of 15.12% and a Tier 1 leverage ratio of 11.87% at June 30, 2025.

Sentiment

Score: 8

Explanation: The company delivered strong financial results with significant improvements in profitability, efficiency, and asset quality metrics like net charge-offs. Capital levels are robust. While there was a slight decrease in total deposits and an increase in FHLB borrowings, and a modest rise in non-performing assets, the overall performance indicates a well-managed bank with strategic capital flexibility and a positive outlook.

Positives

• Net income increased significantly by 32.0% for Q2 2025 and 26.4% for H1 2025.
• Basic and diluted earnings per share saw substantial growth.
• Return on total assets improved to 1.36% for Q2 2025 and 1.28% for H1 2025.
• Return on stockholders' equity increased to 15.85% for Q2 2025 and 15.08% for H1 2025.
• Net interest income grew, and net interest margin expanded, indicating effective interest rate management.
• The efficiency ratio improved, reflecting better cost control relative to revenue.
• Net loan charge-offs decreased dramatically, indicating improved credit quality and effective risk management.
• Non-interest bearing demand deposits increased, improving funding mix.
• Capital ratios remain robust and exceed all 'well-capitalized' regulatory thresholds.
• A new $10.0 million common stock repurchase program was approved, with $9.0 million remaining available, signaling commitment to shareholder returns.
• The Company purchased $35.0 million in bank-owned life insurance policies in Q1 2024, contributing to increased earnings on bank-owned life insurance.

Negatives

• Total non-interest income decreased by 11.3% for Q2 2025, primarily due to lower gains on sales of mortgage loans and net losses on other real estate owned.
• Total deposits decreased by $15.2 million from December 31, 2024, and $32.3 million from June 30, 2024.
• Loans held for investment slightly decreased by $3.3 million from December 31, 2024.
• Federal Home Loan Bank advances and other borrowings increased significantly by $58.6 million from December 31, 2024, indicating increased reliance on wholesale funding.
• Non-performing assets increased to $5.2 million at June 30, 2025, from $4.2 million at December 31, 2024, and non-performing assets to total loans increased to 0.35% from 0.29%.

Risks

• No new 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 were identified in this filing.

Future Outlook

Management expects to continue paying quarterly cash dividends, subject to Board determination and regulatory requirements. The universal shelf registration provides financial flexibility to raise up to $150 million in capital through various securities offerings in the future.

Management Comments

• The Company's community banking strategy focuses on growth in commercial banking services, retail mortgage lending, and retail banking services.
• The success of the growth strategy depends on the ability to generate increasing levels of loans and deposits at acceptable risk levels and terms, without significant increases in non-interest expenses relative to revenues.
• The Company's financial performance also depends on its ability to manage various portfolios and successfully introduce additional financial products and services by expanding customer relationships, utilizing improved technology, and enhancing customer satisfaction.
• Management believes the Company has more than adequate liquidity, both on balance sheet and through additional funding capacity, to meet future anticipated liquidity needs in both the short and long-term.
• Management believes the Company and the Bank meet all capital adequacy requirements and have regulatory capital ratios in excess of the levels established for well-capitalized institutions.

Industry Context

Hawthorn Bancshares operates in the competitive Missouri banking market, focusing on traditional banking services and expanding into wealth management. The improved net interest margin and efficiency ratio suggest the company is effectively navigating the current interest rate environment and managing its cost structure, which are key challenges and opportunities for regional banks. The strategic focus on commercial and retail banking, alongside wealth management, aligns with broader industry trends of diversifying revenue streams and deepening customer relationships.

Comparison to Industry Standards

• Return on Total Assets (ROA) of 1.36% for Q2 2025 is strong, generally exceeding the 1.0% benchmark often targeted by well-performing community banks.
• Return on Stockholders' Equity (ROE) of 15.85% for Q2 2025 is excellent, significantly above the 10-12% considered good for regional banks.
• The Efficiency Ratio of 62.32% for Q2 2025 is competitive, indicating good cost management, though top-tier banks often aim for below 60%.
• Net Interest Margin (NIM) of 3.89% for Q2 2025 is robust, especially in an environment where many banks are experiencing NIM compression.
• Non-Performing Assets to Total Loans at 0.35% for Q2 2025 is very low, demonstrating superior asset quality compared to many industry averages which can range from 0.5% to over 1.0%.
• Net Charge-offs to Average Loans at 0.01% for Q2 2025 is exceptionally low, reflecting strong underwriting and credit risk management, significantly better than typical industry averages.
• Capital ratios (e.g., Total Risk-Based Capital Ratio of 15.12% and Tier 1 Leverage Ratio of 11.87%) are well above regulatory 'well-capitalized' thresholds, indicating a very strong capital position compared to peers.

Corporate Governance

Legal Proceedings

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

Stakeholder Impact

• Shareholders: Benefit from increased net income, EPS, ROE, continued cash dividends, and the new share repurchase program. Potential for future dilution from the shelf registration is a consideration.
• Employees: Benefit from profit-sharing plan, 401(k) match, supplemental executive retirement plan (SERP), and share-based compensation. New branch openings may indicate growth opportunities.
• Customers: Continue to receive a broad range of banking services, with an expanded focus on wealth management and new branch locations.
• Creditors: Strong capital ratios and adequate liquidity position enhance the Company's creditworthiness.

Next Steps

• Continue paying quarterly cash dividends, subject to Board discretion and regulatory compliance.
• Potential future capital raises through the universal shelf registration statement.
• Ongoing common stock repurchases under the new $10.0 million program.

Key Dates

Recommendation

The company demonstrated strong financial performance with significant increases in net income, earnings per share, and net interest margin. Its efficiency ratio improved, and asset quality, particularly net charge-offs, showed remarkable improvement. Capital ratios remain robust and well above regulatory requirements. The new share repurchase program and universal shelf registration provide strategic financial flexibility. While total deposits and loans saw slight decreases, and non-performing assets increased from a low base, the overall picture indicates a well-managed and profitable institution with a positive outlook.

Keywords

Banking, Financial Services, Community Bank, Regional Bank, Missouri, Commercial Lending, Mortgage Lending, Wealth Management, SEC Filing, 10-Q, Earnings, Capital Management, Asset Quality, Net Interest Margin, Share Repurchase