10-Q: Hawthorn Bancshares Reports Strong Q3 Earnings Growth

Hawthorn Bancshares delivered robust financial results for Q3 2025, with significant increases in net income and earnings per share, driven by improved net interest income and margin expansion.

Summary

• Net income for the three months ended September 30, 2025, increased by 34.1% to $6.1 million, or $0.88 per diluted share, compared to $4.6 million, or $0.66 per diluted share, in the prior year.
• For the nine months ended September 30, 2025, net income rose by 29.0% to $17.6 million, or $2.53 per diluted share, up from $13.7 million, or $1.95 per diluted share, in the same period of 2024.
• Net interest income grew by 17.7% to $16.9 million for the third quarter of 2025 and by 11.7% to $48.3 million for the nine-month period.
• The net interest margin (FTE) expanded to 3.97% for Q3 2025 and 3.85% for the nine months, both up from 3.36% in the corresponding 2024 periods.
• Total assets increased by 5.9% to $1.93 billion as of September 30, 2025, from $1.83 billion at December 31, 2024.
• Loans held for investment increased by 3.3% to $1.51 billion as of September 30, 2025, compared to $1.47 billion at December 31, 2024.
• The efficiency ratio improved to 62.30% for Q3 2025 and 63.68% for the nine months, indicating better cost management compared to 66.23% and 67.73% respectively in 2024.
• Non-performing assets increased to $7.3 million (0.48% of total loans) at September 30, 2025, from $4.2 million (0.29% of total loans) at December 31, 2024.
• The company maintains a 'well capitalized' regulatory capital position, with all capital ratios exceeding minimum requirements.

Sentiment

Score: 8

Explanation: The company reported strong financial performance with significant increases in net income, EPS, and net interest margin. Operational efficiency improved, and capital ratios remain robust. While non-performing assets increased, overall credit quality improved with lower net charge-offs. The strategic focus on wealth management and branch expansion are positive growth drivers. The capital raise flexibility is a prudent measure.

Positives

• Net income for Q3 2025 increased by 34.1% to $6.1 million, demonstrating strong profitability growth.
• Diluted earnings per share rose by 33.3% to $0.88 in Q3 2025, indicating enhanced shareholder value.
• Net interest income increased by 17.7% to $16.9 million in Q3 2025, reflecting effective interest-earning asset management.
• Net interest margin (FTE) significantly improved to 3.97% in Q3 2025 from 3.36% in Q3 2024, indicating better profitability from lending and investment activities.
• The efficiency ratio improved to 62.30% in Q3 2025 from 66.23% in Q3 2024, showing enhanced operational efficiency.
• Return on total assets increased to 1.33% in Q3 2025 from 1.00% in Q3 2024.
• Return on stockholders' equity increased to 15.21% in Q3 2025 from 12.87% in Q3 2024.
• Loans held for investment grew by $47.8 million to $1.51 billion as of September 30, 2025, indicating healthy loan demand and portfolio expansion.
• Net loan charge-offs significantly decreased to $0.04 million in Q3 2025 from $0.6 million in Q3 2024, and to $0.07 million for the nine months from $2.7 million, reflecting improved credit quality.
• The company maintains a 'well capitalized' regulatory capital position, with strong capital ratios (Total risk-based capital ratio of 14.90%, Tier 1 risk-based capital ratio of 13.65%, Common equity Tier 1 capital of 10.71%, and Tier 1 leverage ratio of 11.97%).
• Wealth management revenue increased by 54.3% to $0.7 million in Q3 2025 and by 33.3% to $1.7 million for the nine months, driven by strategic focus and added resources.
• Service charges and other fees increased by 6.7% in Q3 2025 and 12.9% for the nine months, due to increased service charge rates.
• Cash and cash equivalents increased by $48.9 million to $99.9 million as of September 30, 2025, enhancing liquidity.

Negatives

• Non-interest income decreased by 1.8% to $3.7 million in Q3 2025 and by 0.7% to $10.7 million for the nine months, primarily due to lower gains on sales of mortgage loans and other real estate owned.
• Non-interest expense increased by 6.9% to $12.8 million in Q3 2025 and by 2.7% to $37.6 million for the nine months, driven by higher salaries, employee benefits, and occupancy expenses.
• Non-performing assets increased by 75% to $7.3 million at September 30, 2025, from $4.2 million at December 31, 2024.
• Non-performing loans increased by 78.8% to $4.9 million at September 30, 2025, from $2.7 million at December 31, 2024, primarily due to one commercial relationship moving to non-accrual status.
• Total deposits decreased by $7.3 million to $1.53 billion as of September 30, 2025, compared to December 31, 2024.
• Federal Home Loan Bank advances and other borrowings increased significantly by 117.2% to $177.1 million as of September 30, 2025, from $81.5 million at December 31, 2024, indicating increased reliance on wholesale funding.

Risks

• 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.
• Actual results may differ significantly from projections due to factors like timing and frequency of rate changes, market conditions, and the shape of the yield curve.

Future Outlook

The company expects to continue paying quarterly cash dividends as part of its current capital allocation strategy, subject to Board determination and regulatory requirements. It also anticipates that the 'One Big Beautiful Bill Act' will not have a material impact on its results of operations. Management believes the company has adequate liquidity to meet future anticipated needs and that its current level of interest rate risk is acceptable.

Management Comments

• Crucial to our community banking strategy is growth in our commercial banking services, retail mortgage lending and retail banking services.
• The success of our growth strategy depends primarily on the ability of our 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.
• Management believes the change in projected net interest income from interest rate shifts of up 200 bps and down 200 bps is an acceptable level of interest rate risk.
• Management believes, as of September 30, 2025, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
• 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 shortand long-term.

Industry Context

The company operates in the competitive financial services industry within Missouri, facing competition from other financial and nonfinancial institutions. Its strategic focus on commercial banking, retail mortgage lending, and wealth management aligns with broader trends of diversified service offerings to capture market share. The establishment of Wealth Management as a separate segment reflects an industry trend towards specialized financial planning and asset management services. The company's ability to expand its net interest margin in a fluctuating interest rate environment suggests effective asset-liability management, a key differentiator in the banking sector.

Comparison to Industry Standards

• The company's return on total assets of 1.33% and return on stockholders' equity of 15.21% for Q3 2025 are strong indicators of profitability, potentially outperforming many regional bank peers, especially given the current interest rate environment.
• The efficiency ratio of 62.30% for Q3 2025, while improved, suggests there may still be opportunities for further cost optimization compared to top-tier banks that often achieve efficiency ratios below 60%.
• The increase in non-performing assets to 0.48% of total loans, while still relatively low, warrants close monitoring as it represents a notable increase from 0.29% at year-end 2024. This could be an early indicator of broader economic stress or specific credit challenges, which would need to be benchmarked against peer asset quality trends.
• The significant increase in FHLB advances and other borrowings (117.2%) suggests a shift in funding strategy, potentially relying more on wholesale funding sources, which could impact funding costs and stability compared to banks with stronger core deposit growth.
• The company's capital ratios (e.g., CET1 of 10.71%) are well above regulatory minimums and 'well-capitalized' thresholds, indicating a strong capital buffer comparable to or exceeding many regional banks, providing resilience against potential economic downturns.

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 it is reasonably possible that these legal actions will materially adversely affect the company's consolidated financial condition or results of operations in the near term.
• A loss accrual is recorded for legal matters where a loss is probable and can be reasonably estimated; some early-stage matters have not yet reached this point.

Stakeholder Impact

• **Shareholders**: Significant increase in net income and diluted EPS, along with a new share repurchase program and continued dividend payments, indicate positive returns and capital allocation strategy.
• **Employees**: Focused recruiting efforts for more experienced candidates and overall merit increases suggest investment in human capital. The pension plan freeze for new hires after September 30, 2017, impacts future benefit accruals for some.
• **Customers**: Expansion of branch locations and operations facilities aims to enhance service accessibility. An account consolidation project led to customer mailings. Growth in commercial banking, retail mortgage lending, and wealth management services provides broader offerings.
• **Creditors**: Increased FHLB advances and other borrowings indicate higher leverage, though the company maintains strong regulatory capital ratios, providing comfort regarding repayment capacity.
• **Regulators**: The company continues to meet all 'well capitalized' regulatory capital requirements, demonstrating compliance and financial stability.

Next Steps

• Continue evaluating the impact of the 'One Big Beautiful Bill Act' on results of operations.
• Management will continue to determine the number, pricing, and timing of share repurchases under the new $10.0 million common stock repurchase program.
• The company expects to continue paying quarterly cash dividends, subject to Board declaration and regulatory capital requirements.
• The company will continue to execute its community banking strategy, focusing on growth in commercial banking services, retail mortgage lending, and retail banking services.
• The Wealth Management segment will continue to be developed with additional management resources and structured products and processes.

Key Dates

Recommendation

Hawthorn Bancshares demonstrated strong financial performance in Q3 2025, with significant year-over-year growth in net income and EPS, driven by an expanding net interest margin and improved operational efficiency. The substantial reduction in net loan charge-offs indicates robust credit quality management. While non-performing assets saw an increase, the overall asset quality remains manageable, and the company maintains a strong 'well capitalized' regulatory position. Strategic initiatives in wealth management and branch expansion are expected to contribute to future growth. The universal shelf registration provides flexibility for future capital needs. These factors, combined with a healthy return on equity and assets, suggest a positive outlook for the stock.

Keywords

Banking, Financial Services, Community Bank, Net Interest Income, Earnings Per Share, Loan Growth, Deposit Trends, Asset Quality, Capital Ratios, Wealth Management, SEC Filing, 10-Q, Missouri Banking