HAWTHORN BANCSHARES, INC. Annual Report - A Deeper Dive into 2025 Performance

This summary provides a clear overview of Hawthorn Bancshares' financial performance for 2025, compared to 2024. The year presented a mixed financial picture, balancing solid revenue growth with increasing credit quality concerns.

Business Overview

Hawthorn Bancshares, Inc. operates as a bank holding company for Hawthorn Bank. It offers a full range of banking and financial services to individuals, businesses, and government entities. Its core operations include commercial and retail banking, trust services, and wealth management. The company primarily serves various communities across Missouri, emphasizing relationship-based banking within its target markets.

Headline Performance: A Mixed Financial Picture

While Hawthorn Bancshares successfully grew its core business, profitability faced significant challenges.

• Net Income: Decreased by 20%, from $50 million in 2024 to $40 million in 2025.
• Earnings Per Share (EPS): Also fell, from $3.00 in 2024 to $2.40 in 2025.
• Return on Average Assets (ROAA): Declined from 1.0% to 0.8%.
• Return on Average Equity (ROAE): Decreased from 10.5% to 8.0%. A substantial increase in provisions for credit losses primarily drove this decline, despite healthy growth in net interest income and other revenue streams.

Revenue Growth Drivers: Expanding Core Business

Hawthorn Bancshares demonstrated strong growth across its primary revenue generators:

• Net Interest Income (NII): The bank's main source of income, grew by 6.7%, from $120 million in 2024 to $128 million in 2025. A growing loan portfolio and effective interest rate management fueled this increase.
• Loan Portfolio Expansion: Total loans increased by 4.3%, from $1.63 billion in 2024 to $1.70 billion in 2025. This growth was consistent across various segments:
  • Business loans (commercial, financial, agricultural) increased by 4.2% to $500 million.
  • Residential construction loans grew by 5.3% to $100 million.
  • Commercial construction loans rose by 9.1% to $120 million.
  • Residential mortgages increased by 3.5% to $600 million.
  • Commercial mortgages also grew by 3.5% to $300 million.
  • Consumer loans (such as car loans or personal loans) were up 6.7% to $80 million.
• Diversified Other Income: Income from non-lending services, including trust services, banking fees, and wealth management, grew by nearly 5%, from $10.25 million in 2024 to $10.75 million in 2025. This indicates healthy diversification of revenue sources.
• Future Loan Potential: Commitments to lend that have not yet been disbursed (loans in the pipeline) increased by 3.45%, from $145 million to $150 million, suggesting continued loan growth momentum.
• Growing Investment Portfolio: The bank's total investments in debt securities (like government bonds and mortgage-backed securities) increased by almost 6%, from $538 million in 2024 to $570 million in 2025.

Risk Factors

The company faces various risks inherent in the banking industry and its operations. Key risk factors include:

• Credit Risk: The risk of loss if a borrower cannot or will not fulfill their contractual obligations. The increase in non-performing loans and provisions for credit losses highlights this as a significant concern.
• Interest Rate Risk: The risk that changes in market interest rates will negatively affect the company's net interest income and the value of its assets and liabilities.
• Liquidity Risk: The risk that the company cannot meet its financial obligations as they become due without incurring unacceptable losses.
• Operational Risk: The risk of loss from inadequate or failed internal processes, people, and systems, or from external events. This includes risks related to fraud, cybersecurity breaches, and data privacy.
• Regulatory and Compliance Risk: The risk of non-compliance with applicable laws, regulations, and supervisory requirements, which could result in fines, penalties, or restrictions on business activities.
• Economic Conditions: Adverse changes in local, regional, national, or global economic conditions could negatively impact loan demand, credit quality, and overall financial performance.
• Competition: Intense competition from other banks, credit unions, and non-bank financial service providers could affect market share, pricing, and profitability.

Management Discussion and Analysis (MD&A Highlights)

Management highlighted its strategic focus on loan growth and diversifying revenue streams, which contributed to increased Net Interest Income and other non-interest income. However, management acknowledged the significant impact of deteriorating asset quality on overall profitability. The substantial increase in the provision for credit losses directly responded to the rise in non-performing and past-due loans, reflecting a proactive approach to managing potential future losses. Despite these challenges, management emphasized the balance sheet's continued strength, supported by robust deposit growth and strong capital ratios. These factors provide a solid foundation to navigate current credit challenges. Management also noted the improvement in unrealized losses within the investment portfolio as a positive development, partially offsetting some pressures from the lending side.

Financial Health

Despite credit quality concerns, Hawthorn Bancshares maintained a solid balance sheet:

• Deposit Growth: Total deposits grew by 5.5%, from $1.8 billion in 2024 to $1.9 billion in 2025. This provides a stable and growing funding base for loan expansion.
• Capital Ratios: The bank maintained strong capital levels, with a Tier 1 Capital Ratio of 12.5% and a Total Capital Ratio of 14.0% in 2025. Both figures comfortably exceed regulatory minimums, indicating financial resilience.
• Loan-to-Deposit Ratio: Reached 89.5% in 2025, reflecting a balanced approach to lending and deposit funding, and indicating sound liquidity management.
• Investment Portfolio: The value of the bank's investment portfolio, specifically "unrealized investment gains/losses," showed improvement. The negative balance decreased from -$20 million in 2024 to -$15 million in 2025. This suggests that market conditions for their investment portfolio are becoming more favorable, or their investment strategy is improving. These investments are typically classified as available-for-sale securities.

Future Outlook

Hawthorn Bancshares plans to prioritize stabilizing and improving asset quality while continuing its strategic focus on sustainable loan growth and diversifying revenue streams. Management expects to intensify efforts in credit risk management, including enhanced monitoring and collection strategies. These efforts aim to mitigate further increases in non-performing assets and reduce future provisions for credit losses. The company also intends to explore opportunities for operational efficiencies and continued investment in technology to enhance customer experience and drive long-term value. While the economic environment and interest rate trends will continue to influence performance, the company remains committed to maintaining strong capital levels and liquidity to support its strategic objectives and navigate potential headwinds.

Competitive Position

Hawthorn Bancshares operates in a highly competitive financial services industry within its primary markets. The company competes with a wide range of financial institutions, including large national and regional banks, community banks, credit unions, and non-bank financial service providers, such as fintech companies. Competition primarily focuses on interest rates for loans and deposits, service fees, product offerings, and customer service. The company differentiates itself through its community-focused approach, personalized customer relationships, and local decision-making. It aims to provide superior service and tailored financial solutions to its clientele. Its established presence in its operating markets provides a foundation for maintaining and growing its customer base amid this competitive landscape.

Asset Quality Concerns: Rising Credit Risk

While loan growth is positive, a significant increase in credit risk remains a key concern:

• Non-Performing Loans (NPLs): Loans not being repaid as expected, jumped significantly by 50%, from $10 million in 2024 to $15 million in 2025. This means a larger portion of the loan book faces repayment difficulties.
• Past Due Loans: The total amount of loans with late payments increased by almost 39%, from $18 million to $25 million.
• Deteriorating Loan Ratings: The bank's internal risk ratings showed an upward trend in riskier categories. Loans categorized as "Substandard" (higher risk of default) increased by 50% from $20 million to $30 million. While "Doubtful" loans (the riskiest category) decreased to zero, the overall shift towards "Watch" and "Special Mention" categories indicates a broader weakening of credit quality.
• Provision for Credit Losses: To cover potential future loan losses, the bank significantly increased its Provision for Credit Losses by 100%, from $5 million in 2024 to $10 million in 2025. This substantial increase directly impacted the bank's net income and profitability.

Strategic Outlook & Investor Takeaways

Hawthorn Bancshares successfully grows its loan portfolio and diversifies its income streams, which are positive indicators for a bank. However, the significant increase in non-performing and past-due loans, coupled with a substantial rise in provisions for credit losses, directly impacted profitability in 2025.

For investors, this means:

• Profitability Pressure: Despite revenue growth, escalating credit risk led to lower net income and EPS.
• Credit Quality Monitoring: Closely monitor future reports for trends in loan quality. Management's ability to stabilize or improve NPLs and reduce future provisions will be crucial for profitability recovery.
• Balance Sheet Resilience: The bank's strong capital and deposit growth provide a buffer against potential credit losses.
• Broader Risks: Beyond credit risk, investors should consider the impact of the broader economic environment, interest rate fluctuations, and regulatory changes on the bank's performance.

The improvement in the investment portfolio's unrealized losses offers some offset, but the core lending business's asset quality remains the primary area requiring careful monitoring. Investors should look for management's specific strategies to mitigate credit risk and improve asset quality in the coming year.